Private Equity Firms Invest in Raising Their Talent Game

Hiring the right talent is always a challenge. But the recruiters who have the most success tend to be highly disciplined about paying strict attention to the value-creation plan. Join us as we preview this exclusive Bain & Company report — supported by Hunt Scanlon research — and shed light on how PE companies are recruiting the right talent. 

March 8, 2021 – Getting talent decisions right – especially at speed, across dozens of portfolio companies – is one of the stiffest challenges private equity firms face today. According to a new report by Bain & Company there are many reasons why talent decisions can go awry but those with the highest success rates have something in common: They are highly disciplined about linking talent decisions to the explicit requirements laid out in the value-creation plan. The Bain & Company report was supported by Hunt Scanlon Media research and authored by Bain’s David Waller, Courtney della Cava, Kristin Schroeder and Rolf-Magnus Weddigen. It first highlights the experience of one PE-owned company in the packaging industry and what can go wrong when the wrong talent is hired.

For a deal predicated on reigniting revenue growth, the new owners developed a detailed value-creation plan (VCP), laying out a strategy to aggressively expand national accounts. Because it required new sales leadership, the company quickly hired an accomplished industry veteran, with high hopes that he could jump-start the commercial organization. Instead, he stumbled badly. The new hire had a strong record within the packaging industry of increasing sales, which on the surface seemed exactly what the company needed. But beyond experience, the new owners and management hadn’t fully considered the nuanced set of capabilities and motivations a candidate would also need to accelerate performance in this particular situation.

The sales chief had succeeded in the past with a hard-driving, command-and-control style, which was like oil and water with the packaging company’s culture. He ended up alienating sales reps who had grown up in a highly decentralized, entrepreneurial organization. The mismatch ultimately threatened to derail the entire deal.

How Top-Performing Firms Ensure Seamless Executive Transitions

Executive transitions are difficult, with failure rates estimated at 40 percent and a new leader often requiring six months or longer to reach breakeven productivity levels. In today’s environment, executive transitions have grown even more challenging. What can be done to de-risk transitions and enable executives to hit the ground running?

To combat failure, defensive tactics are essential, but the top firms also think strategically about opportunities to go on the offensive. With the pandemic amplifying the risk of a rocky start, executive transitions are no longer afterthoughts. The top-performing firms are ensuring that clear transition plans are in place and proactively building bench strength.

To illustrate further, search and leadership advisory experts will share and discuss practical applications of executive transition planning and processes.

We’ll be joined by the following panelists:

·       Jeff Warren – Managing Director, PE Practice at Russell Reynolds Associates

·       Sean Dineen – Managing Director at Russell Reynolds Associates

·       Richard Thackray – Managing Director at Partners Group

·       Courtney Hagen – Chief Talent Officer at Littlejohn & Co.

Topics to be discussed include:

·       Managing executive transitions, especially in a virtual world

·       Frameworks and best practices, with a focus on mission critical roles

·       How to build executive bench strength remotely

·       …and much more!

To register to attend for FREE, click here!

“In short, success in such talent decisions call for paying strict heed to the requirements laid out in the VCP,” the report said. “It may sound obvious, but it is a principle rarely applied either rigorously or consistently.” Done right, Bain says that it follows a clear sequence:

  • Having laid out a deal hypothesis and examined talent issues in due diligence, PE investors align with management—and align quickly—on a VCP that details the value-creation strategies essential to generating attractive returns.
  • This includes a repeatable process to define the key roles explicitly linked to those strategies and clear, measurable objectives for each role. That information then leads to precise job descriptions that spell out the unique set of experiences, capabilities and motivations required for success.
  • The right talent may already be in place or the company may have to recruit people (either internally or externally). But defining needs based on a clearly stated set of value-creation objectives is essential to diagnosing and filling gaps. It also determines the specific targets and milestones leadership needs to gauge progress and measure success.

The Honeymoon Syndrome

A recent Bain/Hunt Scanlon survey of PE professionals shows that firms are well aware that management is critical to deal success. “Yet they too often lack a consistent, repeatable process for making talent decisions swiftly,” the report said. “The natural tendency at the end of a long deal process is to utter a sigh of relief, clink glasses with management (virtually these days) and let things ride for a time. Many deal teams say they hesitate to make changes because they want to give existing managers a chance to prove themselves. Others take the “devil you know” approach and are wary of rocking the boat with management changes at a critical time.”

