Private Equity Portfolio Acquisition: The Value of Proper IT & ERP Due Diligence

Private Equity Portfolio Acquisition: The Value of Proper IT & ERP Due Diligence

Authored By Dr. Jack G. Nestell with contribution from John M. Bielecki

The Value of Proper IT & ERP Due DiligenceWhy do Private Equity Firms Invest in Portfolio Companies?

In order to understand the significant value of proper IT and ERP due diligence, it helps to understand the primary objectives of private equity. A high-level definition of private equity would be: to build healthy and vibrant organizations with organizational cultures oriented towards teamwork, organizational learning, innovation, and creativity while providing customers with exceptional value through quality products and service. This definition is quite consistent among most PE firms.  In order to accomplish this objective, it requires great people, efficient and effective processes, and appropriate technology. Sure, private equity firms invest in organizations (their portfolio companies) in an effort to improve the top and bottom lines. But, we are certain that all PE firms will tell you that this positive and sustained desired financial performance outcome only occurs when organizational culture is developed and supported by people, processes, and technology that is well-aligned in mission, vision, and value. It is true that some acquisitions struggle, or even fail, as some PE firms invest in highly distressed organizations hoping to improve organizational performance and to turn the organization around. But the goal remains the same: to develop a purpose-driven culture adequately supported by effective and efficient processes. This goal requires that IT and ERP be aligned with the organization.

IT and ERP Driven Business Intelligence: A significant Competitive Advantage  

Second, to an organization’s people, there is nothing more important than data. Reliable and immediate access to accurate data become information that becomes business intelligence. That is Accurate Data + Timely Data = Good Reporting. Good reporting leads to sound Business Intelligence. And therefore, trusted Business Intelligence creates a high confidence level in strategic business decisions and management.  Business Intelligence is a significant influence that allows companies to react appropriately to ever-changing market conditions. Moreover, sound business intelligence is a significant competitive business advantage in a competitive global market. This is precisely why pre-acquisition IT and ERP due diligence is so crucial. The primary intent of a successful IT and ERP due diligence is to provide Private Equity firms and their investors’ confidence in that their portfolio can provide reliable and trusted business intelligence without incurring or creating and significant business risks. And, if current state IT and/or ERP does not provide the proper business intelligence, then any investment required to address significant gaps requires an accurate and professional assessment as to the time, costs, and effort required to address any significant business intelligence gaps.

IT and ERP Due Diligence Objective

The primary objective of an IT and ERP due diligence should be to review the current state ERP solutions and the Information Technology (IT) department’s operations to inform the PE firm on the effectiveness and gaps. The due diligence needs to include a thorough assessment of IT infrastructure, IT process, IT team, and ERP alignment with the organization and business requirements. The assessment should also consider IT’s ability to support organizational growth and include recommendations for IT and ERP continuous improvement opportunities. A primary objective is to also understand current ERP and Information Technology ownership and process. IT due diligence should examine key areas such as IT stability, IT security, IT performance, IT support process, regulatory and organizational compliance, budget requirements, and appropriate level of IT resources. The critical objective is to confirm that no significant IT and/or ERP risks or major IT and/or ERP financial exposures exist that could substantially impact on-going business operations. This due diligence process should also examine risks that should be considered as a part of the pre-transaction agreement language.

The due diligence goal is to provide vendor-neutral, unbiased, and objective information to contribute to an informed investment decision and eliminate acquisition risks. In general, the due diligence is intended to highlight key points that should be considered from a private equity investment perspective in an effort to increase the likelihood of  IT/ERP success and reduce investment risk. Ultimately, the goal is to provide an examination that contributes to protecting and ensuring the investment. 

IT and ERP Due Diligence Approach

The approach should be one that effectively provides accurate gap and risk analysis determines if any significant operational risks exist due to IT and/or ERP, and then provide sound options for addressing gaps and risks. Several documents should be requested and reviewed, conduct portfolio employee interviews with appropriate personnel, and then complete follow up calls and analyses. The approach should maintain a neutral, unbiased, non-political, and objective interview process followed by cross-referencing interview feedback against provided documentation.  The IT and ERP due diligence must maintain a structured and deliberate methodology that ensures adequate and appropriate due diligence of the three main components of any organizational IT department: team, process, technology, and its infrastructure. In addition, the ERP and IT due diligence must focus on a holistic view of ensuring the alignment of ERP and IT operations and its support of the business operations.

The IT and ERP due diligence is best provided by a vendor-neutral third party. Else, you get into deliberate and undeliberate biases impacting your due diligence. Moreover, you want objective facts and recommended solutions, not opportunities for product sales events from vendors or their value-added partners. Opportunities for any needed product sales events comes later if/as needed through proper product review and being “smart consumers”.

