Performance Drivers That Create Value and Deliver Growth

September 12, 2019 – As most investment theses for PE investors rely on a significant growth equation, talent and organization capabilities are often the greatest constraint to delivering on a value creation plan. While most PE firms aspire for an in-depth organization due diligence before an investment is made, it is rare that they actually succeed, according to Summit Leadership Partners.

“If talent is audited at all, the depth of leadership and organizational review pale in comparison to other areas of analysis,” the firm said.

The short timeframes of the diligence process, combined with concerns deal partners have of “spooking” the management team, particularly in a seller’s market, make it challenging for PE deal teams to get a comprehensive read on talent and human capital, despite their best intentions, said Summit, a management consulting firm that focuses on advising boards, CEOs and senior leaders on strategically scaling business through talent assessment, leadership development and organization effectiveness. Even after the deal closes, the effort to acquire a true understanding of the leadership and organizational capabilities is no easy task.

The presence of a strong and capable CEO who is on board and able to implement and deliver on the value creation plan is crucial to the deal team. “Most of our clients comment that they already know what they have in a CEO however the capabilities and potential of the leadership team and below that are unclear,” the firm said.

Because leadership and organizational factors contribute so significantly to a company’s ability to execute and deliver on the growth thesis, a holistic understanding and playbook of key talent drivers are critical to accelerate value creation. Successful strategic execution is dependent on seven organization performance drivers. They include:

• Strategy alignment.
• Leadership.
• Culture.
• Talent and capability.
• Structure.
• Decision-making and accountability.
• Organizational agility.

While there are many factors to consider when accelerating business performance, experience is that these drivers matter most, said Summit Leadership Partners.

Strategy Alignment

Understanding and ensuring the level of strategic alignment across the management team and broader organization around strategy is perhaps most critical as it is the foundation underlying each of the other six drivers. Of the management teams Summit Leadership Partners have worked with, 60 percent of respondents buy in to their company’s strategy but only 33 percent believe they are aligned on how to execute it. It is also the driver that most overall organizations score lowest on. Sixty-seven percent of the firm’s clients report it as a gap.

Finding the Right Leaders for Private Equity Companies
Some people like to compare a private equity investment to a marriage. Many steps are necessary in order to build a strong foundation and to be aligned for the future. PE investors and leaders strongly depend on one another to achieve returns and value within an agreed period of time.

According to a report by ResearchGate, the implication of this is staggering given that 51 percent of the difference between good and poor performing organizations can be attributed to strategic alignment. Firms must create a strategic scorecard outlining the key business priorities and required talent and capabilities which the company must execute.

Summit Leadership Partners said to consider the following questions to understand the level of strategic awareness and alignment across the organization:

• Where is the management team most and least aligned on strategy?
• Are you clear on how the company will deliver against each of the strategic priorities?

Leadership

PE firms tend to agree that weak or ill-equipped management teams are often central to deal failures. Yet, acquiring a true read on the deeper leadership capabilities individually and collectively is something often underestimated. “Individual talent assessments have been around for over a decade yet most fail to evaluate the management team’s collective capabilities to execute the strategy and how they function together,” said Summit Leadership Partners. “Scaling leaders and management teams is rarely considered. A CFO for a $300 million company cannot necessarily lead in a $1 billion company in two to three years. Team dynamics are also critical to understand. Twenty-six percent of management teams say that they hold each other accountable for following through on commitments. And only 15 percent of executive teams say that conflict on the team is handled openly and directly. This should be a serious concern for PE investors when betting on a management team to produce two to three times returns!”

Summit Leadership Partners said to ask the following questions to determine if your management team is capable of scaling:

• As a company two to three times larger, how effectively does the current leadership team demonstrate the skills required to lead a larger enterprise?
• How effectively does the management team debate and decide on critical business tradeoffs? Is accountability and ownership clear?

Culture

Organization culture will always trump a well-designed business strategy. According to a report by Bain & Company, a culture that inspires and spurs performance makes companies 3.7 times more likely to be top performers. Growth cultures and mature business cycle cultures are vastly different. Summit Leadership Partners recently worked with a successful yet traditional, old school company that was attempting to transform to a consumer-centric, digital player. Despite a great growth strategy, the culture was obstructing the firm’s ability to be more agile and progressive as required by the dynamic market.

Simply put, culture is a driver of growth. In a recent CEO survey by National Center for Middle Market, CEOs who reported a deep and aligned culture reported 10.8 percent revenue growth. Those who reported an unclear culture reported an average 2.7 percent revenue decline. At its core, culture represents the set of behaviors that are consistently demonstrated and reinforced throughout the organization. Get the culture wrong, performance will flounder and your strategy runs the risk of becoming nothing more than an intellectual exercise.

Summit Leadership Partners said to ask these questions to help determine if your firm’s existing culture supports your strategy execution:

• How would you describe the culture at your company? How would your customers and employees want to describe your culture?
• What about the culture, if anything, needs to evolve/change to achieve your growth strategy?

Structure & Process

Structure is too often articulated as reporting relationships on the org chart. Summit Leadership Partners said that structure is how work really gets done in a company. Growth strategies often impact an organization’s structure and key processes by requiring greater speed and ownership at the front lines.

