Technical due diligence is a required component of many investment deals, particularly those involving big quantities invested in information technology products. To make an informed conclusion, an increasing number of businesses conduct a thorough analysis of an ongoing project, with the primary objective of determining if the project’s assumptions fulfill stakeholder expectations.
Classifications of Due Diligence
The primary goal of due diligence is to determine the risk associated with a prospective or continuing investment. Each study is unique, based on the assessed entity’s unique characteristics. What’s critical here is that due diligence is always conducted by a team of specialists in a given field (i.e., IT experts), which provides you with a deep understanding of a specific aspect of the business’s operations, resulting in a complete, accurate, and highly detailed picture of the company’s overall health.
Occasionally, extra studies might be required to gain a broader understanding of a particular aspect of the company’s operations or to diagnose an issue that the investor has identified. As a result, the due diligence method is always tailored to the facts of the particular situation.
Perform Due Diligence on IT
In situations where the due diligence focuses on a custom software solution, the software development life cycle is divided into numerous phases, which include scoping the project, implementing it, maintaining it, and continuing development. Regardless of whether the project is managed using traditional or agile approaches, the end product (i.e., bespoke software) is the consequence of the implementation of certain assumptions specified during the initial phase.
These assumptions, gathered in software requirements specifications (and then in other types of IT project documentation), are approved by the customer and development team, and then included into a project plan or product backlog. They are implemented sequentially in subsequent revisions of the software in accordance with the pre-planned order.
The purpose of the technical due diligence analysis is to determine not only which functionalities the software should have, but also if the program will match customer needs and legal standards as a result of the planned project activity. Additionally, it will advise you about the economic feasibility of the idea.
As a result, software due diligence enables assessing the present state of a project’s progress, as well as indicating its potential and identifying any drawbacks and hazards associated with a specific application’s current state of development. In practise, it is a profit-and-loss simulation for which each investor must decide whether or not to continue developing the software.
Contrary to popular belief, due diligence is not synonymous with an audit, which often focuses on a single area of control and is initiated by the organization. Indeed, software analysis can be commissioned by either an external or internal party, allowing the software development firm to remove any risks that can discourage the investor or to provide the investor with an accurate image of the IT development progress.
Additionally, it is projected that businesses who conduct due diligence on their long-term software development processes have a greater likelihood of achieving larger and positive returns on their investments.
Due Diligence for Software Is an Essential Tool for Risk Management
The primary objective of the technical due diligence analysis is to compile all of the information necessary to evaluate the progress of software development and to identify major factors affecting it. Thus, software due diligence involves good organization and a high level of competence on the side of the analysts in order to perform optimally for the advantage of the transaction’s parties.
The due diligence approach should be used to analyze information technology initiatives throughout the project’s life cycle. It protects the investor from a situation in which the organization develops a project based on incorrect initial assumptions, resulting in a finished product that does not satisfy the expectations of its intended consumers, resulting in additional expenses.
The most common areas considered in IT projects during the software due diligence analysis are the following:
- The group of individuals involved in the implementation of a certain project, including their expertise, abilities, and experience, as well as the way they work or manage the workflow.
- The technology that was employed throughout the project, including its creativity, code quality, competitive advantage, and intellectual property rights;
- Market and marketing potential of the product developed as part of a certain project, which is decided by elements such as market size and prospects, competitor strength, and capacity to penetrate a market niche.
- Legal requirements, such as intellectual property rights protection, software security and stability,
- Financial considerations, most notably the adequacy and accuracy of financial forecasts relating to the project’s valuation and profitability.
It’s worth noting that due diligence considers risks that arise from the initial phase of the software development life cycle, such as improper identification of the client’s requirements, inappropriate technology selection, or incorrect description of the product’s usability and functionality.
Update Your Existing Product with Due Diligence
Due diligence can also be used to improve a business’s operational efficiency. The research is extremely adaptable, taking into account the unique qualities and specifics of each organization, such as its structure, revenue size, and personnel count.
Additionally, software due diligence can be used successfully to adapt current software or systems to new conditions discovered as a result of the due diligence. They may refer to the market’s unique characteristics (e.g., as a consequence of the introduction of new client needs), the desire for a particular type of technology (e.g., as a result of solutions introduced by other industry players), or to legislative requirements. The information gathered during the analysis enables the project’s scope to be optimized and sub-projects to be properly planned, while taking significant risk factors into account.
How to Conduct Adequate Due Diligence on Information Technology Projects
It is challenging to design a uniform model of software project due diligence since each study should be tailored to the unique characteristics of a particular project and the market to which the software is targeted.
Nonetheless, some fundamental phases of the investigation can be identified:
- When preparing a study’s project, it is necessary to establish the analysis’s aim and, consequently, the information that will be gathered. Bear in mind that the manner in which it is constructed will dictate the study’s scope.
- Preliminary research concentrates on the project as a whole, including its assumptions and product requirements (included i.e., in its documentation). Additionally, it is vital to verify the stability and security of the IT solutions built as part of the project during the research phase. These characteristics should be evaluated in conjunction with a computer hardware inventory and an examination of the project team members’ credentials and competencies.
- In-depth research, on the other hand, focuses on the product’s potential, the feasibility of commercialization, and the supply of support for the product’s users. Not only is the project’s profitability examined at this point, but also its benchmark is established (e.g., by comparison with the products of competitors).
Once the analysis has been completed, a report should be written that includes the study’s conclusions as well as information about the project’s identified hazards. Additionally, the report should make recommendations for the continuation of the project. Due to the breadth of its use, this sort of research is advantageous during the execution of lengthy and complex projects in which the product is subject to frequent adjustments.
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].
