Why Talent is Now at the Center of Value Creation

Christian Franck, head of equity research at Hunt Scanlon Ventures, goes one-on-one with General Atlantic managing director, Anish Batlaw, to discuss how shareholder value is created when companies move with speed and accuracy to get the right talent in place. They discuss the opportunities and challenges on the way to creating a best-in-class talent function.

October 4, 2022 – Talent has always been, and always will be, a driver of value creation. Talent management has been an important lever in the private equity industry for years, but it has never been more critical than today. Due to the scarcity of top-end talent in the labor market, it is crucial for private equity firms to have a talent function in place that successfully attracts and retains top performers to its portfolio companies.

Over his 30-year career, Anish Batlaw has distilled talent management into a methodical science. Mr. Batlaw is a managing director at General Atlantic, where he leads the firm’s extensive human capital efforts in support of its portfolio companies. By merging his years of talent management expertise with General Atlantic’s long-standing talent function, he has helped unlock value in GA’s global portfolio companies.

Mr. Batlaw recently co-authored a new book with The New York Times bestselling author Ram Charan on his novel approach to talent management. For 50 years, Mr. Charan has examined the topic of talent and has worked with Mr. Batlaw on various business ventures. In TALENT: The Market Cap Multiplier, they take a deep dive into the fundamentals of talent management and show how to build and incentivize management teams to increase enterprise value. TALENT offers a rare inside look at how shareholder value is created when CEOs and CHROs move with speed and accuracy to get the right leadership teams in place.

The two argue that the old PE model of hiring talent that has “been there done that” is not applicable today. The talent function that Mr. Batlaw built at GA challenges this approach. It adapts to today’s recruiting challenges and hinges on hiring ahead of the curve. Mr. Batlaw’s talent methodology is “measurable, verifiable and replicable,” according to Mr. Charan. By adopting a similar talent function, Mr. Charan maintains that “management teams can achieve four times market value in five years.”

In the following interview with Christian Franck, head of equity research at Hunt Scanlon Ventures, Mr. Batlaw discusses talent management broadly and how his unique approach drives value.

Anish, it seems as if private equity has been late in coming around to talent as a means of value creation. Your thoughts?

I don’t think PE’s been late. I say that largely because PE firms have always placed emphasis on backing and finding top talent. What’s changed in recent years is that we’ve seen firms double down and invest in the function. I believe there are two reasons for this – the industry has grown significantly over the last decade and the competition for talent has intensified. As a result, there has been a fundamental realization that a more programmatic way of managing talent is required. Firms that were early in building their talent function are reaping the benefits and others are starting to notice.

How is the PE mindset different for talent?

The PE mindset, especially in growth equity investing, is one of fostering a long-term partnership with the Founder/management team and fellow investors. It is focused on helping founders realize their vision and create value, which is the basis for key talent decisions.

How and why is talent inextricably linked to value creation, Anish?

If you think about the private equity model, clearly, every investor is focused on identifying opportunities to invest in companies which have potential. At GA, we’ve focused on spotting growth potential and helping the founder(s) scale their business while some other PE firms are more focused on turnaround opportunities. Irrespective, high performing private equity firms identify key value drivers, and evaluate if the company has the right leader(s), team and incentives in place behind each of these drivers of performance. If there are gaps, then a specific action plan is developed to address it.

How do you see talent management in private equity adapting to these turbulent times?

A few changes will be required. For example, PE investors have been biased towards hiring people who have “been there, done that.” For example, if one need’s a CFO, the approach is to go find someone who is or was the CFO of a private equity-backed company of a similar size. If one need’s a CRO or CEO, let’s find someone who has run a bigger, more complex company and bring that person in. On the surface, this approach seems logical and reliable. However, it gives a false sense of security. From my point of view, if the person does not have the potential or ability to demonstrate first principles thinking, that person is set up for failure in this world. As the bidding for talent becomes more competitive and the pace of innovation and disruption increases, firms will need to learn to hire, retain and develop talent that has potential to scale. Companies will have to make bets on potential. They will need to get better at recognizing promise that has not blossomed yet and help nurture and develop it.

 TALENT: The Market Cap Multiplier

Anish Batlaw has spent the last 30 years building high-performing management teams at public and private companies. He currently serves as a managing director at General Atlantic, the global growth equity firm, where he leads human capital efforts in support of GA’s global portfolio companies. This includes the development of management teams, board of directors, and executive compensation. He previously held roles at PepsiCo, Microsoft, Novartis, and TPG Capital. He previously served on the Board of Directors of Alinta Holdings, Avon Products Company Limited, HCP Global Holdings Limited and TPG Wholesale Pvt Ltd

Earlier this year, Anish teamed up with Ram Charan – a noted expert on business strategy, leadership, and building high-performance organizations – to author TALENT: The Market Cap Multiplier. In this highly informative, easy-to-read book, they reveal how to build and incentivize management teams that can multiply enterprise value several times over in four to five years. It is a formula now followed by a number of leading high-growth companies.

 Buy your copy here!

One of the most eye-popping statistics from your book was the impact on IRR when changes were made to CEO/senior executives in the portfolio companies. It showed how investment returns were greatly influenced by when and how many times a CEO change was made. It was striking that, when a change was required, the biggest returns occurred when placing a CEO or a key senior executive at a company within a year of closing the investment. It speaks to how critical talent decisions are to fund performance and the important role that high quality talent function play in guiding these decisions.

