Investigate to make a wiser choice

Viewpoint

As IT becomes ever more critical to the effective operation of every business, IT directors are being called on to assess the value of IT systems during company takeovers. Although not a core skill of most IT professionals, the process, known as due diligence, is vital when making multi-million pound business decisions.

IT due diligence identifies IT risks and exposures for an organisation prior to an investment being made in a company, allowing the investor to make an informed IT investment decision. It is designed to complement and enhance the legal and financial due diligence practices that are currently undertaken for projects from mergers and acquisitions to flotations.

In the UK, over the past 12 months, there were 5,116 registered deals, the majority of which involved little or no identification of IT exposure prior to the deal being struck. It is no coincidence that over 70% of these failed to deliver their required and expected results.

As IT is central to the administration of a business, it is vital to expose the IT risks before the deal is agreed. Only then can an informed investment decision be made.

Take the cancelled administrative merger of four hospitals to form UCSF Stanford Health Care, where planning and implementing IT was a major factor in the failure. The IT costs rose to five times the original estimate. Unrealistic figures were used to calculate costs and funding of Y2K projects were not taken into account.

In a deal, IT due diligence can bring together the IT and finance directors, uniting them in a common goal of a cost-effective, seamless integration of two firms. The IT director becomes invaluable to the deal process and the acquiring company's bottom line.

Pre-deal, it is important to have the best quality information available about the other firm's information systems. This is where the IT director comes into play. This gives the finance director more leverage in price negotiations; it identifies the risks, qualifies them and gives a clear understanding of bottom line costs of the deal.

IT directors should also carry out an independent assessment of their own systems, to ascertain the state of the architecture, network, and ERP systems. By establishing their own strengths/weaknesses, these can then be weighed against those of the other firm.

Investment bankers putting together merger and acquisition deals often project IT savings far in advance, based on their previous experience. Then the unfortunate IT director is expected to make it happen. The IT director would be wise to validate those estimates as early as possible to avert inaccurate financial projections.

The IT director should look at a merger just as any other major IT project. They should have established methodologies at hand, supported by project-management, cost-estimation and portfolio-analysis tools - used to plan and budget projects and to make informed decisions.

However, although IT directors are frequently expected to carry out the IT due diligence in these situations, they may know their own network inside out, but they can hardly be expected to know about the other company's.

It is wiser and more cost-effective to use an independent consultancy with IT consultants covering all systems, to carry out IT due diligence.

Hugh Craigie Halkett is CEOof Vestech, and as a specialist in IT due diligence has worked on takeovers worth £200m

www.itduediligence.com