DFN: Article about how to apply the KKR philosophy to business cases; though this is written for an "IT business case", the thoughts and ideas in this article are applicable to any business case supporting a product, process or service.
IT due diligence: 10 lessons from The Barbarians at the Gate Thursday, October 8, 2009 at 7:25AM
By Business Case Pro
Due diligence is the study and evaluation of a business opportunity. It means taking a hard look at every angle of an investment. Not just the sunny sales story presented, but also out back, where the aggressive assumptions and fictional claims hide.
The payoffs for due diligence are better decisions, fewer bad investments, and more high-return investments.
Top private equity firms, like KKR (and the original Barbarians at the Gate), have built their business on intense due diligence. Without it, they won’t invest. Exceptional investments start with thorough due
In contrast, IT due diligence remains casual and inconsistent, even though, annual corporate technology spending exceeds the total invested in private equity and hedge funds combined. Predictably, about 30% of IT investments successfully produce the business benefits forecasted.
Invest like Henry Kravis
Business and IT managers are similar to private equity investors. Both are active investors who create value by improving business performance. Both can control outcomes and have access to detailed operating information, unlike public, passive shareholders.
All active investors should use due diligence. The target for review will vary. A private equity investor performs due diligence on an investment proposal. For IT due diligence, the business case is the equivalent of an investment proposal.
Given technology’s mediocre investment results, IT due diligence can learn much from KKR and its co-founder, Henry Kravis.
Reviewing KKR’s recent investment prospectus and public statements reveals they use due diligence in three ways:
■Provides a framework to make investment decisions;
■Lays a foundation to create value; and,
■Develops a platform to measure and monitor investment performance.
Framework for investment decisions
Every due diligence has an investment thesis underneath. Stephen Schwarzman, founder of Blackstone, a KKR competitor, comments: "when
we get into an investment, we have a pretty good idea of what the value we can create over a multi-year period of time."
A KKR investment thesis is built around making changes in the underlying business. Due diligence pushes, pulls, and tests this thesis against business, financial, and management realities.
To speed due diligence and put each investment on the same footing, checklists are typically used. For example, the book Venture Capital Due Diligence, started as a checklist according to its author, Justin
Camp. Checklists ensure coverage of big issues and encourage consistency across different decisions.
Plan for value creation
KKR invests actively. Returns come from improving the underlying business. So, during due diligence, private equity investors plan the actions they will take to create new value for stakeholders.
For example, KKR, has its own in-house team of 40 operational consultants, Capstone, who address issues relating to revenue growth, cost optimization, and efficienct capital allocation.
Believing value creation starts on the first day of the investment, Capsone writes a 100-day plan, which details and sequences the specific changes during the first 100 days.
To monitor an investment you need metrics to review. Hopefully, you are performing due diligence on a high quality IT business case, which defines and specifies the target metrics your technology investment sets out to achieve.
More likely, though, you are facing metrics mania: masses of vaguely defined IT metrics with minimal impact on operating performance. I was recently invited to review a spreadsheet that cheerfully recommended 143 separate measures. All this unactionable mush was elaborately wrapped in a retina-wrecking dashboard.
In contrast, KKR works hard to "to implement best-in-class operating and financial metrics for tracking progress and identifying problems early."
Also, unlike the sell-and-forget ROI models prevalent in IT, KKR takes its financial models seriously and look for data to update their models and check the investment is tracking to plan. If dissatisfied,
they will come round and want shortfalls explained.
IT due diligence lessons
In sum, KKR’s approach to due diligence offers 10 lessons to reviewers of IT business cases:
1.Treat technology as an investment. That way, you are buying the cash flows produced by the technology, not a set of features and functions.
2.Look for an investment thesis, when reviewing a business case. What performance improvements will the technology deliver? Technology value comes from improved business performance. Intinsically, technology has no value until it’s applied to a business problem.
3.Use a professional checklist. Checklists are essential for private equity investors — along with the military, medicine, and aviation. They are popular tools becasue they present information efficiently,
reduce errors of omission, encourage reliable evaluation, and improve the quality of decisions and outcomes.
4.Behave like an active investor. IT and business managers control and influence results, so, they have the same power as private equity investors. It also means their due diligence on IT investments needs
the same rigor and professional tools.
5.Build an IT business case around expected performance improvements and their financial impact, not features and functions. For IT due diligence, treat the business case as an investment thesis that needs
testing and proof.
6.Translate the IT business case into a 100-day plan. The business case is an investment proposal and a high-level value plan. You need more day-to-day detail to execute and implement. A good way to do this
is to sequence the planned actions based on their value and write them into a 100-day plan. Avoid over specified project plans.
7.Use the IT business case and a 100-day plan to monitor and manage your investment in a technology project or solution.
8.Develop and track the fewest number of metrics possible. Track metrics that monitor progress towards operational goals before they show up in the financial results.
9.Avoid the distractions of the dashboard industry. Due diligence matters more than dazzling dials. Present the vital few metrics as simply as possible.
10.Tie additional funding to achieving the milestones laid out in the business case. Make the milestones value-based not just hitting an implementation target in the project plan.