Talent in transformational SMEs: developing the right team should be every CEO’s top post-investment priority
14 February 2019
Pascal Wittet, Partner in our Private Equity team, looks at the “people” challenges rapid growth can bring for small businesses
If you’re a Founder or CEO of an SME looking to take on private equity investment, you’ve clearly got big plans for your business. Private equity involvement is a choice ambitious management teams make to help effect rapid and often radical change and achieve their growth plans.
In the same way that the business will look very different in five years’ time than it does at the point of investment, often so does the senior management team. That process will bring “people” challenges - as the business evolves, so too will many job roles. New skills will have to be developed or brought in. Managing that transition will be key to implementing the company’s vision – but it’s also one of the biggest challenges CEOs of small businesses will face post-investment.
Obviously, as the business adapts and grows, so too will staffing requirements but this is more than simply about more “bums on seats”. The first thing to note is that the CEO’s own job description will undergo a transformation. They’ll be at the helm of a far bigger ship, but not only that: there will be a far greater emphasis on pursuing strategic direction, not just the day-to-day running of the business. To do that, delegation will be key, and the CEO will need to have confidence in the calibre and breadth of skills sets of his or her immediate core team.
New roles – even an entire new management layer – may need to be created, such as dedicated HR, Operations, Marketing or Finance functions, which many SMEs may not have felt they needed (or could afford) up until this point. This will mean promoting internally or hiring externally – either of which will have an impact on existing staff, so it’s important to be open with them about what’s happening and how this will affect them.
Evolution sparks re-evaluation
At this point, many CEOs find that re-assessing the performance and potential of the existing senior management, their strengths and weaknesses, is a constructive exercise to underpin the stability of the team structure. This is not so much about evaluating whether they are immediate promotion material (though that may come into it) - it’s principally about ensuring they have the requisite skills for the job now in hand and that they will be able to grow professionally along with the business.
The reality is that an owner-managed business with 30-40 employees is a very different beast to a post-investment organisation. Post-investment, for example, plans may now realistically include: looking to become two or three times bigger and targeting far greater market share, expanding into new markets, rolling out new products, making acquisitions etc. The pace of change will, often, be relatively fast, and it needs to be, in order to maintain momentum. For many this is an exciting and rewarding time, but for others, it can be difficult to manage. Unfortunately, not everyone is always willing or able to come on that journey.
At Connection Capital we provide the tools and support our portfolio companies need to get to grips with that re-evaluation process. At our recent “CEO Retreat” event we conducted an interactive session in which CEOs used a commonly used management talent assessment tool (the “nine-box model”) which plots current performance against future potential to help them visualise where individuals’ strengths lie and where they would like them to be in five years.
CEOs found plotting this objectively on paper helped crystallise their thinking, ultimately yielding clearer decision-making and enabling them to focus on the people agenda and how to get the best out of their team.
Facing up to some honest conversations
Exercises like this should lead to positive discussions about personal career development and pro-active plans to enhance individual prospects within the team. Where underperformance or concerns about future potential are identified, CEOs essentially have three choices: to try to develop the individual, change their role or, if necessary, replace them with stronger candidates. All involve honest conversations and there is often a lot of reticence here. Understandably so. Tough choices might have to be made but the aim should be, wherever possible, to create a positive outcome for all concerned.
For example, individuals who are struggling to cope with the new demands placed on them by this transformational change often welcome the opportunity to discuss their future in a pro-active and constructive way. We’ve seen instances where this kind of process has opened the way for personnel to be moved to other, more suitable roles, enabling both them and the business to flourish. Similarly, gaps in skills or knowledge can be filled through appropriate training and mentoring, but it’s best to do this sooner rather than later before problems become apparent.
Transparency and communication are vital for buy-in
It’s important to be clear about what people’s roles, responsibilities and goals now are – especially if they are existing team members where job descriptions and organisational structures are changing. As Mark Hepburn, CEO of portfolio company 23.5 Degrees Ltd, a rapidly growing UK Starbuck’s coffee franchise, puts it,
“In owner-managed SMEs, it’s often ‘all hands on deck’ with management wearing many different hats. Post-investment, if an ambitious business plan is to be achieved, there has to be much more rigid structure. Now it’s important to make sure every peg fits the right hole, so defining roles and assessing individual capabilities is vital.”
