Supplier risk in the software industry: data protection and privacy
This blog is in the Top 25 M&A blogs worldwide according to Feedspot
In the swiftly evolving realm of the software industry, the significance of data protection and privacy has become paramount for both enterprises and customers. An aspect frequently disregarded is the potential hazards linked with software providers. It is imperative for organizations to thoroughly evaluate and handle supplier risk to guarantee the security and confidentiality of their data. This article examines the intricacies of supplier risk in the software sector, with a specific emphasis on data protection and privacy.
As software remains a crucial component in contemporary business activities, the dependence on external suppliers for various aspects of software development and upkeep has surged. Despite this leading to numerous advantages, it also uncovers a vulnerability that should not be underestimated. Suppliers may have access to sensitive data and systems, rendering them potential entry points for security breaches and privacy infringements.
When assessing supplier risk, firms must contemplate various factors, such as the effectiveness of a supplier's data protection protocols, adherence to privacy laws, and overall security stance. Collaborating with suppliers who prioritize security and privacy, and actively exhibit their dedication to these principles, is pivotal in mitigating potential risks. This necessitates thorough scrutiny, explicit contractual arrangements, and continuous monitoring of the supplier's performance in these domains.
Moreover, the interconnected structure of the software supply chain implies that a security flaw or data breach at the supplier level can have extensive repercussions. It can impact not only the supplier's clientele but also their clients' customers, leading to a cascade of potential data privacy breaches and regulatory violations. Consequently, it is imperative to guarantee that each party involved in the supply chain maintains the top standards of data protection and privacy.
As the software sector progresses, the demand for comprehensive and preemptive management of supplier risk concerning data protection and privacy will only escalate. Companies that give precedence to this aspect will not only protect their own operations and data but also foster a more secure and trust-based environment for all stakeholders. It is crucial for enterprises to approach supplier risk management with caution, anticipation, and a steadfast dedication to upholding the highest standards of data protection and privacy.
Like my thoughts? READ MY NEW BOOK
ORDER AT AMAZON
ORDER IN GERMANY
Systematic identification of PMI risks in the due diligence process
"My experience has shown that there are certain risks that can always be observed in an acquisition."
[this blog is an excerpt from an interview with me]
"My experience has shown that there are certain risks that can always be observed in any acquisition."
According to your experience, what merger integration risks are there?
Every takeover of a company is associated with numerous risks. On the one hand, there may be unpleasant surprises lurking in the target company, but on the other hand, integration itself also holds many dangers. Finally, risks may also be present in the organization and strategy of the acquiring company.
There are many examples of what can happen in a merger. Particularly in the software industry, it is not uncommon for employees to leave the target. The following points are therefore crucial for the success of an integration process:
How can I motivate relevant employees to stay?
Are there opportunities to document their know-how and make it available to the company in a sustainable manner?
Is the target company really in possession of all intellectual property rights?
Project risks in the context of a merger and the resulting integration already arise during the definition of the project scope, the assessment of the necessary resource expenditure as well as during the coordination of its implementation.
How can the risks of merger integration be classified?
The most comprehensive classification is based on the findings of the merger integration expert Dr. Johannes Gerds. My recommendation is that every company should use this as a basis for identifying risks and identify the problems specific to the company. These can be summarized in a risk catalogue and subsequently supplemented by further project-specific risks during the concrete due diligence. This provides an extremely solid basis for the entire risk management process.
What is the best way to identify risks?
In any case, a structured approach is advisable. As a rule, this is based on a company-specific risk catalogue, which is used in every due diligence. But first and foremost, the project and its integration should be examined from a neutral perspective. In the course of a risk workshop, the entire project-specific risks can then be identified and assessed together with all experts and managers involved.
It is always important to adopt and maintain a neutral position. This not only serves the critical questioning of hypotheses regarding adoption and integration, but also a concretization of the entire planning to be carried out. As a rule, this can be done by the finance department and the central units of the organization that are assigned to support acquisitions.
What are the most common risks?
My experience has shown that there are certain risks that can be observed again and again in an acquisition. These are primarily personnel attrition, serious differences in the corporate culture as well as an underestimation of the actual integration effort and the project management requirements in the case of more complex integrations.
Which risks can have the most adverse effects?
This question must always be considered in connection with the size of the buying company and the company to be bought. In the case of smaller acquired companies, the departure of a few key employees can have a major impact on the success of a merger. However, integration often suffers from a lack of experience on the part of the project members involved as well as insufficient resources on the part of the acquired company.
