"Strategically-Focused" IT-ODD

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Aqualis Advisors’ “strategically-focused” Informational Technology Operational Due Diligence approach expands upon IT-ODD by not only examining the Target’s current IT capabilities, but rather focusing on the holistic IT capabilities that will be required to achieve the Target’s and Private Equity Client’s jointly defined strategic business growth and operational improvement objectives necessary to increase recurring EBITDA.

This is not a standard approach, methodology or set of tools that is often deployed by a leveraged services model.  Rather, it is a forward thinking and experienced-based evaluation of potential opportunities to be realized from an understanding of the status quo as a foundation for achieving ongoing strategic EBITDA enhancement during the portfolio company holding period.

Each engagement is both unique, which requires flexibility in the analysis, and at the same time similar, which requires experience to correlate the parallelisms.  From these contradictory perspectives, unique opportunities to cross-breed ideas are identified as strategic recommendations.

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 nor is there any magic “checklist” to certify the quality of all Targets’ IT capabilities relative to all situations.  Therefore, an effective IT-ODD effort must be sufficiently flexible so as to be able to accommodate variety among targets and transactions in order to be relevant.  Furthermore - 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?

• 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.  Accordingly, for example, the actual investment could be as anticipated, while the deployment of the solution requires a longer time-frame than expected.  As such, 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 (i.e., vs. a full-scope-coverage business application) that fails to be able to effectively support revenue generation or business development activities, resulting with significant custom programming of extensions and increased ongoing IT OpEx to support.

Other IT-ODD considerations:

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/understanding the Target’s business operations.

Not a “Technology Company” Myth

There is a pervasive Myth in Middle-Market M&A  — That IT-ODD is only necessary if the Target is a “technology” company and that if the Target is not a “technology” company, specialized/Non-Financial Tag-on IT Due Diligence is sufficient.

All enterprises, in all industries, utilize information to acquire customers, generate revenues and record results.  While the size and complexity of the Target’s operations will require varied deployments of IT capabilities, all enterprises have some IT capabilities deployed.  Accordingly, an appropriately scoped IT-ODD effort will provide a meaningful assessment of those capabilities and the enterprise’s ability to leverage available information technology components.  Often, lower middle market “technology” companies have minimal IT capabilities supporting their business operations, despite generating revenue from advanced deployments of information technology components.

The key in middle market transactions is not to circumvent performance of IT-ODD, believing the Myth.  - Rather, the key is appropriately scoping the IT-ODD effort to be truly relevant for the transaction.  

It is fact that most longstanding enterprises that are dependent upon legacy industry practices and company processes cannot achieve the productivity, scalability and nimbleness of those enterprises that have been established utilizing current-state information technology components.  This is true in:

• Manufacturing where technology enables collaborative, low-cost, just-in-time "global" (i.e., multiple facility)  manufacturing approaches.  
• Logistics, transportation and distribution utilizing bar code scanning, RFID and other technologies - where meaningful and justifiable deployments can be implemented to realize tangible value.  
• Industries which need to provide standard services with consistent quality across geographic regions and/or facility locations.