Sidestep the Chaos, Risk and Time Constraints of Due Diligence
A Case for the Diligence Management Office
Co-written by Mark Juergens, Senior Partner, M&A Partners, and Mark Herndon, Chairman Emeritus, M&A Leadership Council
While most organizations have adopted the Integration Management Office (IMO) as an essential best practice, few organizations consistently apply the same discipline and rigor to due diligence. Yet, the due diligence process is fraught with just as much – or possibly more significant – time pressure, risk, and chaos that a solid case can be made for adding this critical diligence management office (DMO) role in most acquisitions. Perhaps you can identify with one or more of these common challenges we have encountered in recent transactions:
- No Time for On-the-Job Training
With a recent client engagement, both the Buyer’s and the Seller’s investment bankers and external law firms had each appointed a first-year associate to their firm’s respective role as due diligence program manager. Each advisor firm had its own proprietary due diligence checklist and closing requirements, which the junior associate was instructed to follow without exception. This practice is common. However, M&A success is so heavily dependent on experience and solid business understanding, that even with brilliant junior associates — confusion, duplicated effort, rework, delays and mistakes are often the inevitable results.
- The VDR Data Abyss
In another typical client situation, upon opening access to the Seller’s virtual data room (VDR) the Buyer’s due diligence team was confronted with a literal abyss of data consisting of over 4,500 documents, of which none were cataloged in a manageable data inventory and many were misplaced, mislabeled or duplicated.
- Quality Assurance for Due Diligence
Many diligence efforts still rely on a surprising percentage of new or relatively inexperienced functional diligence resources. In one recent client engagement, the client had several highly experienced due diligence teams, including engineering, procurement, and IT. These teams blazed through the diligence tasks, quickly generating superb analysis and succinct summary findings on time and in shape for a winning executive steering committee readout. However, other functional diligence teams including Sales and Marketing, R&D, HR, and Finance, were staffed by overtaxed and substantially less experienced resources struggling to hit the required report-out dates and deliverables, with few, if any, meaningful “so what” conclusions for either the transaction or integration.
In each situation, one crucial part of the solution was the appointment of a highly experienced due diligence program manager. Often called the Diligence Management Office (DMO), this critical role deserves further consideration as a best practice that can accelerate completion of diligence activities, increase the quality and consistency of diligence findings, increase the efficiency with which the organization is able to make important conclusions and recommendations, and provide an essential bridging strategy from due diligence into integration.
Let’s start with a necessary declaration. Corporate development (or your organization’s designated deal lead, hereinafter referred to as “Corp Dev”) owns each transaction outright and completely. The DMO does not own the process, the ultimate “go/no go” decision, nor any other key deal point, negotiating position, concession, representation, term or condition. Without strong and effective Corp Dev leadership and tightly coordinated decision-making between the executive leadership team and Corp Dev, any deal is doomed to fail. But put a strong and highly experienced DMO team into that baseline scenario, and now you’ve got rocket fuel for every transaction, regardless of whether it’s ultimately killed or closed.
This article looks at seven considerations your organization can pressure test to determine potential process improvements to take your due diligence phase to the next level of success.
1. Define the DMO Role Effectively. The DMO exists as an adjunct to Corp Dev. Comparable to the integration program manager role for integration, the DMO is tasked with supporting the diligence process governance; ensuring fast, efficient and effective diligence process operations across the entire organization and within each functional diligence workstream; establishing and managing the diligence cadence and RAID (e.g. Risks, Action Items, Issues and Decisions Needed) processes; status and reporting overall process completion or other metrics, and ensuring a quality due diligence findings report from each work stream or special issue group. Unfortunately, this is no time to learn on the job. In our view, what makes an effective DMO is much like what makes an effective integration lead for integration manager. Namely, deep subject matter experience in M&A across the entire lifecycle, expert-level understanding of the organization, industry, operating model and business model, combined with the inherent personal characteristics that enable the person to thrive during chaos and multiple conflicting demands.
2. Make it a Dedicated Resource. The majority of organizations may consider one or two deals a year at a normal pace. Most companies don’t have the luxury of large M&A teams fully dedicated to M&A responsibilities. Yet even in these situations vesting the DMO role and responsibilities in a single dedicated individual, or a small team that works across all phases of the lifecycle, offers organizations the most cost-effective leverage to accomplish the intended results. Sometimes residing in a strategic programs office, or within Corp Dev itself, a dedicated senior resource will always out-produce multiple more junior, or alternating resources, and give both Corp Dev and executive leadership the confidence to be able to take on more deals, bigger deals, simultaneous deals, and more globally complex transactions.
3. Support Diligence Workstream Leads. Beginning at initial deal read in, the DMO plays an essential role in function coaching and extending already stretched function diligence resources. Our conviction is that while there is a core due diligence request list for every deal, each deal is optimized by customizing and tailoring the specific diligence request to the specific target or deal type. Many organizations have learned to break the diligence process into time-based phases to prevent deal fatigue or overload on the Seller’s deal team in function resources. An experienced DMO often meets with the workstream diligence leads to verify, vet, and analyze the diligence request list for each deal and verify any unique challenges called out by the deal brief. Once underway, the DMO should participate directly in as many diligence meetings, calls, and review sessions as feasible to provide an overall enterprise context of diligence issues, status, and potential implications for the deal. The DMO provides a vital QA role for each diligence workstream to ensure they have completed all diligence requests and meetings possible given permitted access to the Seller and time available. The DMO also provides a critical role in producing the findings report and recommendations for appropriate stakeholder levels, including Corp Dev, the executive steering team, and the board of directors.
