Keys to Effective Technology Due Diligence

In today’s rapidly evolving technology landscape, technology due diligence (TDD) can become a complex and potentially costly challenge. A critical activity in any M&A transaction, TDD includes an extensive and growing checklist of potential focus areas. Traditional TDD efforts focused largely on enterprise technologies that support back-office business functions or common operations of a business. Since nearly all businesses have some form of enterprise technology, nearly all TDD’s have an enterprise technology component, whether large or small. Common focus areas for enterprise TDD include technology infrastructure, security, communications, office automation, and operational solutions for shared service areas like finance and human resources.

In today’s more modern business climate, the primary focus of TDD efforts is rapidly shifting to business technologies. This is especially true of businesses whose primary product or service involves technology. For these businesses, technology is more than a back-office support function; it is directly connected to the primary business model. Examples of this type of business technology include:

• Software products and software as a Service (SaaS)
• Products with embedded or integrated technology solutions
• eCommerce
• Logistics
• Data analytics

When performing technology due diligence that involves core business technologies, it is important to design an approach that fits the unique characteristics of the business. However, nearly all TDD’s share some common areas of focus, and getting these right can be key to a successful M&A transaction.

Keys to success:

• Start early. That’s right. The first step to a successful TDD is not about technology at all. It is all about placing early and sufficient emphasis on technology as a critical lever in the business strategy. Whether you are evaluating the purchase of a software product or driving growth strategy for an existing portfolio company, the approach must consider the merits of technology as an integral element of the strategy, even prior to the launch of formal due diligence efforts. Failure to do so could, at best, cause you to overlook valuable capabilities. At worst, you could find that you have based your success on technology that is outdated, overpromised, or limited in scalability.
• Know what you are looking for. A key objective of a TDD is to establish a comprehensive understanding of a target company’s technology, from infrastructure through product. However, this alone isn’t enough to determine whether the target is fit for acquisition. Prior to starting a TDD, you should have a clear understanding of your specific objectives, with some definition around the type of product or service that would fit your portfolio. Without this, a technology might appear compelling, even though it misses the strategic objective. Avoid the mistake of investing in shiny objects by establishing clear investment objectives.
• Balance can-do with cost. When evaluating a company’s technology capabilities, it can be tempting to blur the line between concepts and capabilities. Be sure to perform a robust assessment, sufficient to know which capabilities exist and which are still in the planning stage. Although you may choose to invest in a company’s great concepts, it may take additional investment to transform those concepts into functional capabilities. This investment, and the associated development time, should be well defined.
• Pay close attention to product strategy and product development life cycle (PDLC). While technology is the focus of a TDD, most companies use technology as a means to solve a problem, offer a service, or create a product. If the product strategy is lacking, even the best technology may not make it to market. A TDD should include a careful evaluation of the product strategy and product development life cycle to fully understand the process from idea creation through implementation.
• Be sure that you have the right TDD team and resources. In today’s complex technology universe, few individuals have all of the skills necessary to perform an end-to-end assessment of all possible technology areas. Don’t make the mistake of applying a generalist methodology to an assessment that requires deep and specific skills. This doesn’t mean that you need a large team of technology specialists. A seasoned TDD lead should be experienced enough to know when to call in domain experts to perform spot assessments of key technology areas – especially those that are material to the deal.
• Don’t skimp on the basics. While this article focuses on business technology best practices, it is equally important to assess foundational enterprise technologies to establish a clear understanding of all capabilities and gaps. This includes areas like infrastructure, staffing, security, process, and license compliance. These commoditized services represent a significant portion of a company’s expense and may offer both value and risk to an M&A transaction. Proper diligence can uncover technology debt and security vulnerabilities that could result in major expenses post close.

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