The cost of hesitation, however, is high, according to Bain & Company. They found an overwhelming 92 percent of survey respondents said that waiting too long to take action on talent issues had resulted in portfolio company underperformance over the past five years. Almost 70 percent indicated this happened in at least half of their deals. Deal teams are especially wary of changing CEOs—93 percent view such a move as risky or highly risky, and a majority have done it in fewer than half their deals. Yet when they do take action, it is broadly successful 75 percent of the time.

Recognizing the problem, firms have invested steadily over the past several years to raise their talent game. In addition to partnering with best-in-class executive search and assessment firms, Bain & Company said that “general partners have been hiring portfolio talent professionals to assess and build new management teams, diversify boards, cultivate executive networks and otherwise support companies across the portfolio. But it isn’t easy. Most funds have one, maybe two, dedicated talent professionals and a long list of portfolio companies to work with. What’s often missing, starting in due diligence, is a rigorous process applied consistently at the deal level to define requirements for generating anticipated returns.”

Bain & Company notes that this is curious when you consider the meticulous attention private equity firms bring to all other aspects of deal-making and value creation. “Firms are surgical in breaking down balance sheets and revamping supply chains to wring out cost efficiencies,” the report said. “They invest heavily in market research and analytics to determine revenue opportunities and scrub commercial organizations to improve go-to market capabilities.”

Bain & Company and Hunt Scanlon Launch Talent Intelligence Partnership
Bain & Company, the leading global advisor to the private equity industry, and Hunt Scanlon Media, the leading talent intelligence provider to the human capital and private equity sectors, have entered into a partnership to gather data to better understand current PE portfolio company executive talent issues and their link to investment performance.  

“With more detailed insight on the critical talent issues facing the private equity sector, our collaboration with Hunt Scanlon will allow us to work together to develop solutions that drive value creation,” said Johanne Dessard, global financial investors/private equity practice director at Bain & Company. Read more.

“Yet while close to 80 percent of survey respondents said they use the VCP to set growth targets, only 34 percent said they link objectives to clear and actionable executive position descriptions, and only half said they use the VCP to set objectives for individual executives,” the report found. “Many firms, in other words, see the value creation plan as an indispensable guide for planning—except when it comes to determining specifically who they need to execute those plans.”

Linking Talent to Aspiration. Why the Disconnect?

The answer most of the time is that people issues—both at the C-suite level and below—are complex and hard to measure, said the report. “Because personalities are involved, the challenge is widely viewed as art more than science,” it said. “That’s precisely why the firms that excel at talent decisions do their best to take subjectivity out of the process by using a highly analytical, left-brained process analogous to underwriting other essential aspects of the deal.”

Starting with the specific return objectives laid out in the VCP, they work backward to create a fact-based, strategic set of talent requirements. Bain & Company said this demands answers to a few key questions:

  • What roles and functions are critical to delivering on this specific plan?
  • What are the explicit, quantified goals those executives will have to achieve over the short and longer term?
  • What experiences, capabilities and motivations must each executive have in order to execute and generate these results?

A rigorous, analytical approach makes talent decisions easier on everybody because it eliminates ambiguity about what’s required to win, according to the Bain & Company report. “By definition, a strong value creation plan requires a company to do something new, something it hasn’t done before, and the skills needed for that may or may not exist within the company already,” the study said. “The most relevant inquiry isn’t whether incumbent portfolio company leadership has done a good or bad job of taking the company from point A to point B. What’s essential is to be crystal clear about what it will take to get to point C and deliver on the value-creation plan. That shifts the conversation from personalities to precise goals and requirements.”

Related: Improving the Selection of Leaders for PE Portfolio Companies

The most effective deal teams begin to think about the talent a company will need during due diligence. The VCP (ideally created within six months of close) confirms those requirements, forming an essential link between the full-potential strategy and the talent strategy. Bain & Company said that teams “should already be using the plan to create detailed role profiles and scorecards that give the company (and its advisers) the information they need to make assessments This process may confirm that the existing management team is fit for purpose and ready to go with minor adjustments. But it may demonstrate that the company needs to create important new roles or look outside to find the right capabilities. The company, the firm and their advisers must know exactly what they are solving for so they can move expeditiously to build the optimal team.”

