I recently collaborated with Craig Hapelt and Kilian Berz at BCG on the link between digital transformation and sustained shareholder support. A key topic for public companies as they wrestle with the implications of transforming their business models. Pleased that our transformation journey at D+H formed a backdrop for this work. Hats off to all my former colleagues that helped us on that journey.

1. White Paper
Digital Transformation Needs Sustained
Shareholder Support
Gerrard Schmid, Craig Hapelt, and Kilian Berz
December 2017

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THE BOSTON CONSULTING GROUP DECEMBER 2017
y now, executives at companies that compete on the basis of last-mile ground
transportation are having nightmares about Uber and Lyft. For retailers, the
boogeyman is Amazon; for media companies, it’s Google and Facebook. But it
isn’t all negative and the change agents aren’t all dot-coms; traditional companies are
also turning to digital to capture what they see as its potential for breakout growth and
jumps in shareholder value.
Digital’s disruptive potential is so great that you’d be hard pressed to find any industry
that isn’t wrestling with its implications, and any company that isn’t taking steps to
transform itself. The risk facing companies is of exponential decline—which is what
happens when a company is so slow to react that it loses its relevance permanently. The
opportunity is of exponential growth – for those companies that can formulate a
winning strategy.
But as they race to capture digital’s upside, companies are encountering a challenge
they may not have anticipated: the return expectations in their shareholder base. This is
especially common for public companies, whose shareholders may not yet have
experienced a stomach-churning decline in revenue and profit, a material change in
capital investment or a change to the dividend policy. All of these things are possibilities
for companies making a move to digital.
Digital changes the economics of production, alters the competitive dynamics of sectors,
introduces new business models, and makes products and services obsolete. These are
very real threats to companies in many long-standing industries, where high operating
margins, nominal or slow growth, stable market share, and well-established customer
relationships are often the norm.
Here are the six questions we think every traditional company should be asking:
B

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1. What is the nature of the digital shift in our industry? This is about
understanding how the market is changing, and what it means for the
company’s future strategy. For instance, digital could be changing the nature
of customer acquisition or the cost of serving customers; it could be
accelerating the pace of launching new products. Perhaps analytics and
machine learning are coming together to enable more personalization and
create a fundamentally new customer experience. The very basis of long-term
competitive advantage may be unraveling.
It’s critical to get the answer to this question right, and have strategic clarity.
When CEOs and boards do so, it maximizes the reaction time they have.
When CEOs and boards fail to answer this question correctly, it opens the
door to exponential decline.
2. What strategy will optimize shareholder value? Not every company is
destined to become a star in the digital firmament. For some, the right
strategy may be to aggressively optimize cash flow. Nor should the strategy be
the same for every business unit. In an era of digital, some traditional units of
a company may justify heavy investment; others, without the same kind of
growth potential, become candidates for harvesting.
CEOs and boards need to decide if their companies can simultaneously run
cash-rich businesses and build high growth businesses. “Mixed portfolios” of
this sort aren’t always easy to manage, partly because of the ownership factor.
Investors may not fully value mixed-portfolio companies, ascribing too much
of the trading multiple to the companies’ historical low-growth components,
and insufficient value to high-growth components.
3. How will our business and operating models change?
The new strategy will invariably mean a new business model, shifts in the
customer base, and shifts in the company’s cash or capital needs. The new
strategy might also necessitate adjustments in a company’s operating model.

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Many companies, for instance, are building dedicated user experience teams
to control how their various channels interact with customers. And user
experience teams are only one example of an operating model change; digital
is going to prompt many more.
4. Do we have the capabilities and organizational elasticity to manage such
a change? The interdependencies and political realities of big companies—
and their finite resources—mean there will be a lot of moving parts once
decisions are made. Not every function, geography, and line of business is
equally central to the transformation; not every business unit merits equal
investment. A deft approach is needed to accurately gauge just how much
change the organization can make and successfully manage, and where the
critical stress points might be. An equally deft approach is needed for the
challenge of funding the aggressive new bets while continuing to run the
broader enterprise. This requires change management skills, the use of data
and analytics, a willingness to draw on the expertise of people in new fields,
and a solid program management office. The company may also need to
rethink its capital allocation practices to ensure optimal deployment of capital
to the critical components of the transformation.
5. Is our senior leadership team capable of leading the transformation? In
order to manage the continual changes of digital and set the right cadence,
the leadership team, and the CEO in particular, need to demonstrate two
distinct capabilities. First, the leadership team needs to have expertise in
digital and data. Second, it needs to be able to simultaneously manage legacy
businesses and newer, high-growth businesses.
Not every CEO will be up to this. Some will lack the desire to embrace a
complex multi-dimensional transformation agenda. Others may simply have
stagnated in their approach. From a practical perspective, a CEO nearing the
end of his or her tenure may not have the motivation to push the company in