According to research in the Harvard Business Review, 7.5 percent of potential value is lost when there is a “failure to have the right resources in the right place at the right time.” Much of Summit’s strategic acceleration work involves pivoting enterprise operating models to focus on greater clarity and speed. One client’s CEO had 38 direct reports; Summit deployed a more efficient organization model and operating rhythm to speed execution. “Whether looking to penetrate new markets, broaden the product portfolio or enter adjacent industries, structure and process must evolve as the strategy evolves and the pace of growth quickens, enabling key stakeholders to engage across the organization with minimal friction and maximum efficiency,” said Summit. “Previous organization models can jeopardize future strategies.”

Summit Leadership Partners said to ask these questions to determine if the company currently has the right structure and processes in place:

• Are processes and information flow clear and in the hands of those who really need it?
• Which processes accelerate execution and meeting customer demands and which obstruct and slow us down?

Decision-Making & Accountability

Informed and timely decisions are the key to strong performance. Accountability is often bespoke in growth business models. Harvard Business Review found that the companies that were most effective at decision making and execution generated average total shareholder returns nearly six percent points higher than those of other firms. Summit said that often in founder-led companies, the founders retain too much control which earlier was source of speed but can become a constraint as the firm grows. The founder faces a decision point of control vs. growth.

But even the best decisions can be sidetracked by a lack of clarity about roles and responsibilities across the organization. Research with Summit clients has found that only 67 percent of team members understand which decisions are theirs to make and which ones need to be made by someone else. What happens the other 33 percent of the time? The firms said that decisions need to be made at the right level with accountability to support those who interact with the customer the most. Team members need to feel empowered to execute, drive results and take ownership for those results.

Summit Leadership Partners said to ask the following questions to determine if teams understand the existing decision-making process:

• Is there clarity around accountabilities, decision rights, deliverables and interdependencies?
• Are decisions pushed down to the lowest levels of the organization possible?

Talent & Capability

The talent that got you here may not be the talent that gets you there. “Any organization pursuing an aggressive growth strategy will find itself requiring new talent and capabilities,” Summit Leadership Partners said. “Our research has found that as organizations scale, the talent and capability drivers seems to become increasingly important and a constraint for most companies. During our organization assessments, management team members routinely rate the talent as adequate for the future yet have serious concerns for their peers’ quality of talent. Having a strong foundation with this driver is key for enabling organizational performance for the present and for the future.”

Private Equity Recruiting: The Widening War for Leadership
This latest research report from Hunt Scanlon Media examines the growing talent dilemma unfolding at private equity firms – and offers an array of solutions to win the widening war for leadership. According to Hunt Scanlon, the PE sector can expect to see an expanding bidding war for top talent over the next decade. Driving the trend: persistent global talent shortages across the C-suite in most industries and functions, including finance, healthcare and biotech, digital and technology.

Linking talent to value is this report’s overriding theme. Hunt Scanlon has surveyed private equity leaders and their chief talent officers as well as leading executive recruiters specializing in the sector. Their expert commentary and advice is contained in this year’s report. Click here to read more!

“A tech client of ours had a very aggressive growth strategy to expand its current products into new markets yet we learned that they could not retain any key business development personnel,” the firm said. “This talent was critical for its future yet had been reduced by almost 80 percent in the last two years. Management teams must be crystal clear on the talent pools required to drive the strategy forward and invest in, hire, develop and retain like crazy for those roles.”

Summit Leadership Partners said to ask the following questions to determine if the company possesses the needed skills and talent and, if not, how best to acquire them:

• Reflecting on your three-to-five-year vision and strategic priorities, what do you see as your biggest vulnerabilities, gaps or disadvantages from a skills standpoint?
• On a scale of one to 10, how confident are you that the company has the caliber of talent required to deliver your strategy? Why?

Organizational Agility

Across any industry, change is a constant. The ability for a company to anticipate and react to market, competitive and workforce changes are important predictors of success. A report by McKinsey & Company found that 75 percent of respondents say becoming organizationally agile is a top or top-three priority, and nearly 40 percent are currently conducting an organizational-agility transformation. Summit said that companies “need to adopt an agile mindset to connect more intimately with their customers and improve responsiveness to unpredictable and volatile market. They need to respond more quickly to changes occurring in the market as a result of disruptive innovation or changing customer preferences.”

Summit Leadership Partners’ work with clients has shown that organizational agility is one of the higher rated performance drivers. The larger the firm, however, the more agility is sacrificed. It is possible to significantly scale organizations while also ensuring speed and adaptability. They tell their clients to plan for the long term yet execute for the short term.

Summit Leadership Partners said to ask the following questions to determine if the organization is nimble, flexible and adaptable to the constant change that defines today’s business environment:

• How well does the organization adapt to unforeseen business challenges or market changes?
• What is the company’s appetite for taking risks?

Final Thoughts

As PE investors look to accelerate the value creation process, they are increasingly looking to organization and human capital levers to help achieve that goal. “PE firms have advanced beyond financial engineering and optimizing existing assets to create value,” Summit Leadership Partners said. “Our experience and data suggest that, by focusing on the above seven organization drivers, PE firms and portfolio company management teams working in tandem can more effectively deliver on expectations. It begins with an objective assessment and agreed game-plan immediately after the investment partnership begins. The clock is ticking so it is critical to determine earlier in the hold period and not when the strategy stalls.”

“Each driver is important in its own right, but it is the interplay between all of them that is crucial to driving growth and significantly improving the chances of meeting investment goals,” Summit said.

Contributed by Scott A. Scanlon, Editor-in-Chief; Dale M. Zupsansky, Managing Editor; Stephen Sawicki, Managing Editor; and Andrew W. Mitchell, Managing Editor – Hunt Scanlon Media