The Experience Trap

“Without a precise, mission-driven definition of the talent you need, the tendency is to over index on past experience,” the report said. “If growth through a new digital marketing strategy is what you’re after, then surely someone who has made that happen in the past is a strong candidate.” Yet as Bain & Company saw in the packaging company example, if that person lacks the capabilities and motivations required for success in a specific situation, then you may be headed for trouble. As the operating partner of portfolio talent at one firm put it: “There is a tendency among our deal and operating partners to evaluate candidates based on IQ and past experience, but this doesn’t capture many aspects of leadership that are essential for success in very nuanced portfolio company situations.”

Precision for Recruiters

It is hardly news to search firms that finding the right candidate involves more than just evaluating past experiences. But a recruiter’s output is only as good as the input he or she receives from the hiring manager, says Bain & Company. “Because deal teams often lack clear definition around the roles that are critical to delivering value, they are imprecise when defining the required mix of experience, capabilities and motivations. Precision, however, can make all the difference.”

Sometimes experience is actually the least important factor, according to Bain & Company. When a PE firm recently acquired a global aftermarket parts and services provider, a critical aspect of the VCP was increasing revenue of a key business unit based on the strength of new product introductions. “Making that happen would involve transforming the unit’s go-to-market model by building new sales channels and beefing up the commercial organization,” the report says. “The challenge was that nobody on the existing team had done anything like that before at scale. What the company did have, however, was an especially promising executive who the CEO believed had the right stuff to step into the challenge. The new owners agreed this executive had high potential, and they used a fine-grained role description derived from the VCP to set up the right scaffold to support him. This involved identifying the specific areas in which he needed development and setting very specific short- and long-term objectives. Clear expectations, support from management and evaluations at every step of the journey would keep the executive on track. It also could assure the new owners that they had made the right decision in elevating him.”

Related: Talent Challenges Facing Mid-Market Private Equity Backed Companies

Bain & Company notes that the real risk in most talent situations is not placing educated bets on promising people but moving forward based on incomplete information. “That slowed down progress when the leaders of a PE-owned retail chain sought to lay the foundation for accelerated growth,” Bain & Company said. “While the company had expanded steadily under previous ownership by opening and acquiring new locations, due diligence showed that the next phase of growth would require a much more sophisticated approach to marketing—one that would increase the flow of new customers while sharply reducing acquisition costs.”

Early on, Bain & Company said that the company “hired an executive to lead the marketing function who had strong experience generating sales growth through traditional media. Once the VCP took shape, however, the new owners saw a ripe opportunity to improve marketing effectiveness by shifting the company’s media buy online and targeting ads at the company’s key demographic groups in the specific geographies where it had locations. There was also upside in sharpening the company’s online presence,” the report says. “Adding digital competency required doubling the marketing staff and creating a major new role for a digitally savvy chief marketing officer. This person would not only have to dramatically alter the traditional media plan but also manage a digital team, build cross-functional processes and sharpen the customer experience—all while operating in an accelerated, high-pressure private equity setting. A key part of the job was managing change in advance of accelerating growth, building a solid new foundation to support the more aggressive double-digit revenue ambition. That would require the full slate of transformation competencies: redefining roles, breaking old habits and winning buy-in among a wide variety of stakeholders.”

Once the company put an external hire in place, equity value creation took off. Bain & Company says that the new “CMO quickly delivered against a highly specific set of outcomes prescribed by the VCP, drawing up an 18-month marketing roadmap with clear metrics, redesigning the org chart, building cross-functional cooperation and hitting specific customer traffic and efficiency targets. The only regret for the company and its owners was that they hadn’t moved faster to define what they really needed.”

As the data from the Bain & Company survey shows, hesitation and poor people decisions can spell the difference between deal success and failure. “This is especially true in an upside-down post-COVID world, where a combination of record deal multiples and deep economic uncertainty leaves little room for error,” the report said. “Capturing full potential when it comes to talent management means replacing gut decisions with a systematic, analytical approach to identifying needs and filling gaps, starting in due diligence and running throughout the ownership period. Anything less is leaving money on the table.”

Related: Leadership Dilemma Unfolding at Private Equity Firms

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

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