Investing with confidence: the power of digital due diligence
28 September 2023 • 3 min read
Discover how integrating digital due diligence seamlessly with traditional due diligence practices can revolutionise investment decisions for private equity and debt investors. Uncover the potential risks and missed opportunities that could result from overlooking the digital aspect of investments. Learn how embracing a more holistic approach ensures sustainable and profitable investments in an ever-changing digital landscape.
What kinds of technical due diligence do investors currently undertake?
Currently, investors may only undertake limited forms of technical due diligence - an evaluation of a company's technological infrastructure, systems, and processes to assess their efficiency, reliability, and potential risks. Some of these risks can potentially include:
- Outdated or inefficient systems: without evaluating a company's technological infrastructure, investors may overlook outdated or inefficient systems. Legacy technology can hinder productivity, scalability, and competitiveness in the market. This can lead to higher operational costs and difficulties in adapting to changing industry trends and customer demands.
- Lack of technology adaptation: not understanding a company's ability to adapt to emerging technologies and digital transformation can pose risks. Rapid advancements in technology can disrupt industries, and companies that fail to embrace these changes may lose competitiveness.
- Technological dependencies: failing to evaluate a company's reliance on specific technologies or third-party vendors can pose risks. If a company heavily depends on a single technology provider or lacks backup systems, any disruption or failure in those technologies could lead to operational downtime, financial losses, and reputational damage.
- Technology stack and infrastructure: assessing the company's technology infrastructure, including hardware, software, databases (including data security), and networking. Evaluating the scalability, reliability, and performance of the technology stack.
- Technical debt: investigating any accumulated technical debt, which may include outdated or legacy systems that require substantial investments to modernise.
A technology due diligence allows investors to identify potential technology risks, assess a company's technology roadmap, and make informed investment decisions that align with their risk tolerance and long-term objectives. But is that enough? Though investors may have assessed the market potential of their target investment, have they identified additional key constraints and developed a suitable mitigation strategy to realise their desired return on investment (ROI)?
Digital due diligence: going beyond technology to assess digital capability
While technology due diligence plays a vital role in evaluating a company's technical infrastructure, it often falls short in capturing the full breadth of digital readiness. A narrow focus on technology alone fails to consider critical human, organisational, and cultural aspects that are integral to a company's digital success. Shrewd investors should also consider 4 additional factors as part of a comprehensive digital due diligence:
- Product: in the digital era, products and services are increasingly intertwined with technology. Assessing a company's digital product strategy, user experience, and innovation pipeline provides insights into its ability to adapt and meet evolving customer expectations.
- Data: data has become a strategic asset. Understanding a company's data management practices, privacy compliance, and analytical capabilities allows investors to gauge its potential for data-driven decision-making and competitive advantage.
- Delivery: digitally mature companies have adopted streamlined and agile processes that align with their digital strategies. Examining a company's ways of working, digital governance, and scalability ensures that investors are aware of potential bottlenecks or inefficiencies that may hinder digital growth in the future.
- People: last but certainly not least, a digitally ready organisation requires a skilled workforce capable of driving digital initiatives. Evaluating the talent pool, their digital skills, and the organisation's culture helps investors assess the potential challenges and opportunities presented by the human element in a digital transformation.
The conclusion: digital due diligence makes it easier for investors to assess a company’s digital maturity
In an increasingly digital-centric business landscape, financial investors must adapt their due diligence practices to ensure sustainable investments and unlock maximum value. By embracing digital due diligence in addition to financial, legal and commercial assessments, investors will gain a holistic understanding of a target company's digital maturity, potential risks, and growth opportunities.
Our Transaction Advisory Consultants are expertly placed to advise you on how best to integrate digital due diligence into your existing processes. We’ll help you to uncover the potential risks and missed opportunities hiding in plain sight and ensure sustainable and profitable investments in an ever-evolving digital landscape. Contact Sandra Falque or Simon Leary to learn more.