The acceleration of digital transformation and speed of customer demands is turning almost every business into a technology business. Creating, using, or selling technology is now a critical part of every enterprise. But how do companies add emerging technologies and innovations? 

Many companies looking to enter the software economy, the ecosystem of companies that create or are enabled by software, do so through acquisitions, often by targeting startups. Evaluating the potential value of these smaller companies, however, is a specialized skill, says Jeff Vogel, head of the Software Strategy Group for EY-Parthenon. For companies, discovering and accounting for hidden talent and technology risks is a big factor in a successful merger or acquisition.

“They need to believe in the market, that there’s room to grow in that market or room to expand the market; believe in the company’s ability to execute; or believe that they’re coming with a transformation thesis that they’re going to fundamentally change what the company does and how it does it in order to recognize their return,” says Vogel.

Non-technical companies often look to acquisitions, particularly of startups that are touting emerging technology, to make business processes run more efficiently. They also see software investments offering opportunities for high growth and generally high gross margins. But it’s important to gauge the risk and the reward of acquiring software, Vogel says. In the same way that entering the software economy can yield high growth, the market moves fast, making it easy to lose value just as easily as it is gained.

While there are always risks in business, Vogel says that one indicator of a strong acquisition is talent retention and culture. A lack of synergy between company cultures and poorly managed or deployed talent can pose barriers to a smooth acquisition and integration.

“Because software is an intangible IP and it’s very much tied to the people who build it and maintain it, if you have talent drains due to culture, compensation, or other things after an acquisition, that’s usually the leading indicator that the thesis is going to go up in smoke,” says Vogel.

This episode of Business Lab is produced in association with EY-Parthenon. Learn more about EY-Parthenon’s disruptive technology solutions at ey.com/us/disruptivetech.