Due diligence is a time constrained process. Technology due diligence in many cases will feed aspects of other components of the overall diligence process, from risk management to investment and integration planning. In most cases I am asked to complete the technology due diligence process in advance of overall review, which places additional time pressure on program execution.
When time is short, where do you begin? This is not only a practical problem, but a conceptual one as well. The point you choose to begin your technology review will set in motion a way of seeing the engagement, which inevitably will highlight what will be explored and what may be pushed into the background.
I see technology due diligence as a series of phases, or sprints as defined by Agile development. I begin with the investment thesis that is being pursued and then consider if the acquisition seen as strategic, financial or relational. When you have this foundation in place, you can begin to lay out how you plan to tackle key aspects of the assessment and the priority in which they will be placed.
Let me use a large technology engagement as an example. The thesis was that the acquisition represented the ability to capture an investment in developing a national network footprint at a faction of the cost to build it from scratch. The footprint was a depreciating asset that contained a large IT investment and it was critical to the overall deal value to determine if additional investment in IT would be required.
The first phase assessed the state of existing IT assets and needed to validate that no gaps existed to keep the business running in its current state. This was done in parallel to an operations review that was completing a market assessment of where the greatest growth potential existed. The output of the first phase confirmed existing opex and capex requirements necessary for steady state.
The second phase took the output from the market assessment and evaluated if the changes planned for the physical infrastructure would require additional investment in new or upgraded systems. Based on the network requirements under consideration, we were able to determine that additional IT investment would be required to take advantage of the new capabilities and estimated a cost for the changes. It was only by completing the first phase assessing existing needs that allowed us to confirm the investment requirements needed for network upgrades.
The third and final stage brought the technology and operations teams together to review alternative investment options. New options emerged as it became apparent that the current management team’s approach of a full network upgrade could be staged over time with high value markets coming on line first to test the interest in the market for new services and reducing the overall risk. This allowed the financial team to model different scenarios creating options not considered during the initial diligence.
Where you begin your journey will shape the dialog and drive the outcome of due diligence and the transaction structure. When done properly, it will also lead to a much smoother integration process once the transaction completes. Consider breaking your approach into different phases that can allow you build your hypothesis for a successful outcome, find the evidence to support or refute the hypothesis and confirm the evidence to increase the quality of your final assessment.
Originally shared on Russell Clarkson’s LinkedIn page
