The coming reckoning for Private Equity firms that are buying up software tech companies
IIIMPACT is a leading product UX design and development company with over 17 years launching 100s of digital software enterprise and mobile products for startups to Fortune 10 companies. We have helped clients from almost every industry vertical — energy, robotics, fintech, cybersecurity, retail, HR, education, eCommerce, etc.
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Do I have your attention?
Keep reading if you don’t want to be left holding the bag…
…or the wool being pulled over your eyes.
In this article, we aim to help give Private equity (PE) firms a word of warning before they make their next acquisition of a software tech company.
Are you about to make a large investment in a SaaS or software company?
It’s apparently not too difficult to swindle others, who you would think can do the proper due diligence, and wouldn’t get caught.
To get a credit loan at Chase, I have to jump through more hoops than Charlie Javice did with the app, Frank.
Or with Theranos and the poor due diligence that was done with Elizabeth Holmes.
Or FTX and SBF latest trick with investors, customers, and celebrities.
Are you not sure about a potential acquisition where the profitability seems inflated compared to the quality of the product and the code that was created?
With the recession in full swing or still on its way…or a soft/quick landing, if you’re firm has kept a lot of dry powder waiting to snatch up some good deals, be prepared to potentially be ‘holding the bag”.
Companies that are trying to prepare for a possible recession usually cut all of their expensive and usually good resources. However, innovation is inversely proportional to layoffs/cut$.
Good innovation never comes from low-cost, offshore labor.
Never has, never will.
Our company has fixed designs and poor quality code time and time again from ‘reputable’ outsourced teams that create a tech-debt-ridden mess of poor performance, bad UX, and difficult user workflows for software products.
Cutting good designers and developers from your product team and replacing them with low-cost resources from overseas may seem like a cost-effective solution in the short term, but in reality, it can cost your company more money in the long run, create tech debt, and give more work to the rest of the supporting team.
No one ever seems to calculate the downstream cost when poor leadership and processes allow designs to be changed by developers in order to complete a backlog of tickets faster. Improper CSS cascading stylesheets are created so that global style changes in your app aren’t propagated through the hundreds of application ‘pages’ by a single line of code. APIs are delivered half-assed to integration teams and end up not working properly…. to name just a few examples.
One of the main problems with replacing experienced and skilled designers and developers with low-cost people from overseas is that these people may not have the same level of expertise or experience. This can cause the overall quality of the product to go down, and it can also make the project take longer to finish. Also, people working offshore may not have the same level of communication skills, which can cause delays and misunderstandings.
When you use inexperienced resources, they will not have the same high-level, best coding practices and standards as the original team that created the software product that you see today. Short-term financial goals will drive management to quickly build up these types of teams. This will lead to bad coding habits, which can increase the tech debt and give the rest of the team more work to do. Poor coding practices can also cause maintenance costs to go up because the code may be harder to change or fix.
If you are currently building an enterprise, mobile, or SaaS application, and the performance of the app and the work to make updates seem to increase as more and more code is created, then you are most likely in this situation.
Using low-cost resources also makes it more likely that launches will be delayed, which can lead to lost opportunity costs.
Most companies don’t calculate lost opportunity costs when determining quality over cost. Every month that your product isn’t out there gaining customers, how much are you losing?
Two A-player devs will outperform 5–8 low-cost ones by 5x-10x or more.
Would you hire cheap labor to build your house?
Sure, you will end up with a house, but it will leak, pipes will burst, walls will rot…
it will become a money pit…
…just like your software product.
Delays can also make it hard to get back on track, which can hurt the success of the product as a whole. With poor software quality code and design, morale will be low, stress will be high, and the finger-pointing / blame game will be at an all-time high.
Communication is one of the most important things that we try to excel at in our company. We aren’t perfect, but it’s well known that if you don’t communicate effectively, things will break down quickly. This becomes especially important when you have distributed teams working remotely, are in different time zones, or English isn’t the primary spoken language.
When people on a team aren’t in the same place, it can be harder to coordinate their work and share information. This can cause problems like delays and misunderstandings that can hurt the project as a whole.
When putting together a product team, it’s more important to focus on quality than on cost. Even though it might be tempting to cut costs by using low-cost resources from overseas, it’s important to think about how that will affect the product, the team, and the company as a whole in the long run. Investing in consultants with expert UX designers and developers, while slowly building a great internal team, is a great hybrid approach.
Trying to hire internal, permanent employees can be very time-consuming, especially if you make the wrong decision.
Consultants give companies the ability to scale up or down when demand is needed.
So the right partner should be able to provide senior leaders in your team who are skilled and experienced, which will save your company money in the long run, and lead to better product strategy and processes, better communication, innovation, and good coding practices.
The big reason for this article and why companies might decide to get rid of good designers and developers and replace them with low-cost resources from overseas is to….
…make themselves look more
profitable to PR firms and potential buyers.
This can be a short-sighted move because it can lead to a big financial mistake in the long run.
Companies may be able to show a short-term cost reduction when they get rid of skilled and experienced designers and developers and replace them with low-cost workers in other countries. This can make the company look like a better financial deal to PR firms and possible buyers. But this strategy can backfire in the end because it can cause the overall quality of the product to go down and the time it takes to finish the project to go up. Both of these things can hurt the bottom line.
Also, companies that mostly use cheap, offshore resources may not have the skills or knowledge to build good product design and development teams or audit code. This can lead to bad coding habits, which can increase the tech debt and give the rest of the team more work to do. Poor coding practices can also cause maintenance costs to go up because the code may be harder to change or fix.
When a company wants to be bought, it’s important to think about the company’s long-term health instead of short-term cost savings. Companies with a strong design and development team and process will have the ability to quickly innovate and pivot when market conditions change or the PE firm will be left in a bad position.
It’s important for businesses to think about their long-term health and invest in experienced and skilled designers and developers to make sure their products will be successful and, in the end, be more appealing to potential buyers.
If your firm is in the process of acquiring a software tech company in your portfolio, contact us at IIIMPACT so that we can help you reduce risk and give you an honest assessment if your firm is about to make the right decision or not.
Before making an expensive acquisition, our flexible, high-impact teams help companies do tech and design audits to reduce the risk for private equity.
To help answer these questions, we conduct deep-dive analysis audits on potential software companies:
- Are the best coding practices being implemented?
- How is the code quality and scalability? Is there massive tech debt?
- Do their software development teams have a good process in place that is scalable, agile, and capable of handling innovation, growth, and the rapid production of features or products when market conditions change?
- Does a potential company’s A.I. / ML really is Artificial Intelligence / Machine Learning or is it vaporware?
- How good or bad is the usability of their product with their customers?
- Are they actually listening to their customers’ feedback and implementing it effectively?
- Is there a good DesignOps process in place that allows for growth and innovation, especially when market conditions quickly change?
We can help your private equity firm feel confident and reduce risk, allowing you to focus on the numbers while we analyze the technology and product.
IIIMPACT has successfully collaborated with hundreds of companies worldwide. Please drop us a message to set up a quick call.
The journey to launching a software product is fraught with many risks and problems, let us help you navigate and reduce these issues so that you feel more confident during the process.
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