Why are they increasingly relevant in any M&A transaction?
Introduction
Technical due diligence has historically been a process of evaluating the technical aspects of a company, product, or service before investing or acquiring. This includes assessing the company's technology strategy and codebase along with other things such as intellectual property, practices, security, and the capabilities and experience of its management and development teams.
Technical due diligence is essential for investors and acquirers to understand a company's use and suitability of its technology systems and processes. This includes assessing the company's technology strategy, execution, intellectual property, and the capabilities and experience of its management and development teams. By conducting technical due diligence, investors and acquirers can identify and mitigate potential risks and identify opportunities for growth and expansion.
Product strategy, on the other hand, is focused on defining the features and functionality of a product, as well as the target market and go-to-market plan. A well-defined product strategy helps companies to focus their resources on the most critical aspects of their product and to develop a clear and compelling value proposition for their target market. In addition, product strategy is also important for determining the appropriate pricing and distribution strategy for a product.
The Ansoff matrix is an example of a strategic planning tool that provides a framework to help executives, senior managers, and marketers devise strategies for future business growth.
The Ansoff Matrix (Source: Wikipedia)
Products (and services) present multiple options to align with a company’s business strategy: features, options, and new products that can complement, replace, or extend the market segments in which the business operates. Each new decision at the product level can strengthen the main strategic course, go in a new direction, or preserve the business while the new strategy sets in, having a cascading effect on the company operations, including product engineering. Therefore, product strategy can cover the whole spectrum roadmap that sticks to one concept, to the highly diversified course of a business looking for the next wins in a wide array of markets.
Effective product strategy and technical due diligence are critical for the success of any technology or technology-enabled venture. The right product strategy ensures that a company is developing a product that meets the needs of its target market and that it can be successfully marketed and sold.
Technology Drives Valuation And Ability To Implement Product Strategy
Product And Technology Are Value Drivers
The disrupting changes brought by the COVID-19 pandemic have forced businesses in every industry to accelerate their digital transformation, morphing every company into a technology or technology-enabled company.
The outcome of this acceleration is that we have seen results equivalent to those of the preceding ten years in the last two years. These radical changes are here to stay and will accelerate further soon.
The increasing role of technology in every facet of company operations means that the adopted technology becomes an asset of the business, whether it’s an intellectual property portfolio or an EBITDA driver, and will affect its valuation.
For example, the ability to rapidly shift marketing and distribution from physical infrastructure to digital channels and operations to get around the restrictions imposed by strict lockdown policies was often a choice between adapting or dying.
Therefore, even if a company is “technology enabled” rather than a “technology company,” its systems, architecture, application, and the processes around them become key assets for their success or failure. A thorough assessment of the technology stack, architecture implementation, product roadmap, and R&D capability helps identify many of the value drivers of a deal. The same assessment can help private equity investors identify performance improvement opportunities that drive target growth during the holding period.
Product And Technology Assessment
A product strategy is the interface between the business goals, market dynamics, and technology strategy. This three-way flow illustrates the rich translation from concepts into technology that drives and is driven into, market offerings, then back into products into business strategy in a virtuous cycle.
Feedback is the best way to build smarter strategic roadmaps by leveraging market and product performance. It can also be a tool that strategists use to understand better and play market dynamics, test new product features and their adoption patterns, and provide course correction with an almost immediate read on their effectiveness.
A revised Ansoff Matrix that uses product feedback metrics
Technical due diligence assesses how product feedback is gathered and used in the roadmap formulation and execution processes. Some examples of quantitative and qualitative feedback channels that get evaluated are customer service data, service ticket analysis, A/B testing, customer satisfaction surveys, product councils, etc. These sources' comprehensive collection and analysis will inform a data-driven product strategy, while advanced analytics and AI/ML can harness this process.
Therefore it’s critical to clearly assess the maturity of the product or service brought to market:
What levels of disruption and innovation characterize this product, especially in the eyes of its buyers and users?
What is the technology strategy used to bring the product to market fast?
How replicable are the technology and features to sustain differentiation? Is there a Technology gap that needs to be addressed?
In this context, a detailed product and technology strategy assessment becomes key to determining if and how a business can sustain growth, is resilient and can recover quickly from disasters, can secure both its own and its customers’ information, can keep its software and architecture current, modular, maintainable, and with manageable tech debt. This requires understanding the existing and potential technical issues, risks and opportunities, legacy architecture and outdated technical designs, and complexities that must be addressed during an integration effort or as part of a performance improvement plan.
Therefore, product strategy drives and is driven by technology strategy, and their alignment is the foundation for the roadmap to achieve the business priorities. A sound product roadmap must address both product and technical strategy implementation.