4. Effective VDR Management. Most competent Sellers will provide real-time support for VDR and a comparable DMO role on the Seller side. Even with this important role provided by the Seller each Buyer should designate a DMO resource to support Corp Dev and legal in immediately cataloging and verifying all data populated to the VDR prior to allowing access to workstream leads. Given the fact that most Sellers populate the VDR over time, with one or more initial bulk uploads and additional documentation provided as completed or in response to subsequent data requests, the DMO performs a very important role in making a daily audit check of VDR documentation. When new documents are populated to the VDR, the DMO personally verifies transmittal to and receipt by the appropriate workstream lead in the Buyer’s organization and provides other real-time assistance for effective navigation and use of the Seller’s VDR and populated data.
5. On-site Logistics and Readiness. While much diligence work can and should be done via remote meeting and individual workstream analysis, we are advocates of conducting as much on-site diligence as each deal, and each deal team, permits and deems acceptable for that transaction. Some acquirers prefer a large group diligence session at a neutral off-site location such as a lawyer’s office or conference center. Other organizations prefer to allow individual due diligence workstream leads to interact directly with their respective counterparts. Regardless of your organization’s preferred approach, interacting with the counterparty’s diligence team requires the utmost rigor in planning and readiness. An experienced DMO provides an essential role regarding the following tasks:
- Managing the read-in process. Both Buyer and Seller must carefully manage who has been read-in on their side and maintain that list of contacts and chain of command to receive and process all communications or requests between the parties. It’s an often-catastrophic rookie mistake to request diligence information of an individual outside of the agreed chain of command and who has not been appropriately read-in to the transaction.
- Managing the diligence team confidentiality acknowledgment. Organizations that acquire infrequently and those that rely primarily upon part-time or temporarily seconded functional resources to conduct due diligence may want to consider the use of a brief confidentiality acknowledgment statement signed by each person read-into a due diligence role prior to announcement. The DMO is often in the best position to support this requirement and ensure the acknowledgments are approved, tightly managed to maintain the confidentiality of the pending transaction, executed, and archived.
- Managing the size of the party. Many acquirers can relate with the adage, “buying is fun – integrating is hell.” Many a Buyer has exasperated the Seller to the point of the deal break by overwhelming the Seller’s team with the sheer number of functional and sub functional SMEs that want to show up for the due diligence on-site. While Corp Dev owns the diligence staffing decision along with the legal team, an experienced DMO can provide an important functional accountability check to ensure key functional diligence resources required to be in person are on-site, while insisting other subfunction support team members join via remote call only.
- On-site agenda and data management. Any effective on-site diligence event requires both parties to collaborate to achieve an efficient, highly compressed agenda in the available timeframe, and which accomplishes a variety of general session readouts, combined with concurrent and parallel functional team joint meetings, issue workout sessions, daily pre, and post-meeting status updates, along with important dinners and social networking time. A skilled DMO is often needed to support schedule coordination, align specific key meetings and discussions, and orchestrate facilities and all related logistics.
6. Enterprise Diligence Cadence, Statusing, and Reporting. Like integration, a skilled DMO will establish a daily or weekly cadence report out process and manage that process on a real-time basis to drive each workstream through to completion as a flywheel turns a motor. The DMO provides the diligence documentation and meeting cadence that drives the report out process, captures key observations, questions, gaps, issues, and next steps. The DMO summarizes diligence metrics and other KPIs, such as the percent of VDR data analyzed, the percent of the diligence request list closed/completed, and documents and manages ongoing RAID issues. Finally, the DMO provides an important coordination interface for Corp Dev throughout the process to enable Corp Dev to focus on diligence findings, transaction strategy, and deal point negotiations.
7. Continuity and Bridge to Integration. While the DMO and the IMO don’t necessarily have to be the same individual or team, the logic for doing so is both clear and compelling. Diligence insight is often heavily nuanced by cumulative and ongoing observations and understanding of people, context, and data. Transitioning that nuanced insight and understanding from a diligence lead to an integration lead is a common failure point. Without extremely effective onboarding, transitioning, and continued involvement from diligence lead and Corp Dev to integration phase and integration lead, a tremendous amount of time-critical knowledge and trusted relationships can be wasted. A skilled DMO is in the ideal position to help formulate the enterprise and functional integration-related considerations, priorities, guardrails, and concept of integration before the deal close and in advance of the joint integration planning kickoff. The importance of establishing this type of bridge from due diligence to integration cannot be overstated. For example, in our research, we have found that organizations which complete a comprehensive integration strategy framework before launching the joint integration planning teams outperform those that do not create a comprehensive integration strategy framework on almost every key business result outcome measure, including revenue synergy capture, cost synergy capture, achieving the optimal pace of integration, and minimizing unintended value erosion.
One final best practice deserves consideration. In a recent survey, we asked over 150 acquirers a specific question about which executives, M&A team members, and workstream leaders or SMEs had received purpose-built training in either due diligence or integration. The data exposed a risk and a failure point for most organizations, nearly 60% reported that no due diligence training whatsoever was provided – not even for those part-time, temporarily seconded, or new due diligence team members. That, no doubt, explains at least a big part of why acquirers still struggle with partial, incomplete, or inaccurate diligence findings and implications for integration.
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To learn more about best practices in DMO, participate in The Art of M&A® for Due Diligence Leaders / Live-Online training program, July 18-20, 2023 or join us September 12-14, 2023 in Boston at The Art of M&A® for Due Diligence Leaders / In-Person. We look forward to meeting you at either event!