Remember to use care and being professional and proper in your approach. During the process, it is about listening, observing, and examining. While on-site during the observation process, for instance, it is not necessary to provide your opinion or to criticize in any way. Moreover, if due diligence results are shared with the portfolio in an effort to address issues pre-or post-acquisition, it has to be shared and discussed in a way that is proper and professional. On occasion, an internal IT or ERP implementation team member  may want to provide a “rebuttal” to any productive and professional observations in the formal report. This is fine. Not all employees will heed the feedback especially if the due diligence is providing constructive suggestions within their area of responsibility. Although sharing one’s experience requires some subjectivity, as best as possible, maintain an objective, vendor-neutral, and “call it as you see it” approach. After all, that is why the Private Equity firm is paying you.  Your job in providing due diligence is to provide objective feedback as possible based on years of experience and expertise. Even if others have different perspectives, opinions, and perceptions, a sound approach to due diligence provides investment and organizational benefit.

Summary of The General Process 
  • Make sure you clearly understand the business and PE goals prior to beginning the assessment.

Ask the right questions at the onset. These questions will help guide IT and ERP due diligence. When it comes to providing final recommendations and IT and ERP strategy roadmap, these strategic suggestions need to be aligned with organizational goals. The objective is to ensure proper support for potential investment objectives and goals.

  • Request appropriate IT and ERP documentation and information.

There is a vast amount of documentation in terms of IT team/resources, IT infrastructure (networks, systems, applications), IT procedures, and ERP related documents that must be thoroughly reviewed. (More to come on specific documentation in upcoming posts).

  • Conduct Operational tour

The IT and/or ERP due diligence results need to be informed by cross-referencing provided documentation, team member interviews, and evidence confirmation with what is visually observed during an operational tour. Cross-checking multiple sources allows for confidence in ownership and process evidence. What you see may not always be consistent with what you hear.

  • Conduct interviews

The IT and/or ERP due diligence results need to be informed by cross-referencing provided documentation, observation, and direct evidence confirmation with what you hear during interviews. Cross-checking multiple sources allows for confidence in ownership and process evidence. What you hear may not always be consistent with what you see.

  • Assess appropriate IT and ERP documentation and information
    • Review the IT/ERP team, processes, and infrastructure to ensure alignment with organizational strategy. The point is to assess if IT and ERP properly support business operations.
    • Assess the strategy and alignment of all IT components (IT team, process, and infrastructure) to current and future business needs.
    • IT infrastructure: Security, server room, data center, network (voice and data), hardware, fault tolerance and redundancy, backup and restore, performance availability, change management, end-user support, storage systems, and application review. Are the solutions themselves adequate?
    • IT Team: Assess any resource needs or constraints
    • IT Process: Thorough review of IT practice and operating procedures.
    • Clearly examine and consider holistically the observations, interviews, and data.

Did any pre-acquisition considerations, concerns, or risks emerge? Utilize effective qualitative research techniques in order to reach an objective, vendor-neutral, and non-bias report. Utilize evidence such as appropriate interview data, observations of business process and documentation, and direct verification and validation.

  • Provide a formal report

The formal report should include an executive summary, the scope of work, approach and methodology, further details and observations that support the due diligence results, and a list of recommendations.

The Objective of the Final Report:

The goal with the final report is to provide the PE executive team with clear, well-articled, and objective discoveries of immediate business operational concerns that could impact the business upon acquisition. The report should also identify the less critical but urgent items that should be addressed upon acquisition.  While every organization has its IT and ERP “flat spots”, the goal is not to focus on regularly and fairly routine IT operational improvement opportunities. Rather, describe issues that may have a significant impact on business and investment risks that may create significant time, financial, effort, or even legal risks post-transaction.

The Report Should Include:

