I talked about Due Diligence in a previous article, and gave you 13 ways to spot lies and deception. Here’s an additional list that’s specific to Information Technology, although you can probably see parallels in other types of due diligence:
12 More Ways to Spot IT Lies and Omissions
- The current solution doesn’t scale up
Maybe there’s a small-scale version of a certain capability working, but it’s not ready for the large-scale production you’re going to need. For example, a certain process is done by hand, and isn’t yet ready for mass production.
- The current solution doesn’t scale down
This is less common, but still a concern. Sometimes a system only works for large volumes, and isn’t cost-effective when scaled down to lower volumes. That can be a concern in a fluctuating economy.
- The seller is evasive on version numbers and specific types of hardware and software
This is often a tip-off that the seller is using outdated equipment or unsupported software versions. It can also mean that the seller is using unlicensed software.
- The number of people in an area doesn’t make sense
You’re given an organization chart that shows a certain number of people in an organization, but you know from personal experience that this number is too high or too low for the work that needs to be done.
- Omitted business functions
Think about the processes and business functions that need to be performed in a company like this. Have you gotten a description of the people and systems for every one of them? If not, then how are they done? Are they outsourced? Has certain information been held back?
- Customer list doesn’t match revenue
Either the seller is claiming more revenue than can be accounted for, or the revenue seems low given the number of customers the seller is claiming. Either way, further investigation is needed.
- Lack of clarity around ownership of rights
For any proprietary software or hardware that is being used by the seller, it’s important to get a legal document from the seller stating that they have complete intellectual property rights for that software or hardware. If any part of the development of that software or hardware was outsourced or subcontracted, then the seller should be able to produce legal documents that show that the outside resource holds no rights.
- Informal subcontractors
If the seller uses an informal arrangement with subcontractors where they may legally own rights to some of their work, then you may be in trouble on the purchase. You may have to get signed documents from every current and previous subcontractor assigning the rights to the seller.
- Person who did the work is no longer with the company
This introduces two issues: (a) intellectual property rights, and (b) the possibility that no one currently with the company knows enough about the previous work done to maintain it or enhance it.
- There is no (or not enough) budget for maintenance and replacement of equipment
In some cases the seller will strip “unnecessary” items like maintenance and equipment replacement out of the budget so that the P&L (profit and loss statement) will look better.
- No contingency or disaster plans
Like #10, in many cases the seller will try to operate without any contingency or disaster plans in an effort to minimize cost. This obviously introduces a high degree of risk for the business.
- Lost in technology translation
This is like #13 from the first list but it refers to the situation where a business claim is made by the seller that can’t be supported by the technology the seller is using. For example, the seller claims 24×7 system availability, but only has one server with no fault tolerance.