Founded by Henry Ford in 1903, the Ford Motor Company rocketed to success by mass-producing reliable, low-priced automobiles. When Henry’s son, Edsel, took the helm in 1918, he championed a different strategy for a new era. He sought to replace the Model T — iconic but outdated — with a more modern design geared to high-end and foreign markets, and later embraced compromise with labor amid the suffering of the Great Depression.

But Henry could not let go of Ford’s origin story, undermining his son at every turn. The result was declining sales and years of labor strife that left the company on the brink of collapse by the 1940s. It was only the efforts of Edsel’s son, the more forceful Henry Ford II, that saved the auto giant from bankruptcy.

In family enterprise, generational transitions often pit one narrative against another: tradition versus innovation, continuity versus change. Indeed, when older generations craft painstaking succession plans or build elaborate constraints into trusts or shareholder agreements, they are really constructing a story: about the values and life lessons that helped them succeed, and that they hope will do the same for their children. Younger generations, however, must often adapt this narrative to their own goals and values, along with the changing world around them.

Failure to reconcile conflicting narratives can spell ruin for a family business or the waste of a financial legacy, as it nearly did for the Fords. To avoid this fate, families need to think differently about the stories they tell.

The value of critical distance

Conventional wisdom holds that family heritage, like wealth and reputation, “belongs” to the older generation. In this telling, succeeding generations are merely stewards or caretakers. They are given an inheritance or entrusted with the family business — and then charged with not frittering it away or screwing it up. Framed this way, a legacy can feel more like a burden than a gift.

Of course, it’s not as simple as that. Research suggests that younger generations do value their family heritage, especially as a source of traditions more motivating than money alone, and are motivated to preserve it. According to a 2021 survey of 300 Canadian business owners by the Family Enterprise Foundation, nearly 90% of next-generation family business leaders believe it is important to preserve a legacy.

But younger generations also want something more from that heritage: a sense of purpose, a collective identity for the family, the seeds of new entrepreneurial gambits, permission to go their own way. And as our own research shows, next-generation leaders are uniquely positioned to find what they are looking for in the family story.

Older generations often identify closely with the family or the family business, which can actually obstruct key learnings from the past. Eager to protect the family’s reputation, they may downplay scandal or setback rather than learn from it. By contrast, our analysis of 94 family businesses shows that younger generations tend to have more critical distance from the family story. This lets them grapple with its difficult chapters and respond appropriately, whether by making amends for past misdeeds or by reforming business practices going forward. It also frees them to draw insights from their story that can fuel innovation and sustainability.

Legacy as a source of purpose

How, then, can the next generation build on their family legacy while recasting it as their own? Our research and experience suggest four strategies for next-generation leaders.

1. Seek out role models in the family story.

Some next-generation leaders hesitate to embark on risky new ventures outside the traditional scope of the family business. Locating exemplars in the family story can legitimize a new way forward.

One third-generation CEO used this approach to advance his vision for a more sustainable enterprise. Fredo Arias-King, head of Mexican pine resin producer Pinosa Group, had lamented the disappearance of Mexico’s ancient pine forests that threatened both the industry and the communities that depend on it. Then he stumbled onto the published speeches of his grandfather, company founder José Antonio Arias Álvarez, who had preached environmental stewardship. “I don’t think he could have known just how devastated the forest would eventually become,” said Arias-King, “but somehow my grandfather knew that planting trees would become extremely important.”

Affirmed by his grandfather’s words, Arias-King helped found Ejido Verde, a nonprofit that would later become an independent, for-profit enterprise. By making no-interest loans to farmers and communities, with pine resin as the means of repayment, the organization promotes reforesting through new pine plantations.

2. Forge an identity beyond the founder-entrepreneur.

It’s easy to revere the family’s wealth creator. For the two adult grandchildren of one founder-entrepreneur — a private equity pioneer who rose from poverty to become one of America’s richest people — that was the problem. They wanted their own children, beneficiaries of a generation-skipping trust, to know the person behind the legacy that would pass to them. So they engaged one of us (John Seaman) to probe beyond the classic rags-to-riches tale they had heard growing up.

The founder, they learned, was a gifted yet deeply troubled man. This more nuanced understanding enabled the two generations to have a frank conversation about the issues raised by their ancestor’s life: the obligations of a business to its workers and communities; the consequences of untreated mental illness; and the unfair burden often shouldered by women in wealthy families.

This conversation, in turn, led members of the fourth generation, all in their twenties, to rethink their roles in the family enterprise. One set aside her qualms about joining the family business and put herself on a path to succeed her father as president, but with a determination to nudge the company’s private equity portfolio toward impact investing. Another resolved to pursue her own entrepreneurial dreams outside of the business, rooted in progressive values that were in stark contrast with her great-grandfather’s. Still another joined the board of the family foundation, where she helped steer its grant-making toward her generation’s individual passions.

