Content List
Due Diligence Consulting in the IT Sector: What are the Hidden Risks and Opportunities?
Vlad Zghurskyi
05.08.2024
5 Min Read
When merging with an IT company, there is one question you need to ask yourself: does the company's software support your future growth? Believe it or not, but it is often an overlooked thing. When it comes to M&As in the IT sector, due diligence consulting is a crucial step.
If you want a metaphor, we can say it’s like inspecting a house before you buy it—you need to know what you’re getting into. But beyond the obvious checks, there are hidden risks and opportunities that can make or break a deal. Let’s uncover some of these. Read on.
Here are just a few numbers you have to know:
- 62% of mergers and acquisitions fail to meet financial goals, often due to poor due diligence;
- Companies that check the target's technology are 2.8 times more likely to succeed.
The rapid evolution of technology presents a unique set of challenges for due diligence in the IT sector. Unlike tangible assets, a company’s IT infrastructure can be a complex web of interconnected systems, software, and processes. A comprehensive IT due diligence process is essential, and here are some hidden risks a proper due diligence can uncover:
Outdated Technology
One of the most significant risks is discovering that the target company’s technology is outdated. While the core systems might seem up-to-date, supporting technologies such as deployment scripts, test frameworks, and front-end libraries might be lagging behind. This can lead to increased costs and time-consuming updates post-acquisition.
Security Vulnerabilities
Another hidden risk is the presence of security vulnerabilities. These are often not immediately visible but can have serious implications. A thorough technology risk profile helps identify these vulnerabilities, ensuring they are addressed before they become costly problems.
Over-reliance on Third-Party Components
Many IT companies rely on third-party components to build their solutions. While this can speed up development, it can also introduce risks. Dependency on third-party services or components means you are also inheriting their risks, such as licensing issues, potential service discontinuation, or lack of support.
NOT Customer-Centric Technology Strategy
If the customer isn’t at the heart of the technology strategy, it’s very bad. During IT Due Diligence interviews, if you find that customer needs have been ignored or feedback has been disregarded, it’s clear the technology is developed according to some team’s views, not real need people have.
Hidden Costs
Licensing agreements, software subscriptions, and ongoing maintenance contracts can add up quickly. IT due diligence uncovers these hidden costs, allowing for a more accurate valuation of the target company.
Poor Team Alignment
While focusing on the roadmap and strategy is important, ensuring team alignment is crucial when evaluating an organization. Sometimes the misalignment is so severe that no one can clearly explain what the company does.
Besides aligning the tech team, it’s essential to check the commercial team’s alignment too. For instance, asking the commercial team for a recent sales meeting recording can help assess if the tech and commercial offerings are in sync.
Opportunities Due Diligence Can Open Up
Unfortunately, a standard technology due diligence usually only skims the surface. It often consists of interviews with the target company’s IT leaders, and a review of documentation. It leads not only to many overlooked flaws, which we have listed above, but also to missed opportunities. Here are what you can find with a proper IT due diligence:
Innovative Technologies
Sometimes, during due diligence, you might uncover innovative technologies or methodologies that the target company uses. These can be integrated into your own processes, providing a competitive edge and driving future growth.
Foundation for Credibility
Strong technology is a key asset, and verifying its capabilities is essential for any investment or business deal. A thorough IT due diligence process helps identify potential risks and ensures you’re getting the most value. This applies to mergers and acquisitions, where deep dives into the target company’s technology are crucial, as well as startup investments, where investors rely on due diligence to make informed financial decisions.
Synergy Identification
IT due diligence can uncover opportunities for synergy between the acquiring company and the target. This can lead to cost savings, improved efficiency, and a faster return on investment.
Specialization by Industry Check
IT due diligence can be customized to specific industries with unique technological needs.
Here are some examples:
- Healthcare: Consultants specializing in healthcare IT due diligence would understand regulations like HIPAA and the specific security requirements for handling sensitive patient data.
- FinTech: Expertise in financial technology allows consultants to assess the security of financial transactions, compliance with anti-money laundering regulations, and the robustness of trading platforms.
- Cybersecurity: Consultants with deep cybersecurity knowledge can evaluate the target company's vulnerability management practices, incident response capabilities, and overall security posture.
What Should You Check Before Merging with an IT Company?
On the surface, you need to know simple things – how strong is the IT team, and what is the value of the software portfolio.
- Situational Analysis: This helps you see how well the company’s software can adapt, grow, and work with other systems in the future. It gives you clear facts to understand if expanding will be doable and what it might cost.
- Post-Transaction Roadmap: Estimation of the costs of maintenance, repairs, and ongoing development. This helps you see how IT investments fit into the overall business plan. You can identify areas where combining resources and technologies will result in cost savings. For example, the use of shared services or streamlined processes can reduce overheads and improve efficiency.
- Technology Risks: This identifies and evaluates the risks linked to the company's technology. It looks at the main technologies they use and also the supporting ones, like deployment scripts, test frameworks, third-party components, and front-end libraries. For instance, a robust and well-documented deployment process can enhance reliability and speed up time-to-market for new products.
Here’s a comprehensive checklist you can use for a Due Diligence in IT:
Therefore, each party gets their own benefits:
- Investors: Due diligence = Reduced risk, informed decisions.
- Projects: Due diligence = Identify weaknesses, improve offerings, build investor trust.
Conclusion
IT due diligence consulting is not about identifying risks; it’s a strategic investment that empowers informed decision-making. So, the next time you embark on an acquisition, remember to look beyond the surface to find those hidden gems and pitfalls. If you have any questions – contact us for a consultation!
Due Diligence
IT Consulting
Cybersecurity
Tech Opportunities
Share this post
Ready to grow?
With our M&A expertise we are ready to help you achieve your strategic goals!
Connect with us