Software Due Diligence: Elevate Your Software Investments

Deloitte enhances decision-making in software investments by combining commercial aspects with product, tech & software aspects.

Commercial Due Diligence (CDD) on companies with a software or tech-enabled business models examines critical aspects related to the commercial scalability of the product and service offering. Key questions to be addressed include the market dynamics, trends and drivers with the aim of evaluating the underlying market growth and demand for the respective software products or tech-enabled services, as well as critical factors driving them. Furthermore, the CDD focuses on the market segmentation and differentiation from comparable products and services, and analyses customer behaviour and key usage patterns such as customers’ investing cycles, key purchasing criteria and willingness to pay. Moreover, commercial analyses put an emphasis on customers’ overall satisfaction and loyalty both qualitatively as well as quantitatively, e.g. measured by key performance indicators such as net revenue retention and expansion or NPS. Finally, the CDD takes a closer look at the market positioning and competitive differentiation of the software products or tech-enabled services, as well as the applicable sales model and go-to-market strategy effectiveness.

As a result of the commercial assessment of the market, customer and competitive environment, investors benefit from a holistic evaluation of the growth, profitability, and value creation potential of the business model (so-called commercial scalability), the realization of which is often subject to a sufficient level of technological scalability to be more closely examined by the Software, Product & Tech Due Diligence.

Software, Product & Tech Due Diligence investigates product capabilities and future development in relation to the client’s investment thesis. It provides an overview of the structure, design, technology stack, and quantifies any technical debt. It also considers the makeup and effectiveness of the product development team and its impact on profitability. In addition, this diligence includes examination of patents, the IP portfolio, development practices, use of open-source code, hosting, cloud, and cyber security.

Hence, the Software, Product & Tech Due Diligence addresses key questions related to the validation of investors’ investment hypotheses as well as the feasibility and realization of both top- and bottom-line growth and value creation potential. In this sense, it is essential for substantiating hypotheses and findings derived from the commercial assessment and helps in identifying key implementation risks or specific measures required to transition from pure strategy to results.

Deloitte’s integrated and comprehensive approach optimizes the investment process, yielding time savings and cost reduction. It enhances investor confidence by creating profound insights into market potential, feasibility, integration complexities, and scalability. Furthermore, it conducts thorough evaluations of product and development costs, meticulously estimates timelines to address crucial capability gaps, and identifies strategic opportunities for acquisitions, integrations, and synergies. The integrated assessments serve as a strategic compass for software investments.

Software is essential for modern businesses and often serves as a significant distinguishing feature. It provides value and gives companies a competitive edge. There are four distinct sections:

• Infrastructure software forms the computing environment's backbone. This type of software includes system software and middleware, such as operating systems and utility programs. It enables other software and applications to operate and is crucial for system-centric firms.
• Enterprise software helps businesses accomplish specific tasks and can be divided into horizontal software (common solutions for any industry, like HR software) and vertical software (tailored for specific industries like healthcare management systems). It aids in optimizing and automating complex business processes.
• Consumer software addresses end-user needs and includes applications that help users carry out specific tasks like gaming apps, web browsers, etc. Through consumer software, firms can provide unique user experiences and interfaces.
• Tech-enabled services are reliant on proprietary software delivered as online services or Software as a Service (SaaS). Businesses using such services offer customers enhanced scalability and cost-effectiveness, distinguishing them from competitors.

Software Due Diligence (SW DD) comprises an in-depth process segmented into two key stages. The first phase employs an outside-in review solely relying on primary and secondary research whereas the second phase focusses on confirming the findings with target access and detailing the analysis. The average duration of a SW due diligence is three to five weeks.

Phase 1 (outside-in)
 

The process begins with an assessment of the software product suite. This involves a thorough examination to identify, for example, any shortcomings in the product offering. It also considers the alignment of different products with market demand, particularly in the context of Software as a Service (SaaS) delivery. A deep dive into the technology and architecture USP includes insights about the technological stack in use, understanding the architectural designs implemented, and gaining knowledge about any past or future scalability issues encountered. The analysis of the Research and Development (R&D) organisation covers various aspects, including but not limited to employee sentiment. The key sources of information are 10-15 interviews, conducted with past employees, competitors, and industry experts. Furthermore, secondary sources such as product and employee reviews are used. This phase maybe orchestrated in tandem with the Commercial Due Diligence (CDD) workstream, enabling an encompassing understanding of technical purchasing criteria and market dynamics.

Phase 2 (target access)
 

The purpose of the second phase is to detail the DD with deeper information from the target. In case an outside-in assessment is done, the aim is to validate the findings of the first phase. A key element is to ensure that the proposed product offering is comprehensive and coherent with the potential buyer's investment thesis, with a particular focus on identifying potential investment gaps. An in-depth examination of the technical architecture related to e.g. scalability, technical debt is done, the efficiency and composition of the R&D teams is being analyzed and compared to industry best practises and the approach towards hosting and cloud strategies validated.

The key sources of information are one to two expert interviews with senior product and technology managers as well as data requests and written questions (IRL).

Deep Dive: CAST Application Assessment (Source code)
 

CAST’s software intelligence technology is utilized for Due Diligence processes, providing a detailed structural quality assessment of software by automatically understanding its source code, architecture, data, and transactions. It enables the identification of potential technical risks, providing investors with a thorough view of the state of the software. By using CAST, accurate valuation of software assets and informed decision-making in Due Diligence processes and detailed insights into the structural quality and performance of software products can be achieved.

Being non-invasive, CAST technology operates locally without the source code ever leaving the computer from the target. It begins by automatically reading the source code to understand the overall health of the software, examining the quality, robustness, modularity, and maintainability of its codebase. This thorough assessment aims to ensure the structural soundness and reliability of the software. Additionally, by providing a broad understanding of possible improvement opportunities, it enables cost-effective decision-making in improving the code. Simultaneously, CAST technology examines the safety and security of third-party components within the software, maintaining the software’s integrity and minimizing security risks. Lastly, in terms of open-source licensing, CAST technology investigates any potential threats and risks to ensure compliance. This capability is crucial in mitigating any legal implications associated with the misuse of open-source licenses. The comprehensive and automated capabilities of CAST make it an effective technology for conducting a review of a software's source code, thereby ensuring its robustness, cost-effectiveness, safety, and compliance.

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