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One of the consequences of more competitive deal markets and more money in private equity is the increased use of consultants – not only pre-deal during due diligence, but also post-deal, bringing-in expertise or manpower to accelerate performance improvements.
In general, private equity has a rigorous vetting approach to hiring specialist advisors for clearly scoped projects. To be engaged, a consultant must first get approval from the fund, and then by the company management. These hurdles are high. In addition, many mid-market buy-out managers have not previously used consultants, or if they did, they were one-man-bands, often without international experience. The price for quality can be a barrier. Also, unlike most corporates with consulting budgets, cash-conscious PE doesn’t leave much for consultants. And, if so, every project needs to be justified on its stand-alone cash return. It’s a harsh environment for consultants – but invigorating. Things happen.
Despite PE’s rigor, we often see mistakes being made with regards to consultant selection – in particular for organisational effectiveness topics in the portfolio.
The big international blue-chip consultancies deliver deep industry experience, market and strategy competence, and the pedigree needed to give lenders confidence. They play a key role. However, their internal structures and management processes make general management consultants unsuitable for addressing organisational aspects, where real-world leadership experience is essential. In addition, they are constrained from addressing key leadership topics by not wanting to bite the hand that feeds them. General management consultants are clearly not fit-for-purpose for organisational topics.
Executive search firms are also frequently engaged to go beyond the search remit, and consult on broader organisational and cultural topics. This brings-up different challenges. They have an inherent conflict of interest with their core search, selection and placement businesses. At a minimum, this rightfully brings into question recommendations that have an impact on leadership in general, or specific leaders.
There are also a large number of soft-factor, culture and coaching consultants active in private equity. With their backgrounds in psychology and social sciences, they serve an essential purpose in helping to nudge leadership behaviour. But, they lack a deep understanding of the mechanics of strategy, business processes and value growth.
Each of these established consulting disciplines is a valuable specialisation. However, none of them brings the holistic understanding of management processes needed to drive organisational effectiveness (OE). For this reason, many tricky OE projects, like operating model re-design and implementation, often fail to deliver the desired results.
The right answer is to select a specialist consultant that has deep, line-management transformation expertise combined with blue-chip strategy experience. One which has a deep appreciation for the critical soft-factors, but is unencumbered by any potential conflicts-of interest with leadership. Only then, will the sponsor and portfolio management get the needed objectivity, credibility and collaboration to ensure buy-in and accelerate organisational change.
This article originally appeared as the HumaticaCorner column in Real Deals magazine. The PDF version of the article can be downloaded here.