2020 was the year the world changed. Paradigms shifted, long standing assumptions were overturned. Business plans were disrupted, and competitive positions were realigned.
New Environment, New Challenges:
Small and Mid-Size Businesses of SMBs were heavily impacted by change. Some were advantaged, others disadvantaged by the disruption. For example, a company with technology to facilitate staff working remotely is better positioned than a company with staff tied to the office. No matter, each is faced with the challenge to evaluate opportunities and threats and take steps to preserve and create value in this new environment.
Mining for Value with Technology:
Accelerating digital transformation is a strategy many businesses are taking to build and safeguard value. Changing demands from customers, the work force and all participants in the supply chain are driving investment in and adoption of technology. Advances in technology tools, capabilities, and processes are fueling digital transformation. The pace of technology development is ironically demonstrated in the negative where microchip scarcity is shutting down production of mid-level vehicles to feed the chip requirements of higher profit, top-of-line cars.
Gartner forecasts the overall, worldwide IT spend for 2021 to increase 8.4%, rebounding from a 2.2% decline in 2020. Much of the increase will reflect the adoption of cloud and other (X)aaS technologies. The proliferation of data and investment in analytic tools, artificial intelligence and machine learning will allow businesses to derive actionable information from raw date, gain competitive advantage and increase their value.
Asset Creation:
The use of these technologies will change from the tactical, IT supporting business processes to the strategic, technology as core components of the enterprise. Data will become a value bearing asset.
Benefit for the Business and Private Equity Firm owners:
SMB owners and stakeholders will benefit from improved processes, and operational efficiencies. The benefit of increased value will also accrue to private equity firms with opportunities on two axes. The data assets of their portfolio companies will present new opportunities for market creation, synergies, and efficiencies. Also, the acquisition landscape will be enriched as potential targets build and demonstrate value that can be magnified as part of the private equity portfolio.
Create Value but don’t Ignore Infrastructure and Tech Debt:
New technologies can increase the value of a business, but it is important to not overlook the infrastructure that supports the business. Obsolescence of hardware or software can undermine the efforts and progress made to create a new class of assets. Servicing tech debt by strategic updating, maintenance, and retirement of systems and equipment that is out of date is an essential part of preserving value. Strategies for recognizing and managing tech debt are covered in the book Tech Debt 2.0, How to Future your small business and increase your tech bottom line, published by the IT Ally Institute in April 2020.
The Value of Cybersecurity:
Digital assets are not the only source of increased value for an enterprise. Technology and globalization have created an exposure that is an existential threat to businesses of all sizes. SMBs are not immune to attacks that have become daily events as major companies, institutions and municipalities are targets of cybercrime and disruption. Ransomware, phishing in all its forms and similar attacks drain billions from businesses each year. Another class of attack threatens the basis of our societies’ undermining principals of democracy, clouding many aspects of our lives with misinformation, conspiracy theories, “alternative facts”. etc.
In this environment businesses that can build a robust cybersecurity defense increase their value and safeguard their future. Much like the technologies used to leverage data, cybersecurity needs to become a core component of the business, incorporated into all areas and activities.
Strengthen and Increase Resilience:
PricewaterhouseCoopers (PwC) conducted their Global State of Information Security Survey (GSISS) for 2021 last summer. They surveyed 3,249 C-level executives, worldwide, across a range of industry sectors. The survey confirms that cybersecurity is no longer the sole purview of the IT department. “Although tech is very much in the picture—security leaders are working closely with business teams to strengthen and increase the resilience of the organization as a whole.” 50% of responders say that cyber and privacy will be baked into every business decision and plan”, up from 25% in the previous years survey. “Fifty-five percent of executives plan to increase their cybersecurity budgets, with 51% adding full-time cyber staff in 2021 — even as most executives (64%) expect business revenues to decline.”
With businesses, in their entirety, embracing the need for cybersecurity. executives want increased testing across a wide range of scenarios so they can anticipate attacks, plan and take steps to ensure their critical business function will stay up and running. “It is not possible to forecast the future, but it is possible to plan” to address imaginable scenarios. Disinformation attacks and threats sponsored by nation states are among the scenarios identified as concerns in the survey.
Cyber Assets Future Proof the Business:
This cyber threat environment demonstrates the real value businesses can create by developing a broad and deep cyber defense strategy encompassing all areas of the enterprise. Such a strategy represents a lasting asset, safeguarding the future of the business. This is value, equally as important as intellectual property, new products, research and development, and a loyal customer base.
Higher Stakes for PE Portfolios:
Private Equity firms face the same cyber threats as individual businesses. Actually, the stakes are higher with PE firms protecting their investors from vulnerabilities that can spring from anywhere in the portfolio of companies. Cybersecurity is only as strong as the weakest link in the portfolio, and then the next weakest, then the next weakest link, and so on.
Momentum Cyber is the premier advisor to the cybersecurity industry and has recently published the “Cybersecurity Almanac for 2021 The report states that PE firms continue to show a strong interest in cybersecurity fueled by the acceleration in digital transformation and the increased vulnerability. PE firms were responsible for 37% of the M&A activity in the cybersecurity sector last year and a 28% (YoY) increase in cybersecurity investment. Private Equity professionals are securing their investments with the same strategic thinking utilized in portfolio planning and acquisitions.PE firms are taking a portfolio-wide approach to managing cybersecurity, benefiting from efficiency and cost-savings, and gaining insight to the security health of their portfolio.
Boosting Portfolio Value:
A portfolio approach to security creates value that is greater than the sum of the security assets of the businesses that make up the portfolio. Firms adopt, portfolio-wide cybersecurity standards. This creates a cybersecurity strategy that aligns with the risk tolerance characteristics of the PE firm rather than the individual portfolio members.
A high threshold of cybersecurity readiness for joining the firm preserves the value of the firm’s security asset.
In addition to shared policies and standards, multiple businesses in a portfolio bring the benefit of multiple eyes and minds to bear on monitoring security as each organization has its own unique sensitivities. A robust council of security resources can boost investor confidence.
Value for the Future:
Investors understand that the value of a business is based on its ability to thrive and deliver returns in the future. Preparing a business for the future in today’s environment depends on assets that promote speed, flexibility and resilience. Emerging technologies can prepare a business to meet future challenges and safeguard against evolving threats.
About the Author
Michael Fillios is the founder and CEO of IT Ally Holdings, a diversified holding company that provides IT and Cyber advice and consulting to family owned and private equity backed small and medium size businesses (SMBs) and Credit Unions. As a former Fortune 500 global CIO, small business CFO, technology entrepreneur and management consultant with more than 25 years of experience, he is responsible for driving the strategic vision and growth of the IT Ally Holdings companies including IT Ally, CU Ally, fraXtion and the IT Ally Institute. His first book, Tech Debt 2.0®: How to Future Proof Your Small Business and Improve Your Tech Bottom Line, was published by the IT Ally Institute in April, 2020.
[This article was originally published on itallyllc.com.]
