Using Leadership Assessment to Win the PE Talent Wars
May 15, 2024 – Talent has become an increasingly acknowledged driver of value creation in private equity firms as pressure to deliver outsized returns increases. With this, PE funds have invested in executive recruiting services and built out their own internal functions to find the best talent in an increasingly competitive landscape. Nevertheless, the evaluation process for talent hasn’t evolved enough since the industry’s start. “I’ve watched throughout my entire career in executive search the way decisions are made on the selection and evaluation of human capital – statistical results haven’t improved much, and we can do better,” explained Elan Pratzer, CEO and founder of System-3. “Executive search and private equity often overly rely on experience, assuming if ‘you’ve done it before you can do it again.’ But that does not take circumstances into account. Consequently, a person who has been very successful in one set of circumstances may not be able to repeat the same success in a separate set of circumstances.”
Mr. Pratzer said that even though private equity and executive search leaders often make incredibly intelligent decisions around talent and fit, he noted that “if they applied a data-driven system to their approach, they would do even better more consistently.”
Leveraging Technology to Assess Leadership
Current leadership assessment technology has been a key tool for assessing talent success; however, those assessments have typically measured personality traits that suggest who a person might be. Mr. Pratzer says, “to increase the odds of the accurate assessment of potential success, you need to understand what leadership behaviors are required to be successful and to be able to determine if those you are assessing manifest those behaviors under pressure. That data, if objective, will help executive search firms and private equity firms make better decisions more often and be a game changer.”
Related: Here’s How PE Firms Can Reduce Talent Churn and Produce Better Leaders
“Not only can these behavioral assessment tools more effectively help PE firms with aligning on talent fit, but they can help executive search firms carry out a more efficient process,” said Mr. Pratzer. “You can do more tailored interviewing and reference checking, saving time, being more informed and finish your searches earlier; with this kind of technology, search firms can be even more productive,” he noted.
Elan Pratzer is the founder of System-3. Founded in 2021, System-3 is a predictive, unbiased SaaS based leadership solution that minimizes bias and objectively measures whether emerging and experienced leaders, deploy the core leadership competencies required for success in today’s complex business environment, when under executive pressure. Mr. Pratzer has spent 30 years assessing and advising business leadership at the most senior levels of corporations. Elan has acted as an advisor to shareholders, boards and CEOs on matters related most often to strategic human capital decisions and organization transformation.
Recent statistics from the US. Dept of Labor indicates that 30 percent of hiring failures result from leaders’ inability to navigate high-pressure situations effectively. Given the high stakes involved, both executive search consultants and PE talent leaders want to get it right the first time. As a result, companies are increasingly using additional processes to assess a potential leader for their capability beyond merely prior experience.
Related: How Recruiters Facilitate Founder-PE Firm Agreements When Sourcing New Talent
Many leadership assessment tools have emerged to help make the process more data-driven and provide talent teams with a more holistic view of a candidate. Not only can these tools help to bring a quantitative look at an individual’s decision-making process, they can also provide better insight into how they might impact culture at the organization.
Nevertheless, the challenge remains selecting the right variables in which to assess a leader, so that when the unavoidable high-pressure situation arises, the company can feel confident that the leader they chose can navigate it successfully. Because System-3’s assessment is a leadership simulation, the algorithm objectively measures their behavior, decision-making processes, and leadership competencies required for success in modern business settings.
Building a Leadership Pipeline
Not only can assessment technology be helpful for PE firms and executive search consultants for finding top leaders, but it can also be leveraged as a tool for understanding the growth and future successes of the talent pipeline in an efficient and objective way.
“Private equity firms often don’t have a line of sight into the quality of talent they already have or are acquiring just beneath the C-suite or a couple of levels below, so we don’t really know what their potential is,” Mr. Pratzer said. “We don’t spend the time, money, or energy to know who these people are and develop them. These potential employees are incredibly cost-effective and valuable to their organizations. For shareholders they represent the future leverage and long-term success of their company.”
“Just because these individuals haven’t done it before, doesn’t mean they can’t do it,” Mr. Pratzer continued. “If they can do it, they are often your best talent for taking on a bigger more strategic role. These people often have the technical skills required, it’s the leadership capabilities and fit that will make or break high potential talent. “Being able to predict how up and coming talent will behave as an executive leader under pressure, offers a treasure trove of resources many companies overlook.”
Turning the Subjective Objective
Every facet of the interview process today is subjective in nature, according to Mr. Pratzer. “While this information is critically important, and behavioral interviews and the references are important, they’re subjective,” he said. “You have to still understand the kernel of what the real risk is in order to get a holistic picture of the talent, and their fit to the organization’s needs.”
His suggestion is using predictive objective behavioral assessments early in the decision-making process. Using that data to inform interview strategies and reference checking so decision makers can focus on potential areas of concern.
This helps provide a more well-rounded picture of the candidate, which compliments, and challenges subjective perspectives.
Related: A Look at the Landscape for Hiring a PE Operating Company CEO
Contributed by Scott A. Scanlon, Editor-in-Chief; Dale M. Zupsansky, Executive Editor; Lily Fauver, Managing Editor – Hunt Scanlon Media
