Operational Due Diligence
Assessing the viability of joint ventures, mergers, acquisitions or investments in a new operation or business by analysing the operational methodologies, systems, process and culture.
An often neglected area when assessing the viability of a joint venture, merger, acquisition or investment in a new operation or business is how the business will operate, in particular depth of management expertise, integrity and effectiveness of the management systems and processes. These are generally less tangible elements in a business as opposed to the financial data, past performance and nature of the business’s tangible assets such as intellectual property or resource deposit (in the case of a mining operation). However the operating system and capability are critical success drivers for any business and a review of management résumés with the cache of business processes will not necessarily provide a clear indication.
Operational Due Diligence requires a specific set of skills and expertise born from experience in developing and implementing management systems, process improvement and behavioural change programs. This experience working with established businesses to identify areas of weaknesses and opportunity for improvement, to extract more value, can effectively be applied as part of a due diligence exercise and assessed in conjunction with financial, safety and asset performance or potential.
There are four key elements to Operational Due Diligence:
1. Organisational Design and Effectiveness
2. Management Systems
4. Behavioural Model
Organisational Design and Effectiveness
“The design of your organisation and the capability of your people are a leading indicator of your success”
This can be a strategic and/or operational level assessment to determine whether the organisation (design, structure and capability) is capable of delivering the required business outcomes. This includes the design of the organisation itself and how the levels of accountability operate against the work being done and the tools being used to control and manage the work. Having role clarity at all levels is important. This is assessed against how people (& teams) actually work and whether accountability sits at the right level (if it exists).
In order to assess organisational design and effectiveness it is important to first understand how work is being controlled through the Management Systems and the type of work being done through the Processes.
Management Systems are the tools used to control the work. This includes how work is Forecast, Planned, Scheduled and Executed plus the Reporting & Review regime.
Forecasting work involves translating the business plan for a given period into the work volumes that need to be done; this can include units of production or level of service provided against the financial targets.
Once the volumes are quantified standards for unit cost and quality, time, skills required and organisational interfaces form the Planning elements of a Management System. With both the volume and standards information work can be planned in detailed and scheduled using the Scheduling tools available to the business.
The Execution elements of a Management System should focus on the way the work is done, how it is controlled by front line and middle managers, how resources are deployed and the effectiveness of the tools available to identify and manage variance.
Reporting on the work done against the plan is critical as it not only provides visibility of variance but ensures that both cost and quality are being managed.
The final element is Reviewing performance against plan / budget and that appropriate action is being taken is to address problems and lead the business towards achieving both its commercial and strategic objectives.
Due diligence of the Management System involves a detailed analysis of all these elements. This should not just be a desk top exercise of whatever documentation is available but is a critique of the Management System through discussion with stakeholders and assessment of the effectiveness of the tools. This also provides a useful insight into the capability of the management team and the confidence one can have in their ability to deliver the desired business outcomes.
The analysis of Processes is a critical look at the work being done. This involves a review of process maps (if they exist) and importantly a critical analysis of the work itself, how it differs between teams and departments, disconnections in the continuity or flow of work and the extent of waste or lost time within the process. Having a clear definition of what the work is, enables the review of the management system to be done against the actual work itself and not just a generic model of work.
The due diligence of Processes starts with understanding what is driving the work in a specific area and what is the value being added. Experience has shown that there is often a lack of clarity or understanding of what is driving the work and in some cases why the work is actually being done (it could be redundant effort adding cost but not value). The next step is to look at the actual work process itself and testing it against quality, cost and deliver requirements – misalignment of any of these requirements results in higher unit costs, rework in other areas and missed schedules.
In the majority of organisations interdependent work processes are required to deliver the ultimate customers’ requirements. Understanding and defining these interdependencies which include transition or handover points, the key steps in the value chain and the support work (such as shared services) provides the means for analysing the overall process chain. This process chain may have constraints (reducing throughput), non-value activities (such as re-work) and redundant activity which only add cost.
The fourth element in the Operational Due Diligence Exercise is looking at the Behaviours of managers and the key people within an organisation. This Behavioural analysis uses an Active Management model as a bench mark to assess whether planning, execution and review of the work is consistent, disciplined and driving high performance.
Experience has shown that while many organisations possess (in their libraries) the necessary tools they may not be being used effectively resulting in underperformance – this is a behavioural factor not a process or system problem. Observational analysis and structured interviews with key people are used to assess the type of behaviours being exercise in an organisation and the impact they have on the business’ performance. Surveys to gauge the organisation’s capacity for change and alignment of the management teams can also be employed in this part of the analysis.
When is Operational Due Diligence Required?
Operational Due Diligence can be done in existing business as part of the pre-acquisition or merger assessment or for a Greenfield operation as part of the the financial risk analysis. The methodology described above is applied easily in existing business environments but it requires access to the organisation including all levels of management. The depth and extent of the analysis can be adjusted to meet the needs of the client.
In a new operation this exercise focuses more on the proposed operating system in particular whether there is documented evidence that an operating model and methodology has been considered. While in this case there will not be various levels of management to interview and observe there will be key executives that are driving the new business initiatives.
The other side of this service offering is helping clients prepare for an operational due diligence audit. This is particular useful in a greenfield operation where there may not be the depth of operational experience within the team of entrepreneurial executives driving the new venture. It is also highly beneficial when assessing the viability of joint ventures, mergers, acquisitions and investments in a new operations or capital projects.
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