  • The current State of ERP and IT Summary
  • Executive Summary: High-level review with a focus on immediate potential investment risks as it relates to IT and/or ERP.
    • Advise of any language that needs to be included in the sale agreement or a Transition Services Agreement (TSA).
    • Identify immediate ERP/IT risks that may have an immediate impact on potential acquisition
    • Clearly document IT/ERP gaps that are not acquisition impactful but have a significant impact on operational efficiencies.
    • The executive summary needs to be clear on any identified budget or financial implications.
    • Visual Scorecard Indicating High-Level Status of Current ERP and IT Components/functions.
  • Review of IT Due Diligence Scope of Work
  • Review of Primary Objective of Due Diligence
  • Description of Approach
  • Provide an appropriate level of detail and observation evidence needed to support the executive summary.
    • IT/ERP Infrastructure review: Is the solution appropriate for today and future growth
    • IT/ERP Process and SOP concern: Is the actual technical IT solution properly managed. Is the ERP properly aligned with the business processes and requirements
    • IT/ERP Organizational concerns: Any resource gaps or constraints in terms of personal to manage and support IT and ERP systems.
  • Recommendations: Provide any immediate, mid-term, and long terms options required to address any team, process, or technology gaps. Include time and cost guidelines. Provide suggested recommended actions to be considered immediately upon post-acquisition. These are the areas believed to have the biggest impact on improving performance and minimizing risks. Recommendations also need to include any potential considerations or language for the pre-transaction agreement.

Private Equity and Portfolio Benefit

The organizational benefit of proper IT and ERP due diligence for private equity firms is objective, vendor-neutral, third-party, and unbiased review of the portfolio that the firm is considering as a potential investment. As a third-party due diligence provider, it is critical to leverage your professional experience, subject matter expertise, and then “call it as you see it” using an objective as a possible approach. The due diligence is intended to provide and offer insight to help ensure that the post-acquisition process is as smooth and productive as possible. The goal is to provide sound feedback and recommendations to minimize short and long-term acquisition risk. If the due diligence is done well and thoroughly, the portfolio will benefit from reflection of the feedback, insight, and/or executing the recommendations.

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Enterprise Resource Planning (ERP) Success: Practice vs Research vs Applied Research

Enterprise Resource Planning (ERP) Success: Practice vs Research vs Applied Research

Practice vs Research vs Applied Research

by Jack Nestell 

erp applied research“Not only is each and every organization different, but each specific organizational context also changes all the time and is very dynamic. The people, culture, technology, processes, issues, challenges, and solutions depend upon context and vary with time. But, what does not really change is a theory based on general principle, this is one reason why research is so relevant, practical, powerful, useful, and valuable in the “real world”.”  

One of the goals of ERP organizational change practitioners should be to bridge the gap between practice and the application of all the great ERP organizational change research.

Research can be from any combination of collaboration from practitioners, academic researchers, or ERP vendors. First, and clearly, there is a lot to learn from in terms of one’s own, as well as other’s experiences, as long as that experience is reflected upon and in context. Second, a case study (informal or formal academic research-based) can help provide significant insight. Third, organizational learning and evaluation programs also provide significant insight and opportunity for reflection. Fourth, informal and formal surveys (quantitative and/or qualitative) and other evaluation methods provide insight as well (Note that some surveys may be grounded by research, theory, and principles and some…well, not so much so…but still may provide some value). Fifth is academically approached and scientific-based research that I will discuss more below. All of these methods and resources provide opportunities for organizations, and individual practitioners, for self-reflection and for contributing to our field: ERP organizational change success.

As mentioned in a previous post, ERP practitioners, ERP vendors, and ERP scholars (with private and University funding) don’t spend significant time, money, and effort on a problem that doesn’t exist. But, if any level of good research and evaluative learning is to bring real value to your organization then it first needs to be successfully applied across contexts (i.e. to your context). The idea and point here are simply that if as practitioners, we are going to successfully be able to apply sound academic research, then the study should be approached from a high objective standard that allows practitioners to 1) gain accurate insight in a way that allows practitioners to 2) consider the application of research results within other contexts. And trust me, there is lots of great research that meets these criteria. Even if research is based on a specific context, it can prove to be very valuable and applicable to other contexts. This holds true especially if research results are supported by fundamental theory and principle.

When I speak of “ERP organizational change”, I am primarily speaking of both the field of ERP research as well as the field of organizational culture and change research. But, the field of “ERP organizational change” considers (or should) many fields and disciplines.  (Practitioners understand, and research demonstrates, that successful ERP organizational change requires not just technology, business process, and project management methods, but also organizational culture as well as education and learning principles). This high-quality ERP organizational change research that I speak of is based on an objective, vendor-neutral, non-bias approach to study and its application. Moreover, this research is often supported by proven theory and solid principles, hence making the findings or results applicable across contexts. These are theories and principles that ought to support the latest practitioner fads, practitioner approaches, and practitioner and ERP vendor “selling points”. If not, what are these practitioner fads, approaches, and  “selling points” really based on? And will they be effective?

From shared experiences and based on research, it is pretty safe to say that ERP organizational change agents would benefit from this sound research founded in principle.

