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CEOs, Corp. Development

Using Customer Due Diligence to Chart a Winning Innovation Roadmap


Customer due diligence is a standard item on the check list of things to do prior to closing a deal. Unfortunately, many customer due diligence programs are just cursory reference checks with little to no added value. It might be rapid and cost effective, but it’s a missed opportunity to engage with customers and derive deep insights from them as it pertains to post-close playbook for growth.

A well-designed customer due diligence program, one built on the Voice of the Customer (VOC) methodology, includes a broad mix of quantitative and qualitative customer feedback. The feedback can be transformed into insights and recommendations to help mitigate risk and accelerate value creation post-close.

The added benefit of a VOC-based customer due diligence program is that the methodology is highly scalable and entirely customizable. This means that in addition to determining the strength and stability of customer relationships, customer due diligence can also help address a variety of deal-specific objectives on either the buy- or sell-side of the table.

The following case study demonstrates how customer due diligence was recently used to maximize the odds of a successful deal.

The Challenge

Our client, a private equity firm, was looking to acquire a global manufacturer of specialized chemistry solutions. The acquisition target was investing heavily in the research and development of new products. However, its customers were not expressing a strong interest in these new offerings. This led to little return on the R&D investment and compressed margins.

The target company suspected that their customers themselves were not innovating, which led to limited demand for a broader portfolio of products.

If this hypothesis turned out to be valid, it would give the private equity firm the confidence it needed to reduce the scope and scale of its R&D program post-close. However, if the hypothesis turned out invalid, the VOC methodology would provide an alternative explanation and present opportunities to evolve the company’s approach to new product development.

Strategex partnered with our private equity client to develop customer due diligence to:

  1. Improve market share by measuring customer loyalty via the Net Promoter Score™ (NPS™) and identifying opportunities to improve customer loyalty.
  2. Boost customer satisfaction by uncovering opportunities to enhance the customer experience.
  3. Reinforce competitive advantages and shore up competitive weaknesses by benchmarking the company against the competitive set across a variety of key purchase criteria.
  4. Determine if an ongoing innovation program was a worthwhile purist by validating or invalidating the hypothesis that their customers were not interested in a broader portfolio of products.
  5. Develop an approach to innovation that was more likely to succeed by securing a robust understanding of each customers’ internal innovation efforts, outlook for the category, and unmet needs.

The Approach to Customer Due Diligence

To better answer these questions, Strategex conducted 49 customer interviews across 34 of the target’s top accounts. All interviews were conducted by phone and they lasted 45 minutes on average.

The interviewers used an objective-based discussion guide prepared in collaboration with the private equity firm.

Transcripts of each conversation were provided to the client on an ongoing basis after the interviews. Once we collected all of the data, we aggregated, coded and synthesized the results. The management report outlined the key themes and recommendations. The report also included an in-depth analysis of the data and customer commentary in total, across a variety of segments.

The Results

In respect to the innovation question, the customer due diligence revealed that:

  1. The hypothesis was false. The company’s customers did think they were being innovative. 16 out of the 34 accounts interviewed said they considered themselves to be highly innovative.
  2. The approach to innovation was out of touch with customer needs.  Customers expressed little interest in the company’s new products was they were not relevant to the needs of their respective businesses.
  3. There was no shortage of innovation opportunities. We asked the customers about their unmet needs, pain points, and outlook for the categories in which they work, and identified over 200 potential innovation opportunities.

Armed with these insights, the private equity firm responded by closing the deal, increasing the R&D budget rather than cutting it, and by implementing joint innovation programs with key accounts. This ultimately led to the development of new products that were highly relevant and in high demand.

The deal ended up being highly successful. The customer due diligence provided the management team with a launch pad for value creation. It also bridged the innovation gap between the portfolio company and its most valuable customers.

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