Star search: Portfolio company hiring

“I don’t know if the CEO is going to make it. I am going to give her a few more months to turn it around.”

“For one of my portfolio companies, I have had to change the CEO three times in five years; company performance is significantly lagging expectations.”

“The CEO was a disastrous hire. He was a terrible culture fit; we didn’t do a good job of assessing him.”

I hear similar horror stories from private equity professionals on a weekly basis. Fortunately the solution to these issues is easy. Private equity firms need to view hiring as a deliberate, strategic, and rigorous process. This will enable firms to hire “rock stars” who will drive phenomenal portfolio company performance.

Struan Scott

Consider the following 10 commandments to achieve human capital success:

1. Hire a senior resource dedicated to human capital issues. GPs embrace creating centres of excellence for IT and Procurement. The same should apply for HR 
Human Resources isn’t as easy as it sounds. Often portfolio companies do not have the resources to hire and develop world class HR talent. Some private equity firms have hired former Fortune 500 chief human resources officers. Others have hired former senior retained search professionals. And some firms have a COO skilled in HR who works closely with portfolio companies. Best in class firms leverage this HR expert to lift the performance of the executives and HR leads within the portfolio companies. Best practices will often be shared across companies informally or through regularly scheduled events. They also drive improved performance through better organisational design, compensation, executive coaching, hiring, etc.

2. Before you launch a search for an executive, develop a clear understanding of the critical drivers of success
Determine which sort of leader is appropriate for this stage of your business. For example, for a turnaround a command and control style might be more appropriate than an empowerment leadership style. 

What is unique about your culture? What sort of executive will be effective? What sort of person will be motivated to tough out the hard times? 

Develop key metric driven objectives that the hired candidate will need to achieve in the next 24 months. Understand that just because a candidate has delivered similar objectives in the past does not mean they will be successful at your company – leadership acumen and cultural fit are crucial.
When you have hired your candidate, use the key drivers of success to accelerate a quick start and monitor progress.

3. Ensure all key stakeholders agree on the key drivers of success 
Sponsors as well as key levels of management should agree what a great candidate will look like before you start your search. This is particularly important for club deals.

4. Develop a system to track the performance of each senior level search conducted at every portfolio company and adjust your hiring strategies accordingly
I recently spoke with two of the largest private equity firms about their approach. One tracks the type of search and the fee charged and they are noticing they have been awarding searches to a recruiting firm that charges the lowest price even though the performance of the executives placed has been terrible. Another has been tracking the number of searches each recruiting firm has done and they have been awarding searches based on the number of searches previously awarded even though the performance of the executives hired has been woeful. 

5. Avoid getting burned by retained search firms. Key questions to consider: 
Does the firm show you their most senior partners and “bait and switch” with junior resources? 
Does the search firm view this search as importantly as you do?
What is the firm’s closure rate? Some of the best known search firms only successfully close around 80 percent of their searches. 
How quickly do they close searches? 
What other  private equity firms have they worked for? Reach out directly to these other firms for validation of value provided by the search firm. 
Does the firm offer flexible pricing based on their and/or the executive’s performance? 
Do they listen? What is their process for understanding your portfolio company’s strategic business objectives and culture? Many search firms will take your position description, tell you they know what you need, disappear for months, return with some candidates, and tell you to pick one.
Do they truly conduct original research? Some will tout their large database and research capabilities only to end up just recycling resumes. 
How do they attract candidates? Don’t just go off the perceived status of the firm’s brand. 
Can they demonstrate a combination of science, art, and resources in their approach to assessment? What are their assessment strategies? Don’t rely on people who say “Trust me – I have been interviewing for 30 years.”  

6. Be thoughtful and strategic about how you interview candidates. “Gut feel” doesn’t usually work
• Craft behavioral interview questions to understand:
• How the candidate will meet key objectives for the role
• Cultural fit
• Track record and how it was achieved (e.g. have they always had a strong brand name and resources to help them)
• Motivation
• Potential derailers (e.g. pressure from family and friends not to relocate)
• Create a feedback process – once the candidate has been hired, look over your notes to see trends in how good and bad hires answer questions. 

7. Ask your finalist to present their plan for how they will meet the key objectives for the role. If you don’t like the plan, don’t hire them 

8. Be thoughtful about references
Combine references provided by the candidate with “blind” references. Ensure the people providing the references understand the key objectives for the role and the company culture. Talk to supervisors, peers, reports, clients, etc. 

9. Continue to assess your finalist
Be wary if your finalist demonstrates high ego needs. Pay attention to how they negotiate their offer. If they are selfish and overly demanding, you should walk away. 

10. Don’t underestimate the importance of executive coaching
A private equity human capital-focused operating partner recently shared that the COO at one of his portfolio companies performed very poorly for the first year. The COO overanalysed everything and couldn’t make a decision. The operating partner started coaching the COO. He also guided the CEO on the best way to manage the COO and in a few months the COO became an exceptional performer. 

If you use the same level of rigour in hiring as you do when purchasing companies, your hiring success can only improve. The right human capital strategy can be the difference between a fair return on investment and an exceptional one. 

Struan Scott leads the private equity practice at Morgan Samuels, a human capital consulting firm focused on retained executive search. Struan can be reached at sscott@morgansamuels.com