Due Diligence Issues: An Overview
| Author | David A. Steiger |
| Pages | 61-76 |
Managing a Complete Due Diligence Investigation
A general manager for a large manufacturer starting a business in China
once told me that relationships must be in place before even starting what
ordinarily is understood as “due diligence.” There are a number of steps
involved. Unless you want to court frustration and delay, you must rst
identify and obtain all the necessary internal approvals before proceeding.
To obtain those approvals, it is necessary to conduct comprehensive tech-
nical and commercial feasibility studies. In both realms, a key question is
“what type of foreign entity is suitable to do business with us?”
Strategic Considerations: Shacking
Up versus Tying the Knot
Many companies that lack international experience are often too quick to
fully commit to joint operations with a foreign business entity they barely
know. Before jumping into a joint venture with a company halfway around
the world, a company should rst consider a licensing arrangement or per-
haps a strategic partnership. A strategic partnership in business is much like
“living together” is in a personal relationship—it gives the parties an oppor-
tunity to get to know each other before entering into a deeper commitment.
The point is that if there is reticence on the part of senior management to
go forward with a given international foray, starting with a more limited
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Chapter 4
Due Diligence Issues: An Overview
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strategic partnership might provide an opportunity to sufciently demon-
strate the real-world benets of the relationship to the extent that you can
ultimately consummate a joint venture.
It is important to make sure that products, strategic vision, and legal
issues are squared. It is also possible that a key member of management
will change during the course of the project. One example of this would
be where a new chief executive ofcer comes on board with a number of
questions about an ongoing venture in an offshore location. Be prepared to
address the various concerns of new stakeholders throughout the process
and to defend the strategic rationale for continuing forward. As David L.
Margulius rightly puts it, “the offshoring landscape is littered with the spec-
tacular failures of companies that missed or lost sight of the big picture.”1
Do not let changes in senior management, which have become so frequent
in recent years, cause you or your client to lose big-picture focus.
Even in relatively smaller companies, there is value in setting up a manage-
ment steering committee that can take practical and philosophical ownership
of an international project. This steering committee should include repre-
sentatives of key operational groups to help ensure and maintain buy-in
from them, the absence of which could likely create severe problems during
implementation.
2
The committee’s membership should also include personnel
necessary to consider how internal needs, market conditions, distribution,
and so on are likely to evolve over time, so the project as negotiated and
implemented is not obsolete before the ink on the contract is dry.3
So just how should the steering committee strategize? Jay Horton lays
out a pragmatic framework. Horton suggests that the key is to get the com-
mittee to agree and concentrate on a single “focal question” at the outset.4
That question will vary depending on the company or the industry. As Hor-
ton suggests, the issues may be “How can we augment and leverage our
1. David L. Margulius, Offshore Partnerships Demand a Wide Range of Expertise, I
W, 35 (Aug. 25, 2005), available at http:// www .infoworld .com /d /developer -world /offshore
-partnerships -demand -wide -range -expertise -519.
2. Warren S. Reid, Outsourcing: The 20 Steps to Success 1 (1996), http:// www .wsrcg .com /
Articles /OutSourcing .pdf.
3. Id. at 2.
4. Jay Horton, Expect the Unexpected, 3 T O I (2005), http:// www
.outsourcing .com /content .asp ?page=01b /other /oe /q405 /expecttheunexp .html &nonav=false.
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