Process risk refers to potential problems associated with a company’s software development processes, including the software design, coding, testing, and deployment, as well as the organization and personnel. An assessment of this type of risk provides a forward-looking indication of how future software development is likely to go and issues that may arise. Code risk refers to the problems in the code itself, such as the quality, reliability, licensing, and security of a company’s software code. It’s reflective of past practices and the accumulation of issues over time.
Private equity firms need to understand both process risk and code risk because both can impact a company’s value and growth potential. Accumulated issues in the code, commonly referred to as technical debt, represent a backlog of work for development resources that could otherwise be adding new features. Process weaknesses are indicative of how well the team will be able to execute in the future. Poor software development processes and low-quality code can hamper a company’s ability to scale, reduce its productivity, and ultimately harm its bottom line. In contrast, robust and well-designed software development processes and high-quality code can provide a competitive advantage, increase efficiency, and enable a company to adapt to changing market conditions.
To identify process risk, private equity firms should conduct a thorough review of a company’s software development practices, including project management, software design, coding standards, testing, and deployment. They should also evaluate the company’s quality assurance practices including code reviews, automated testing, and bug-tracking. Such an assessment is usually based on both interviews with senior technical personnel and a review of documentation they provide. (Some firms have in-house technical resources who do this; some farm it out.) A deep review of a company’s software development processes can help private equity firms identify areas of improvement, such as the need for better documentation, more rigorous testing, or the implementation of industry standard security controls.