By seeing their founder-entrepreneur in human terms, the family’s younger generation was able to move beyond hero worship to forge their own identities — which promised to make them responsible owners and stewards of their ancestor’s wealth and the business that created it.

3. Reckon with past wrongs to find a new path forward.

Many families have skeletons in the closet — scandal or wrongdoing they have long concealed or downplayed. (Henry Ford’s history of antisemitism and violent confrontations with unions are examples of this.) The willingness to confront these darker chapters, it turns out, can be a powerful motivation.

That was the case for the Reimann family, owners of consumer goods conglomerate JAB Holding Company and one of Germany’s richest families. The three adult children of Albert Reimann Jr., who ran the company in the 1930s and 1940s, knew they had been born of their father’s affair with an employee, Emilie Landecker. They also knew that Emilie’s Jewish father, Alfred, had been murdered by the Nazis. But it was not until 2019, when they commissioned research on the company, that a more sinister secret emerged: their father and paternal grandfather were themselves ardent believers in Nazi race theory who abused forced laborers.

It was the younger generation — Albert Jr.’s grandchildren — who were most adamant about reckoning with this secret. “When I read of the atrocities…sanctioned by my grandfather, I felt like throwing up,” recalled Martin Reimann. “I cannot claim that I was very interested in politics before…But after what happened, I changed my mind.”

At the insistence of Martin’s generation, the Reimanns paid compensation to former forced laborers and their families. But they did not stop there. They refocused their family foundation on combating antisemitism and strengthening democratic institutions. They also renamed the foundation in honor of Alfred Landecker, making him the narrative driver behind the more fundamental change they sought. Far from an isolated act of corporate atonement, then, this was an attempt by the next generation to use lessons from their family heritage to build a more just future.

4. Leverage the family story as a source of competitive advantage.

For some family business entrepreneurs, the next venture can begin with a step back. So it was for British restaurateurs (and sisters) Helen and Lisa Tse, whose family heritage empowered their rise.

Their grandmother, Lily Kwok, had emigrated from Hong Kong in 1956 and settled in Manchester, where she and her daughter Mabel built one of Britain’s first Chinese restaurants. But the business eventually went bankrupt, the victim of racism and Chinese gangs.

The story might have ended there. Instead, Helen and Lisa picked up the threads of their family narrative and carried it forward. Abandoning successful professional careers, they established their own Manchester restaurant, Sweet Mandarin, in 2004. But the restaurant only took off when Helen published a best-selling memoir about her grandmother. With this narrative platform, the sisters branched out into other endeavors, like cookbooks and cookery classes, tied to their own life stories.

For the Tse sisters, family heritage proved to be a source of competitive advantage. By recovering an immigrant’s tale with universal appeal, they gained acceptance outside of their own ethnic communities. And by situating themselves in an entrepreneurial tradition spanning three generations, they created a sense of longevity that evoked quality and trustworthiness, even as they also innovated new products alongside recipes inherited from their grandmother.

Family legacy is not a monologue; it’s a dialogue, a collective story that belongs to the whole family. When families think of legacy in these terms, they empower younger generations to harness that story to their own purposes, drawing strength from their elders. Legacy, in short, becomes not a burden but a blessing — one that can help families sustain wealth and purpose long into the future.

This content was originally published here.

The post How to Build Upon the Legacy of Your Family Business — and Make It Your Own appeared first on Matt Dallisson Global Executive Search | Leadership Consulting.

Two years ago, I wrote a Harvard Business Review article about how middle market companies were under-served and over-charged for capital transactions. Nowadays, with all the turbulence in financial markets, a new kind of squeeze is on for mid-sized companies.

For the past year or more, all kinds of economic warning signs have been flashing for business leaders — rising interest rates, falling stock prices, the growing risk of recession. In times like these, cash is king. You might need it to protect yourself in a storm; or, you might want cash because you have a chance to play offense.

But how will you line up those funds? According to the 2022 Annual U.S. PE Middle Market Report, Pitchbook, investments in middle market companies from private equity firms has drifted downward over the past 10 years while lending to middle market companies has fallen nearly 60% over the past year.

What’s more, you cannot rely on commercial banks for your lending needs the way you probably used to do. Since 2014, the role of banks in leveraged lending has declined from about 80% to under 10% of all leveraged loans. And the trend of non-bank predominance in middle market lending is growing ever stronger.

