Pressure to drive returns continues to increase. One distressed assets investor recently lamented: “Even for complicated carve-out deals we have strong competition and high multiples”. Another leading global fund manager commented: “The problem is that we have to buy companies that are already good today and make them great companies”.
It is no surprise, then, that many operating partners have been recruited to sweat assets post-deal. However, this is a tough job which has to span the transactional world of the deal-maker and the process-driven culture of company management. There are no easy answers to master this delicate balance, but the most effective operating partners have a remarkably simple secret of success.
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 improve their practices and change their behaviour, financial gains will be left to chance and timing. Furthermore, we see increasingly sophisticated buyers who are not willing to pay a premium for unsustainable improvement.
So, how should operating partners facilitate needed behavioural changes in the portfolio?
The challenge is great. As an operating partner it is difficult to get actively involved in day-to-day decision-making, as this can jeopardise management accountability. Like senior executives, operating partners have to work through layers of management to get change to happen on the front-line. Having worked with sponsors over the past 12 years, some helpful lessons for managing transformation have become clear:
Create fact-based transparency
The foundation of a successful transformation process is fact-based transparency. It’s needed to establish a case for change and facilitate a productive discussion on improvement areas. However, this is particularly difficult with behaviours and management practices. Although recognised as critical, they are otherwise subjective by nature and there are no accepted standards to drive objective transparency.
However, Humatica’s Altus service has proven effective in benchmarking the specific organisational behaviours and management practices that drive value creation and the collective ability to adapt. An employee survey and structured interviews are used to objectively assess organisational behaviours and management practices 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 to identify gaps to best-practice – in how sales, purchasing, innovation, HR and other processes are managed. In the absence of hard facts, it’s difficult for operating partners to drive a productive dialog on soft-factor changes in the organisation and leadership without descending into unproductive finger-pointing.
Make your plan, their plan
Given the communications and change management challenge of transformation, it is sometimes hard to keep in mind that investors, managers and employees all share the same basic goal of having a healthy, profitable and growing company. The task at all levels is 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 value growth – an often over-looked truth.
To get buy-in for 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 it, and they require social proof from respected peers to build commitment. The active involvement of managers and employees in defining necessary measures is therefore a pre-requisite for implementation success. Without broader vetting and agreement on issues and measures, it’s just too easy to pass on change and go for daily business. In this regard, qualified third-party facilitation can accelerate management consensus on the issues and remedies. If you don’t have a strong fact-base and 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 group confirmation has a miraculous effect. People find it nearly impossible to discount the 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. This approach makes transformation not only sustainable, but also fun – and that is something MBO executives and sponsors can bank on.
Andros Payne is managing partner of Humatica, a specialist consultancy in organisational performance and white-collar productivity