March 21, 2022

Guiding Tenets of an IT Due Diligence Playbook

Guiding Tenets of an IT Due Diligence Playbook Strategic IT Consulting

Highly acquisitive organizations whether a public company or private equity firm (or portfolio company) often approach IT diligence and post-deal integration planning with vastly different degrees of attention and discipline. An organization’s approach is generally driven by the buyer’s level of experience with acquisitions. Less experienced buyers rarely operate from a playbook since most are focused on just getting the deal closed. With less emphasis on IT risk assessment and planning, the target’s IT issues and opportunities are often pushed down the road, or even handed off to the next buyer.

Conversely, highly experienced and disciplined buyers approach acquisitions using a well-scripted methodology driving detailed execution plans they can implement immediately upon close. Disciplined buyers know that this approach is key to achieving greater returns and recognition by investors.

There are several basic principles or tenets of these disciplined IT playbooks that can be applied to any deal, whether it’s a platform acquisition, a carveout, or a simple accretive tuck-in.

Tenet #1: Disciplined Planning is Critical

An IT (and operational) due diligence has the same fundamental objective as a financial diligence: looking ‘under the hood’ of the target’s operation. The financial diligence focuses on whether the numbers are accurate as of a point in time and the forecast is credible, while an IT discovery evaluates the current risks surrounding the target’s business applications, infrastructure, security, and supporting IT organization. The disciplined playbook goes beyond the scope of general risk and remediation: it examines greater details of the target’s IT environment so that leaders can produce an immediately executable plan for risk remediation, system/data integration, and post-close value creation.

Tenet #2: Investing Upfront Drives Future Success

Almost all buyers will assess the state of the IT environment on a platform or carveout deal, even if they’re only doing it to satisfy third-party intermediaries. The playbook of the sophisticated buyer emphasizes a comprehensive and thorough understanding of the target’s IT environment prior to close to effectively execute on remediation and value creation opportunities. Sophisticated buyers rarely rely solely on an internal resource to do a ‘drive by.’ Instead, they hire experts well-versed in both risk identification and plan execution. An added benefit of bringing in third-party professionals is they can craft a realistic post-close remediation budget estimate the buyer can use leverage during final negotiations. Generally, the estimated remediation budget exceeds the third part diligence fees.

Tenet #3: Diligence Playbooks are Fluid

A critical element of any assessment of a target’s IT environment is aligning the investment thesis, acquisition approach, and particulars of the deal environment itself. While the playbooks of successful buyers and their third-party advisors follow a rigorous and detailed methodology on each deal diligence, they are certainly not ‘one-size-fits-all.’ Buyers and their third-party experts collaborate early on to determine the scope and depth of the assessment in key areas of the IT due diligence, including the scalability (and sustainability) of core ERP platforms and the security/infrastructure posture. The end report and plan for each of these deals vary depending on the particular situation.

Tenet #4: Process Opportunities are Important

Evaluating the target’s systems and processes is a project that varies in scope, but most strong acquisition playbooks direct teams to identify major process/reporting gaps or new opportunities. It is not uncommon for the target to have an undersized ERP platform, or a platform that was never fully implemented and is bogged down by manual workarounds causing operational inefficiencies. A clean system bill of health doesn’t necessarily mean the target is operating its business efficiently. Rather than singularly focusing on system platforms, savvy buyers evaluate whether key processes are properly supported and integrated by technology. If they aren’t, it’s a potential opportunity for improvement. Opportunities for improvement may run the gambit and prioritization is driven by the nature of the deal, risk and opportunity. The IT diligence allows buyers that discover significant operational opportunities to begin executing immediately, instead of waiting for things to fail.

Tenet #5: Post-Diligence Execution Doesn’t Wait

A key signal of an effective playbook is that it emphasizes immediate execution of identified projects designed to remediate risks, integrate systems/data, or take advantage of value creation opportunities. Many playbooks are integrated into an overall strategy roadmap, where the onramp of the new acquisition is carefully controlled. Armed with a comprehensive plan developed from the IT diligence process, the buyer is able to identify the most appropriate resources for execution even prior to close. As indicated earlier, savvy buyers are singularly focused on effective and efficient execution of the investment thesis and will invest accordingly. Instead of waiting until internal team members are free to tackle the identified projects, they employ third-party professionals who can execute accordingly.

Tenet #6: An Eye for Data and Reporting

A comprehensive IT due diligence on accretive deals and carveouts can provide an enormous head start on planning for data and reporting integration. A savvy buyer’s playbook calls for collaborating with the target’s team even before the deal closes to evaluate key data structures (not data itself) and develop automated means for integrating or migrating master, transactional, and financial data into either pre-existing business intelligence platforms or legacy ERP platforms. While an automated data import or integration is not always possible, it can substantially reduce the manual data consolidation and reporting effort that is required post-close. Immediately integrating the target’s data into a consolidated reporting platform also creates additional runway for the buyer to execute an ERP strategy.

Even in today’s increasingly complex political and economic environment, a broad spectrum of buyers are executing a “buy and build” strategy. Increasingly, savvy buyers and their third-party service professionals follow proven playbooks for IT diligence crafted through decades of experience (good and bad). No plan or subsequent execution will ever be perfect. However, a comprehensive understanding of the landscape and path forward certainly is better than flying blind.

The professionals are Marcum Technology have significant experience advising mid-market buyers on IT acquisition strategies, due diligences, and post-integration value creation. To learn more, contact us at hello@marcumtechnology.com.