However, even the private debt market of specialty lenders, business development companies (BDCs), family offices, and non-bank lenders now faces a big test amid 2023’s uncertain economic outlook. After nearly a decade of rapid growth, private debt could be in for a rude awakening as higher interest rates and more restrictive covenants threaten companies’ abilities to service their borrowing costs. These factors in turn force investors to think twice about their private debt exposure. Meanwhile, aggressive monetary tightening and the very real prospect of a global recession could also dampen the deal pipeline for alternative lenders, much as it has already done for private equity capital providers.

Yet, on the bright side, investors are raising large amounts of new debt and equity capital. In early April, The Wall Street Journal reported that Assured Guaranty Ltd and Sound Point Capital Management agreed to join forces in a $47 billion corporate debt fund to take advantage of the high demand from investors who want to put their money into private debt hoping for higher yields than the stock market is providing. Big-name PE firms also remain bullish on their private credit strategies. In December, private equity firm KKR was urging its limited partners to increase their allocation to private debt, and Blackstone’s credit arm has more than doubled its AUM (assets under management) over the past five years.

And on the equity side of the house, middle market PE fundraising remained steady at $133 billion in 2020, 2021, and 2022 — up from an average of $95 billion in 2017 and 2018 according to Pitchbook’s 2022 Annual U.S. PE Middle Market Report.

What Does This Mean for Middle Market Companies?

Middle market companies — typically those with between $25 million and $1 billion in annual revenue — can no longer rely on past capital providers to get the best deal. The right deal, with terms that benefit you, may be with an equity investor or lender you don’t even know yet.

Recently, a senior executive of a national accounting firm (40,000 clients with $50 million and under in revenue) told me, “One of my clients, a merchant cash advance company is doing a debt securitization. They were paying their investors 3.5% interest on the securitization notes last year. They are currently doing a deal at 8.5%. Thus, when they advance money to business owners, the cost to those business owners will be going up.”

The bottom line is that you are going to be paying more to raise capital for the foreseeable future. The likelihood is that you will be under-served and over-charged for capital in the coming months or years. And, this will affect many companies just like you. According to the National Center for the Middle Market, on average approximately one-third of middle market companies will seek a loan in a given year.

Three Ways Mid-Market Companies Can Go Hunting for Funds

If you need to secure funding for your business, where should you begin your search? Try these three avenues:

Your circle.

You can start by looking for the best deal you can get from your known circle. But the “usual suspects” may not come through for you. With pandemic impact, inflation, and general economic turmoil on the horizon, that old gang of capital suppliers has changed. Your local commercial bank, private equity firms, and many non-bank lenders may no longer be anxious to work with you, but you can try shopping around.

Hired help.

If you’re too busy running your business to comparison shop on your own, you can hire someone to shop for you. Hordes of commercial loan brokers and M&A advisors have sprung since the dawn of the pandemic to help middle market companies wade through the alternatives. You’ll have no trouble finding thousands of commercial loan brokers ready to charge you 2% to 5% to help you find loans. And equity financing intermediaries changing anywhere from 4% to 10% for capital raising abound.

Networks & online marketplaces.

Find the best deal through a tech-enabled marketplace. While nearly all lenders — including banks — offer some sort of online solution to your financing needs, several new tech-enabled marketplaces have sprung up to help. Shopping tools like Opus Connect and Axial are equity fundraising networks. Cerebro Capital lets you submit your loan application to a pool of nearly 2,000 lenders split roughly 50-50 between commercial banks and non-bank lenders. Cerebro charges a fee for the use of their tool beyond whatever rate you pay to the ultimate lender. The same is true for RealAtom and iBorrow, both designed for commercial property financing. If your financing needs are larger ($50 million or more), you have many advisors and funders to choose from such as MidCap Financial and Alliance-Bernstein.

Know What You Want and Shop Smart

While any of these three avenues can get you the funds you need to grow, there’s more at stake than the money itself. Terms, ease of process, and maintaining control of your confidential information and the timing of the process are important to any successful deal. Circumstances vary and the trade-offs are real, but whatever route you follow, try to:

Under the current circumstances, getting a good deal on new capital is not going to be like it was during the past “cheap money” environment. But in many ways, navigating the new capital acquisition landscape is easier — the resources are often at your fingertips. You just need to remember to be realistic about what you can get out of a deal, use the best available data security to transmit it safely, and negotiate the terms you ultimately are willing to pay. Find a process that works for you — preferably one that is relatively simple and cost effective for you and your company.

This content was originally published here.

The post How Midsize Companies Can Access Capital in Turbulent Times appeared first on Matt Dallisson Global Executive Search | Leadership Consulting.

