The Science and Best Practices of Due Diligence

The fast pace of change today requires that businesses have a much greater appreciation of due diligence. Sufficient forethought, investigation, and assessment of the transaction are necessary of relevant aspects of the past, present and predictable future of the change. Due diligence often involves:1) Requesting, collecting, reviewing and validating operational and financial details,
2) Refining technical details and pricing proposals, and
3) Confirming or updating initial information needed to make an informed decision.The primary reasons for proper due diligence are to risk mitigate the potential for bad decisions and improper investing of funds or resources, over pricing, or undesirable purchasing based on:1) Bad assumptions, unknown constraints, or fraud,
2) Poor or missing documentation,
3) Poor or incorrect referencing,
4) Weak articulation of needs and expectations, and
5) Improper delivery of products or services.The following due diligence recommendations can reduce risks and improve results associated with business changes:1) Plan for the time that risk management and mitigation takes,
2) Don’t overlook the importance of risk management and mitigation,
3) Use a team approach to verify sufficient and timely risk management and mitigation has occurred,
4) Ensure that team members understand their role in the process,
5) Understand that risk management and mitigation involves:
a. Proper sequencing within leadership, program management and system processes,
b. Sufficient time and patience,
c. Multiple parallel activities that align to the leadership, program management and system lifecycles of the business,
6) Ensure that you build into your business plans the costs involved in performing due diligence,
7) Articulate business vision, policies, plans, risk tolerances, needs and innovation expectations,
8) Understand the business and program risks are greatest when the cost increases, program expectations, and needs can’t be articulated.It is important to understand that it is a mistake to conduct risk management and mitigation in a rushed or ad hoc manner or think of due diligence as the “last step” to a finalized deal. Due diligence, similar to quality and risk management, is best done as an ongoing formal process that measures risks for new business or changes to existing businesses. Risk management and mitigation isn’t about “just doing it” and may span MANY months. It is IMPORTANT that changes are understood and documented throughout the business or program lifecycle so that expectations are understood, managed, shared, implemented, and ultimately achievable.Quantifying risks and opportunities is a critical piece of the process. Businesses follow similar approaches in managing change or taking advantage of new opportunities. The two critical variables in measuring risk are the “Severity of Impact” to the business and the “Probability of Occurrence” of the risk or opportunity. These variables are significant to performing due diligence and are used in quantifying the risk of the transaction or change.There are multiple perspectives for risk management and mitigation from both the purchasing and seller perspectives and determine if the change will be wise for growth, profitability or whether there are other tangible benefits. Other benefits may include:1) Demonstrating new products, capabilities, or desirable service areas, and
2) Broadening a geographic market.Determining what you need from the transaction is just one step in the process. Other steps include creating a strategy, requesting information, inviting vendors to bid, evaluating and selecting responses, negotiating the deal, and building transition plans. Risk management and mitigation is used to make a selection based on the responses to requests and the validation of these requests for detail. The primary goals for due diligence is to:1) Understand the business context for the transaction,
2) Reaffirm that the transaction will satisfy business goals,
3) Ensure that the work to be performed and delivery expectations are clearly understood and documented,
4) Ensure that the environments and potential transformation to any new environments are understood,
5) Ensure that both parties thoroughly understand the deal so that it may more successfully derive tangible benefits from the engagement,
6) Ensure that the assumptions and requirements of the deal are validated by contract, and
7) Ensure that the responses to the contract can be validated, including the ability to execute the workload, the quality of the work, and proposed pricing.The near and longterm results that come from the growth opportunities and other benefits of a successful implementation and use of the due diligence process can take an organization beyond adding the intended new business capabilities, investment opportunities and other changes and can actually result in a major cultural, product, and service change to the company.