This article was jointly written by Bryan Ducharme of Venture 7 Advisors and John Burton of NPI Technology Management. Our companies share the view that there are important strategic and operational advantages to outsourcing the IT function to experts.
Business owners who have built companies over time need to plan for their exit well in advance. Any operational shortcomings should be corrected long before the process of selling the business begins. One important way to build company value is to make sure that technology assets are well managed.
Venture 7 co-founder and Managing Partner Bryan Ducharme says, “Once an interested buyer signs a Letter of Intent, a very intensive due diligence process begins. The buyer’s team will include attorneys, accountants, and other specialists who will leave no stone unturned in examining the business. We’ve seen valuations reduced when the acquirer discovers IT deficiencies that will require expensive fixes. We’ve also seen IT problems lead buyers to dig deeper into other areas of the business in search of problems. It’s always better to correct problems before the company is offered for sale.”
The hidden costs of in-house IT operations
Many business owners hire internal support staff because they perceive contracts with outside specialists as being more expensive. But with the right partner and the right agreement, deliberate outsourcing of selected operations is a cost-saving strategy.
Outsourcing expenditures are more visible because an invoice arrives every month for the services. The full cost of managing IT internally includes salaries, benefits, overtime, education, hardware, software upgrades, etc. Maintaining an internal operation is almost always more expensive than outsourcing, especially for smaller companies. The actual costs of an in-house IT function tend to be buried in the budgets of every department supported by IT. They are also found, but rarely tracked, in the loss of company productivity when systems are disrupted.
The benefits of IT outsourcing
Quality of service – It’s critical to maintain current versions of operating systems, security patches, applications, etc. Small internal teams rarely have the capacity or expertise to explore, test and fully evaluate hardware and software. Even a small outsourcing firm can offer those services and amortize their efforts in support of multiple clients. Technology specialists develop expertise by testing and installing in varied environments, and are far more likely to be adept at highly specialized and high-risk areas such as fail-safe systems, disciplined data backup, compliance and security. Outsourcing the IT function to experts is insurance against business disruption.
Expertise – There is an acute shortage of qualified IT personnel. The best talent rarely chooses to work on a small team for a company where IT is a non-core element of the business. They gravitate toward large companies or IT service firms where they’re exposed to many clients, industries and technologies, and where their expertise provides a path to promotion. A reliance on internal staffing almost always means settling for inexperienced or lower potential employees.
Technology Debt – The combination of relatively expensive internal IT staff and the challenges of managing that staff often lead to under-investment in hardware and software. When companies operate with outdated equipment, software that has outlived its useful life, and lapsed vendor agreements for equipment and applications, a “technology debt” is accumulated. Deferred maintenance is a debt that isn’t reported on the balance sheet, but it shows up eventually either in the form of business interruption or during due diligence when a company is being sold.
Stability and scalability – Just as any business owner develops processes, procedures, documentation and back-up resources in their field, IT outsourcing firms refine their operations in ways that an in-house “IT guy” can’t. A well-organized IT firm provides a team with depth of experience and continuity that eliminates the business’s dependence on a small internal staff. Similarly, keeping pace with the demands of a growing business or even temporary peak resource requirements is much easier with an outside IT relationship.
Management distraction – Managing the day-to-day activities of a small IT team is a distraction for most business owners. How do they know if they’re focusing on the right things? How likely is a small IT team to have the planning and budgeting expertise to position IT within the broader organizational goals? Business owners need to know that their IT spending is on track and on target. Using an outsourced provider guarantees that technology is moving in the right direction: that’s the value they bring to their clients.
Surviving due diligence with the deal intact
“We’ve been hired on several occasions by acquiring companies to perform IT due diligence on a potential acquisition target,” says John Burton, President of NPI. “Any deficiencies we find are reported back to the negotiating team for potential value adjustments. Buyers then usually reduce their offering price to factor in a technology refresh.
“Technology debts have to be paid one way or another. Like the people at Venture 7, we’ve seen that operational excellence provides benefit not only in day-to-day operations but also when it’s time to sell. We make sure that our clients approach IT due diligence with total confidence.”
Reducing a buyer’s risk
The quality of information technology operations is a key indicator for potential buyers, who are concerned with data accuracy and security. Maintaining business continuity following an acquisition is paramount to a successful transition. The buyer’s overall risk is considerably lowered when there is an outsourced IT team in place – with supporting procedures, process automation and staffing flexibility. For the selling company, outsourced IT can be positioned as a valuable feature.
Business owners should consider the limits of their management resources and focus on the core areas of their business. Managing IT assets is one area where an outsourcing partner pays significant dividends. Outsourcing may “feel” more expensive than handling specialty services internally, but the real long-term costs of trying to do too much internally are almost always higher than a well-structured outsourcing relationship. This is certainly true with IT support.
About NPI Technology Management
NPI Technology Management provides technology services linking financial goals to technology performance. We help clients to plan, build, run and manage technology through excellence in communications, application performance, user experience, mobility, Cloud and security.
John Burton is a technology consultant with NPI and works with business leaders throughout the Northeast with their technology planning and execution. He is a thought leader for a variety of cutting edge technology subjects and writes frequently for the NPI blog at www.npi.net/news.
About Venture 7 Advisors
Venture 7 Advisors is a merger and acquisition advisory and business consulting firm that assists clients with strategic and operational change. We work with business owners to build business value and execute successful transfers of ownership. Venture7Advisors.com
Bryan Ducharme is the co-founder of Venture 7 Advisors. He is an M&A Advisor, business consultant, exit planner and frequent speaker and writer on business ownership topics.