Getting to the Heart of Private Equity
Liam Forde
Is Private Equity (PE) a tried and tested method for unlocking value? It attracts highly trained, talented and motivated people, so it may surprise you to find out that more than one-third (37%) of PE investments fail to deliver more than the original investment. Given that median returns in PE are about 13% over the long term, getting it wrong less often is as key as optimising the investment in every one of their portfolio businesses. Private equity deal teams are famous for providing in-depth, insightful analysis. What is often missed is that picking the right leadership team and creating the right culture is as important as designing the right strategy. However, deal teams are often less well-trained and less focused on the people elements of the deal. The head rules.
Peter Drucker famously said “culture eats strategy for breakfast.” Does this apply to Private Equity?
More and more today’s CEOs recognise that culture is key. They realise that getting teams, culture and leadership right will dramatically improve the speed and chances of success. Culture work (here meaning how we work together, as teams, as leaders and as employees) has a good ROI.
So what have we found at The Zone?
Over the last 20 years, we have worked around the world, in over 30 countries, designing and delivering high-performance workplace cultures. We have been industry agnostic, which has given us access to and experience with a wide variety of businesses and markets. We have worked with more enlightened Private Equity firms, with their deal teams, in portfolio businesses and with their leaders, pre and post-deal.
Culture acts as a stabilizer and an accelerator. It’s the safe platform for people and teams to grow, improve their capacity to perform, innovate and be resilient. This was graphically demonstrated with a deal we supported.
Our PE client in the Quick Service Restaurants sector had invested $85M in an underperforming global franchise. Poor culture meant the customer experience was lacklustre and store cleanliness and performance ranged from non-compliant to average at best. Staff turnover was over 80%, meaning they were continually stretched to deliver any real consistency and they were burning cash recruiting and retraining. In the chaos of churn, managers were promoted too early and thrown in the deep end. The total financial impact of a ‘no care’ culture was significant.
Partnering with the Chairman and CEO, we first reset the Executive Team. The fish rots from the head, so without executive alignment and without them walking the talk, nothing we did would stick. We stopped investing energy in flavour of the month approaches. We asked the executives to leave, who were simply into head based management, command and control, or were in it for ego. If we wanted the employees to care, we needed leaders who cared.
We co-created a new mission, vision and strategy for the organisation using simple, relevant language and launched their new Values, a key driver of culture. We trained Culture Champions across the company and rolled it out across every store. Those Champions became the informal leaders of the business, and were the first to be promoted. They already lived and breathed the new culture, they were passionate about the business and had the trust of the staff. They led from the inside without power or title. Now the business was experiencing the collaborative advantage!
When people want to work together, when they care and when they are supported to do what is right, both for the business and the customer, you create the collaborative advantage. You unlock collective intelligence.
The outcome was a wave of innovation, dramatically improved efficiency and a real focus on quality. Service became something to be proud of. The smile came back into the service and delighted customers followed a lifted morale. People started having fun doing their job. They regained personal fulfilment. The heart returned to the organisation, and the spirit was alive again. The company began to grow again and outperform the market. Our client was able to sell early (within two years) at a great price (over $130M) because the culture had driven exceptional performance, attrition was low and the lead team was firing on all cylinders. It was a great story. Everybody won.
Culture alone did not create the success, but then again, neither did smart strategy. Whilst the food was great again, the service was better and pride the differentiator. Customers felt the difference.
The Zone’s work is most well known for high performance cultures, yet we cannot ignore vision, purpose, strategy or execution. We have to believe in our story. We call this The Zone Framework. It’s all interconnected. When teams develop strategy, we help optimise the human dynamics, we make it real. A team that listens to each other and honours the diversity of different perspectives will create a better outcome, faster. The ability to speak up when things don't ‘smell’ right (intuition) and not be judged or shut down is critical. Ego is not on the menu nor are hidden agendas or bureaucracy. Power plays quickly destroy creativity and engagement. We must also make room for personal brilliance, and acknowledge “superpowers”. Loudness or dominating the floor is not necessarily a sign of brilliance. Collective Intelligence needs nurturing to create competitive advantage. Finally, when teams execute, particularly under pressure, keeping them aligned, collaborating and in the zone of high performance is key. It’s like flying a plane--we are constantly course-correcting but with our eyes firmly on the destination.
The Research
Ensuring leaders are leading and not micro-managing nor building silos, is critical. Leaders need to build environments that inspire, empower and innovate, yet at the same time drive accountability. Delivering today, creating tomorrow and differentiating in-market are table stakes for leaders. Businesses today need to be lean, agile and customer-centric to survive and thrive. The Digital Revolution is disrupting every industry and every operating model. Transformation is the new normal. When there is change, culture is key.
BCG found that 90% of organisations that made culture change a priority during a digital transformation reported strong or breakthrough performance, while only 17% were able to accomplish strong performance without addressing culture. The case for making culture a priority was even more compelling in the long term: 79% of companies that invested time and effort into changing their culture were able to sustain their robust gains for three years or more. Not one of the companies that neglected culture were able to achieve such results.
Those numbers speak for themselves.
Over a decade of research in positive psychology and neuroscience has found that a culture of positivity, that prioritises ‘flow’ or ‘being in the zone’, has a significant impact on results.
The work of Harvard Professor Shawn Achor shows us that when our brain is in positive we are 31% more productive, 3 times more creative, 10 times more engaged, generate 37-50% more sales, are 23% less tired and 40% more likely to get a promotion. When primed for positivity even doctors make the correct diagnosis twice as fast. His TED Talk The Happy Secret to Better Work has clocked up 19 million views and counting.
In a 10 year study, McKinsey concluded that top executives reported being 5 times more productive when in flow. Culture is what makes it possible, and sustainable.
Happiness and high performance can co-exist. In fact, they do at the world’s most successful organisations. Get it right and you unlock employee engagement, customer engagement and performance. You unlock Collective Intelligence. So if you want to get it right more often, remember investing in the right culture is key.