Talent shifts in value creation

Optimizing talent and organization capabilities is a recipe for portfolio improvement, especially in the current climate.

By Dan Hawkins, Summit Leadership Partners

Chefs routinely update a restaurant menu to capitalize on seasonal changes and favorable margins. Similarly, private equity funds and operating partners adjust their approach to value creation based on changing market dynamics. Optimizing talent and organization capabilities is a recipe for portfolio improvement, especially in the current climate.

Dan Hawkins, Summit Leadership Partners

In the past year, recessionary pressures and volatility have prevailed amid rising interest rates and a decline in M&A and IPO activity. Valuations remain relatively high in most sectors and have yet to revise for macroeconomic conditions. Although PE firms have ample dry powder to deploy, funds are monitoring the health of portfolio companies while evaluating future transactions. Consequently, value creation drivers have shifted from a steady focus on growing revenue-driven multiples to instead shoring up portfolio company profitability through efficiencies and performance improvement. Along with those headwinds, it’s still a tight market for top talent.

At Summit Leadership Partners, we increasingly see PE deal-related activity slowing and an increased focus on assessing and improving the current portfolio of talent. If a significant investment is imminent, investors are particularly critical and expect robust assessments of management team talent—and even expanded audits of succession and organization health. There is also increased attention on CEO performance, management team dynamics, organization design and integration of add-on acquisitions.

Here are four key ingredients for PE operating partners to serve up portfolio improvement.

Support and maximize the top talent you have

As Stephen Stills once sang: “If you’re down and confused…love the one you’re with.” Indeed, during difficult times, making drastic changes can increase uncertainty and aggravate an already challenging situation. Summit’s 2022 survey of CEOs also found that the majority of respondents (51%) were concerned about attracting quality talent to support accelerated growth.

Many management teams can thrive if given the necessary support for how to lead and address focus areas. Counsel from experienced leaders and playbooks about how to achieve key business outcomes can empower people to deliver transformational results.

This dynamic applies to CEOs too, including founder-CEOs who may not have navigated through a downturn. Research indicates that firing the CEO typically delays the value creation plan (VCP) by 18 months on average. Instead, assessing and maintaining current leadership while providing a robust support system can generate better ROI more quickly.

There are intangible skills that typify strong leaders and facilitate success: self-awareness, authenticity, flexibility and a willingness to learn. Once you’ve assessed talent for these and other pivotal traits, you can support them to lead and succeed—as long as they’re willing to be coached.

Evolve talent assessments

Don’t just focus on what an employee has done previously. Historical assessment processes and approaches rely too much on past experiences and ignore the new context for C-suite competencies.

At Summit, we spend an extensive amount of time understanding the VCP and the business environment a CEO faces. Assessments must evaluate “have done” plus “can do.”

PE has developed the muscle memory for a certain type of talent assessment: exhaustive (and exhausting) multi-hour interviews delving into background, college study and job experience. That process only reveals part of the story. It doesn’t effectively assess the potential for growth if targeted support and coaching are provided.

Instead, talent assessments should evolve to evaluate key skills that enable success, such as critical thinking, learning agility, inclusive leadership, empathy and the ability to engage a distributed workforce. That often reveals capabilities and talents that can be unlocked to create greater ROI.

Challenge the organization blueprint

PE has long focused on recruiting and assessment for driving value creation. All too often, the structure of an organization may not be aligned with business strategy, and economic volatility magnifies any misalignment. It’s critical to challenge management team roles, operating models and even company culture to drive improvements. Given the challenges of executing on growth-oriented VCPs, wise investors and human capital architects break strategy into critical capabilities, roles, structures and decision rights.

Summit’s organization blueprint process has been the fastest-growing offering in the firm due to the need to establish organization clarity early in the investment cycle. Growth-oriented organizations should always examine potential changes that can enable continued growth.

You cannot simply fire, assess and hire your way to delivering on a VCP. Efficiency and effective scaling are key to profitability, so consider new organization models and designs to help maximize talent and productivity.

Be proactive on integration

An insufficient integration plan is one of the most common reasons why acquisitions fail to capture expected value. Sometimes PE funds are overly focused on maintaining a friendly, hands-off relationship with add-on acquisitions and management teams, but they also need to deliver results quickly.

It’s critical to identify a future-state organization design and operating model as investors seek new deals. Complexity can hamper decision-making and value creation, so it’s important to be intentional with integration to realize synergies.

Platform companies can achieve successful integration sooner with a proactive organization plan that clarifies strategy and operating model to eliminate ambiguity. Ensuring overarching clarity on organization design helps put the right people in the right roles to execute the investment thesis during integration and beyond.

Dan Hawkins is founder and CEO of Summit Leadership Partners