In PART I we cracked the shell on digital disruption and what it could mean to your next investment.  In this post we'll frame a new tool to manage the tech elements of deal risk:  the Q·of·T

Q·of·T:  What you don't know will hurt you

The Q·of·T™ provides a rapid technology evaluation framework focused on both seller's and buyer’s interests and identifies elements that are accretive and elements that are regressive to value creation.  Informed through years of practical experience, the Q·of·T decomposes a firm’s technology ecosystem into a precise map that overlays the people, processes, and systems driving a company’s digital DNA. 

The Q·of·T assessment consists of 4 key elements.  Each is designed to convey critical information in a language familiar to investors and each is crafted through the lens of either a sell-side valuation or buy-side deal thesis.

• Technology Balance Sheet: a view of a company's underlying technology expressed as assets (those elements that add to valuation or aid in achieving value creation) and liabilities (those elements that decrease valuation or provide headwinds in achieving value creation). Read more about the Technology Balance Sheet.

• Decision Guides: a more detailed analysis of select dimensions to provide a greater understanding of assessment results and insight into future technology needs. There are over 30 decision guides available to include:

  • Technology Inventory

  • IT Organization Assessment

  • IT Delivery Effectiveness

  • IT Spend Analysis

  • etc.

• Findings: an organized set of conclusions and recommendations based on the overall technology assessment.

• Discussion of Risks: identification and discussion of key risks that have the potential to jeopardize valuation or future value creation - again all focused specifically on buy and sell side strategies.

The Q·of·T assessment framework organizes the analysis of a target firm’s technology into a structured hierarchical model consisting of Areas and Dimensions.  The 8 Q·of·T Areas classify the analysis into common organizational and operational attribute groups. 

Q·of·T Areas

• IT Strategy

• Infrastructure

• Software Applications

• Data

• People and Organization

• Process, Practices, and Tools

• Governance

• Other

While not all 60+ Dimensions defined in the Q·of·T standard warrant detailed evaluation for every deal, they do frame a composite set of guidelines that ensure no stones are left un-turned.   Overlaying operational dimensions are a variable set of quality or non-functional capabilities.  These capabilities are often overlooked yet key to both operational efficiency as well as the ability to adapt to ever changing market expectations.  The Q·of·T quality considerations include:

• execution qualities such as maintainability, interoperability, reliability, etc

• evolution qualities such as scalability, performance, etc

Why you need a Q·of·T

Sell-side companies and brokers will benefit greatly in 2 areas:  (1) more accurate valuation from subjective elements and (2) greatly reduced potential for deal crushing surprises during buyer due-diligence.  Technology is two parts art and one part science and just as art has intrinsic value so does tech.  The value of software that enables the operationalization of GAAP is well understood (comparisons are plenty).  The value of bespoke tech that enables market leaders is highly subjective.  Understanding where your client firm's tech sits on this continuum can be critical to optimal valuation.  Proactive sellers will preempt buyer's due-diligence (Q·of·E) with their own assessment of financial health.  Knowing what buyers will discover gives firms the ability to fix or address issues proactively.  Keen buyers will conduct tech diligence and sellers would be wise to understand in advance what they may find.

While the process and content for buy and sell side diligence scenarios are very similar, the lens by which they are conducted differ.  Buy-side firms perspective revolves around (1) accurate valuation and (2) accurate future-casting of 3-6 yr value creation windows.  We all know:  buy low, sell high.  Beyond EBITDA there may lurk hidden risks (liabilities) in a target's tech.  These liabilities may pose significant and unexpected drains on cash or present hidden exposures to competitive risks during hold periods.  While predicting the future is uncertain, we do know that with holding periods elongating the risk of a target being "Amazoned" by a new entrant through the use of innovative technology is real. 

Run a Q·of·T on your next Deal

The threat of tech in 1999 was viewed mostly as a disintermediation play - one that narrowed or eliminated the gap between producers and consumers.  Today's Digital Disruption stretches the very fabric of markets and creates new business models highly impactful on traditional value propositions.   Companies that fail to leverage tech in new and creative ways will risk loosing to new entrants with lower barriers to entry.  Knowledge is power.  Know your asset or the asset you are buying like no other.  Know your Q·of·T!