Technical Due Diligence: Depth and Systematic Methodology Essential

Investment in technology-enabled services and technology-focused firms continues to be an area of focus in the Private Equity arena. The PitchBook Crystal Ball report identified technology as the most anticipated area for growth in 2017.

Every company in today’s data-driven age relies on technology for operations. A firm’s approach to technology and its impact on supporting profitability and growth is something that should be well understood prior to investment.

For potential investments across the board, true technical due diligence goes beyond the traditional “checkbox” methodology normally applied by IT due diligence, such as operational items like servers or ERP systems, to dive deeper into areas including ability to scale, process inefficiencies, and skill-set adequacy of the teams involved.

Likewise, technology companies that create software products require even deeper analysis, including in most cases code review, development platforms and methodologies, technical debt, and team analysis.

The reality is that the surrounding depth of technology issues related to people, process and platform is similar to a “multiplier effect” on risk.

Due Diligence of Technology is Just as Critical as Vetting the Financials

Along with assessing financial, legal and business risk, vetting of a company’s technology position helps insure that an investment made today will be sustainable tomorrow. Technical due diligence uncovers critical qualitative and quantitative metrics about the target’s internal systems and processes that will impact valuation and performance. Data-driven decisions provide higher levels of confidence that the unknowns are exposed.

What is the strategic state of the company’s ability to grow with their existing systems? If the technology is not optimal, what level of expenditure may be required to transform? Inadequate assessment (or worse, no assessment) of critical data can mean substantial further investment down the road.

When Bain & Company surveyed 250 senior managers with M&A responsibilities, half said their due diligence process had overlooked significant problems, and only 30 percent were satisfied by their efforts. To avoid these pitfalls, investors should employ a proven approach to technical due diligence that includes a thorough and repeatable process. Checking the boxes on a list of surface-level criteria is not enough.

Winning Equation: Systematic Assessment + Strategic Technical Expertise

Experienced technical due diligence practitioners know the questions to ask and the places to look to dig deep into the state of an organization’s technology products, services and usage. Applying a systematic and repeatable process based on best practices to analyze and validate a firm’s technology position will discover potential issues that can impact ROI down the road. Approaching due diligence in 3D—focusing on the people, process and platforms—provides the most comprehensive view of technology risk.

• People: What are the capabilities of the firm’s key people? Do they have the right team in place for growth?
• Process: What kind of process does the firm use to develop and manage technology? Is it documented, predictable and scalable?
• Platform: What is the state of the target’s technology product/platform? Are their operational platforms streamlined and efficient? Is the system architecture up-to-date and scalable?

Keep Pace With the Reality of Rapid Technological Change

Technology is complex and always evolving, and investors can no longer make decisions based simply on a firm’s current tech profile. In an environment of constant change, an organization’s technology needs to be able to evolve quickly and nimbly to keep up.
Knowing whether a potential investment is ahead and will stay ahead of the technology curve is critical. A deep dive helps investors understand strengths, weaknesses and core capabilities to identify red flags and areas of opportunity.

The goal of any due diligence is to avoid surprises. Unlike financials, technology is not black or white, and the technical strategy – all of the parts – must align with the business goals. Our clients understand there may be existing gaps and rely on NeuEon to bring a C-suite viewpoint, with technical depth to the table to boost confidence in the process – and make investments pay off longer term.