Large companies, on the other hand, often underestimate the complexity and effort required for integration. In addition, the cultural differences between the company buying and the company to be bought also involve a recurring risk potential.
Medium-sized companies tend to show mixed forms of problems with mergers, such as those found in small or large companies. Although the resources are often better and often more experience is available than for smaller companies, there are the risks known from them. But even the acquiring company can create considerable distortions through wrong decisions and negatively influence the success of an integration. Examples of this can be found in surprising strategy changes or sudden changes in the receiving organization in the middle of the integration process.
Once risks have been identified, how should they be dealt with afterwards?
In my view, there are four very typical approaches to dealing with risks: Ignoring and observing or actively initiating countermeasures and sales. Of course, the first approach is the easiest, but also the most dangerous way. Therefore, it is not really recommended, even if the probability of these risks is minimal. Perhaps I should note at this point that we are not talking about probabilities in the statistical sense, but rather about assumptions, i.e. assumptions about the probabilities of occurrence. According to this, even a risk with a low probability of occurrence can occur at any time, precisely because one does not know its probability.
Observation appears to be the most sensible step for risks that are unlikely or can hardly have any consequences for the success of the project. They are identified and regularly checked to see whether their probability of occurrence and thus their influence on the success of the project have changed. Accordingly, active countermeasures can be taken in good time in the event of an expected hazard potential.
But one can already act in advance and take countermeasures if the occurrence of risks is to be avoided for very pragmatic or political reasons. An example of this is the impending departure of relevant employees, which can be prevented at least temporarily by contractual regulations. In this way, time can be gained which is actively used to transfer their relevant knowledge about products or workflows in the company to be purchased to other persons or to document them if necessary.y
A practitioner´s view on risk, risk perception and risk handling in merger integrations
Every acquisition and merger integration carries numerous risks. Actually, acquisitions and merger integrations have a bad reputation due to risk. Many integrations fail or do not reach objectives in a sufficient manner. This is why it is important to detect, evaluate and to manage risk in M&A transactions and in merger integration.
Risks can e.g. originate from the target company, from the acquiring company and from the integration of the two companies. In the best case, these risks are determined in due diligence, mitigations are planned and all is being handed over to the integration team as soon as possible.
Risk discovery in due diligence
While the target related risks are analyzed in detail in due diligence, the risks related to the acquiring company and the risks related to the integration itself are often neglected. In addition, not all risks can be determined in due diligence alone, new undiscovered risks might come up during the integration.
What you see is all there is
We learn from Kahneman that the risks that are being found depends very much on the experience of the people looking for risk. He says that you will only find the risks that you have experienced, heard about or read about.
This is why it is very important to use risk catalogues, experienced integration managers and risk managers. Walk through the risk catalogue to see if there are applicable risks, use your own or somebody elses experience to determine additional risks and run a risk workshop with an experienced risk manager.
Key risks in merger integration
Experience shows there are risks in merger integration that occur in each acquisition. While there are many risks outside of companies, let us focus here on risks inside the involved organizations. From my point of view, these reoccurring risks are:
Brain drain/Attrition: key employees or a large share of employees from the target are leaving.
Cultural integration problems: people don´t feel at home, feel lost or frustrated and thus attrition increases and people are leaving.
Wrong perception and estimation of integration complexity and effort: acquisitions can get complex on many dimensions like size of the target and acquirer business, number of companies, countries and locations involved. With the complexity, the effort may skyrocket.
Bad management of the integration scope and integration project: these are generic project management problems revisited. They also occur in merger integration projects.
How to deal with risk
In my view, there are four ways to deal with risk: Ignore, monitor, mitigate and sell.
Ignoring risk is dangerous alternative. If at all, you should use ignoring only for a risk that you think has very limited impact on the success of the merger integration and very small likelihood. And you have to be aware oft he difference between probability and likelihood. Likelihood means you only have a guess about the chance of a risk to become true and impact the merger integration.
Monitoring risks is a slightly better approach to risks. In this case you simply watch the risks to see if the likelihood or the impact has changed. If a likelihood or impact increases, you might switch to one of the following alternatives.
Mitigating risk is the preferred approach. This means you are trying to establish counter measures to be able to avoid the risk or reduce the likelihood or the impact of the risk. Be aware that mitigations needs people, time and budget to work.
If certain risks are perceived to have a massive financial impact and cannot be properly mitigated you might want to sell these risks to insurance companies. One example might be environmental risks of manufacturing plants.