A comprehensive guide to IT due diligence with a checklist included

it due diligence checklist

In 2023, all industries increased their IT spending per revenue share compared to the previous year. However, this doesn’t automatically imply that these investments are going to be beneficial for every business.

That’s why technical due diligence is so important during various business transactions like M&A. It helps assess the target’s technological capabilities, strengths, and weaknesses.

Read the article to explore the importance of technology due diligence, learn when and how to prepare for it, access an IT due diligence checklist, and discover how iDeals can assist in the process.

What is technical due diligence?

IT due diligence or technical due diligence is a thorough examination of a company’s IT assets, systems, processes, policies, and procedures before a business transaction.

The most common cases when an IT due diligence process is required include mergers and acquisitions (M&A), investments, partnerships, initial public offerings (IPOs), and legal proceedings.

The goals of technical due diligence are:

Identifying potential risks. Uncover and assess any risks associated with the target company’s IT infrastructure and systems. This is especially important in light of the increasing cyber risks: between 2013 and 2022 the number of data breaches has more than tripled.
Identifying potential opportunities. Explore how a business transaction can be beneficial in terms of the technologies the target offers. For example, according to the Valuing technological synergies in mergers study, companies leveraging technological synergies gain advantages such as enhanced innovation capabilities, improved competitive positioning, and increased market share.
Ensuring data security. Evaluate what security measures the target implements to protect data and privacy, as the consequences of a data breach can be severe, including reputational damage and financial losses. For example, in 2023, the average cost per data breach was $4.45 million.
Verifying compliance. Ensure that the target company adheres to relevant regulatory requirements and industry standards in its IT practices. Companies that don’t comply with data protection laws can expect heavy fines. In Europe, for instance, they can reach up to €20 million or 4% of the firm’s worldwide annual revenue from the preceding financial year.

All mentioned goals ultimately lead to one key objective of IT due diligence: informed decision-making. By assessing the target’s IT assets and systems, investors can decide whether or not its IT health is satisfying enough to proceed with confidence in a business transaction.

To be well-prepared for technical due diligence, consider the following:

Conduct internal assessments. Evaluate IT infrastructure, software architecture, and data security measures internally to address potential issues in advance.
Organize essential documents. Prepare important documents like contracts and policies that may be reviewed during the due diligence process. Create a tech due diligence checklist or leverage the one provided below in the article.
Ensure secure access to documents. Use data management software like a virtual data room to provide investors with secure and controlled access to confidential information.

Generally, take IT due diligence seriously and be proactive about any identified issues or risks, as it can significantly contribute to the success of a business transaction. A weak strategy, on the other hand, may result in overlooked vulnerabilities and pose potential obstacles, leading to complications during the due diligence process.

IT due diligence checklist

Use the technology due diligence checklist to uncover potential risks, identify growth opportunities, and make informed decisions during a business translation you’re involved in.

Technical diligence aspects and goals	Items to check
1. Business strategy and business roadmap Goal: to make sure the company has a clear and cohesive strategy, roadmap, and a healthy SWOT competitive awareness.	SWOT (strengths, weaknesses, opportunities, and threats) competitive factors Strategic planning (how IT is integrated into the overall business strategy) IT roadmap (to assess the alignment of IT initiatives with broader business goals) Operational plans and procedures (how IT operations support and contribute to the overall business operations)
2. Organizational structure and technology team setup Goal: to assess the efficiency, alignment, and scalability of the company’s IT department.	Analyze the organizational chart and reporting structure Evaluate the qualifications and experience of key IT leaders and IT team members Review the number of staff in the IT department and assess whether it aligns with the company’s needs Assess the vacancies that need to be filled Evaluate any existing strategies or initiatives in place to retain key IT talent
3. Software Goal: to assess the software architecture and its alignment with business goals as a broken or inadequate architecture can hinder scalability and increase maintenance costs.	Data architecture and management lifecycle Technical debt and management approach Security design and secure programming principles Integrations Intellectual property ownership Operating systems Software licensing agreements Anti-virus systems
4. IT infrastructure Goal: to assess the ability of the company’s information technology infrastructure to support business operations and future growth.	Infrastructure deployment model (on-premises, cloud-based, or hybrid) Cloud and data centers approach for deploying physical infrastructure Roles and responsibilities for the internal IT team Business continuity and disaster recovery approach Business applications management Hosting and deployment independence Contractual agreements
5. Product quality Goal: to assess the overall reliability, functionality, security, and market competitiveness of a company’s products.	Code coverage and adherence to coding standards Test case management process and tools Effectiveness of QA practices in identifying and preventing defects History of defects and bugs in the product The product’s performance under different loads and conditions. Quality organization health and inclusion in the team
6. Software development lifecycle and business tools Goal: to conduct a business tools overview and assess their effectiveness and suitability.	Agile methodologies and commitment to continuous improvement Release planning and management process Sprint planning and management process Delivery trends and performance metrics The degree of automation in integration and deployment processes The effectiveness of team collaboration tools The effectiveness of quality assurance processes and practices
7. Customer care Goal: to evaluate the effectiveness of an organization’s technical support.	Customer support systems (ticketing system, knowledge base, customer communication tools) Customer-focus mindset (organization’s commitment to a customer-centric approach) Defect rates and management process Escalation rates and management process Delineating between support and engineering teams Service level agreements (SLAs) Customer feedback and satisfaction scores
8. Cybersecurity Goal: to assess data security (security measures, policies, and practices).	Data strategy (data collection, storage, processing, and sharing) Network security measures, including intrusion detection strategy Physical security strategy History of breaches and management Compliance requirements, cybersecurity regulations, and industry standards Business continuity and disaster recovery plans Programs for educating employees about cybersecurity best practices Security audits, vulnerability assessments, and penetration tests
9. Portfolio investment balance Goal: to assess the overall health of the company’s investment portfolio to optimize the balance between risk and return.	Level of efficiency for code leverage and reusable components strategy Level of diversification across asset classes The financial performance of each investment in the portfolio Level of technology adoption and innovation within each investment

