It’s Not About the Tech, It’s About Alignment 💡
Many investors ask, “What’s the value in technology due diligence?” The truth is, it’s not really about the tech. Sure, we can find efficiencies, much like Gordon Ramsay refines dishes for struggling restaurants, but technology usually works. What doesn’t work are people, budgets, strategy, and implementation plans.
This week’s focus is specifically on professional services firms. Unlike technology or SaaS companies, these “non-tech” businesses are often at higher risk of budgetary and technology risk because their service and product lines need thorough assessment, followed by alignment with technology. For investors, understanding this dynamic is crucial.
The Risks of Antiquated Systems in Services Firms
Even in large services firms, it’s not uncommon to find antiquated processes. Full-time employees are sometimes responsible for managing basic tasks like scheduling, resourcing, utilisation, and profitability, often relying on spreadsheets. Alternatively, some firms have invested heavily in bloated ERP or PSA systems that are underutilized.
Spreadsheet-Driven Firms 📊
Firms that rely heavily on spreadsheets present both a risk and an opportunity. These businesses often suffer from manual inefficiencies, but with the right processes in place, they can quickly benefit from digital transformation. However, this transformation must be preceded by the design of effective business processes.
Bloated ERP Systems 💻
On the other end of the spectrum are ERP systems that are expensive to maintain, require significant operational costs, and can be particularly problematic if not fully adopted. When executed well, ERP systems can transform a firm’s efficiency, but getting there requires proper leadership and vision.
The Key to Success: Leadership and Vision
What makes the difference between a failed and a successful tech implementation in a services firm? In our experience, it comes down to leadership. A leader with experience, pragmatism, and vision can make or break the success of any system implementation.
Many of these systems are not complex builds but rather connections of existing tools. Often, the founders or operations leaders who built or took over these systems are still driving innovation. This dynamic is not inherently negative, as it fosters a balance between initial creativity and operational maturity. In some cases, multiple minds contribute to better systems.
A Case Study: Finance Bias
We once worked with a services firm where the finance leader built the entire tech system. Naturally, it was finance-heavy, with excellent reporting and forecasting, but the technology supporting core business processes was fragmented. This led to inefficiencies, as full-time administrators had to manage processes end-to-end. Still, financial accuracy was impeccable, illustrating the tension between specialised skill sets and holistic system design.
Socialising with Services Firms 🗣️
At our firm, we spend a great deal of time engaging with founders and owners of professional services firms. This proactive approach ensures we stay ahead of the curve. Simply waiting for firms to come to us for tech due diligence isn’t enough—we need to know what challenges growing firms are facing.
Observations From Owner-Managers of Services Firms
From our conversations with owner-managers, we’ve identified three key patterns:
- Leadership Tension: Most firms have unresolved tension within their leadership teams. This tension is rarely addressed and often gets in the way of strategic planning, which can severely impact any digital transformation effort.
- AI Ambitions vs. Automation Reality: Many firms are eager to explore AI, hoping to reduce headcount and increase efficiency. However, what they actually need is automation—a much cheaper and simpler solution to implement.
- Time Poverty: Most owner-managers are time-poor, spending too much time on delivery and business development. This lack of strategic thinking negatively impacts their ability to innovate and transform digitally.
Common Issues found during Tech Due Diligence
Having laid out the landscape of professional services firms, let’s dive into the common pitfalls we observe during tech due diligence:
1. Digital Disillusionment
Firms often pitch technological advancements as a key growth driver, but the actual technology and team skills rarely match the pitch. This gap leads to unrealistic service-line promises, especially when there’s no experience to back them up.
2. Promising New Service Lines Without Experience
Management often sells the idea of new service lines as a growth opportunity, but they may lack the technological expertise or customer knowledge necessary to deliver on those promises. For example, a managed service provider (IT MSP) that primarily serves SMBs may struggle to meet the demands of enterprise clients without the right personnel and strategy.
3. Failing Digital Transformations
Enterprise Resource Planning (ERP) systems often become bloated, inwardly focused, and replicate what was already being done well through spreadsheets. These systems may enhance reporting, but they rarely deliver significant customer or partner value, making them poor investments.
4. Dual Strategy Confusion
Some firms that have successfully automated operations get overly ambitious, creating new tech platforms without the resources or focus to maintain them. This distracts the team from innovating on the original platform, creating confusion for investors who can’t easily track where the money is being spent or value is being created.
5. Tech Inefficiency Causing Headcount Growth
We recently conducted tech due diligence for a 100-employee professional services firm in an attractive market. Despite their growth plan, the outdated tech forced them to hire an additional 300 junior-level staff. Our recommendation was to spend £3m re-platforming, which successfully reduced headcount and streamlined operations.
6. Ineffective Self-Service Portals 🚪
Many firms push for digital transformation by implementing self-service portals. However, these systems often go unused because customers prefer direct interaction. A professional services firm we worked with was advised to adopt self-service technology, but our analysis showed that most customers preferred to speak to a representative. The solution? Don’t bother with unnecessary tech for tech’s sake.
What Investors Should Look For 👀
When assessing a professional services firm, investors should focus on:
- Scalability: How effectively can the firm expand without significant headcount increases?
- Service Quality: Is the technology truly improving the customer experience?
- Effective Self-Service: Are there systems in place to give customers immediate access to services?
For firms looking to grow through acquisition, the core technology platform must be robust, automated, and scalable.
Services Firms are at Higher Risk!
In summary, professional services firms are at a greater risk of ineffective tech implementation and overspend than tech companies.
This is because technology is often viewed as a cost centre rather than a strategic enabler. The key is ensuring that the technology aligns with the firm’s business practices, which in professional services can change frequently.
Investors should consider the firm’s technology stack carefully. Poorly implemented tech can lead to headcount issues and stagnant service models. And while cyber concerns are universal across acquisitions, it’s essential to understand that even brick-and-mortar professional services firms require a thorough tech assessment. Don’t skip it just because they aren’t a tech company!
