3 key areas critical to your IT due diligence
Last week we kicked off this mini-series by talking about why IT due diligence often fails. Sometimes it’s prioritized lower than financial aspects. Other times, it’s performed by non-tech-savvy persons. Most often, though, assessors don’t look beyond the “IT window dressing,” taking it at face value.
Glossing over IT infrastructure can drive your Total Cost of Ownership (TCO) far higher than you expect. Unsecured networks, antiquated hardware, legacy software and messy data – these can end up giving you a whopping case of buyer’s remorse.
Today we look at a possible example of such failure. Then we’ll dig into three key areas you’ll need to assess. Otherwise, you won’t have an accurate picture of whether IT assets will make – or break – your merger or acquisition.
A cautionary tale
Let’s take a look at a hypothetical example of a large pharmacy company.
One of its business line handles enrollment of clients’ employees and retirees into Medicare and private drug plans. It wants to expand this business by acquiring a smaller company, one that specializes in handling such enrollments.
On paper, the acquisition would make the company a much bigger player in this niche healthcare market. The financials are solid. And the target company’s systems seem ideal for handling the bulk enrollments needed by most larger clients.
Sounds perfect, right?
After the purchase, the pharmacy giant find that enrollment infrastructure:
- Was from a third-party, barely supported and ran on old equipment.
- Could not handle batch jobs of more than a few hundred entries at a time.
- Crashed and aborted often, stranding thousands of applications without a trace.
- Had no modern user interface, nor a comprehensive security model.
- Hampered migration to its center due to hard-coded addresses and static interfaces.
Unfortunately, it was too late. The decision is already made. And the company then ends up in CMS sanctions, setting the company backwards, not forwards.
#1 Do you know what you’re buying?
Would it surprise you to know that “hypothetical” scenarios like this really happen? It does. And even if our hypothetical purchaser emerges from consequent sanctions and recovers its standing, the total cost of a misstep is incalculable.
What is the real state of the infrastructure you are buying? Look beyond the glossy reports to answer questions like:
- Is it robust and functional for the foreseeable future?
- Will you be merging infrastructure right away, or maintaining the status quo?
- Is their network infrastructure secure?
- Will you have to invest a lot of money to bring things up to your standards?
Note it’s important to understand why you’re purchasing the company. It may be an acceptable risk or cost to prop up or replace everything. But it’s only acceptable if you know it up front.
#2 Will the “new” technology enable – or disable – new business?
Let’s assume the target company’s technology is in decent shape. What will it bring to the table for improving your business operation?
Will the systems improve customer service or product service delivery? Will they advance your operations goals, making you more competitive? Or will it be a liability to current business?
For our hypothetical pharmacy company, the true infrastructure state is hidden or glossed over, or perhaps deemed “not relevant” by the assessors. But more than that, it’s purported to handle mass transactions so the company could serve larger clients. In reality, it cannot.
If it could, it would improve the customer satisfaction of healthcare enrollees, building customer satisfaction and trust in the brand. Instead, the opposite occurs.
Knowing the actual capabilities of the technology up front lets you know whether the acquisition will advance your business goals – or move them backwards.
#3 Will the technology scale or integrate?
Buying a business is rarely done with the intentions of it standing still. Unless you only mean to acquire a new customer base, you acquisition either to grow it or to plug it into some other business.
Your due diligence agent has to probe deep to answer questions about the scalability of the target company’s IT. If they are at-or-near capacity, you can’t grow them. And if you intend to integrate them into another another business, they need robust interfaces so they can communicate with other systems.
In our example, the acquired systems aren’t able scale to handle even meager batch processing. Worse still, the company figures the acquired system as a prominent part of its future plans. This means abandoning existing, more capable systems, based on unverified claims.
Each of these broad areas is a starting point for deeper investigation. They help you know:
- What assets you are buying – and in what condition
- How (or if) they will drive your business goals forward
- Whether they can scale and integrate with the rest of your business.
Remember that finding IT shortcomings may not kill an acquisition. It will, though, allow for better decisions about using (or discarding) the acquired technology. As we said earlier, finding such faults is only unpleasant when it’s too late to do anything about them.
Of course, finding a competent partner is key to success. Next week, we’ll look at how you can select the right company to perform IT due diligence for your M&A.