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Business and continuity: A plan for resilience

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.

  • In 2016, EY conducted a survey to analyse the acceptance and adoption of technology in the business world. Of the 600 non-technical corporates surveyed, 74% felt that digital transformation had changed the way business operations and processes were conducted; 59% confirmed that the digital aspect is considered when making major decisions.

Digital diligence could, therefore, identify growth potential of a target.

  • In another survey conducted by EY in 2018, 61% of 900 participants claimed that adopting digital processes can boost revenue. The automated and streamlined operations of a company could be used as a benchmark across a portfolio, leading to more profits for a PE firm. Therefore, investing in a technically robust company could prove to be profitable.

With companies adopting digital methods of operation, it becomes imperative to value the digital assets of a company to ensure successful M&A.

  • In a recent survey by Merrill Lynch, 65% of the respondents felt that proper due diligence is the most important factor for successful M&A; 63% believed that digital diligence will ensure greater security in an M&A deal.

Companies with virtual operations call for strong IT Infrastructure.

  • According to Check Point (a US-based cybersecurity company), 28% of the world’s companies were victims of cyberattack in 2020 (with most companies now operating virtually), a 50% increase over 2018. Thus, digital diligence will also ensure the robustness of a prospective investment’s IT infrastructure and cybersecurity policy

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 asset

Process relevance

Potential evaluation criteria

Social media presence

Digital connectedness with current and prospective clients

  • Frequency of updating social media accounts

  • Usability of content

  • Number of social media followers

External website (web link)

Quality and relevance of information provided to third parties

  • Footfall/web traffic on company website

  • Ease of surfing

  • User-friendly website

Internal web link (intralink)

Connectedness with employees

  • Up-to-date company information

  • Update frequency

  • Employee engagement

IT infrastructure

Business continuity and protection from cyber theft

Frequency of

  • Software updates

  • Security patch deployment

Material non-public information (MNPI) policy

Confidentiality and safety of client data

  • Frequency of policy updates (quarterly/annually)

Workforce’s technical prowess

Efficiency and effectiveness of workforce in digitally conducting business operations

  • Employee training frequency and training topics

Business continuity plan (BCP)/disaster recovery (DR) plan

Preparedness for dealing with a calamity

Frequency of

  • BCP/DR tests

  • BCP/DR policy updates

Updated data centres

Ensures data is on hand if the office becomes inaccessible due to a crisis

  • Frequency of data transfers to virtual data centres

Intellectual property

Safeguards against infringements, increasing investor confidence in company

  • Timely review and revision of patents, trademarks, copyrights, legal disclaimers

Online subscriptions

Creates a customer base and attracts prospective clients

  • Newsletter circulation

  • Content relevance

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:

Focus area

Traditional due diligence

Digital due diligence (also covers)

Key performance indicators

Financial metrics such as revenue, EBITDA and ratios

Digital assets: Website, web traffic, and compliance and privacy policies

Value proposition

Financial performance, market reach

Digital active connectedness with existing/prospective clients

Management

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.

  • With companies shifting to virtual operations, their IT infrastructure (long considered a “backwater”) has gained importance. A 360-degree analysis (traditional and digital diligence) could, therefore, guarantee a PE firm the safety of its investment by ensuring that the target company is not only financially strong (traditional diligence) but also technically equipped (digital diligence) to deal with disruptive shocks.

Likewise, company focus has shifted to ensuring it has strong IT infrastructure and a robust BCP in place.

  • In a 2020 survey 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.

Sources:

Merrill Corporation report: M&A in the digital age

EY report: Digital Deal Economy Study, January 2018

EY report: Dealing in a digital world, July 2016


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About the Author

Delivery Manager, Corporate and Consulting Practice

Archana Kanojia 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.

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