The Most Common IT Due Diligence Traps

 Investors often overlook IT due diligence when assessing a target company for acquisition. While it is true that the IT function represents a relatively small portion of most companies’ overall enterprise value, overlooking IT due diligence can be a costly mistake. This is because the IT function is often critical to the company’s ability to generate revenue and profit. Furthermore, many problems that can arise from an acquisition are due to integration Issues – in particular, problems with integrating the target company’s IT systems with the acquirer’s IT systems. Therefore, performing IT due diligence is essential to the M&A process.This blog post will provide an overview of 20+ red flags investors should look for when performing IT due diligence on a target company.

IT Due Diligence Red Flags related to the Team

Lack of investment in personal development is prevalent in the technology industry. This is obvious when we assess teams during IT Due Diligence. Hence the diligence exercise can help uncover areas that need investment.

The challenge compounds when money is injected into the team because there’s a need to parachute experienced people in to turn around and develop the tech environment.

1. Misalignment within the leadership team

The most destructive “people” red flag is when the team isn’t aligned. It is obvious to focus on the roadmap and strategy, but it is also essential to ensure the team is aligned when evaluating an organisation.

There are numerous real-life examples where the CTO’s vision opposes the lead technical team’s view. Or more disturbing is when the strategy misalignment is so severe that it’s impossible to work out what the company does – to the point no one can explain what they do.

In addition to ensuring the tech team are in alignment, it’s also essential to speak to the commercial Team to check complete alignment. For example, asking the commercial Team to submit a recent recording of a sales meeting can be useful. This way, it is possible to assess if the tech team is aligned with the commercial offering / or how the commercial offering is presented. 

This action, admittedly, appears more like a commercial due diligence task, but I promise it’s well worth the tech advisors undertaking this on behalf of the investor.

2. Avoidance

Senior technology staff are articulate and able to run circles around most people as they describe the intricacies of their beloved technology solution. But these presentations could be avoidance – long-winded monologues to keep us from digging deeper into what’s happening.

I recall meeting a CTO in Amsterdam for a leading-edge Fintech product. The one word I could use was “slick” and full of “founder magic”. I don’t think anyone could resist his passion and narrative (good storytelling Is important, even in tech).

But some things didn’t feel right. When we dug deeper into the product, bespoke engineering was uncovered that could be replaced with off-the-shelf solutions, and the hosting costs through a small provider were spiralling.

The investment was contingent upon the hosting concerns being addressed, and plans were made to reduce the bespoke engineering efforts.

3. Poor internal communication

An easy way to judge a team’s/business culture is the quality of the input (meetings, written and oral comms) and the output (precisely how much work is completed).

Communication issues need ironing out before pouring money in. For example, a recent assessment of a team uncovered a divide between ‘old’ and ‘new’ thinking. The division created a noticeable impact on the working environment and was significantly impacting productivity.

4. People in the wrong seats

In some situations, poor return on investment is due to people being in the wrong seats. Some CTOs prefer being ‘hands-on’ and are unwilling to let go of control. Which means less strategic and commercial evolution of the tech offering.

Conclusion.

Performing due diligence on a target company’s IT infrastructure and software is critical to the M&A process.

Investors should look for red flags indicating problems with the company’s IT systems, including outdated technology, lack of standardisation, and data quality issues. By addressing these issues early on in the process, investors can avoid costly mistakes down the road.

Beyond M&A offer a sober and pragmatic analysis of these considerations with 15+ years of experience in tech M&A.

For More Info: Tech DD