Transparency and communication are key to getting buy-in, which in turn is essential for achieving the company’s vision. For staff at every level, understanding their place in the team and the positive role they can play in its success is a great motivator. Conversely, no-one likes uncertainty, nor do they respond well to having the goalposts moved without being informed. Failure to bring people along on the journey through mis-managing these sensitive issues, rather than because of individual shortcomings, would be a great shame.
At the end of the day, private equity investors are buying into the management team, led by the CEO. While appraising talent development is a very valuable exercise at the point of investment, it should not just be a one-off which is then forgotten about. The process should be regularly repeated as the business evolves. Ultimately such analysis can also help identify gaps in the organisation or in the team’s potential which is critical for succession planning if the CEO is seeking to exit at the same time as the PE firm.
Summary: Looking at the big picture
When it comes to post-investment talent management, immediate hiring requirements often need to be addressed to fill obvious gaps, but that’s just part of the bigger picture. The skills and experience of the incumbent team have helped the company become successful thus far – but do they have what it takes to take the business to the next level? CEOs need to be asking what support good performers need to become high achievers? Could those who are struggling to adapt benefit from more training or do they have valuable expertise that could be deployed elsewhere in the business? Are internal promotions or external hires the best move? And what if individuals haven’t bought in to the company’s future vision and strategy and aren’t willing to do so?
Data from a study undertaken by Drax in 2018 shows that the best-performing PE investments get to the answers to these questions and make the necessary changes around a year before average-performing investments. So, for a CEO and the Board, it is not just about going on that journey of talent analysis and optimisation, it’s about how soon you start and how focused you are on getting there quickly.
5 top team talent management tips for CEOs
- Assess performance and potential of core team objectively. Using a tried-and-tested talent analysis framework such as the “nine-box” talent and succession planning model can help give shape and rigour to this process. For a really objective view use an independent management assessment centre.
- Be open with staff about where they are now and talk about their future. This is essential for finding solutions to problems and motivating them to continue to be champions for the business.
- Create accurate, detailed job descriptions and very clear accountability – so that everyone - especially the current team who are witnessing major structural changes – know exactly what they are accountable for delivering.
- Engage staff with your vision before explaining changes that will affect them. After all, it’s not just hands and heads you need, but hearts too
- Get another perspective - use your chairman, non-executive director or another trusted mentor to help you work through your people plan
Portfolio business case study: 23.5 Degrees Ltd
Team building ahead of the curve
When Starbucks franchisee business 23.5 Degrees Ltd received £5.6m in growth capital from Connection Capital it had a bold target: to go from 13 stores to 150 within five years.
To achieve that goal, CEO Mark Hepburn realised that he needed to visualise in detail what the business would look like at that point in the future, and that included how management was structured and what other personnel needs the business would have. Having done that, he then worked backwards, charting out the key milestones and management team ‘must-haves’ along the way, getting staff and the Board involved in the process.
His primary focus was on the key strategic management positions, such as the Operations Director. When deciding whether an external hire or internal promotion would be more suitable, he had to balance a number of competing pressures. Were key members of the existing team ready to step up? Would they be demoralised if one of their peers was promoted at this point? How would they feel about an outsider being brought in? For a company that prided itself on offering real scope for career progression, it was important that staff felt they had clear opportunities to climb the ladder.
With the backing of his Chairman, Mark decided to bring top-level expertise into the role, from whom his existing team could learn and develop, giving them the chance to aim for promotion to the next management tier when they were ready to do so. “We realised we needed to recruit ahead of the curve, rather than behind it, as small businesses are so used to doing,” he explains. “The same goes for existing talent management.”
Being open with the incumbent team about rationale for this step and how it would ultimately benefit their career prospects was vital.
“Our approach has enabled us to maintain stability within our team, so that everyone could be excited about our journey and achieving our goals,” says Hepburn. “Without that stability, the risk is that people just focus on the here and now, they don’t see the big picture or that they have an important place within it and you risk losing them.”
He adds, “Businesses like ours need to deliver – for customers and shareholders but also for the people that work for us.” Three years on and 63 stores from that initial injection of capital, that’s exactly what 23.5 Degrees are committed to doing.