Perhaps, generally speaking, organizational stakeholders know very little about “ERP organizational change” research. And perhaps, they shouldn’t care or have to spend time, money, and effort to know and learn about ERP organizational change. However, for ERP organizational change practitioners (i.e. change agents), it is our job to take advantage of this great ERP research that provides opportunities for insight and reflection (that is founded in non-bias, vendor-neutral, and fundamental principles.) Why? Because we owe it to the organizational stakeholders. 

Not only is each and every organization different, but each specific organizational context also changes all the time and is very dynamic. The people, culture, technology, processes, issues, challenges, and solutions depend upon context and vary with time. But, what does not really change is a theory based on general principle, this is why research is so relevant, practical, powerful, useful, and valuable in the “real world”.

For practitioners, this research can be very powerful knowledge. And, I personally think that this is where many organizations and practitioners “miss the boat”. Point is, there is some great ERP and organizational research that as ERP practitioners, is a significant tool and source of information.


Enterprise Resource Planning (ERP) Organizational Change Success: Kumbaya….Wait…What?!

Enterprise Resource Planning (ERP) Organizational Change Success: Kumbaya….Wait…What?!

(Jack has recently been asked to review a new ERP article for a well respected and reputable Journal. Here are his thoughts):

Really, just how important is, or is not, teamwork to ERP organizational change success? Who can prove it? I am way too busy and don’t want to get caught up in wasting money, time, and effort in kumbaya ideas. With a disciplined project management approach, proper ERP solutions selection, and just ensuring that the organization stays on task should be good enough to “get ‘er done”.  Or is it?

Organizational teamwork is a component of and driven by, organizational culture. Does effective and efficient teamwork have any impact on successful ERP assimilation? We all assume this, and it makes sense, but prove it to me! As ERP practitioners and change agents, we have a lot to do and deal with in our day-to-day ERP organizational change duties. We have a disciplined template and project management plan and technique. We stay on task to the plan and implement the appropriate technology, that’s good enough. I am not going to worry about building into my plan deliberate, intentional, and concrete activity in which to measure, promote, build, and encourage organizational teamwork just for an ERP project. That’s just a waste of time. Oh, wait, am I sure about that?

Over the last several years of ERP research, the quality of work, reflection, and perspectives never cease to amaze me. We are talking about scholars and tenured practitioners in ERP organizational change that spend hours upon hours hoping to contribute to the success of your ERP organizational change endeavor. As practitioners, we should all heed the insight. Incredibly insightful ERP studies exist and continue to come out all the time.

I can’t wait to share more but as an example, I am reviewing an article for a well-established professional journal. This study further illustrates some of the great interest and work that further attests to the value of successful ERP organizational change. The article is a study of an organizational culture element, teamwork, and how it may or may not correlate to ERP organizational change success. This is a unique study. I talk all the time about the very high-level success triad (people/organizational culture, process, and technology). Could or will this study provide additional insight and provide further evidence as to the value of organizational teamwork during an ERP organizational change effort?

OK, we all know that Kumbaya (unity, cooperation, peace, harmony) is maybe intentionally overemphasizing the idea, but overall, teamwork and everything good that comes with it such as constructive conflict resolution is absolutely worth the time, money, and effort. And, for us ERP practitioners, we should build concrete team building goals and actions into our master plan.

I’ll say it again, hats off to ERP organizational change researchers. Practitioners, let’s apply and share this great work.

Good stuff, stand by for more details down the road.

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Enterprise Resource Planning (ERP) Organizational Change: “Culture” is Much More Than a Buzzword

Enterprise Resource Planning (ERP) Organizational Change: “Culture” is Much More Than a Buzzword

erp cultureRecently “culture” appears to have become even more and more of a buzzword when it comes to digital transformations or ERP organizational change. There are many great articles, blogs, and posts that generally, and correctly, point out the significance of organizational “culture”. While it is certainly true that “culture” is an incredibly critical component of the ERP organizational change triad (people/culture, process, technology), “culture” is often used as a buzzword and often in a conversation doesn’t quite scratch the surface of what it really means.

As ERP practitioners, our only goal should be the success of the organization. This means that we should be quite serious about considering and adding any and all tools to our ERP organizational change toolbox. This means that ERP practitioners would benefit from understanding more this idea, and buzzword, called “culture”. What is it really? Can you measure it? How? Can you really change it? Really?! How? Why does it even matter? Can someone prove to me why it really matters?

At Nestell & Associates, it is not (and never has been) just a buzzword. To drill further beyond the surface, we believe that ERP practitioners would benefit in understanding stakeholder theory, organizational diversity versus performance factors, leadership styles (ex: transactional versus transformational), corporate learning culture, leader-member exchange theory, etc.

