Technology Readiness After Close: Diligence and Post-Deal Success Factors
In a recent virtual session, Private Equity International’s Operating Partners Technology Forum, panelists met to discuss successful technology due diligence and post-close technology readiness considerations for those partnering with investment teams, providers, and target companies. Brent Fisher, technology enablement leader at Riveron, hosted a discussion with experts Tye Howell (Blue Point Capital), Paul Souvick (Cerberus Operations), and John Mavriyannakis (Maverix Private Equity). During diligence phases and post close, here are some key takeaways to consider when assessing technology readiness.
When it comes to successful change management, ultimately, it is the responsibility of leadership to set the vision.
KEY TAKEAWAY #1
Technology must be scalable and align with the investment thesis.
At the onset of diligence, private equity (PE) firms must evaluate the target company’s people, processes, and technology. IT diligence must yield a hypothesis of the technology roadmap that aligns with the investment thesis and determines how to shape the diligence process. For example, one investment thesis may focus mainly on uncovering risks in the current landscape that, if unaddressed, could cause high costs during the hold period. Another PE firm’s investment thesis may focus primarily on business applications with the ability to scale for multiple additional acquisitions quickly upon closure. Because priorities can vary, it is crucial to align the roadmap of technology with the investment thesis and identify the key people that can support the strategy and enable successful growth.
While it is not a deal breaker if a target company lacks a fully modernized state, it is important to identify key areas that can introduce risk, cost, or inability to scale. Proper technology readiness can ensure investments and efforts can grow, scale and avoid risk during a several-year hold period. High-level diligence might make an organization’s technology seem ready to optimize, but upon digging further, proper diligence and post-deal implementation planning can reveal major issues.
Effective operating partners also seek executive alignment on digital transformation opportunities and the roadmap for a successful partnership. They want to ensure the management team is aligned with focusing on business outcomes to drive enabled technology decisions. Any unwanted technology not only lacks business value, ultimately it costs time and dollars. Whether the portfolio company needs better management reporting, automation, or right-sized enterprise resource planning (ERP) solutions, the key is to avoid a technology-for-technology’s-sake mindset. Thinking that technology alone will solve the problem is inaccurate; challenges, issues and pain points are solved through people, and by focusing on the business process – aligning the technology to support these factors.
KEY TAKEAWAY #2
Hone the diligence focus toward data and cybersecurity opportunities.
While assessing data protection and cybersecurity may previously have been a “check the box” exercise, in recent years this topic has required a heightened focus. Experts describe cybersecurity as an area that is consistently evolving, with risks around ransomware, cyber espionage, protecting proprietary IP, and how a company is mining and managing its data. As a result, most PE firms and partners now must take a proactive mindset to address these opportunities early and comprehensively.
The question of cybersecurity is often top priority with the investment committee. Significant time may need to be invested into enhancing the cybersecurity posture to determine what can be done immediately after close to address any concerns that may become an issue and can negatively impact valuations.
KEY TAKEAWAY #3
Plan for ample change management efforts.
Culture and change management is the foundation to successfully optimize the technology landscape. From an IT and technology perspective, one of the most common challenges in the post-close period is underestimating the impact of change on users, governance of projects, and people aligned to the vision. For example, having several, disparate systems in place creates an abundance of very expensive digital filing cabinets. While a target company may need new business applications to scale (such as a CRM, ERP, or other system), often the associated processes within a target company remain quite archaic, rather than being an integrated, end-to-end solution. Additionally, these processes may have been in use for a long period of time, causing resistance to change.
Beyond the processes, technology is only as good as the people who are using it. The adoption of the cloud, the proliferation of applications, and the expectations set by software companies often create a messy landscape. Simply acquiring point solutions can sometimes make one business area work better; it can also add a plethora of manual efforts that cost teams within the organization valuable time and money if it is not integrated in the end-to-end solution
When it comes to successful change management, ultimately, it is the responsibility of leadership to set the vision. When undergoing system implementations, process redesign and introducing new applications, teams should understand the impact of change and educate the users on why change is taking place.