Note: the provided technical due diligence checklist isn’t a one-size-fits-all solution and can be adapted to specific business needs during the IT due diligence process.

How iDeals can help with IT due diligence?

iDeals offers a solution for simplifying and enhancing IT due diligence during a merger and acquisition process or other business transactions. This is a virtual data room (VDR), a secure online repository for document storage, distribution, and management.

Simplify your due diligence with iDeals VDR

A virtual data room has numerous advantages over traditional physical data storage and cloud storage options like Google Drive. This includes better security, more efficient collaboration, and cost-effectiveness, which is possible due to several features the provider offers.

1. Security features

iDeals is known for robust security measures, ensuring the highest protection of sensitive data. Among the key security features are:

document permissions

Two-factor authentication. It requires users to verify their identity through an additional step: a code sent to a mobile or email, adding an extra level of security.
Redaction. It allows users to selectively hide sensitive data within documents, ensuring that confidential details are protected from unauthorized parties.
Fence view. It enables restricted viewing, showing only a part of a document where a cursor hovers and hiding the rest under a sliding barred screen.
Watermarks. They appear on the document as semi-transparent overlays, indicating who and when has accessed the document, discouraging unauthorized sharing.
Granular document permissions. They provide control over who can access, edit, or download specific documents, ensuring that information is shared only with authorized individuals.

2. Document management features

iDeals also offers advanced document management functionality that simplifies the complexities of data storage, distribution, and management:

add labels to documents

Bulk upload. It allows users to upload multiple documents simultaneously, making the process fast and effortless.
Automatic index numbering. It simplifies document organization and navigation by automatically assigning identification numbers to each uploaded file.
Advanced search. It enables users to quickly find necessary documents by entering keywords or applying multiple search filters.
Labels. They categorize documents effectively, simplifying navigation within the data room. Examples of labels may include departments (HR, finance, marketing, legal), status (approved, draft), type (report, offer, invoice), etc.

3. Collaboration features

Q&A functionality

Notifications. They keep stakeholders promptly informed about any updates, newly uploaded documents, new questions, and tasks.
Questions import, It allows a quick transfer of multiple questions in bulk from Excel to the virtual data room, saving time from copying and pasting them.
Q&A. It enables secure collaboration by allowing users to create, manage, assign, and re-assign questions to experts.

Why is technical due diligence important?

Technical due diligence is important because it allows a thorough assessment of a company’s IT infrastructure and practices and, thus, provides investors with insights for informed decision-making. This helps to mitigate possible risks and enhance the success of a business transaction.

Who performs technical due diligence?

Technical due diligence is typically conducted by investors who, in turn, may engage IT experts, such as IT consultants, cybersecurity specialists, and technology auditors to assess the target’s IT infrastructure.

What is a diligence checklist?

A due diligence checklist is a detailed list of items that need to be examined during a due diligence process. For example, an IT due diligence checklist may include cybersecurity policies, data protection protocols, software licenses, technology contracts, and disaster recovery plans.

What are due diligence tools?

Due diligence tools are software designed to facilitate document management, collaboration, and analysis, streamlining the due diligence process. An example of a due diligence tool is a virtual data room, a secure online repository for storing and sharing confidential documents.