The fact is, these ideas are not just things that only mean something in the lab.  These are real-world ideas driven by real-world facts in which ERP, as well as organizational change and culture research, demonstrates directly impact ERP organizational change success.

Perhaps in some organizations, there may be perceived factors that are only  “scapegoats” for the risks, challenges, and failures when in fact the real factors are culture-related?  Could this be possible? Some great ERP organizational change research is demonstrating more and more the significance and impact that the culture part or of the triad has on successful ERP assimilation. And, we would like to share more with you.

Stay tuned as we drill-down further into “culture”, what it means, and how as practitioners we can utilize in an effort to continue to bring value to organizations. We’ll have some leading scholars, practitioners, researchers, and true pioneers in the fields of ERP and organizational change to provide some guest posts and chime in on the idea of “culture”.

Well Said…….

Well Said…….

well said img“These situations can be emotionally draining. When a sales manager is in your face, adamant that your decision is going to ensure that she does not hit her annual quota, it is intimidating, even if you know it is not true. Keep in mind that your organization did not invent business. In addition to all of the tangible advantages ERP brings to the table, create an additional success out of knowledge that your ERP package represents the norm for business practices, and you have the opportunity to quietly correct some bad business habits.”

 “ERP and Legacy Business Processes: Is Change Inevitable?” Posted on 25/05/12 by Tom Stephenson

Private Equity Portfolios: Mitigating ERP Organizational Change Risks

Private Equity Portfolios: Mitigating ERP Organizational Change Risks

private equity portfoliosAs noted in yesterday’s post, ERP organizational change can be extremely challenging, risky, and even result in failure. But, the good news is that it doesn’t have to be this way.

ERP implementation challenges and risks will never be fully eliminated. And, there will never be such a thing as a perfect ERP implementation. Stanciu and Tinca (2013) define a successful ERP project as one in which accomplishes stated and desired functionality, able to utilize as planned, and operational within the planned time and budget. In addition, success can be in the form of business value realized such as reduced inventory cost, improved supply chain visibility, reduced operational costs, etc. However, ERP implementation challenges and risks can be better managed and/or eliminated if an organization knows what to focus on and look for during an ERP organizational change effort.

With insight and awareness of “success factors” ERP failure risk can be mitigated. In fact, much study has been done among practitioners and in academia research looking for ERP “success models” and “critical success factors”.  Organizations need to consider evaluative learning in order to improve their ERP success and to mitigate risks. Evaluative learning is the act of considering, reflecting, and learning from the experience of others. Experienced ERP practitioner professionals and ERP researchers have identified a vast array of critical success factors in an effort to shed light on and provide mechanisms for, addressing and mitigating organizational ERP failure, risks, and challenges.

Complex factors and influences impacting ERP success allow underlying conditions to exist that create gaps and thus prevent the vision of ERP success in many organizations that are not the obvious, visible, and tangible factors. Corporate diversity, corporate culture, corporate communication, and corporate leadership are more of the soft-skills and characteristics of an organization. This as opposed to functional, systems, technical project tasks that tend to be more tangible, testable, and task-oriented. These more tangible factors tend to be easier to quantify and measure and notice.  But is often the less tangible factor that has the greatest impact on ERP success. Scholars and practitioners continue the search to find common denominators in considering all possible influences upon ERP organizational change success.

ERP research presents a common notion in suggesting that organizations that become aware of, implement, and put the appropriate emphasis on the vast array of critical success factors will be better prepared and positioned with the organizational skills needed to increase the likelihood of ERP assimilation and meeting the desired organizational goals.

The key for organizations is to dot I’s and cross t’s in terms of project management, but also be cognizant of some of these critical success factors. So, if your organization is considering implementing a new ERP solution, keep in mind some of these key factors. ERP organizational change projects is not just an IT or project management office endeavor. Success requires the entire organization to be prepared, engaged, and committed. Some examples follow. Proper vendor selection from a professional vendor neutral partner is critical; there is only one best ERP fit for each and every organization. The executive team needs to be visible and active supporters. ERP organizational change can be significant and requires a tolerance for conflicts (conflicts of interest among different functional departments are common in ERP implementations which lead to time delays, budget overages, miscommunications, and hence project failure).  Transformational leadership in which leaders are able to create a corporate culture of acceptance, willingness, and transformational mindset among the stakeholders. Strategy alignment and communication in which the organization needs to allow time and resources of the stakeholders in order to have time to strategize, plan, motivate, and manage appropriate key success factors. This is a small example of the many success factors. For more, please visit