IT plays a vital role in value creation of any business; therefore, it is fundamental that prospective acquirers clearly understand the technology capabilities and liabilities they are acquiring. IT Due Diligence during the deal process is critical to understand if technology enables and underpins the business as a whole.
What is the Problem?
Traditional IT due diligence has often fallen short and its importance can still remain underestimated; this leads to differing ways of assessing the IT function during the due diligence process. In compiling a report, Deloitte polled the opinions of 1,000 corporate and Private Equity executives; 46% said that less than half of their transactions over the previous two years generated the expected value or return on investment. The failure was more pronounced amongst Private Equity executives, where the figure was 56%.
In the same report Jason Langan, Partner, M&A Services, Deloitte commented ‘We’re also seeing a trend in the form of roll-up strategies that basically follow a pattern where you’ll have a PEI firm that buys a sub-scale business and bolts on smaller companies at a lower multiple to roll it up into a business of scale’.
With above in mind the value of IT Due Diligence cannot be overstated. A pro-active determination of capability, scalability, risk, weakness and opportunity are fundamental enablers of the client’s decision making.
What Are the Specific Causes of Inadequate IT Due Diligence?
When we enter companies, who are struggling to integrate the IT successfully following the completion of the deal, we find in many cases the expectations are unrealistic due to inadequacies during the Due Diligence process. These have been due to:
- No IT Due Diligence being performed at all – this results in the acquisition being made without a full understanding of the IT risks, scalability, and opportunities.
- The IT Due Diligence being performed as a ‘bolt on’ to the Commercial Due Diligence – the risk is that IT is being assessed purely from a commercial angle. The assessment is often not thorough enough and carried out by someone whose core competency is not IT.
- IT Due Diligence carried out by an independent contractor – this is often an ex-CIO and is a challenge for one person to have depth and breadth of IT knowledge. In these cases, the reports tend to be written in language that was too technical, and which lack any clear, actionable opinions for a non-technology audience.
- IT Due Diligence being carried out by an existing portfolio resource – these tend to be a quick ‘kicking the tyres’ type of review and typically lack any methodology or relevance to the investment thesis.
What is the Answer?
In recognition of the role IT plays in the overall strategy of any business, the IT due diligence should be integrated into a wider value-creation approach to due diligence, showing technology as a vital element of business strategy. It is also important to make IT due diligence findings accessible – via opinion-led reports written in plain English for investors, rather than just for technical experts.
Having said the above, it remains essential to look closely at IT costs and risks, with a particular focus on cyber risk and costly information security breaches, which we are seeing emerging with a growing frequency. The IT Due Diligence should always tackle the questions risk, scalability, competence, and compliance.
However, we also recommend focusing on the value opportunities that arise from technology in the target company. Typically, we look for answers to questions such as:
- How does technology differentiate the business from its competitors?
- How does it drive profitability through revenue growth and/or pricing optimisation?
- How does technology enable automation, improve the customer experience, and enhance pricing, risk and wider market insights?
- How rich and well-structured are the business’s data sources?
- Are the tools in place to extract maximum value from its data?
- Is there a clear cost benefit to planned technology investment?
- Do those plans drive value over an investor’s hold period?
- Do those plans align to the wider business objectives and targets?
- What investments in technology would we recommend?
Our recommended approach to IT due diligence examines the foundations of value in many financial services organisations and provides a more complete understanding of the potential of the deal – as well as the risks.
How Can We Help?
We have a range of pre- and post-transaction core services, tailored to suit individual client’s challenges, to help ensure that IT is a successful enabler for the transaction lifecycle.
We bring a dedicated IT Due Diligence Team, coupled with our unique IT DD Framework and have an array of specific technical and industry experts that we can bring in as required. We work either as part of a combined diligence team, together with the client’s financial, tax, operational, commercial, risk, cyber and other diligence advisors, or on a standalone basis.
If you would like further information or help with IT Due Diligence, please contact us at firstname.lastname@example.org.