Excellent IT systems and organizational structures are the backbone of digital products and services. The right balance of in- and outsourcing, the chosen framework or platform can be a competitive advantage or crucial detriment, which must be examined in a Technology Due Diligence or IT Due Diligence.
Most acquiring firms have a set of investment objectives in mind when acquiring a new technology company. Performing technical due diligence to evaluate the product, architecture, processes, and organization helps ensure that those objectives are met prior to closing the investment. Additionally, a detailed look at these aspects helps validate any assumptions the investment firm has made, such as the ability to scale the number of users within an estimated timeframe in the future.
A refined technical due diligence process is quick, efficient, and answers the investment questions in easy-to-understand terms with sufficient detail. Target companies are typically analyzed from three perspectives:
- Technical risks to the investment coupled with the cost to mitigate;
- Opportunities for growth post-investment close to help meet objectives; and
- Strengths of the company that should be preserved and/or built-upon moving forward.
Each of these perspectives is analyzed from the following categories. Included below are some sample questions to ask and answer:
Product Strategy and Product Portfolio
- Does the product strategy fit with the investment company’s growth objectives?
- What are the product strengths, weaknesses, opportunities, and threats (SWOT) to help validate a reasonable direction is possible?
- How does the company determine the product roadmap and what will add the most business value?
Product Function and Quality
- Are there obvious quality problems with the product, such as performance issues, that may be expensive to fix?
- Does the product fulfill end user goals in a usable way or is an expensive UI revamp necessary?
Architecture & Code
- Is there anything in the architecture that is an impediment to meeting growth objectives?
- Are there legacy components in the software that require replacement? How much will this replacement cost?
- Are there third party or open-source components that may be problematic from the legal or technical view?
- Is the code written in a maintainable way such that others can be productive in the code base quickly?
Processes, Practices and Tools
- Are there opportunities for efficiency gains and/or cost reduction?
- Will the existing practices scale appropriately with company growth?
- Are there existing skills gaps that inhibit efficient delivery?
People & Organization
- Are the right people in the right roles to meet investment objectives (particularly leaders)?
- Who are the people critical to the business and must be retained with the acquisition?
- Are there significant gaps in the organization that must be filled to meet investment objectives?
- Is the level of R&D spend appropriate for the company size? Are there opportunities for reduction?
IT/Operations/DevOps
- Are there opportunities for cost reduction, such as a move from locally managed resources to the cloud? What is the cost in doing so?
- Is there a suitable business continuity plan in place, and if not, what risk is undertaken and what is required to implement one?
- Are the expenditures reasonable given company size?
- Are deployment practices efficient with minimal risk of human error?
Product Support
- What are the top support call generators that may be indicative of product problems?
- How many escalations make their way to the development team?
Professional Services
- Are implementation times long potentially indicating lack of configurability/customization in the product?
- Are there opportunities for product enhancement to scale to larger number of customers requiring less on the services side?
While many items found during technology due diligence may not make or break a deal, it is important to understand the risks and opportunities to evaluate a potential investment. The existence of technical risks may affect the ultimate deal conditions or price. The cost of a technical due diligence is insignificant compared to the magnitude of a software company investment and the benefits abound.
The Litcom Approach
Litcom is an independent source for IT due diligence. We have broad knowledge and experience in all aspects of IT management. Our association with leading industry research firms gives us practical data for benchmarking the target company’s IT spending and preparing a useful economic analysis. Our structured methodology allows us to deliver an assessment within short deadlines and our strict independence from technology vendors gives us an unbiased perspective that is essential for due diligence. Please contact us for additional information at: [email protected] .
