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Posted: April 21, 2011

Buyer Beware

Ignoring IT due diligence could lead to costly problems

By Matt Kenney

When entertaining a transaction, most firms understand the necessity - and value - of financial and tax due diligence. Information technology due diligence, on the other hand, is an often overlooked and underrated need. Even sophisticated buyers may not recognize the risk that outdated systems, noncompliant licensing or inadequate support resources can pose to the success of a transaction.

Before deciding to forgo IT due diligence, buyers should, at minimum, ensure they know the answers to a few critical questions. They should also understand how the state of a company's technology infrastructure can affect post-transaction costs and key areas of company operations.

According to leading independent IT research firm Gartner, 2009 went down in history as the worst year ever for IT growth. Hardware sales plunged by 15 percent, creating an aggregate 6.8 percent decline across the industry. Staffing levels plummeted, too. According to the Bureau of Labor Statistics, the United States saw unemployment rates double across all IT occupational categories between 2006 and 2009.

By the close of 2009, midsize companies had halted spending - and were refocusing on extending the useful life of technology assets. They postponed important system upgrades and delayed the implementation of new systems. Findings by Gartner that midsize companies were already technologically less efficient than their small (less than 100 employees) and large (more than 1,000 employees) counterparts suggest these organizations may regularly defer IT upgrades or turn to less than optimal solutions to curb spending.

In addition, IT decision making and implementation within this period has been conducted with significantly less staff. While ideally post-layoff staff should represent the best of the best, companies are just as likely to retain their least expensive - and potentially least skilled - employee base, including IT personnel.

What does this mean for the transaction process? Outdated, undersized, nonstandard or custom-developed platforms point to cost, data integrity, regulatory and security risks. Buyers may find that significant enhancements to technical and business application infrastructure are required after the acquisition. Critical investments in a company's Web presence and customer relationship management system may also be needed to support daily operations and the sales cycle.

Given the vulnerable state of IT in many organizations, buyers should consider the following questions:

Have the systems kept pace with changing regulatory requirements?
Will a sizable investment need to be made after the acquisition?
Is the company up to date and compliant with hardware and software licensing?
Are staffing levels and expertise sufficient to maintain post-transaction stability and support post-transaction objectives?
Do internal or industry-
standard benchmarks reveal areas
of weakness?

While security, integrity and scalability of the IT infrastructure are more difficult to benchmark than other areas of due diligence, they represent a rapidly growing threat. Including IT in the due diligence process not only protects your investment dollars but optimizes investment performance post-transaction.

Matt Kenney is a managing director in the Denver office RSM McGladrey Inc.
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