Operating Partners have the most difficult job in Private Equity. They should facilitate transformational change post-deal, but without formal authority. Our experience shows that those who are most effective use fact-based transparency and social proof as levers of influence to facilitate voluntary change.
Read more in this month’s InFocus.
Kind regards,
Andros Payne
Managing Partner, Humatica
Lost in translation – the art and science of making your plan, their plan
How operating partners effect organisational change without formal authority
Pressure for driving returns continues to increase. As a distressed asset investor recently complained, “even for complicated carve-out deals we have strong competition and high multiples”. No surprise that many operating partners have been recruited into funds to sweat assets post-deal. However, this is a tough job which needs to span the transactional world of the deal-maker and the process-driven ethos of company management. There are no easy answers to master the delicate balance. However, the most effective operating partners have a remarkably simple secret of success.
The Challenge
A common denominator across all funds is that to be successful, the operating partner model must translate the investment plan into concrete actions in the portfolio company organisation in order to realise improved performance. Until front-line sales reps, product managers, or purchasers change their behaviour, financial gains will be left to chance and timing. And, increasingly sophisticated buyers are not willing to pay a premium for unsustainable gains.
So, how should operating partners facilitate the needed behavioural change in the portfolio? The challenge is great. As an operating partner it is difficult to get actively involved in the operation decision-making as this can jeopardize management’s accountability. Like senior executives, operating partners have to work through layers of management to get change to happen on the front-line. Having helped sponsors with this over the past 12 years, some useful lessons for managing the transformation have become clear.
Create fact-based transparency
The foundation for beginning a transformation process is fact-based transparency that establishes a case for change and facilitates a productive discussion on improvement areas. However, this is particularly difficult with behaviours and management practices. Everyone knows they are critical, but there are no accepted standards and practices are often subjective in nature.
Humatica’s altus service has proven effective in benchmarking the specific organisational behaviours and management practices which drive value creation and the ability to adapt. An employee survey and structured interviews are used to objectively assess best-practice behaviours and management processes in the context of the full-potential plan. Since management practices are as diverse as the managers who define them, there is great benefit in getting fact-based transparency and identifying the gaps to best-practice. Without hard-facts, its difficult for operating partners to drive a dialog on soft-factor changes in the organisation and leadership to grow value.
Make your plan, their plan
Given the communications and change management challenge of a buy-out, it is sometimes hard to remember that investors, managers and employees all share the same basic goal of having a healthy, profitable and growing company. The challenge at all levels is therefore to translate this common goal into relevant objectives and measures among front-line staff. Top-down command-and-control can work in the short-term and in times of corporate stress, but voluntary acceptance is the only way to get long-term sustainable change that drives growth – an often over-looked truth.
To get buy-in for organisational change, a fact-base is necessary, but not sufficient – as many frustrated consultants will attest. Voluntary acceptance, requires a collaborative approach. Change must come from those who will implement. And, they require social proof from respected peers to build commitment. The active involvement of groups of managers and employees in defining necessary measures is therefore a pre-requisite for implementation success. Often times, a qualified neutral third-party facilitator, like Humatica, can accelerate management consensus on the issues and remedies. If you don’t have a strong fact-base agree implications with a group of managers to get their public commitment, “it ain’t going to happen”.
On the other hand, coupling hard-facts with a group vetting, has a miraculous effect. People find it nearly impossible to discount facts and neglect truth in groups. And, once a public commitment is made among respected peers, it is hard to go back on promises without losing face. The right approach makes transformation not only sustainable, but also fun. And, that is something MbO executives and sponsors can bank on.
