How to assess a target's back-office capacity during diligence

Operational diligence covers a lot of ground that is genuinely knowable. Systems, processes, customers, suppliers, cost structure, the reporting stack, and the organizational chart with names against boxes. Scopes conventionally reach key-person dependency as well, which is the closest the standard exercise gets to the question sitting underneath all of it. Whether the finance and operations team running the business today is sized for the business it will be running eighteen months from now.

That question is hard from the buy side for structural reasons, and none of them is about anyone's candor. The access is brief and scheduled. The people best placed to answer are answering inside a transaction. The week being observed is the week the company prepared for. What the process delivers is a presentation of an operating team, and what the question needs is an ordinary Tuesday.

Why an inside read does not transport

Because the inside read runs on time and on plain answers, and a sale supplies neither.

On a company's own team the read is available to anyone willing to watch for a quarter. The signals are observable, they are well described, and an operating leader can run that read on their own people. It needs two conditions a deal team does not have. Enough weeks to see a pattern, and a team with no reason to manage its own answer.

There is a second difficulty, and it is the more interesting one, because it does more than limit the reader. It works against them. The condition being looked for does not present as strain. A team carrying more work than its structure accounts for tends to be a team of unusually capable people, since that is who carries a surplus without dropping anything.

So the thing a buyer most needs to see is the thing hardest to see, because it is working. Part of what a target produces every month is produced by judgment. Somebody decides what gets picked up when nothing in the structure picks it up, and none of that is visible in a data room. That supply is inside the performance the buyer is pricing. Operational Alpha has a name for it. Coping is competence doing the work of design, and it takes forms recognizable enough to have been written down.

On its own team a company can simply ask how the week really works. In diligence that question arrives inside a transaction, so it has to be answered from the artifacts instead.

What a deal team can actually read

The artifacts. Four reads run on material the process already generates, and none of them asks a target to volunteer anything about how anyone is holding up.

• Names against the monthly output. List what the business produces every month. The close, the reporting pack, AP and AR, payroll, vendor administration, and the reconciliations underneath all of it. Then ask which name owns each one. Where a single name answers for outputs that have little to do with one another, the read is a person rather than a function.
• Authorship of the recurring artifacts. A schedule that reproduces itself out of a system behaves differently at a transition than one rebuilt each month in a workbook by the person who designed it. Neither is wrong, and the second is often the better piece of work. They transfer differently, and transfer is the only thing being measured here.
• The names on the answers. A diligence Q&A log records who resolved what. In a company of any size, a narrow set of names against a wide set of questions locates the load precisely, and it does so without anyone being asked to characterize their own week.
• The overlap with the plan. The value creation plan names owners. Set that list beside the answer list. Where the same names carry both, the plan is already drawing on committed hours, which is why sound plans stall without anyone missing a deadline.

None of the four produces a verdict, and none of them should. Together they size something the model has no line for. How much of a target's operating output is supplied today by judgment rather than by design.

What operational people risks show up after the close

The work that had no home before the deal is the same work that gets heavier after it, and the people carrying it now have a plan sitting on top.

Three consequences recur. The first is the plan itself, since a value creation plan and the running of the business draw on one set of calendars. The second is transaction volume, which arrives on the day a bolt-on closes and lands wherever the recurring work already lands. The third is continuity, because capacity held inside a few people's practice leaves when they do, and a hold period is long enough for that to happen at least once.

The same team gets read again at the other end of the hold, by a buyer's adviser rather than by a deal team. What diligence asks of an operating team at exit is a different exercise built on the same constraint. Capacity that was never designed has to be explained by the person who supplied it.

What a buyer should ask before closing

The useful response to the read is a line in the plan for the first two quarters. A team supplying capacity by judgment is producing the performance being bought, and marking that team down would be marking down the thing that made the company attractive.

The list of things worth asking management directly is short, and nothing on it asks anyone to characterize their own workload. Which pieces of the monthly output have no owner beyond the person who happens to run them. What each of those would need in order to be run by someone who did not design it. And which of them the plan adds volume to in its first year.

Answered before signing, capacity becomes a budgeted item with an owner. Answered after, it competes for attention with every initiative in the plan, and it loses, because it carries no date. The distinction underneath all of it is between a company that needs more people and a company whose work was never given a place to sit. That is the difference between a hiring problem and a design problem, and it is the argument the rest of this library is built on.

Where Kayana fits

A boundary first, because it matters here. Kayana does not run commercial or operational due diligence, does not advise on transactions, and has no window into any deal. What Kayana builds is the operating capacity a company runs on afterward.

Kayana creates Mini-GCCs for PE-backed middle-market companies. The operators arrive already senior, recruited out of the capability centers the Fortune 500 built, and they work inside one company's systems and cadence. The company defines the seat and what “done” means. We design and run the environment around it. Enough of those seats in one company amount to a small embedded operating team, which is the Mini-GCC model, and it takes no entity, no real estate, and no multi-year build.

Two things about it matter to a reader sitting on this side of a close. The build has a lead time, and capacity is easier to arrange in a quarter when nobody needs it yet than in the quarter somebody does. And it has to still be standing in year three. The number we watch for that is voluntary turnover, which runs 3–5% in year one across the teams we build.

Quick answers

Designing capacity so that it does not depend on the person who built it is the subject of the book. Operational Alpha →