The below write-up was inspired by the words of the Governor Cuomo, Governor of New York. In nearly all of his television presentations he always expressed the need to get unto the front foot as they have been on the back foot since the outbreak commenced. His words:
“We talked yesterday about planning forward, getting ahead of it, that we have been behind on this virus from day one and rather than be reactive, be proactive, get ahead of it.”
In the world of rugby football we call it being on the front foot. Whenever you find yourself on the backfoot it means you are not prepared and slow to react. When on the front foot it means you are anticipating the tackle or receiving the ball and thus quick to react and move ahead of the opposition.
Technology Due Diligence is increasingly becoming relevant with most financial transactions, as most industries have hardware and software incorporated into there operations in one way or another. Unfortunately its an area in general legal due diligence that is given little attention.
With the advent of Covid 19, most industries have incorporated even more technology into their operations. Remote monitoring of activities requires sensors and IP cameras. Remote working requires use of cloud solutions. Even payment solutions require incorporating new concepts like blockchain. In one way or another our beloved corporations will never be the same again once we come out of the Covid 19 era. Part of the change shall be our increased reliance upon technology.
Considering technology shall play an even more pivotal role in day to day operations, the value and risk attached to it shall be even more critical. Due Diligence methodologies will need to change. On the sell side, the type of documents need to be prepared must show amongst others:
1. Software ownership status
2. Software and hardware architecture scalability
3. Third party platform interface
4. User dependence and expansion potential
5. Status of software updates (some software have reached their end date and no updates are available which is a major risk)
6. Third party support for proprietary software
7. Certification of in-house support staff to show competence and capability to manage IT infrastructure
8. Software code language for in-house/outsource developed software
These are just a few of the things that corporates on the sell side need to consider in a typical due diligence exercise when populating the data room. The more comprehensive the quicker the potential for the transaction to be consummated.
On the buy-side the risk can be high when acquiring IT assets. Poor due diligence could lead to the wrong valuation and exposure to risks which pop-up post acquisition. The cost of correcting such errors could be scary. The check-list for Technology Due Diligence needs to ensure it covers both hardware and software assets. Bare in mind that the hardware components usually always include a software component.
Lenders to a corporates need to ensure Technology Due Diligence is also incorporated in their due diligence process. Imagine a food based manufacturing company seeking a loan to assist with their expansion plan. Undoubtedly the ability to pay back on such loans is dependent upon the operations working unhindered. All that’s needed to put a spanner in the works is for the software managing a critical part of the manufacturing line to cease being supported and the firm that developed same software to cease to exist. Note that manufacturers and suppliers of hardware rarely are the same parties that developed the software which manages the operation of the hardware.
Insurance firms need to include IT assets as part of their due diligence exercise when valuing the assets they seek to attach a premium to. Failure to attach the correct value to an asset could lead to significant issues down the road for both parties.
Procurement departments need to deploy a due diligence mindset to ensure all risk elements are captured and positioned carefully when corresponding with vendors during the tender process.
The post Covid-19 era must not be taken for granted as we deploy an increasing amount of technology. Lets stay on the front foot. Not the back foot.
For assistance talk to one of our due diligence experts. It could be the difference between a successful post covid 19 era and …..
Managed Legal Services is a unit of the law firm Oladipo Opanubi. It focuses exclusively on due diligence for buy-side, sell-side, restructuring and debt transactions. The team consists of subject matter experts (SME), Technologists, Project Managers and Solicitors.
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