Spare a thought for the due diligence analyst. She sits at the center of a critical business function that is steadily expanding in scope and scale. Her analytic skills are the main value-add of the due diligence product, but too much of her time is spent in the costly and inefficient effort of gathering information. Technology has driven a tremendous expansion of information that can be obtained around the world, but until recently has not provided useful solutions for gathering that information. This challenge will be the focus of the “Lifting the Burden” series of blog posts.
Defining the Stakes
Due diligence has never been more important or more challenging to provide. The volume of corporate transactions is driving high demand for due diligence services, and the due diligence product is increasingly more than just a “check-the-box” regulatory requirement. Whereas in the past, the due diligence report might get a cursory read and then go straight to the back of the client’s transaction folder, these days the report will often receive the careful attention of senior management.
Due diligence is also growing in scope, moving beyond the basic legal, regulatory, commercial and reputational background review to encompass political and social media risks, environmental and social concerns, and financial details. And across all these subject areas, the digital information environment is enormous, with the number of websites, blogs, social media apps, and databases continuously expanding.
And even as the importance and scope of the due diligence process are increasing, clients are pushing for faster turn-around, either because they want to close their deal quickly or because they wait until the late stage of a deal to start their due diligence.
Analysis is the real value-add of the due diligence project – assessing the reliability of the collected information; connecting disparate pieces of information; triangulating significance from apparently unrelated data points; and highlighting what important items remain outstanding. But that is the second step in the process. The first step is information collection, and that’s where the challenges of time, cost and quality can upend a project.
The Challenges of Information Collection
The information-gathering phase of a due diligence project prompts a number of questions, including: What information can be found? Who can find this information? How do we contract and manage them? And each of these questions can pose challenges for the analyst.
What information can be found?
The main sources of information for a due diligence project are familiar: site visits; corporate and litigation records; media and social media; and direct enquiries. But this information exists across innumerable national and local jurisdictions, all with different procedures and different levels of public documentation available in different formats.
A typical due diligence project may require collection in 5 or 10 jurisdictions; a due diligence analyst may need collection from 50 or 100 jurisdictions over the course of a year’s worth of projects. And even the most experienced due diligence analyst is going to get assignments in unfamiliar places.
Often, it can be a challenge just figuring out what information is available and the particular process accessing it. Consider corporate registration records: in New Zealand, these details can be accessed easily online, whereas in Paraguay the same information must be requested in person at a government office; and in Chad and Mali, the information is only available to company representatives or with a court order. Or take civil litigation records: in Kosovo, details of court proceedings are easily accessible online, whereas in Luxembourg, such information requires a contact inside the legal system to review the documents manually.
Who can find this information?
The analyst probably knows contractors who can gather information in some of these jurisdictions, and she may have colleagues who know more about other jurisdictions. But even a large due diligence team will not have resources in every corner of the world. Many due diligence advisories maintain databases that store the details of previously-used contractors, but that data gets old quickly; much of it is often stale; and the analysts who inputted the source data may have left the firm, so there is nobody to follow-up with.
In addition, the longstanding secrecy culture of the due diligence industry can be an obstacle to sharing this knowledge. The industry has plenty of former intelligence professionals, and the mystique of the private intelligence company is a useful marketing tool. But fundamentally, due diligence is not spycraft, it is structured information gathering.
So the analyst must spend precious time and resources finding local contractors. But she won’t have time to thoroughly vet them, so she cannot be confident that they share her values and ethics. And she will not have first-hand experience with them to confirm their competence.
And even in jurisdictions where the analyst has an existing relationship, what happens if her go-to investigator is on holiday? He may have a backup, but they come with the same concerns about ethics and competence.
How do I contract and manage them?
It can take time to arrange terms with local subcontractors. But clients are often unwilling to wait that long to receive the due diligence proposal. So due diligence projects are often priced before the in-country investigative costs can be nailed down. With wildly varying price-points between different jurisdictions and contractors, cost estimates can turn out to be way off. The result may be an unprofitable engagement.
And when the project kicks-off, every contractor has their own process and works at their own pace. Inevitably, the analyst will spend valuable time following-up on their progress, and may find herself nagging them for results and struggling to keep them on track.
But complications can occur on both sides of the contracting relationship. What happens when the analyst goes on vacation, gets sick or otherwise hands-off the project to a colleague? That new analyst needs all her project documents, communications and other details, but probably won’t have access to her email. Collaboration within a due diligence team adds another layer of complication.
And when the work is done, the payment process can be another challenge. Wiring money to bank accounts around the world is a heavy administrative burden. And onboarding subcontractors is often a time-consuming and bureaucratic process that takes precious time away from more high value tasks. This is particularly the case on projects that require a small amount of work in a large number of jurisdictions: trying to pay 50 contractors $200 each for basic corporate records checks across 50 jurisdictions can be a huge hassle. And every contractor will have a different payment system that must be followed – “Do we pay this guy 33% or 50% up-front?... He’s complaining the money hasn’t hit his account yet -- did it go through?... Who do we call about this and does anyone in our office speak the local language?”
So how does a due diligence analyst conduct information-gathering in a way that is efficient, reliable and scalable, and that leaves her with the time and resources to focus on analysis? In subsequent ‘Lifting the Burden’ posts, we will expand on this challenge in more detail. Read more posts from Ground Truth in our blog.