Technical Due Diligence Identifies Opportunities And Risks For The Business Strategy
Product Strategy, Legacy Architecture, Tech Debt, And The Hidden Costs In An Investment
Legacy architecture and technical debt refer to an organization's existing systems, infrastructure, and software. These systems and software are often inherited from previous generations and are often outdated and difficult to maintain. They may also need to be more flexible and adapt to new technologies and business requirements.
A sound product strategy, especially when evaluating a SaaS (Software-as-a-Service) business, must consider the limitations and costs associated with legacy architecture and technical debt because these can greatly affect the ability to implement the strategy.
One of the main challenges of legacy architecture is the high costs associated with maintaining and updating these systems. Organizations may need to invest significant resources to keep these systems running, which can divert funds away from other important projects and initiatives. Additionally, legacy systems may need to be more secure and more vulnerable to cyber attacks, which can result in costly data breaches.
One of the costs of legacy architecture is the lost opportunity represented by needing help to take advantage of new technologies and business models. Organizations heavily invested in legacy systems may need help to innovate and stay competitive in their industry. They may also miss out on new technologies' potential cost savings and revenue opportunities.
Another cost of legacy architecture is the need for scalability and the inability to handle high-volume data processing. Legacy systems may need help to handle the amount of data that modern technologies can process, which can result in delays and inefficiencies.
Finally, the maintenance of legacy systems can significantly drain IT resources and personnel. IT teams may need to spend significant time and effort maintaining and updating these systems, which can take away from other important projects and initiatives.
Therefore, legacy architecture and technical debt can be a significant cost to an investment. It can be difficult to maintain and update, inflexible, less secure, and unable to adapt to new technologies and business requirements. It can also divert funds from other important projects and initiatives, miss out on potential cost savings and revenue opportunities, need more scalability, and significantly drain IT resources and personnel.
Whether a company has a technology strategy and a plan in place to address legacy architecture and technical debt or has already modernized its architecture and addresses technical debt continuously as part of its product roadmap could have a substantial impact on the evaluation of the company to meet the investment thesis and at what cost.
Product Strategy, Cloud And AI/ML
The Cloud, Big Data, and AI/ML utilization have become pervasive, powering SaaS platforms and services, enabling any business to become more agile, responsive, and cost-efficient. Modern software stacks and tooling, coupled with the Cloud, enable companies to build rapidly resilient and scalable customer-facing applications and services and refactor their internal infrastructure.
In technical due diligence, a formulated product strategy to leverage these technologies would be considered future-proofing and added value in most cases. As is often the case, implementing new and disruptive technologies can improve efficiencies and reduce maintenance costs, lead to re-engineered business processes for efficiency and cost control, and become a competitive advantage in the marketplace by enabling entirely new processes and toolings ahead of everybody else. In other cases, for example, when a company lags in technology, it might become a game of survival just to stay on par with the rest.
With the ever-increasing amount of data being collected and available, the cost of computing resources and services available with the Cloud and SaaS is considered the norm rather than the exception, and their impact on the bottom line might be significant. For this reason, it’s becoming more relevant for investment thesis and technical due diligence.
A Healthy Tech Due Diligence Helps Value Creation
Conclusion
In technical due diligence, starting from our clients’ investment thesis, we place the right amount of attention on product strategy, product roadmap, and service model, evaluating technical architecture, digital transformation strategy, infrastructure cost optimization, line of business management tools, R&D costs, organization, and process efficiency, intellectual property, security, technical debt, and cloud strategy. These are based on various industry benchmarks and through the optics of short, medium, and long-term product and technology strategies for EBITDA impact and revenue growth.
At RingStone, we have recognized the need for detailed product and technology strategy due diligence in the context of the specific business in which the target operates. We assess technology with the optics of the business rather than in a vacuum. We have built our processes, tools, and capabilities to help our clients clarify what it might take to realize their performance optimization and value creation objectives.
About The Author
Demetrio has a technical background and deep business experience in modern technology, software development, and product management. He has worked with several technology startups worldwide, facilitating and executing product strategies and partnerships and developing executive teams during high-growth stages to sustain rapid expansion and successfully drive innovation.
Demetrio has been involved in the software development industry in many functional roles, being a Product Manager, a Test Manager, a Strategy Manager, and a COO while also staying active in the M&A industry. He has created and launched many products at Microsoft during a 20+ years tenure.
Today, he is a Practitioner at RingStone, working with private equity firms and portfolio companies in an advisory and operating capacity, leading Technical Due Diligence and pre- and post-transaction activities. Contact Demetrio at demetrio.dambrosi@ringstonetech.com