The Business Case for Due Diligence: A Cost-Benefit Analysis of Corporate Due Diligence Practices for Responsible Business Conduct
1. Benefits of human resource due diligence
(Deutsch & West, 2010)
During a survey when people were asked about the benefits of HR due diligence then up to 92 percent people responded that they benefited due to HR due diligence. The process provided cultural understanding to them that contributed in sustainable mergers (Deutsch & West, 2010).
(Deutsch & West, 2010)
Organizations that do not conduct HR due diligence have to face some difficulties while having mergers and the most common factors that create difficulties include poor leadership integration, poor selection of target audience, and again lack of cultural understanding (Deutsch & West, 2010).
(Deutsch & West, 2010)
When people from different companies were asked that in which area they find the need of improvement then approximately all departments ewer listed that can be seen in above picture. This means that HR due diligence is important for improving all departments (Deutsch & West, 2010).
(Deutsch & West, 2010)
However, despite all these benefits, it is true that the due diligence has some limitations in setting up the accurate expectations to the overall synergy that is available to in the agreement or deal. According to the study of McKinsey, 42 times the due diligence failed in offering accurate guideline for creating value and capturing synergies (Deutsch & West, 2010).
2. Benefits of Increased Productivity due to due diligence
The term due diligence has different meanings that can be applied to different situations (Spedding, 2009). Improvement in productivity has been the never-ending journey for organizations. Because organizations do not see the end of the road, therefore, they may not consider it at first. Initiatives that are taken to improve the productivity are considered expensive when organizations are not aware of the advantages that they attain when they implement due diligence. Due diligence enables organizations to identify the factors that contribute to declining productivity of the business. These factors include lack of effective, repetitive and consistent processes; lack of process governance and process discipline; and non-availability of a mechanism for measuring and tracking the improvement in productivity. For enhancing the productivity, it is essential that the gap is analyzed because it helps business to recognize their situation with respect to the targeted position. Due diligence helps companies in managing change through providing information regarding the change readiness (strengths and weaknesses). Before implementing change, analyzing and verifying that whether the change will succeed or not is an approach that can prevent the organization from huge losses. However, an organization through post-implementation review can better determine the change need in specific departments and set strategic direction. For example, change is essential for enhancing productivity and people are the key elements in bringing change in the organization. Strategically deciding on their benefits and reinforcing them positively, and providing them, training with the aim of driving success is only possible through proper investigation (Patra & Bartaki, 2009). Due diligence allowsorganizations and entrepreneurs to determine the root cause of the problem and then resolve the issue through implementing the findings that enhance the productivity of the business. For example, when PeggyDavis (a businesswoman) was looking for a career change, during her due diligence she recognized that up to 710 percent people in America never had any therapeutic massage. She started a venture and investigated the root causes of diseases, and translated the massage into improved concentration, blood circulation, energy, sleep and decreased anxiety, stress, and fatigue. This marketing strategy helped her in enhancing the productivity of the business that resulted from due diligence (Davis, 2006).
It has been determined that up to 30 percent businesses fail due to poor practices of hiring. These hiring costs commerce $ 4 billion annually. However, other employees involved in crime costs companies another $45 billion to 50 billion per annum. Through pre-screening, the hiring cost can be attributed to the standard checks of background. This cost is average $3000 and less than 3 percent. Bad hiring can costs companies up to $ 40000 that can outweigh the cost of due diligence; therefore, it is essential that companies do due diligence before hiring that as it will prevent organizations from the bad hiring loss as shown in the image below (Crimescreen. 2004).
3. Benefits of risk management due to due diligence
Companies face several risks when conduct business operations, these risks can be internal and external as well. Corporations in the United States are facing theimmense risk of frauds and thefts, and these activities cost organizations immensely. For example, in a car rental company an employer paid $750000 to the employee who was a rape victim of the fellow employee. A guard service company paid $ 300000 to its client because the guard was involved in stealing from the customers. The service provider was found guilty because they did not check that the guard has acriminal record. After working only a week a driver was involved in an accident, a telephone company paid $550000 to injured party because the firm did not investigate that in just 18 months the driver had five tickets of traffic. These financial losses to companies clearly communicate the need for due diligence when companies plan for risk management.
