Part 4: People: The most unpredictable of assets
Risk is apparent and inherent in all levels and business groups of an organization. A quick search online reveals countless articles and blogs, written by experts and analysts alike, dedicated to the shared view that one of the main threats facing organizations today is employee turnover.
It’s not surprising, employee turnover can cost a company not only money, but also time, intellectual know-how, and can weigh heavily on those individuals left behind in the organization. For companies who’ve built divisions or kept knowledge in the hands of one or few key individuals, the negative impact associated with a key man loss can be much larger and more detrimental to the operations of the business.
During diligence, as you assess the Management teams, it is also important to look for tenure and engagement from key resources depending on the role of IT in the business. For instance:
- In a software/high tech company, or company where a proprietary system is critical to business operations, careful evaluation and access to the Lead Developer is important.
- In a heavy transactional business, careful evaluation and access to the Data & BI Manager or Chief Software Architect is important.
- In businesses where a large percentage of business is driven through an eCommerce platform, careful evaluation and access to the Web Developer/Admin is important.
In many deals, these roles are often not “under the tent” or aware of the potential transaction, so it is crucial to set the stage early, that access to these people is necessary. Even if your IT diligence provider needs to go under a guise of consulting help or IT auditors, there is the potential for missing key IT organizational risks with key members of the team. Below is a sample of good, bad, and ugly situations with respect to the IT organization.
The good: A scalable enterprise with leaders suited to help the company grow for the next 5-10 years.
- Uses outsourcing and offshoring resources for commodity functions (such as infrastructure hosting) and designates a role within IT to manage those relationships.
- Has thorough documentation of IT processes and proprietary information (and is regularly updated)
- Each IT role has a primary resource and individual who could backfill, if necessary
- Key positions have long tenure with the company, succession planning has been thought through and prepared, and these individuals work closely with the business in setting the technology roadmap/initiatives
The bad: A company with minimal documentation of key IT processes and proprietary information.
- Certain core functions within IT may be outsourced when they should be staffed internally (such as IT contractors deploying system changes to production)
- Has individuals with critical knowledge that are viewed as a flight risk, but it does not have a back-up or mitigation strategy
- Has a history of high turnover within the organization
The ugly: The IT organization lacks understanding of the business, including how it supports and enables the company to prosper.
- Documentation for key IT processes and proprietary system information is minimal or non-existent
- The IT organization has multiple single points of failure
- Relies on specialized skill sets not widely available in the local market and individuals with proprietary system knowledge and history
- Has a history of high turnover among key IT positions (i.e., there have been 3 CIO’s in the last 5 years)
- There are key individuals within the company who do not have transition or mitigation plans if they leave, voluntary or otherwise
While not every company can or does have a strategy for mitigating the lottery effect (key employee wins the lotto and quits their job immediately), it is vital to identify key individuals within IT, understand their fit relative to the investment thesis, and have succession plans in place as you would have for other key members of the management team.
I hope these segments have been helpful in driving a better understanding of the impact of IT diligence on your next deal. Please reach out for further information or if there are future topics that might be of interest to delve into deeper.
The Good, the Bad, and the Ugly blog series is based on a chapter Matt Sondag, Keith Campbell, and I co-authored for The Operating Partner in Private Equity Volume 2 – providing valuable insight to private equity firms on how best to acquire value from an IT operating partner.