One of the sacred principles of change management is “stakeholder involvement,” i.e. engaging and including people who will be affected by the change in the process of making it happen. GE’s well known “change acceleration model,” or CAP, refers to it as “mobilizing commitment.” Kotter’s eight-step framework for change emphasizes doing this through “building a coalition” and “enlisting a volunteer army.” McKinsey has even done research to quantify the number of people who should be involved and concluded that at least 7% of employees need to own aspects of a major transformation.

But what if the process of engaging so many people in change actually slows things down instead of speeds them up? In my consulting experience, this is an ever-present danger in mid-sized companies, particularly those that place a premium on keeping employees fully informed about the business and foster a culture of “belonging.” When everyone feels that they have a stake in the company (which is great), they also feel that they should have a say in what gets changed. And since there’s no way to drive changes that satisfy everyone, the process of involvement either takes a very long time or creates decision paralysis.

Here’s a quick example: A tech company with around 1,800 people around the world was experiencing a slowdown in its growth. Based on input from strategy consultants, the senior team agreed that there was a need to increase the firm’s focus on selling a particular class of software to enterprise clients. As part of the culture of keeping everyone appraised of new developments in the business, the CEO discussed this strategic objective at an all-hands meeting, along with a general description of what this change might mean. In the weeks that followed, lots of people participated on teams — in Product, Operations, Sales, and Marketing — to develop more specific plans for increasing this type of enterprise sale. Since all the team members had a vested interest in protecting their jobs, budgets, and organizations, however, none of the plans included any ideas about what would be stopped or delayed so that resources could be shifted to the new focus. So, while everyone in the company knew that these enterprise sales were important, there was little actual movement in that direction.

Unfortunately, this is not an isolated example. A few months ago, I was talking with a business leader whose company needed to stop doing customer transactions in a certain country due to political and regulatory pressures. She said that they had assembled a large task force that was charged with creating a process for identifying customers who would be affected, the financial implications for the firm, and the technology support needed to “turn off” product access. However, the task force was struggling to reach consensus about what to do and how to do it. Sales was pushing to migrate larger customers so that their business would be booked outside the affected country, and they could retain the revenue, but Operations was concerned that this would require extensive workarounds, each one of which would need to be approved by the regulatory team. Product didn’t know if they could reconfigure all of their offerings in this way and wanted time to do an analysis. Meanwhile, Finance was trying to figure out the financial model which would determine the cutoff point of which customers should be migrated and which should not. In other words, they were stuck.

It would be easy to walk away from these examples thinking that high levels of employee involvement can be detrimental to managing change. Maybe it’s easier for one senior executive, such as the CEO, to just tell everyone what to do rather than have too many cooks in the kitchen. The real issue, however, is not whether to get large numbers of people involved or not — but rather how to get them involved, and what role senior leaders continue to play.

In the cases described here, senior leaders engaged many people in the early stages of shaping and planning change — a time when there is usually a need to make tough decisions. But the more people who are involved in making such decisions — each of whom will have different opinions and be affected differently — the more difficult it becomes to actually reach a conclusion. No matter how much of a “big hat” people will put on, it’s human nature to view decisions through the lens of whether they will be good or bad for you and your team.

To some extent this also is an issue of expectations. Getting lots of opinions and views early on is incredibly valuable. It enriches the discussion and opens up new possibilities. But there’s a difference between offering a view and being a decision-maker; and that’s where mid-sized companies with a culture of engagement can struggle. Asking many people to weigh in, provide data, and engage in discussion is not the same as having everyone be part of the decision. That needs to be done by a smaller team, usually the CEO and his or her executives. Then, once the decision is made, the larger group can proceed to figure out how to make it happen most effectively. Even then however, a senior person or team — either the CEO or an executive owner — needs to direct the execution since there will be lots of small choice points that also affect people differently. This was an issue in both cases. Everyone knew what had to be done in general — but figuring out how to make it happen required lots of decisions to be made about stopping current activities or making tradeoffs.

Principles to Keep in Mind If You’re on the Verge of a Major Change in Your Company

If you are contemplating major change in your mid-sized company — and you have a culture of widespread engagement — here are a couple of principles to keep in mind:

First, be very clear about whether you are engaging people for the purpose of providing input or for making a decision.

If you are intending to get to a decision, clarify ahead of time that the executive sponsor or senior leader will have the final vote, particularly if the broader team can’t reach a consensus. This is what eventually happened in the tech company that wanted to refocus on enterprise sales. When not much change occurred through the broad-based approach, the CEO worked with a few other senior executives and staff people to identify shifts in priorities for key groups and assigned them goals that supported those shifts. They also did some minor restructuring that put resources where they were most needed. While not everyone was happy with these changes, they accepted them as needed. In fact, several people said that these decisions should have been done much earlier.

Second, be sure that a leader or sponsor will continue to be deeply engaged throughout the change process.

