Due diligence is the corner stone of any investment. We check the reviews and ratings on everything we purchase. When was the last time you went out to eat without checking the restaurant rating on yelp.com or watched a movie without checking the tomatometer on rottentomatoes.com? We want to make the best use of our time, energy and most importantly, money. Getting into any transaction with all the pertinent information helps us make the right decision.
In the corporate world, due diligence is the research and analysis of a company or organization done in preparation for a business transaction. The business transactions can range from a supplier contract to a corporate merger. It is the duty of a firm’s directors and management to act prudently in evaluating associated risks in all transactions. The top executives in an organization tend to focus on financial and legal diligence and often minimize the importance of an IT due diligence.
Let’s take the case of the United Airlines and Continental Airlines merger. The two behemoths merged in September, 2013. Both airlines had been reporting losses due in part to the Great Recession and expected the merger to generate savings of more than $1 billion a year. Four years on, the integration process that was supposed to take 18 months is still incomplete. The merger of the reservations systems in 2012 resulted in chaos. The U.S. Department of Transportation fined United Airlines $350,000 in 2013 for delaying more than 9000 refund requests from passengers. The issue was blamed on unforeseeable anomalies that caused issues with processing the refunds. Four years after the merger closed, there are still two separate IT systems for maintenance.
Information technology is a critical component of any organization’s ability to deliver product and services, improve productivity and profitability as it meets the business objective requirements. It is also part of a multi-faceted comprehensive approach that is not only performed within an organization core functions but also other support entities of the organization. Information technology systems are no longer looked at as just another cost center for companies. They can be drivers of growth and innovation if utilized and leveraged correctly. Amazon and Google leveraged their existing cloud infrastructure, which was built for their internal business needs, to create new cloud hosting services that are now separate business divisions within the above organizations.
Like any other interruption in normal business, there are associated risks with mergers and acquisitions such as the more obvious, software disparities between both organizations. As a result, IT due diligence requires learning not only enterprise solutions but also the organization’s industry, business environment and most importantly, its reliance on technology.
IT due diligence would typically begin with a technology assessment of the merging organizations. This would include understanding the organization’s IT infrastructure, compatibility with other systems, adaptability to future needs and ease of conversion. A comprehensive approach would include all relevant operations like Human Resources, Legal, Finance, Operations and other corporate support entities in the assessment as well. Assessing the other relevant operations into consideration helps understand the impact of any changes in the information technology arena on the core functions of the organization. This will ensure that potential problems are screened early, plans are in place to handle issues and adequate resources are made available to ensure that the merger goes through without a hitch.
With regards to an acquisition, a smart approach to facilitate a smooth merger is to initiate a strategic short term transition time-line that focuses on transition and minimizes the inherent risks. The approach should also address long term advantages of all business opportunities that may result from the IT due diligence. Key objectives of acquiring an organization include a smooth transition and maintaining or improving the operating results of the newly merged organization.
The IT due diligence framework is developed to identify and quantify several factors including risk management, technology and related business opportunities, technology implications and transition plans. This framework provides a clear picture to the top executives on what the risk profile for IT is, any technology or process constraints and the impact of the transition plans. This helps the executives make a better informed decision taking into consideration the IT landscape and its important role in the organization.
For more information regarding this topic, please contact your local UHY Advisors professional or the author of this article:
Management & Technology Principal