Published on June 25, 2021 by Archana Kanojia
Change is the end result of all true learning — American author Leo Buscaglia
The 2020 pandemic tested companies’ processes and procedures, including their technology interfaces. Businesses have been adopting technology for a while now, driving technology integration in all domains — from manufacturing, logistics, e-commerce reach-out to customers and public relations in social media to management control in enterprise resource planning. Technology has been the backbone of business continuity planning, and in 2020, global businesses realised that technology provides more than assistance; it is a critical facet.
We believe that as the world recovers from this crisis, technology integration will continue and the investor community, too, would see the need for digital technology. Assessing digital prowess was the second priority for non-tech businesses, but the pandemic demonstrated that digitisation could be critical for non-tech commoditised businesses as well.
We believe, therefore, that the due diligence process should also be digitised and conducting digital due diligence should be as important as conducting due diligence the traditional way.
Traditional due diligence critically examined operations
Until recently, due diligence conducted by a private equity (PE) firm, before zeroing in on an investment, involved identifying, investigating, and auditing and analysing a company:
- Identifying: Usually, an analyst is assigned to conduct research and identify potential targets. Deals sometimes come in through referral/direct contact
- Investigating: This refers to checking whether a potential deal will be a strategic fit for the acquirer; it also involves analysing products and services offered and seeing how they complement the acquirer’s business or strategy
- Auditing and analysing: This relates to assessing the financials of a target company (such as revenue, EBITDA, and relevant ratios) as well as factors such as its management team and employee and compensation policies
Digital due diligence is a coming-of-age concept
Digital due diligence is not a new concept but has come into focus at a time when the world is becoming increasingly digital.
Digital due diligence (digital diligence) refers to conducting a comprehensive analysis of the digital assets of a company. It involves evaluating its digital footprint (social media presence), IT infrastructure, compliance and privacy policies as well as disaster recovery (DR) and business continuity plans.
A well-planned and properly implemented digital diligence process would ensure that the company
- Has a strong digital presence
- Is strongly connected to its clients and is accessible to prospective clients in real time
- Is proactively prepared to deal with any calamity
Digitalisation is driving the need for digital diligence
Globally, companies have been streamlining their processes by digitalising them.
Digital diligence could, therefore, identify growth potential of a target.
With companies adopting digital methods of operation, it becomes imperative to value the digital assets of a company to ensure successful M&A.
Companies with virtual operations call for strong IT Infrastructure.
Factors to analyse when conducting digital due diligence
Digital due diligence will help analyse a company’s digital assets to arrive at a correct valuation. Listed below are some of the digital assets that could be analysed as part of a “digital valuation” of a company, and the respective evaluation criteria:
Digital due diligence to complement traditional due diligence
Digital diligence is an emerging discipline. Thus, it should be seen as an extension of/adding value to traditional due diligence, and not as a separate field. Thorough digital diligence would make the due diligence process more robust. In other words, conducting traditional and digital due diligence would ensure “holistic due diligence”.
Digital diligence complements and completes traditional due diligence, as indicated below:
Key performance indicators
Financial metrics such as revenue, EBITDA and ratios
Digital assets: Website, web traffic, and compliance and privacy policies
Financial performance, market reach
Digital active connectedness with existing/prospective clients
C-suite positions such as CFO, CIO and CTO
IT infrastructure and management (e.g., BCPs/DR plans)
The pandemic highlighted the importance of conducting digital due diligence
This pandemic transformed the way business should be conducted, calling also for transforming the way companies are valued.
Likewise, company focus has shifted to ensuring it has strong IT infrastructure and a robust BCP in place.
- In a 2020 by Mercer LLC, 49.6% of 266 respondents were concerned about business continuity after the pandemic, although some companies were able to scale up fast and adopt (and thereby enhance the visibility of) digital workplace solutions such as Amazon WorkSpaces and similar solutions such as Citrix and Azure.
- In similar surveys, c.51% of 302 respondents did not have a BCP in place, and 58% of 266 respondents were able to offer work-from-home options to their employees.
As highlighted amid the pandemic, having a BCP/DR plan in place, supported by strong IT infrastructure, can ensure smooth business continuity in the event offices are rendered inaccessible.
Acuity Knowledge Partners has long understood the importance of clients maintaining digital ecosystems. We take a holistic view of our clients’ perspectives, and our digital service offerings have provided solutions and ensured the smooth delivery of time-critical assignments with the help of a strong IT backbone even amid this crisis.
Not only did we swiftly and smoothly shift to remote working as a precautionary response to the crisis, but we continue to support our clients and ensure business continuity during these challenging times.
About the Author
Archana Kanojia, Delivery Manager, Corporate and Consulting Practice, started her career with Acuity Knowledge Partners in 2010. She currently provides oversight to various teams assisting client business development teams’ in proposals drafting, managing proposal content, lead generation and consultant databases. Previously, she provided oversight to teams that assisted clients to set up fund databases for private equity funds of funds, analyzing private equity (PE) firms and their funds from an investment standpoint, and also extended investment support to PE firms through industry studies, information memoranda and similar activities.
Archana holds a Post Graduate in Business Management with a specialization in Finance and Marketing from New Delhi Institute of Management, Delhi. She also holds a bachelor’s degree in Commerce (with honors) from Delhi University.