This is what happened, somewhat dramatically, with the task force that was shutting down business in a certain country. Several weeks after hearing that the task force was stuck, I learned that they had disbanded the task force, set a date to stop doing business in the country, sent letters to their customers, and turned off the requisite systems. Done. No more debates. When I asked how this had come about, I was told that a senior executive had met with the task force and realized that the path they were going down would require thousands of hours in staff time, delay the “stop” date, infuriate regulators, and probably cost more than any possible revenue savings. So, she told them to just set a date in the next two weeks and get it done. Once everyone looked at it that way, it was a no-brainer.

Getting large numbers of people involved in change efforts is a critical element in change management. It widens the aperture of perspectives, generates a broader array of solutions, and increases the commitment that people have to doing things differently. Expecting a broad group of stakeholders to all put aside their personal and functional agendas for the greater good, however, may be unrealistic. So as a senior leader, don’t expect this kind of group to make tough decisions on their own. You’ll still need to do that, not just at the beginning, but throughout the process of change.

This content was originally published here.

The post Leading a Midsize Business Through Change appeared first on Matt Dallisson Global Executive Search | Leadership Consulting.

Growth equity has become one of private equity’s fastest-growing segments in recent years, but today’s market uncertainty has slowed that momentum: 2022 was a year of disruption. Investors faced a multitude of downside risks, including geopolitical tension, energy and food scarcity, rising inflation and interest rates, stock market volatility, and supply challenges triggered by the war in Ukraine and the legacy of the COVID-19 pandemic. At the present point in the economic cycle, there is no clear-cut path to expansion, profitability, or resilience.

This period of change should encourage growth investors to rethink their models of engagement with portfolio companies. Such investors can coach them through the disruptions that lie ahead, mitigate the risks they face, and steer them toward long-term optimal growth. In short, they can educate and reinforce the founders and CEOs of these companies, many of whom have never led an organization through an economic downturn.

Especially now that there is some clarity around interest rates and other market dynamics, growth investors can help their portfolio companies survive the downturn in three ways. First, they can review the entire portfolio and divide its companies into different categories based on the degree to which market volatility has affected them. This classification will help identify the companies most in need of support. Second, investors can adopt a number of value creation levers to get these priority companies on the path of optimal growth. Third, they can invest time and resources to build the right talent and capabilities not only in their portfolio companies but also in their own companies.

From growth at all costs to optimal growth

Diverse institutional investors and multimanagers have been drawn to growth equity’s high growth and returns potential over the past few years because the investable universe of appropriate companies has expanded substantially, primarily as a result of substantial funding for venture capital. Thanks to this expansion of the investable universe and the increasing returns for growth equity, 2021 was a record year for the strategy: fundraising touched $132 billion globally—56.5 percent year-on-year growth. Across the United States and Europe, the deal count for growth equity and venture capital reached approximately 30,000, making 2021 the most active year on record.¹“Q4 2022 PitchBook-NVCA Venture monitor,” January 11, 2023; 2022 European Venture Report, PitchBook, January 18, 2023.

Since then, the liquidity tailwinds powering growth equity’s fundraising and capital deployment spree have showed signs of waning. According to our 2023 Global Private Markets Review, fundraising for growth equity and venture capital dropped by 17 percent and 11 percent, respectively, year over year. Deal momentum dropped as well, especially in the second half of 2022. Growth activity fell by 18 percent, to $254 billion. VC deal volume fell even further, by 33 percent, to $498 billion. The decline in VC deal volume was more dramatic in the second half of 2022, when it fell by 55 percent from the second half of 2021. Meanwhile, PE returns disappointed across strategies. As a result of deteriorating technology valuations, VC and growth equity returns led the decline, in stark contrast with the past several years. The median VC and growth fund fell by 6.3 and 7.3 percent, respectively, through the first three quarters of 2022. The median buyout fund earned 0.9 percent.²McKinsey Global Private Markets Review, 2023.

Given the change in the macro environment and the metrics that drove valuations in the past, many portfolio companies across industries—especially in the later stages of investment—also expect “down rounds”³When a company raises equity capital at a lower valuation than it did earlier. in future. Because of reduced fundraising, the compression of multiples, and the overall market slowdown, fewer unicorns were created in 2022 than in the 2021 boom (exhibit).

It’s too soon to say how long this slowdown might continue. Public markets already face high levels of volatility: through the first three quarters of 2022, for example, the S&P 500 recorded its third-worst performance since the 1950s.⁴“September, Third Quarter 2022 Review and Outlook,” Nasdaq, October 3, 2022. In this period of uncertainty, growth investors have considered shifting from the growth-at-all-costs approach to optimal growth. As investors learn to operate in a world of higher interest rates and reduced access to capital, it is less realistic for them to expect hypergrowth across their entire portfolios. But if they shift focus to reducing risks and increasing the resiliency of their investments, they can pursue a path of optimal portfolio growth.

