Navigating Out of the Trough of Disillusionment

This is the second of a quarterly interview series for private equity investors and portfolio company managers, developed by AlixPartners SVP Connor Lott. In this article, Connor talks to Partner and Managing Director Ted Bililies about the importance of ensuring employee buy-in for successful value creation plans, how execution fatigue can set in, and what leaders can do to navigate their teams out of the “trough of disillusionment.”

Ted, thanks so much for sharing your insights with us – can we start with the importance of employee alignment and buy-in to a value creation plan? Was Vince Lombardi right when he said, “Individual commitment to a group effort – that is what makes a company work?”

Connor, you’re exactly correct. Historically, value creation plans (or investment theses) were largely about financial engineering and broad-stroke operational improvements. Unfortunately, many remain that way. However, with the presence of many new challenges in the private equity environment, the “human factor” is taking center stage as a key lever of value creation.

What are some of the pressures that are making investors focus on talent, leadership and culture as primary drivers of value? Interest rates make the cost of capital more expensive and raise the bar of performance. Hold times have been increasing, which pressures compensation and equity models. And the labor shortage continues. We have 4 (sometimes 5) generations in the workforce which really challenges an organization’s need to attract, develop, and retain good people. 

So the answer to your question is a big, unqualified ‘Yes!’ The most successful private equity firms are building in the human capital plan during the due diligence. They are identifying the specific value creating roles and making explicit the key objectives and outcome metrics. This allows them to assess the incumbents, ensure their alignment, and plan for their succession since strong players rarely stay in the same role for long. We are increasingly involved in not just assessing talent at the outset of an investment, but periodically during the hold time. This allows us to conduct specific alignment exercises particularly with the executive team and to ensure that the company has robust succession plans which are a great way to identify and promote younger talent that hasn’t yet reached the “star” level.  

From your perspective – when should leadership become a “topic at the table” for sponsors and company management? Is it during the value creation execution itself or before?

Talent, leadership and culture should be part of the discussion from the inception of a potential new deal. The very best investors understand this. I’ve had the privilege to work closely with the founders of several iconic private equity firms and each of them will say that exercising judgment on people – who they invest in – in far and away the most critical thing they do. So fundamentally discussion of “who” is an ongoing discussion from the very beginning of a deal.

Since so many of our clients and companies are going through transformations, leaders neglect the topic of talent at their own peril. People make transformations successful – or not. Again, there are studies clearly demonstrating that companies that begin transformations by identifying the key roles and fill those roles with the right people – not always the go-to stars – and who have a process of training and developing successors, are far more successful and sustainable in their transformations than organizations that view it as purely a financial exercise.

For PE-backed companies and management teams, borrowed capital means abbreviated timelines and an intense focus on performance – but I must imagine that at some point that can result in fatigue and disillusionment. What are some symptoms that those breaking points are possibly being reached?

You’re spot on with your question, Connor, and in fact it has gotten worse because hold times have increased so much in the last few years. As we reported in this year’s Ninth Annual Private Equity Leadership Survey, the intense focus and pressure on performance has actually gotten measurably worse with an average hold time now of 6, maybe 7 years. There are things investors can do to prevent or slow fatigue and disillusionment – like rotating talent and making sure that career and skill development is an active feature of the organization. In terms of symptoms, you of course need to watch for increased turnover, lower scores on engagement surveys, and fill rates for key jobs. Companies should do exit interviews, of course, and really listen to what employees are saying as they exit. The best firms have started doing “stay interviews” to understand key employees needs to remain with the organization and to make sure that they are met.

Once you’ve diagnosed that teams are in a “trough of disillusionment” – what are some ways you advise CEOs and management teams to climb their way out?

There is no substitute for honesty, so one aspect of the executive coaching we do with leaders is to help them call a spade a spade, meaning, tell the truth to employees, tell it like it is. With everyone on social media, there’s no where to hide anyway! CEO’s need to name the problem and to take responsibility for it. In terms of climbing out, people need to be listened to but they can also be asked to join in the solution. Employee-generated solutions to morale issues are great ways to turn around lower morale. This will look different at different organizations but this is where a great CHRO and CEO can look to make the values and professed shared beliefs really come to life, in other words, to walk the walk. Concrete changes that make a difference in employees lives – for example, more frequent job rotation and training, recognition programs, affinity groups, etc. – are all ways of demonstrating ‘people as well as profits’ at a private equity-backed company. 

 I will also add that private equity is finally starting to move to a place where they are sharing equity beyond just the C-suite. Individual wealth creation used to be only for a select few in any investment. Now, we are seeing firms like KKR and Blackstone sharing equity more broadly, so employees outside the C-suite can accumulate wealth. As you know, here at AlixPartners we’ve put an equity-sharing plan in place several years ago for this very purpose. It just makes sense, and is an effective antidote to fatigue and disillusionment.

One of my prior interviews was with Morty Singer of Traub Capital Partners, and he spoke of companies that are “cultural wastelands” which I found intriguing. As a leadership and talent expert, have you encountered these “wastelands”? Does that make the value creation journey especially perilous?

It does indeed! Again, some of the best private equity investors in the world have told me that culture isn’t just important, it’s everything. Leadership and culture are two sides of the same coin so, if you are in a cultural wasteland, then you have a serious leadership problem too! Enter Gen Z. We know younger workers (and older ones, too) want to work for firms that have strong values and support the causes that they (workers) deem important. They want to work for firms that care about their health, including their mental health. And they want to work in firms and organizations that are diverse and inclusive. This is true not only in North America but in EMEA as well.

Now there’s nothing about the phrase “cultural wasteland” that sounds like the sort of environment I just described!  Many of us are old enough to remember a time when the primary expectation was to put your head down, work hard, and maybe ask for a raise or a promotion -- in several years. Your paycheck was your reward. We are so far away from those times of course that it is laughable. I would go so far as to say that I don’t know how a firm without a strong culture can really survive, at least not in the long term. With the unemployment rate fixed at 3.8% apparently, labor will be in short supply for some time to come. There is simply no better way to attract and retain talent than through a strong culture and, of course, the opposite of that statement is also very true.