Operational due diligence is important for private equity firms to identify areas for improvement in target companies, such as purchasing, supply chain, and sales. This allows firms to make informed buying decisions. Key areas of focus include sales and marketing capabilities, procurement spending analysis, manufacturing and supply chain network optimization, leveraging technology in administration, and assessing service provider risks. HCL recommends a systematic approach over 6-8 weeks involving subject matter experts and industry benchmarks to comprehensively evaluate a target company's performance, value creation potential, and risks.

1. HCL TECHNOLOGIES
Private Equity Due
Diligence – Think
Operational
Operational Due Diligence for PE firms
Ramkumar Rajachidambaram
4/30/2014
Operational due diligence is critical to identify the areas of improvement such as purchasing, supply
chain and sales in order to buy a target company. HCL can support operating partners in conducting
through due diligence and help them in making a correct buying/investment decision

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Private Equity Due Diligence – Think Operational
Introduction
Due diligence of private equity and its portfolio companies is very critical in current
uncertain environment. The operational due diligence is critical to address new
regulatory regimes, anemic global economic growth, and the perpetual threat of
financial destabilization.
PE Partners are far more involved with portfolio companies and therefore able to
provide significant input. They employ experienced operating partners, or
individuals with deep functional experience and industry knowledge, to act as board
members and to consult with portfolio-company CEOs and senior managers
throughout the lifecycle of the investment. Seasoned PE operating partners support
the portfolio management teams streamline operations, concentrate on core
strategic aims, and deliver profits to the bottom line. Such activities include
influencing the CEO to spin out a nonessential division, restructuring a company’s
operational structure to keep processes lean, or providing cash management
expertise to portfolio companies acquired through leverage.
Operational Due Diligence
Operational due diligence is focused on operational and internal data and aims to
find quick opportunities to improve performance. Operational due diligence is
hypothesis driven and vary on case to case basis. The areas where operational due
diligence is done are:

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Sales and Marketing
Sales capabilities are the most crucial function and provide insights on the
company’s potential for rapid growth. Through management interviews ,operational
due diligence assess the firm’s efficiency in marketing, sales and account
management and its scope for rapid growth.PE firms often neglect the possibility of
profitable growth including pricing opportunities due to their less tangible impact
and mid-term focus.
Purchasing & Procurement
Procurement is an important lever for supplier value creation particularly in aligning
purchasing across divisions and increasing transparency of external spending. HCL
conducts operational due diligence to classify spending according to categories,
suppliers, divisions and regions. Post classification a comparative analysis is done
across all the companies. Due diligence involves conducting stakeholder discussions
with purchasing executives and incumbent suppliers. Post discussion, a spend
analysis is done to identify areas for short term improvements.
Manufacturing and Supply Chain
For this, operational due diligence involves conducting sample site audits and
external comparison to look for consolidation opportunities in the manufacturing
network. The analysis includes conducting shop floor assessments to identify poorly
aligned processes, underutilized assets with a scope to improve operations at
individual sites – leading to savings, increasing asset utilization, efficiency and
automation.
General Services and Administration
This involves fully leveraging new technology and outsourcing opportunities.
Operation due diligences need to focus on areas such as Finance, HR, IT and sales
support to identify opportunities for co-coordinating processes, increasing systems
support and promote shared services, outsourcing and offshoring.
The due diligence should include stakeholder interviews with key managers,
resource analysis, quality survey and usage of external benchmarks.
Service Provider Assessments
PE firms/its portfolio companies may outsource or use licensed technology
applications or their own proprietary software. In the case of outsourcing, due
attention should be paid to the importance of data being handled and whether the
outsourced company has proper backup systems in place. In the case of licenses,
investors should confirm that formal legal agreements are in place to use the
software for a given time period. Proprietary software has its own issues, including

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whether the software is maintained regularly, whether there is adequate IT support
internally for the software, and similar operational risk issues
Best Practice Approach
HCL use systematic approach to assess the top line and bottom line
improvements,potential of a target company and its associated risks.The ideal time
taken to conduct operational due diligence should be between 6-8 weeks.The
challenge should be to obtain high quality data and perform high depth
analysis/assesments over the data.
The assesment should involve subject matter experts,access to industry
benchmarks to identify gaps and obtain comprehensive understanding of potential
for value creation.
Conclusion
This paper has highlighted some of the major issues to consider when conducting
operational due diligence on PE firms. As is evident, the process is both complex
and time-consuming, but the outcome in the form of understanding operational risk
and associated challenges. Detailed operational due diligence would guide the PE
partners to assess if it has to invest its funds in the target company and the areas
of improvement that it wish to undertake post acquisition.