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Will operational technology make or break your next PE deal?
5-minute read
June 28, 2024
A cautionary tale
Shortly after conducting due diligence to assist a client in negotiating the carve-out, Transition Services Agreement (TSA) planning and acquisition of three manufacturing plants, one of the facilities was rocked by a devastating explosion.
Our client engaged us to conduct buy-side technology due diligence for a private equity (PE) backed acquisition. Despite objections from the seller, we insisted on conducting plant site visits to observe the on-premises tech stack firsthand.
What followed was a startling revelation in the server room. Systems and operations were at risk due to clogged vests, roof leaks and standing water, all exacerbated by the proximity of the sever room to an active boiler. This discovery raised a significant “red flag” regarding the target’s Operational Technology (OT) infrastructure and enterprise value.
We promptly communicated these concerns to the client, who, after careful consideration, decided to walk away from the deal.
Soon thereafter, disaster struck. The plant experienced a major explosion due to a lack of preventative maintenance. It resulted in employee injuries, extensive damage to the plant facilities and significant production downtime. While we are sympathetic to all involved, we helped our client avoid a multi-billion-dollar liability.
While this example may depict a worst-case scenario, it underscores the significance of OT due diligence, emphasizing the need to expand perspectives beyond conventional IT considerations.
At other targets, we have observed inadequately skilled personnel in operations and maintenance, deficient maintenance planning and scheduling, and incompatibility stemming from data silos and the sourcing of technologies from diverse vendors.
If left unaddressed, OT issues hinder an acquirer’s ability to drive growth and value.
OT’s strategic importance
IT primarily focuses on data processing, management and communications. OT, in contrast, encompasses the hardware and software responsible for detecting, monitoring and controlling industrial equipment, assets, processes and events. OT is thus crucial in industries such as pharmaceuticals, industrial, energy, healthcare, transportation and utilities.
The capabilities of OT and IT in action at a production site
PE firms increasingly focus on operational value creation—currently accounting for 79% of their target efforts. OT plays a strategic role in the investment lifecycle for firms, from due diligence and value creation to risk management and exit optimization.
By leveraging OT effectively, firms can drive operational improvements, mitigate risks and create long-term value for their portfolio companies and investors in several areas:
Retailers use OT to implement smart shelves equipped with sensors. When items are running low, the system alerts staff to restock. This minimizes out-of-stock situations, enhances customer satisfaction and fosters loyalty.
Manufacturing facilities rely on OT to detect signs of equipment degradation. This allows workers to schedule maintenance activities during planned shutdowns, avoiding costly unscheduled outages.
Logistics companies integrate OT with IoT-enabled tracking devices to monitor the location and condition of shipments in transit, optimize route planning and minimize energy utilization and transportation costs.
Software and service companies use OT to send invoices to customers electronically and facilitate electronic payments, which reduces days sales outstanding (DSO) and improves cash flow.
In the mining industry, wearable sensors equipped with OT technology can monitor workers' vital signs, detect signs of fatigue or heat stress and alert supervisors to potential safety risks.
Physical and application security measures limit OT system and device access to authorized personnel. Segregating OT networks from IT networks helps contain cyber threats and prevents attackers from directly accessing OT systems.
The characteristics of OT and IT
Unlocking value throughout the deal lifecycle
By adopting a systematic approach to OT optimization across the deal lifecycle, PE firms can not only mitigate transaction risks but also achieve superior outcomes for their investments.
In the due diligence phase, the PE firm needs to thoroughly assess the target's financial health, market position, operational capabilities and growth potential.
Transitioning into the value creation phase, firms can consider improvements to optimize production efficiency, minimize disruptions, reduce costs and enhance asset utilization within portfolio companies. Additionally, initiatives can focus on driving operational excellence and fostering sustainable growth through OT-driven supply chain analytics, demand forecasting models and inventory optimization tools. Compliance assessments and risk mitigation strategies are needed alongside the implementation of OT solutions, to facilitate regulatory reporting and auditing requirements.
Lastly, during the exit phase, leading firms will concentrate on optimizing operational performance, bolstering market positioning and showcasing operational excellence with OT solutions to attract potential buyers or investors.
OT value creation framework
Partnering for success
OT risks are increasingly significant in today's complex business landscape, with the potential to disrupt operations, compromise security and undermine regulatory compliance. However, with the right partner, PE firms can navigate these challenges effectively and unlock the full potential of their portfolio investments.
By leveraging cutting-edge technologies, implementing robust security measures and driving digital transformation initiatives, Accenture empowers numerous organizations to harness the full potential of their OT investments.
For instance, through the adoption of predictive maintenance solutions utilizing OT, manufacturing facilities can quickly achieve a 10-15% reduction in unexpected downtime, but reductions of 30% or more are possible. Similarly, a logistics firm utilized OT-driven supply chain optimization to lower transportation expenses by 20%.
One logistics firm was able to reduce its transportation expenses by 20% through OT-driven supply chain optimization.
With a deep understanding of OT systems and a proven track record of delivering transformative results, Accenture is well positioned to help clients address OT challenges effectively. These resources allow PE firms to navigate the evolving landscape of OT with confidence and resilience, positioning themselves for long-term success in the digital age.
The author would like to thank J. Neely and Ramoj Paruchuri for their contributions to this article.