IT-ODD Definition
Aqualis Advisors provides strategically-focused Information Technology Operational Due Diligence (IT-ODD) advisory services to Private Equity Firms, their portfolio companies and acquisitive corporate enterprises. A clarification of terminology may be helpful to understand the difference.
What is “Information Technology Operational Due Diligence (IT-ODD)”?
The appropriate deployment of information technology is a critical success factor in every business.
- Regardless of industry, revenue size or scope of operations, information technology can facilitate and enable the conduct of business activity to create differentiation and competitive advantage.
- Therefore, information technology is a critical component of every transaction. While this is obvious in a technology enabled business, it is equally essential in all enterprises.
- The essential objective of IT-ODD is to determine if a Target’s IT capabilities are acting either as an asset, which enables achievement of acquisition objectives, or as a liability, which hinders achievement by inhibiting effective, efficient conduct of day-to-day business operations.
There is no “one-size-fits-all” IT-ODD approach. There is no magic “checklist” to certify the quality of all Targets’ IT capabilities. Therefore, an effective IT-ODD effort must accommodate variety among targets and transactions in order to be relevant.
For instance, a lower middle-market enterprise deploying a simple, out-of-the-box accounting package with no dedicated IT resources is often deemed unnecessary for IT-ODD. That can be a costly mistake. With such a Target, the focus of an appropriately focused IT-ODD effort would be to confirm that an envisioned IT platform and investment is accomplishable. The key is “accomplishable” because the anticipated solution may not provide adequate remedy or may not be achievable as envisioned.
For instance, the actual investment could be as anticipated, while the deployment of the solution requires a longer time-frame than expected. A transaction that anticipates a five-year holding period will fail to achieve value if the first few years are lost to a misguided IT platform or application implementation. In other cases, the envisioned application solution may be an upgraded financial application which fails to effectively support revenue generation or business development activities, resulting with significant custom programming of extensions and increased ongoing IT OpEx to support.
The lower the Target’s revenue base, the greater the impact of an IT platform error. — Will that envisioned IT platform really be an asset as anticipated or in reality a liability?
Data processing focused due diligence, while important for financial due diligence validation, is not IT-ODD.
Data processing is the electronic handling of business transactions. Often these electronic processes mimic previous manual processes which were simply mechanized to achieve productivity, especially with regard to financial accounting activity. Data processing focused, controls-oriented IT due diligence assesses the adequacy of a Target’s application systems to support the processing of business transactions with sufficient controls to ensure that accurate financial results have been generated historically, and will continue to be generated in future periods.
Unfortunately, data processing and electronic transaction handling does not represent a current-state, effective deployment of information technology. Data processing and electronic transaction handling does not facilitate and enable the conduct of business activity to create differentiation and competitive advantage.
IT-ODD goes beyond just verifying the veracity of corporate data. IT-ODD must assess the deployment of the Target’s IT capabilities to determine if those capabilities are in fact leverageable assets or encumbered liabilities, as well as what operational risk exists resulting from the decisions and practices associated with the deployment of those IT capabilities.
That assessment can only be determined through the requisite, relevant experience of the resources actually performing the analysis, interacting with Target personnel and reviewing the Target’s business operations.