The Antidote to Costly, Labor Intensive Operational Due Diligence

Blog post Team CENTRL 2021-07-30

Introduction: Why ODD?

If you’re part of the investment business community, or an investment manager yourself, then you probably already know where the Operational Due Diligence group sits in your organization, that it’s a process geared towards a thorough review and reporting of an investment target’s internal operations. That it gives you a big picture as well as a granular assessment of the target company, and allows you to create a strategy accordingly.

You might be feeling jaded about the importance of your Operational Due Diligence knowing that most of the time, not having a thorough ODD strategy in place isn’t a cause for alarm up the chain of command. Or you may be feeling overwhelmed by the process: the sheer volume of documents obtained through a Due Diligence Questionnaire is enough to have you questioning the place of ODD in a businesses’ overall strategy. After all, how can anyone company effectively collate and process that much information and produce insightful analysis and recommendations in a timely fashion to impact investment decisions.

Here at CENTRL, we believe that a thorough and streamlined ODD process is vital to the health of any private business, fund, or investor firm. What’s more, we believe that this process can be relatively quick and easy—resulting in timely and insightful results and fewer pain points along the way. That’s why we created an ODD software that can provide all of the benefits of a robust system without the time-intensive burden of a manual ODD process. Through automation, we believe that ODD can better serve a company and its investment managers.

We hope this article will convince you and your investment team of the importance of the process, and help gain a better appreciation for it along the way. So, read on as we outline some of the strengths of the process, and the weaknesses you leave yourself open to without it.

Reasons to Perform ODD

To summarize, Operational Due Diligence is the absolute best metric for outside interested and acquiring parties to better understand a company’s business practices and make an informed decision guided by data and quantifiable metrics.

With successful ODD in place, you can assess and corroborate the value of the target organization in terms of infrastructure, cost performance, asset quality, and of course, potential for asset growth. Think of it as a roadmap to the target organization. ODD allows you to see everything about their business laid out clearly, from their organizational structure to potential conflicts of interests and relevant history of its talent pool. Without this, a company stays in the dark about potential future bumps in the road, or potholes that need patching along the way.

Of course, this identification of potential risks is a huge part of what makes the Operational Due Diligence process so important. It would simply be bad business to enter into a private investment with unexplained past significant loss events. Or one which lacks depth of management or C-suite direction with no plans on changing their operations now. Vetting a company through ODD gives you the best chance of understanding investment risks, and gives you a way to strategize about heading them off before they become baked into your business.

By the same token, Operational Due Diligence can expose hidden strengths in the target company, whether that be previously unknown assets, lower than anticipated redemptions, a strong liquidity profile, or other factors. The whole point of ODD is to give you the clearest possible picture of this company, the good and the bad together.

After Reading This, Not Performing Thorough ODD May Not Be an Option

We’ve all heard the horror stories: the hedge fund failure nightmares, the Madoff scandal. Tales of business practices that were decidedly not above-board and caused considerable heartache up and down the business chain. Hedge fund failures which have amounted to almost $100 billion dollars in losses are often caused by a combination of factors, from unauthorized trading (which comprises 5% of failures), or misrepresentation of investments from valuation to existence (which makes up 18% of failures), to plain old operational issues, including quality staff and poor resiliency (resulting in a whopping 56% of failures).

These stats are worrying, yes, but we’re bringing them into the conversation for an important reason: they all can be avoided with a robust Operational Due Diligence strategy in place. Because of course, in-depth ODD works with the explicit aim of articulating these potential problems ahead of time, taking a deep dive into the business practices of a target company and making sure that everything is above board and not at risk for failure.

Making Cost Effective ODD Possible for Investment Teams

So, we’ve covered the importance of performing ODD to assess potential strengths and weaknesses of your target company and help seek out failure points beforehand. But given the plethora of information that can come out of Due Diligence review, it is understandable if you don’t think your team has the time to supervise an ODD Group, or analyze the data necessary to properly understand the target investment’s business practices.

An automated system, similar to that of CENTRL’s DD360, not only helps streamline the gathering of information, but can also simplify the creation of analytics to give you a valuable and nuanced view of the target that can improve your investment decisions. Critically, an automated system can streamline and enhance your current process while not adding to its burden. Some of the critical components include:

Digitization Allows for Significant Productivity Gains and Facilitates Breakthrough Processes

Where a manual system would require an agonizingly long process of creating, populating, and then collating questionnaires, DD360 pre-populates all DDQ data with previous manager answers. It comes pre-designed with a rules & workflow engine for internal delegation and custom reminders in regards to these questionnaires, and allows you to score your DDQ with an automated (and customizable) scoring engine.

DD360’s centralized digital interface allows your company’s messaging all to be located in one place, including clarifications, and the uploading of all necessary documents, so nothing gets lost in the shuffle of the manual ODD process.

This digitization even facilitates confirmation from third-party vendors, including your auditor, fund administrator, prime brokerage, and custodial and banking relationships (based on length of relationship and industry reputation). In short, streamlined, digitized communication cuts out hours of unnecessary work for investment managers.

Automation Provides Analysis and Transparency to Evaluate Management’s Investment Decisions

Now the questionnaire documents have been centralized and streamlined. But how does that help with the big-picture view of the investment target? DD360 takes specific steps to help investment managers understand the consolidated view of the target investment by: automatically running benchmarks across all managers at a detailed level, utilizing dynamic dashboards to track progress and provide transparency for management, and preparing detailed analytics and reports to gain insights and highlight risks and exceptions where necessary.

This process can also help manage issues and findings within the platform by both documenting an issue’s status, severity, and recommendation, and creating an action plan to combat the issue. DD360 also manages progress on issues from start to finish, so you aren’t left worrying about ongoing issues or worrying that you’ve missed something along the way.

These are just some of the key features of an automated ODD process utilizing DD360. A robust Operational Due Diligence procedure is designed to be as specific as possible, creating a well of information that is, frankly, deeper than a company might know what to do with. Which brings us to another question:

The “How” of ODD

To make this process adequately robust, detailed, and exhaustive, there simply isn’t enough of a workforce on staff at your organization to synthesize and collate it. So how can we revitalize this process so investment managers are able to concentrate on the aspects of the target company that are most important? A manual process is highly resource constrained, and makes it difficult to perform comprehensive and effective ODD.

Many companies try to attain comprehensive due diligence through a hybrid of manual and systems resources, while others turn to third-party or outside consultants, CENTRL believes that the true answer to a smooth ODD process lies in its automation. That is, of course, why DD360, the revolutionary automated operational due diligence software, exists. We’ve created a quick and streamlined solution that will take the headache, uncertainty, and amount of time consumed in the ODD process, while still providing a robust, thorough, and granular look at the investment target’s operations from A to Z.

The automated approach used by DD360 allows the investor to quickly gather all of the necessary evidence for the ODD process to run smoothly and comprehensively. The more flexible and automation, the more time you can spend analyzing, performing risk management, and communicating with senior management. And the more trouble you can potentially save yourself down the road.

Learn more about our adaptable solution to your ODD pain points here, and be on the lookout for future blog posts that delve into more specific aspects of the overall process.

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