In Diligence, Competition Between Competing Budget Priorities can be more Important than Competitive Position

Many M&A deals are attractive because the acquisition target company can turn heads and get customers excited about new technology and an enhanced value proposition. Of course, the promise of an attractive and fresh value proposition can motivate customers to switch suppliers, or even create a new spend line item – both cases affording the target a terrific growth story.

The commercial due diligence in these cases can be trickier than most realize. Far too many diligence exercises are conducted by measuring enthusiasm (for a solution) in a silo. Sometimes it happens because the diligence professional is excited and anxious to promote the solution. Sometimes it happens because the diligence professional limits his or her outreach to either the buyer or the user but fails to reach or consider others in the customer organization.

Siloed (and flawed) Voice of Customer approach:

  • “Would you enjoy a solution that ...?”

  • “How interested do you think you would be in upgrading to ...?”

  • “How significant would the improved productivity be to the organization...?”

Comparative (and more effective) approach:

  • "Considering competing spending priorities, how interested is your company in upgrading to ...?”;

  • “Are there other significant investments or upgrades that the company is considering making? How do those compare (from a cost and value perspective? How about from a decision-making consensus perspective?”; and

  • “Do you think that the XYZ department can handle two significant changes in one year?;” etc.

When completing diligence of this nature, we cannot forget that competition for spend is not just between suppliers, but also between competing categories of spend. The target company is not just competing for budget, it is competing for time and attention and needs to contend with switching costs. This is especially true given the degree to which technology and innovation impact so many categories of spend today. The customer organization itself can be excited about many opportunities, but typically has the capacity to absorb far less: "We would love to upgrade our production system right now and my boss has been trying to make the case for it for the past 9 months, but, apparently, there are regulations that are forcing the front office to deal with a significant upgrade to our POS system, and that is getting all of the attention of the IT organization."

Many diligence projects and many adoption curve projections fail to properly measure these other critical forms of competition. By keeping this in mind, you can avoid the same mistake and plan for a truer reality (and develop strategies to better address customer hurdles).

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