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these new directions. In these cases, there’s an argument for bringing in
someone new.
The board of directors will need to consider these factors during succession
planning and while assessing the overall readiness for a transformation.
6. Will our current shareholders support the transition we need to make?
There are certainly shareholders who embrace the idea of digital
transformation and are inclined to support it. But they may not be the
shareholders a company has today. And if they aren’t, the company may find
it difficult to take steps in its long-term interests, like trimming dividends or
stopping dividend growth, selling off a cash-cow business to generate capital,
or sacrificing short-term profits in order to make bigger bets.
Even in the best case, where a company has undertaken a digital transition
and its revenues and profits have remained stable, there are likely to be a lot
of below-the-surface changes that investors need to understand. More revenue
coming from a new customer segment and less from an old one; the economic
implications of a business model change; the investment needed to keep pace
with digital technologies; and the uncertainties of operating in new
geographies: these are all important developments that shareholders must
grasp. Management needs to decide if it wants to materially increase its public
disclosures so that the shareholder base has the necessary information to
support its moves. One should not discount the possibility that some
transitions, because of their complexity, will work better in private equity
settings than in the public markets.
An Example of Digital Transformation
All of these questions and issues came to the fore with DH Corporation (D+H), a
traditional Canadian check-printing company that found itself challenged as the internet
took hold and digital payments started to grow. Leveraging its strong cash flow and

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relationships with the big five Canadian banks, D+H made a series of acquisitions that
fundamentally changed its identity into a global FinTech company. The transformation
began quite modestly in 2006 and accelerated significantly from 2012 onwards.
Ten years after beginning its transition, the company had become a leader in real-time
payments software, of lending software solutions, and of core banking software to more
than 8,000 banks globally. It had added more than $1 billion in software revenue, and
software represented almost 60% of its total revenues.
As the transformation unfolded the company made several operating-model pivots,
shifting from a services orientation to a product orientation, and from a single
geographical focus in Canada to an international customer base. Another operating-
model change gave D+H the flexibility to deal with its different businesses according to
their actual needs. In particular, alongside of its high-growth innovation segments, D+H
had low-growth legacy segments that needed to be managed with operational precision
and for the cash they could produce.
But the greatest challenge involved managing the investor base. D+H’s original domestic
Canadian investors had been attracted by the company’s solid dividend that was
supported by a straightforward business. As the company transformed into a provider of
software products in geographically diverse markets, the shareholder base became less
familiar with the products and markets in which D+H operated, and was less clear on
how D+H’s changes might affect the company’s financial performance. (The software
products themselves were deeply embedded in banks’ back offices, making them hard
for shareholders to grasp in any but the most abstract way.) For instance, the slowdown
in IT spending at European banks post-Brexit was a new phenomenon for D+H
shareholders, something they would previously not have had to worry about.
D+H had a highly successful business model transformation, and total shareholder
returns (TSR) of nearly 17% on a compound annual basis between Sept 2011 and Sept
2016. Over a 10-year period, D+H delivered a TSR compound annual growth rate
(CAGR) of more than 10%, versus a CAGR of less than 4% for the overall Canadian

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index, the S&P TSX. Yet some investors struggled with the higher volatility in D+H’s
quarterly earnings, and were unsure whether the dividend could be sustained through
the transformation. D+H decided to explore strategic alternatives. It transitioned from
public to private ownership and merged with another player in 2017.
Implications for Traditional Companies and Opportunities for Investors
Traditional-company managements need to act proactively. In particular they must:
 Develop a robust fact set on their current baseline, digital trends and industry
outlook, and do a thorough portfolio review.
 Articulate a clear understanding of their source of long-term competitive
advantage.
 Build a cohesive future strategy, informed by industry archetypes and the
company’s specific position and ability to transform. This should include clear
assessments of the company’s capital and any gaps in capabilities and expertise.
 Ensure that their shareholder mix will allow them to make the moves that are
necessary.
There are also implications for investors. These players need to:
 Assess the vulnerability of digital disruption on their portfolios (there is no such
thing as safety in an era of digital).
 Understand and enhance the digital capabilities of companies they own or look
to acquire. There are diagnostic services that can help investors do this, including
BCG’s Digital Acceleration Index.
 Identify untapped opportunities. This includes companies that are ripe for digital
transformation but haven’t moved in that direction because of pressure for
quarterly earnings.

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Digital is indeed disrupting the world. Companies have a chance to capitalize on the
change that is underway. Not to do so is to risk everything. As we get deeper into this
era, Andy Grove’s oft-quoted worldview needs an update. Only the digital survive.
Gerrard Schmid
Craig Hapelt
Kilian Berz
Gerrard Schmid was the chief executive of D+H throughout much of that company’s
transformation, and is now a Senior Advisor at The Boston Consulting Group. Craig Hapelt is
a partner and managing director in BCG’s Toronto office. Kilian Berz is a senior partner and
managing director in the firm’s Toronto office and is the global leader of BCG’s Financial
Institutions Practice.
You may contact the authors by e-mail at:
schmid.gerrard@advisor.bcg.com
hapelt.craig@bcg.com
berz.kilian@bcg.com
About BCG
The Boston Consulting Group (BCG) is a global management consulting firm and the
world’s leading advisor on business strategy. We partner with clients from the private,
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opportunities, address their most critical challenges, and transform their enterprises.
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bcg.com.
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