Monday, April 01, 2002
Book Review. Title: Acquisition: IT Due Diligence from IT Manager Development Series by Mike Sisco.
Summary: This book is one of a ten-book series of short, focused books on aspects of IT management. The companion to this particular book is Acquisition: IT Assimilations, which I reviewed in my 31 March entry.
Due diligence is about risk management from an investment perspective. This 88-page book provides a process and set of procedures for assessing the value and viability of investments in companies. The approach set forth is the book is about due diligence in acquiring companies; however, the process and procedures can be used to do an internal assessment, evaluate vendor viability and even develop a capital project portfolio.
What's Inside: The relationship between due diligence and acquisition that is the subject of the related book is defined by a meta process that begins with a letter of intent (deal structure and expected value), an assessment of value, risks, opportunities, financial impacts and projections and related criteria (due diligence - dotting the i's and crossing the t's), the acquisition, and assimilation of the new company into your existing operations. If you closely examine the factors and essence of due diligence it's boils down to CYA - cover your butt. The eight chapters in this book give you everything you need to make prudent decisions that will withstand the most critical scrutiny, and will prevent you from blundering into an investment that squanders instead of adding to shareholder value.
Specifics: The process, as in Mr. Sisco's other books, is straightforward and follows a logical sequence. He examines the key risks. steps you through how to conduct an onsite review, and provides a complete list of data collection templates. These templates include:
As you can see, the process covers asset identification, budget projections and other indicators to determine the true costs against which the actual value of the acquisition can be determined. This is what due diligence is all about - examining every facet and understanding the big picture and the details before investing.
- Business applications portfolio
- Infrastructure portfolio (servers, LAN and WAN assets)
- IT organization structure
- Project initiatives
- Automation capabilities
- Software licenses/agreements
- Software licenses/agreements - to other companies
- Maintenance and support agreements (hardware and software)
- Other contracts and leases
- Capital budget items
- Consulting/contract work - 12 month planning horizon
- Operating budget - 12 month forecast
- Transition costs - 12-month forecast
The due diligence report is the end goal of the process and the book provides ample guidance for developing a report that summarizes the information captured during the data collection phase. As valuable as this process is, the appendices in the book provide equal value to any reader who is in a position that requires the application of due diligence. Each of the eight appendices are outlines, forms and supporting artifacts that you can tailor to your needs. Another valuable aspect of this book is the format that characterizes all of the books in the series: case studies, personal notes and side bars that liven up the text while imparting Mr. Sisco's extensive experience and observations.
What I would Have Liked: Since Mike Sisco is a frequent visitor here I am going to take this opportunity to express what I'd like to see in the next edition. Here's my wish list:
- An appendix that's a financial analysis primer - important balance sheet indicators, how to read a balance sheet and how to make sense of it all. Yes, the financial types will be responsible for this; however, this is something IT managers need to know, and too many can fill in a spreadsheet without understanding the overall picture that the numbers portray. Understanding leases - this is another area that is complex and needs to be exposed in greater detail. If you think IRS rules and tax laws are complex, take a close look at the Byzantine approach leasing companies take!
- Provide a list of auditing approaches in common use, with an emphasis on Control Objectives for Information and Related Technologies and key Financial Accounting Standards Board compliance criteria. These do not mean that IT professionals should practice auditing and accounting, but there are compliance requirements and practices of which they should be aware.
- Introduce the Altman Z-Score as a fundamental due diligence tool. Linda and I have used this particular tool and take every opportunity to disseminate information about it and its value for assessing the viability of a company.Overall this is an excellent book and it meets my personal criteria for value: short, focused and straightforward. It's filled with advice, tools and techniques, and--most importantly--is written by someone who has obviously performed due diligence. If you're an IT manager it may cost you more to not have this book than many times the price.