You’re exactly right. We like to back founders and help them build great teams, and whenever we’ve done that well, our returns have been high. On occasion, our portfolio companies have had to hire a CEO or a president. Accurately assessing candidates for these roles has been vital. When companies got this decision right the first time, IRR was high but when we got it wrong and had to bring in a second (or a third) replacement, returns were down significantly. Interestingly, we also found that when we made the change in the first year (as opposed to the second, third or fourth years), returns were three times higher. It makes a compelling argument to move “with speed and accuracy” when building high performing leadership teams.

“When you assemble a new leadership team, you may have a few people who’ve been with the company for a period of time, and you inject two, maybe three additional people onto the team. This changes the team dynamic. It’s one thing to hire eagles, but it’s another to teach them to fly in formation.”

With top-end talent highly sought after and therefore a growing scarce commodity, what are some of the challenges you’re seeing in your talent function and how have you overcome them?

Let’s spend a little bit of time on this issue. First, if you think about the labor market today, supply is constrained. COVID took almost 10 million people out of the workforce in the United States, with baby boomers accelerating their retirement. The big hole they’ve left within the workforce, in some ways, has had an inflationary impact on the system. In addition to that, a large number of people decided to opt out of the corporate world and move to mission-driven organizations. Many others moved into the entrepreneurial world, or into the gig economy. This was largely precipitated by the democratization of technology, and the efficiency of our capital markets. It’s so much easier now to set up a business than it ever was in the past. This rise of entrepreneurialism is an incredibly positive trend but has also contributed to the demand for growth-oriented talent. Companies do not have to be big to attract top talent anymore. Rather, top talent is now increasingly drawn to entrepreneurial opportunities where they can unleash their creativity. Increasingly I hear that people feel stifled by the bureaucracy and red tape in large organizations.

We’ve found that in this labor market, talent does not stay in the market for very long. So, if you run a traditional process, you may end up with a great process, but no candidate. Companies need to get great at spotting talent and attracting it to their platform and doing it fast. Today, you can’t wait to start a search when a position opens up. We’ve had to proactively go out, build a talent bank – or a repository of vetted talent – that we would love to have in our portfolio. We are always recruiting, getting to know talented executives, and finding ways to stay connected with them over the years. Then, when positions come up, we can dip into that talent bank, and not only hire a person who’s performance and potential is known to us but also dramatically cut the time it takes to fill key vacancies, quite often by half. We still value and work with our preferred search partners, but also have this unique talent bank to rely upon.

Other than increasing hiring efficiency, what are some of the other advantages of building your own talent bank of candidates?

The talent bank does three things. One, on occasion, you tap a candidate in the talent bank and quickly inject them into a portfolio company. Second, you can go to them for references and ideas on candidates. “A players recommend A players”. So, if you go to them for ideas on candidates, it is highly likely that they will point you in the direction of an A player. And third, sometimes they can assist with due diligence or help validate your assumptions.

But to the point that you were making earlier, Christian, if a position comes open today, it is tough to start a search, and close it quickly and with accuracy. To ensure accuracy, we start with a scorecard or clarity on the outcomes that we want the incumbent to deliver in the medium term (circa 18-24 months), then align on a core set of individuals that will be conducting the interviews. We then need to impress upon them the urgency and need to open their diaries and make time to meet with the candidates. While we still like to meet with a final candidate in person, we conduct a lot of video meetings, which has helped improve the speed with which we work. There is continuous internal collaboration – reviewing and calibrating our interview notes and assessments. Finally, we reference the top candidates and validate the content that was shared with us during the interviews. The process delivers on accuracy but there is still an opportunity to improve on speed.

“That’s where the notion of talent density comes in. I don’t think that businesses have the luxury of sticking with C players and B minus players. They need help the B’s become A’s, and continuously work on attracting A players to their platform.”

Finally, when you have a CEO or C-suite hire that fails, how much does this set you back? How severe is a failed search at that level?

It is very, difficult to recover from failed senior executive hires. Those mistakes are incredibly expensive. If you have two miss hires, you’re done. But I would say it’s not just for roles at the top. Rather, critical roles can exist at all levels and ensuring one has high performing talent in these roles is super important. Since 2019, wages in the United States have increased more than twice the rate of the two years before the pandemic. That’s a massive increase in workforce cost. This increase leaves companies with two choices. Either increase your revenue at a similar or a faster rate, which is not that easy to do, or build a more productive workforce. That’s where the notion of talent density comes in. I don’t think that businesses have the luxury now to stick with C players and B minus players. They need to help the B’s become A’s and move quickly to attract A players to their platform. And if a mistake is made, then remedy it quickly. It is better for the individual as well as the company.

So, a more holistic approach to talent is what you are advocating?

Previously, there was a lot of focus, on getting the top roles right: the CEO, the President, maybe the CFO. Over the years, it broadened to the entire management team. Now, I think companies need to increase focus on the productivity of their workforce and introduce new, forward looking, KPIs to measure progress on Talent Density. They need to study the scalability of the org design and programs to drive motivation. Companies must double down on the roles that have a direct link to their core value drivers and move quickly and with accuracy to ensure they have top talent in those roles.

So how do you think of your own role as a talent partner?

My role is to help our CEOs and deal teams set and execute the talent agenda. The core competency is providing leadership on talent and organizational matters, and helping our companies make people decisions. My energy and time is dedicated to helping our companies create long-term value. Overall, I think the talent partner’s work is based on the notion of creating value and ‘pull or demand’ for their services.

Related: Hiring Top Talent in Unprecedented Times

Contributed by Christian Franck, Head of Equity Research, Scott A. Scanlon, Editor-in-Chief; Dale M. Zupsansky, Managing Editor; and Stephen Sawicki, Managing Editor – Hunt Scanlon Media

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