What is the difference between operational due diligence and other types of due diligence? (2024)

Operational due diligence (ODD) is the process of evaluating a target company's operational capabilities, processes, systems, and performance. It differs from financial due diligence by focusing on understanding the target company's operations, efficiency, and effectiveness, as well as how it can be integrated with the buyer's operations. ODD covers various aspects of the target company's operations, such as strategy and business model, organization and management, human resources and culture, IT infrastructure and security, supply chain and logistics, production and quality, customer service and satisfaction, and regulatory compliance and risk management.

Operational due diligence is important for several reasons. First, it can help the buyer identify potential synergies and cost savings that can be achieved by combining the operations of the two companies. For example, ODD can reveal opportunities to consolidate facilities, streamline processes, optimize inventory, leverage technology, or cross-sell products. Second, it can help the buyer avoid potential pitfalls and liabilities that can arise from operational issues or gaps. For example, ODD can uncover operational risks such as outdated systems, poor quality controls, inefficient workflows, employee turnover, customer complaints, or regulatory violations. Third, it can help the buyer plan and execute a smooth and successful integration of the target company's operations with its own. For example, ODD can provide insights into the operational culture, values, and expectations of the target company's employees, customers, and suppliers, and help the buyer align them with its own.

Operational due diligence is conducted through a combination of data analysis, document review, interviews, site visits, and benchmarking. The buyer typically requests information and documents from the target company related to its operations, such as business plans and strategy documents, organization charts and job descriptions, employee policies and contracts, IT systems and policies, supplier contracts and agreements, production reports and quality records, customer contracts and feedback, and regulatory licenses and certificates. After analyzing the data and documents, the buyer assesses the target company's operational strengths, weaknesses, opportunities, and threats. Interviews with management, employees, customers, and suppliers can provide a deeper understanding of their operational perspectives and issues. Additionally, the buyer may visit the target company's facilities to observe its operations firsthand and verify its claims. Lastly, benchmarking against industry standards can help identify gaps or areas for improvement.

Operational due diligence can be a complex and lengthy process, requiring the collection, analysis, and verification of a large amount of data from various sources. It is also subjective, as it involves evaluating and comparing different aspects of the target company's operations that may not have clear or consistent metrics or benchmarks. Furthermore, it can be sensitive and contentious, as it may expose operational problems or conflicts the target company may not want to disclose or address. To ensure successful ODD, some best practices are defining the scope and objectives clearly, prioritizing key operational areas and issues, using a structured approach to collect and analyze data, involving experts from different operational functions and disciplines, engaging with the target company's management in a respectful manner, and documenting and reporting findings in a concise way.

Operational due diligence differs from other types of due diligence in several ways. First, it focuses on the operational aspects of the target company, rather than the financial, legal, commercial, or environmental aspects. Second, it evaluates the target company's operations from both a standalone and a combined perspective, rather than a historical or a projected perspective. Third, it aims to identify both the synergies and the risks of integrating the target company's operations with the buyer's operations, rather than the valuation or the deal structure. Fourth, it involves a more hands-on and interactive approach, rather than a desk-based and document-based approach.

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