As we start to see mergers and acquisitions activity ramp up, we shift focus to the value of technology due diligence.

What do you review during due diligence? You probably look at financials, customer lists, markets and existing executives. You may even review operations, eyeing potential efficiencies, such as those gained by integrating departments like HR, accounting and IT.

Randy Myers, CFO Magazine, states “For CFO’s, valuing the synergies to be realized by eliminating overlapping or redundant systems and operations is a fundamental aspect of M&A due diligence.” But how often do you review the technology area itself?

Not planning ahead can be painful. Take one scenario where the company being acquired had better systems than the acquiring company. Obvious choice, right? Yet, missing was an assessment of whether the systems could handle additional volume. No one reviewed the process changes that would need to be undertaken by the acquirer to use the new system.

Additional resources were required for exceptions the system couldn’t support. Customer service reported serious complaints that affected patients. By spending time up front during due diligence on integration, the knowledge would have changed the approach, and possibly even the decision to use the system.

Another company assumed the integration would be simple because the two entities had the same vendor. The complexity, however, occurred in integration when the acquirer realized the two systems were implemented quite differently. Integration would have been approached differently had this been understood up front.

In a different situation, a company wanted to shut down a facility leased by the acquired company. A five year telecommunications contract had been signed the year before. Suddenly, the company was absorbing a five-figure penalty that was not budgeted.

If you’re Warren Buffet or you are just buying a customer list, you probably don’t care about the issues here. But in most situations, sharing customer lists for cross-selling, increasing efficiency and eliminating duplication is important.

Significant delays and business-impacting issues during integration are expensive. It may be a lack of understanding the IT environments up front, a lack of planning, or even cultural issues between the two companies’ IT organizations. What is the impact?

1. The acquired company’s employees are often given exit dates up front. Suddenly, the timeline gets extended, and you’re now paying retention bonuses, while still losing key people for the transition.
2. Exceptions may be handled manually, or custom programmed into a system which is being shut down. Without adequate planning, customers may get the wrong bill, pricing or experience other problems.
3. Contracts are often reviewed at the high level, but are they considered when deciding where to merge operations? Is a base level analysis of software licensing performed? If the company was not buying licenses properly, the cost of becoming legal should be considered.

Systems issues can double or even triple integration schedules, impacting cost and payback periods for acquisitions. Surprises are rarely cheap. It’s impossible to fully plan up front, particularly when you have limited access to employees at the target company. However, M&A due diligence would benefit from more fully addressing integration risk. Hiring a consultant, like WAN consultants, can really help your business during the process.

Next month, we’ll discuss priorities for technology due diligence.

About The Guest Author: Laura Pettit Rusick helps CEOs optimize IT to support growth and change in small and mid-sized organizations. Her company, OPT Solutions, provides IT Evaluations, Software Selections and Retained CIO services to enable growth, reduce costs and increase productivity. Sign up to receive the PDF “Ten Critical Success Factors for Optimizing Business Processes“.