Investors typically execute this kind of strategy by finding faster routes to profitability, regularly reviewing the cost base, and developing healthier balance sheets to reduce risk and increase cash runways and the time between funding rounds. An optimal-growth model has worked well in previous downturns. In fact, some of today’s largest and most successful companies were born during the dot-com bubble, in the late 1990s, and survived the subsequent crash because of a well-positioned long-term growth strategy.

Playbook for long-term value creation

Growth equity investors can take three steps to create an optimal-growth model for their portfolio companies:

Fund managers tend to have limited resources for creating value, so it is essential to continuously determine which portfolio companies have priority. One option is to split the portfolio into different categories, depending on the downturn’s effect on each company. We believe that individual portfolio companies lie on a spectrum, with four distinct groups shaped by two key factors: first, their exposure to market conditions and to the macro environment and, second, their financial resiliency—for example, how much do rising interest rates or lower consumer spending affect a company.

Levers

After identifying priority companies, investors can take several approaches to get on a path of optimal growth. Some funds are by design more passive and less focused on building capabilities. Nonetheless, to unlock returns it’s critical for many operating teams to act as coaches for portfolio companies. Few high-growth companies employ executives who have lived through the type of economic slowdown occurring now. Industry experts who have experienced past crises can help today’s entrepreneurs understand how to approach this period of uncertainty.

A two-pronged strategy can help portfolio companies achieve optimal growth. The first is to stretch the runway:

The second strategy is growth-oriented cost optimization:

The choice of levers depends on the trajectory of the portfolio companies. Survivors and defenders, for example, can focus on sustained cash management and strategic pivots to align their business models and offerings with long-term trends. Investors ought to consider the appropriate returns on resource investments for such companies. Bloomers can focus on continuing to invest in their businesses for the long term to help them come out on top when economic growth resumes.

Once the appropriate levers have been identified, fund managers can adapt their operating models by engaging more with the portfolio companies and helping them with their strategic initiatives. By increasing the frequency and depth of discussions, investors can, for example, ensure that target initiatives get the most appropriate kind of support.

Focus remains a key unlock for value creation in high growth portfolio companies, hence initiatives with marginal or particularly long payoffs should be deprioritized in favor of doubling down on the core.

Investing in people

An optimal-growth strategy relies heavily on skills and competencies at the level of both the fund and the individual portfolio companies. Talent is a defining factor in the success of these companies across cycles. In a challenging market environment, building necessary skills and providing the right tools are even more make-or-break than usual. Investors seeking optimal growth shouldn’t hesitate to invest in developing human capital for their portfolio companies.

Historical study indicates that portfolio-value-creation teams help raise overall investment returns for funds. According to a McKinsey analysis, for example, PE firms with such teams outperformed their peers in the 2008 financial crisis. Of the 120 largest PE firms whose 2004–18 investment returns we analyzed, those with value creation teams or portfolio-operating groups achieved an internal rate of return (IRR) about five percentage points higher than the rest.

Resources can sometimes be scarce at the fund level, especially if the vehicle’s capital is invested in many companies. The solution is to have flexible resources so fund managers can give portfolio companies end-to-end on-the-ground support and bet on potential growth levers. Those managers should think carefully about the deployment of their operating partners’ resources to ensure that they are effectively allocated to portfolio companies that need support and have a high probability of providing strong returns on exit. As funds move into more active roles, they may need a different operating model, with more specialized talent and a stronger focus on partnerships than we have seen in the past few years.

This is a period of historic uncertainty, and unprecedented times often call for radical measures. Growth investors have long served as advocates for portfolio companies. Now these investors need to become coaches—scrutinizing the portfolio, categorizing companies by how they are likely to fare in the new environment, determining the best courses of action, and allocating resources to goals.

For many growth equity investors, this level of active engagement represents a fundamental shift from the way they have traditionally operated. If the downturn intensifies, they have only limited time to change their approach and take the steps required to unlock returns. The time to act is now.

This content was originally published here.

The post A winning strategy for growth investors at a time of uncertainty appeared first on Matt Dallisson Global Executive Search | Leadership Consulting.

The rationale for combining businesses into one company, or for splitting them apart, should be the same: to create more value. Yet we often hear leaders describe separations as the opposite of M&A integrations, at least in terms of “capturing value” in the near term. M&A, done well, unlocks value by realizing synergies. But it needn’t follow that separations must present a drag on near-term value creation under the assumption that the separated entity (“CarveCo”) needs to build back the same support structure it had used when it was a part of the divesting company (“RemainCo”), or because the transaction poses insuperable risks to business continuity.