Comes to globalization, when businesses expand their roots in other countries, they have to face multiple risks such as technological risks, social, economic, and environmental. These risks have become the mandatory element of transaction processes. Due diligence allows companies to determine the broader sustainability issues and opportunities. For example, additional capital requirements to meet up the new regulatory environment. The best example that presents the benefit of due diligence is a recently purchased chemical production company that relied on river barrages for transporting its goods. The company, during the due diligence process, analyzed that the dropping level of the water that could stop the organization from continuing its set mode of transportation. The forecasted financial impact was $ 10 million; through due diligence, the firm was able to prepare an appropriate plan of contingency for managing the risk (Brown et al., 2013).
The top ten risks have been presented in above figure that companies face when they do business domestically or go globally. The picture clearly demonstrates that the risk readiness of organizations increased when they used due diligence approach for risk management.
It can be observed that in some cases despite having low risk readiness, the losses occurred from these risks declined in 2015 as compared to 2013. It happened because due to due diligence companies were able to prepare more efficient solutions and implement them effectively (Case, 2015).
Braverman, M (2003). The human side of due diligence: protecting the M & A investment. Retrieved February 12, 2016, from http://www.bravermangroup.com/services/OrgConsult/text/The%20Human%20Side%20of%20M%26A.pdf
Brown, R., Shackleton, A., Gibbons, J., & Das, J. (2013). Improving business performance and minimizing risk by embedding sustainability considerations into the transaction lifecycle.ERM. Retrieved February 12, 2016, fromhttp://www.erm.com/en/insights/spotlight-articles/improving-business-performance-and-minimizing-risk-by-embedding-sustainability-considerations-into-the-transaction-lifecycle/
Crimescreen. (2004). Benefits of Pre-screening. Retrieved February 12, 2016, from<http://www.crimescreen.com/stats.htm>
Davis, P. (2006). Clear Your Mind, Increase Productivity ‘the Benefits of Massage. Corp Magazine. Retrieved February 12, 2016, fromhttp://www.corpmagazine.com/health-and-wellness/clear-your-mind-increase-productivity-the-benefits-of-massage/2/
Deutsch, C., & West, A. (2010). A new generation of M&A: A McKinsey perspective on the opportunities and challenges. Retrieved February 12, 2016, from http://www.mckinsey.com/client_service/organization/latest_thinking/~/media/1002A11EEA4045899124B917EAC7404C.ashx
Gleich, R., Hasselbach, T., & Kierans, G. (2012). Value in Due Diligence: Contemporary Strategies for Merger and Acquisition Great Britain: Gower Publishing, Ltd.
Howson, P. (2003). Due Diligence: The Critical Stage in Mergers and Acquisitions. USA: Gower Publishing, Ltd.
Keller, A. (2004). Human Resource Due Diligence within the Context of Mergers & Acquisitions: A Mathematical Valuation Model of Human Resources. Retrieved February 12, 2016, from http://www.grin.com/en/e-book/178455/human-resource-due-diligence-within-the-context-of-mergers-acquisitions
Patra, P., & Bartaki, S. (2009). Productivity Improvement Using Ten Process Commandments. PMI Virtual Library. Retrieved February 12, 2016, fromhttp://www.pmi.org/Learning/knowledge-shelf/~/media/pdf/knowledge-shelf/patra_bartaki_2009.ashx
Rimmer, S.,& SanAndres, A. (2012). Human resource due diligence. PWC.Retrieved February 12, 2016, fromhttps://www.pwc.com/us/en/hr-management/assets/pwc-human-resource-due-diligence.pdf
Spedding, L.S. (2009). TheDue Diligence Handbook: Corporate Governance, Risk Management and Hungary: Elsevier.