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Time to Add Culture to the M&A Due Diligence List

In the technology industry, with its incessant change and ever decreasing product cycles, we rely on staying innovative to beat our competitors and capture market share.

It's assumed that doing better science and developing superior technologies provides the 'secret sauce' for differentiation and is the key driver of new product, process or service development success.

And when it comes to technology exits and investments, it's where we focus in the M&A process – establishing value through defensible technology IP and ensuring all is what is seems through technology due diligence along with the financial and legal context that surrounds it.


Cultural Due Diligence

But I’d argue that to establish true value in a firm per se, and to ensure that value is retained in the acquisator post-purchase, cultural due diligence now needs to be applied in the technology M&A transaction process.

As a builder and seller of technology businesses, I've long held this suspicion – that culture is massively undervalued as a developer and guarantor of value, and, that if you are looking to build a technology firm for a high-multiple exit, you would do well to ensure that your cultural practices are given at least equal credence along with technology, financial and legal factors. In fact, I’ve always found that it’s your cultural practices that will create sustainable value and enable you to shine in the other three areas. Crucially, it’s culture that drives the science and technology.

This belief now appears to be being validated by new research. Recently, a research study conducted by the University of Maryland's Center for Excellence in Service at the Robert H. Smith School of Business and 3Pillar Global looked at the reasons for product development success in cutting-edge business.


Product Development Success Index

The research which focused particularly on software product development – an industry where products are built using technology platforms, so one would assume where technical expertise is at a premium – makes interesting reading.

Its startling findings, though, have profound implications for those involved in all sectors where product, process or service innovation keeps the wolf from the door and where value is traditionally thought to arise. 

What was particularly thought-provoking about its findings was that it is culture, feedback, communication, staffing, collaboration and time/budget focus that drives development success more than any other factors – including technical expertise.

Of these six factors, it is culture that is most influential. The implication of this being that organisations seeking to optimise product, process or service development should focus on creating a culture that fosters innovative thinking and strategy rather than on mastering and applying available technologies. Attitude rather than aptitude, if you will.


Six sense

The research names six characteristics that define an organisation with an innovative culture. According to the research, these are:

  • Making it clear that every employee's contributions are valued:
    It also ensures individuals throughout the organisation and the ideas they come up with are respected, regardless of from which function or level in the organisation they arise. Within high-performing organisations, there is a spirit of appreciation and a commitment to celebrating success. Leaders in these organisations are the biggest enthusiasts for this approach – they 'walk the talk' at all times.
  • Providing an opportunity for all team members to learn and grow:
    Team members at the most successful companies regularly participate in new projects, take on new responsibilities and try their hand at new skills. Google’s 80/20 rule is one well-known example of a company providing on-the-job freedom to work on something outside their normal day-to-day responsibilities.

  • Engaging with the idea of continuous improvement:
    High performance organisations are continually improving their products, processes and services. Innovative teams are not afraid to take intelligent, calculated risks.
    They are comfortable with the idea that something can always be better. They release products, processes and services early and often and seek customer feedback to refine, reiterate and improve. They learn from mistakes and refine their performance over time.

  • Providing the flexibility to be creative:
    High-performance cultures provide the flexibility for people to approach things differently. Innovative teams respect the power of the individual and this provides teams with the opportunity to create new, differentiated approaches. They encourage free thinking and empower individuals to test new - even obscure - concepts. They foster creative ideas.

  • Embracing cross-departmental collaboration:
    The best product development organisations tear down functional silos. They work collaboratively across the organisation, communicating and, more importantly, engaging, through both informal and formal channels.
    Within the most innovative organisations, cross-departmental collaboration is standard practice and part of everyday life. Cross-functional engagement is highly valued and rewarded.
    In such organisations, for instance, technologists work closely with marketing. Marketers work closely with product management. Communication is constant and established as the norm.

  • Culture, not technology, is the driving factor behind innovative companies, products and successful exits:
    Organisations are more likely to succeed if their people truly believe that their contributions to the organisations are valued and feel as though they have room to grow without fear. Organisations are likely to be more innovative if they allow people the flexibility to take risks, be creative and challenge the status quo.


So there you have it. Some guidelines to compare your organisation to if you are looking to step up your innovation game. As these findings clearly demonstrate, it is the soft skills, not the technical capabilities, which organisations need to develop if they want to become leaders in their industries, proficient at developing successful products, processes and services and deliver the best multiples at exit.


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Jonathan Simnett

Jonathan has been involved in the enterprise technology business for over three decades, managing and turning around existing business and helping management and their investors in fast-growth technology segments to grow, manage change, enter markets, transfer technologies, acquire, merge and sell. He’s worked with large and public infrastructure and system integration companies including: AT&T, Avaya, BroadSoft, BT, C&W, Cisco, HP, Global Switch, GMC, Huawei, Informix, Infosys, Intel, Myriad Group, Novell, IBM, IGT,  Nortel, OpenReach, Pace, TCS, and Sybase.

In addition, he has also worked with fast growth and venture-backed companies taking many to trade sale/public offering including: Calyx, Cambridge Cognition, CloudApps, Concateno, e2v technologies, Ecotricity, Engensa, free2give, Getjar, Holition, Intuwave, Interoute, Logicalis, Medelinked,  Multiven, Natural Machines, NMQA, Qinec, Socialbakers, Thorn Medical and Zomm.

He holds a Master’s degree in Science and Technology Policy from The University of Manchester, attended the Stanford Graduate School of Business and blogs on technology innovation, marketing and management  at "The World According to WestFour".