There are costs and risks of separations, of course, but like every key business decision, these should be considered under a cost–benefit analysis. In fact, what may seem to be the most daunting costs of separations are often more perceived than real. Does CarveCo need an effective support structure? Yes, but that doesn’t mean it needs the same, equally expensive support structure that it had under RemainCo; the “scale benefit” of general and administrative (G&A) can be vastly overstated. Could business disruptions arise as a result of a separation? Yes, but in the aggregate, there is typically a greater cost to standing still, and identifying potential disruptions is the first step toward mitigating or even preventing threats to business continuity. And might employees of CarveCo feel unnerved by the changes, or perhaps even leave? Yes, again—but employees can also be reenergized by the transformation, attracted to a more nimble, purposeful company and inspired to make it even better.

Any “keep versus divest” decision will always be highly fact-specific; even the very term “separation” encompasses significantly different types of transactions. For all of the variation, however, common lessons clearly apply—the most important of which is that separations present an unrivaled opportunity for both transacting and transforming—by anchoring in the question “what is most value creating?” The answer is almost never to do things the same way that they’ve always been done.

The right support structure

Building and maintaining effective support functions requires significant investment, no question. Across industries, there is a significant “G&A gap” between high and low performers of 4 to 8 percent of revenues (Exhibit 2). Understanding and addressing the gap can translate to significant value.

While both RemainCo and CarveCo require robust support structures, it’s a mistake to assume that RemainCo’s support structure will be necessarily applicable to CarveCo, or that CarveCo—given its purpose, size, and type of business—needs to scale all the way back up to its RemainCo levels for its business to thrive. In fact, we’ve found that companies can leave tremendous value on the table if they default to making CarveCo’s structure a RemainCo “mini me,” and elevate continuity as an end in itself, rather than to use the separation as an opportunity to transform. Companies should choose the right operating model for CarveCo, not just the familiar one. Five steps can be particularly helpful.

Across industries, there is a significant “G&A gap” between high and low performers. Understanding and addressing the gap can translate to significant value.

1. Create transparency

The first step in any separation is transparency. What specific roles, activities, assets, contracts, and people should support each business? Transparency provides a baseline. Achieving transparency is much more demanding than just a superficial review. It requires disaggregation. Think of the way, for example, that a mechanic would disassemble a motorcycle to understand what makes it go, or where its inefficiencies may lie. The goal should be clarity on a microlevel, with an eye not just to “what resources is this company using to support its operating model” but also “what resources should it be using given its specific circumstances as a stand-alone business?” While that degree of atomization may sound daunting, there are highly replicable templates that CarveCos can use to create and assess detailed, structured fact bases. Typically, many of the support costs and processes that CarveCos uncover when they create transparency and get down to constituent parts are rightsized—were CarveCo still to be a part of RemainCo. But when that’s no longer the case, applying RemainCo’s cost as the default setting for its constituent businesses is almost never optimal.

2. Compare and contrast with peers

To gain a clearer sense of what the actual “right size” is, it’s essential to present a neutral, fact-based comparison both with peer businesses and with other parts of the business. Key focal points when comparing peer businesses include levels of automation, degrees of specialization, numbers of interfaces per process (this typically reveals clear opportunities for simplification), IT systems and applications that peers use, and the legal conditions in which peers may operate in achieving a leaner (or less lean) operation (for example, with respect to labor rules, reporting requirements, and occupational health and safety).

It’s important to bear in mind that while it’s insightful to better understand peers’ choices and outcomes, an effective separation shouldn’t solve for CarveCo to be like its peers, any more than it should solve to be like RemainCo. For example, in one separation, RemainCo found that the finance function of CarveCo was significantly larger compared with other companies in the same business benchmark. Rather than immediately starting to slash full-time equivalents (FTEs), however, the senior team looked deeper. As it disaggregated activities within the finance function, it discovered that beyond what could be considered traditional “transactional” financing activities (such as reporting, controlling, and budgeting), RemainCo’s finance function was actually contributing to a number of value-adding strategic projects for CarveCo. Much of the separation and transformation efforts, the team determined, should therefore be devoted to the finance functions—bearing down, in particular, on what to protect, what to preserve, and how to improve. By gaining clarity at a granular level, the function was able to achieve a relatively fast 20 percent reduction—the “easy wins.” The next 20 percent of reductions required significant investments in automation. These could not be made in parallel with the carve-out—but, importantly, RemainCo, CarveCo, and any new owner would have a clear understanding of necessary next steps and dangerous third rails.

