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Digital Disruption in the Middle Market

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5 “Must do’s” for Family Businesses Facing Digital Disruption

It is no longer a secret that digital disruption is the single biggest issue facing organizations of all kinds. The increasing pace of change is unprecedented and is being driven by the agenda of a handful of the largest “tech” companies. Wikipedia defines Digital disruption as “the change that occurs when new digital technologies and business models affect the value proposition of existing goods and services”.

Numerous examples can be found no further than your cell phone. Amazon Prime is significantly affecting physical store sales, companies such as GrubHub are changing the way we serve our family meals and magazine ads versus online digital advertising is no longer a contest.

But it is not just large companies disrupting large companies. In fact, digital disruption may be a stronger disruptive force at smaller companies than larger companies.

Family and privately held businesses must tailor their response to reflect the nuances of family owned and/or managed businesses. Digital disruption presents both an opportunity to reshape the business and a mandate to assess its impact on all levels of the enterprise. Management and Boards of Directors must understand the changing nature of the company’s risk/return profile, communicate that to all stakeholders and then prioritize and marshal the company resources accordingly.

More often than not, with family and privately help businesses, there is a wide divergence of experience, knowledge, financial condition, perspectives on the industry, participation in the business, and views on the value of the intangibles of owning the business. Creating alignment among the stakeholder groups is challenging but critical in order to survive and thrive in the face of this change.

Here are 5 “must do’s” for any family/privately held business wanting to confront and win in the digital disruption challenge:

1. Move the locus of responsibility and action to the C suite and Board. Often the IT Department bears the responsibility for understanding the impact of digital disruption and for implementing solutions or initiatives. If siloed in the IT Department, the full impact of change on all levels of the organization including product, customer experience, marketing, capital raising and strategy may not be fully understood or appreciated. Once the impact is understood across the organization, companywide buy in and resource allocation needs to be driven from the top with the CEO owning the process with oversight from a Board that has both domain expertise in the technical areas most affecting the business and experience with pivoting businesses in response to massive external changes in the industry and internal changes in the dynamics of the business.

2. Identify and assess tech trends most affecting the industry. Fully understanding and staying on top of the most impactful industry specific trends in technology requires an upfront and ongoing process. The CEO and Board need to drive and/or oversee this process and participation needs to include members of senior management across all functional areas. Trusted and experienced 3rd party resources with experience in technology driven change can greatly enhance the speed and quality of the process deliverables.

3. Perform Internal assessment of operations. Technology companies tout radical improvements in productivity for the enterprise, some of which materializes, and some does not. In order for the company to benefit from the increased productivity offered by these solutions without reacting to every new promise from an early stage company requires a disciplined and periodic process that often is best coordinated by the IT Department. Areas of focus need to include workflow changes, digital aptitude of management and employees, opportunities for automation, elimination of redundancy, ROI expectations and an honest (and thick skinned!) post mortem of prior digital investments.

4. Reforecast the short- and long-term future of the business. A new perspective on the various go forward short- and long-term projections for the business materialize as a result of this process. Since there is a lot of variability and uncertainty around the future impact on profitability and capital requirements of digital disruption, conservative (worse case), base case and upside scenarios should be built incorporating the insights developed from the above process. In addition, an analysis of the current exit environment along with an attempt to anticipate future potential exit environments, needs to be performed to fully understand and outline the cost/benefit of continuing to own the business.

5. Create a process for stakeholder alignment. Particularly important for family businesses, it is critical to give shareholders a clear picture of the rapidly changing risk return profile of the business. Using the knowledge gained from the steps above, stakeholders need to be brought up to speed so a clear mandate can be given to management on how best to navigate the changes ahead. Wide ranges of individual stakeholder experience and financial sophistication can cause this process to be difficult. The use of outside advisors can be helpful in bridging this knowledge gap. Should there be a wide divergence in opinions about holding the business versus exiting the business, a mechanism for providing full or partial liquidity needs to be implemented. Again, an experienced independent 3rd party is recommended to manage this process.

Taking a rigorous approach such as this to understand as thoroughly as possible the internal and external implications of digital disruption gives the family business the best chance of successfully navigating change and preserving family legacy, harmony and value.

Alan Nichols is a partner in the Northern California office of Newport LLC.

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