3. Be open to nuance

While baselining and benchmarking help to recognize and prioritize areas where significant value may be untapped, actually realizing meaningful opportunities again requires teams to get very granular—to understand the specific activities that CarveCo needs to conduct and to identify the appropriate level of support that its business or businesses need, including spans of control and reporting lines. Many activities may, but need not, be provided by CarveCo in-house. But others can often be either outsourced or stopped entirely.

In one effective separation, team leaders discovered that CarveCo’s human resources function was spending several days onboarding new employees and conducting additional training sessions on an ongoing basis. Those activities were necessary before the separation, when there were certain details and updates that many employees of the RemainCo conglomerate needed to know. But those additional details and steps simply weren’t relevant for the single-business CarveCo, where learning the ins and outs of the larger corporation wasn’t necessary. Much of the onboarding, the team found, could be scaled back, and several trainings could be eliminated. Business-specific training was made available on an as-needed basis from a third-party provider.

By examining and aggregating individual use-case examples, companies can begin to identify significant efficiencies. Being open to nuance helps avoid the trap of too easily sorting into “keep/outsource/eliminate” outcomes. It’s often the case that a function that had employed, say, ten or more people when the business was part of RemainCo should neither be eliminated nor outsourced, but instead reduced to a fewer number of people who may (or may not) perform other roles. It may also be the case that in order to achieve net reductions, hiring or reskilling people with different capabilities will be a necessary precondition. Reductions may also need to be scheduled in sequence, as complications can arise if every move is executed at once. Continuity, after all, matters a lot—but as a means to preserving and creating value, rather than as an end or coequal objective.

4. Rethinking technology

Technology is a unique consideration in separations. IT is itself a separate function, and like every function, it should be scrutinized for potential cost savings and efficiency improvements once the business is no longer part of a larger company. At the same time, the use of IT systems, infrastructure, and support is integral to and runs across every part of CarveCo. While RemainCo may require a more expansive range of hardware and software, CarveCos can, in many cases, perform many—and sometimes all—of their core needs using common applications (such as Microsoft Excel) and off-the-shelf or lightly tailored options. This can greatly reduce IT expenses without sacrificing much (if any) of the functionality that a smaller company needs.

Many effective CarveCos conduct joint workshops among support functions and IT in order to align on business needs and identify outdated and unused IT systems, which should be eliminated. They also align on a separation approach, transitional service agreements, and appropriate lead times to ensure that essential technology is operationally ready from the moment the businesses are separated.

In one successful separation, the leadership team decided to stop using an advanced HR management software; the technology was ideal for larger organizations but expensive, and indeed obtrusive, for a company of CarveCo’s size. Choosing a less bespoke option not only immediately and directly reduced expenses but also eased the transition to CarveCo’s “Day 1”: the transfer of data to Excel could be done ahead of time, with no need to negotiate a new software license or to draft transitional service agreements (TSAs).

5. Create your road map

Identifying the appropriate G&A within and across CarveCo functions is a necessary but insufficient step to building a more value-creating business. To get from point A to point B, companies need to create a road map that spells out how to turn ideas into action. The details and timing of next steps should be clear.

The exercise should begin with outlining the new organizational setup based upon the activities reviewed, the opportunities identified, and the program conceived for IT simplification. A robust road map encompasses all functions, highlights key milestones, and identifies the interdependencies that will be critical to achieve a business-ready CarveCo. It can also define the spans of control, reporting lines, and how different functions should interact with one another. While traditional road maps are useful to see the big picture, for great maps, granularity is once again essential. Any practicable (as opposed to merely aspirational) road map sets forth FTE sizing at the level of an individual employee—or, more precisely, the specific activities and roles that individual employees should undertake. The detail reaches well beyond senior management.

Better practice, still, is to anticipate what could come next and plan for scenarios under a “next generation” organizational setup. Best practice is to spell out the next-generation arrangement and define changes that are implemented in the premarketing, preclosing, and postclosing phases. Those, of course, can differ depending upon the specific buyer and real-world time constraints. Sometimes, a buyer will offer a price that is so clearly value-creating for RemainCo and above what RemainCo could reasonably expect to receive in even the best-planned separation; in those cases, the main goal will indeed be to get the deal done as quickly as possible while making a clean, legal break. But usually, judicious forethought is a value multiplier. By thinking about a separation in a rigorous and imaginative way, challenging assumptions about support structures, identifying potential disruptions, and being very clear in planning (and communication), companies can create the conditions that add up to a higher price—and that drive better businesses. The more detailed the road map, the more likely that RemainCo and CarveCo will create more value.

In addition to transaction timing, another major factor influencing the degree of implementation of the transformation plan is the likely exit route. A spin-off or IPO will, by definition, require a capital market-ready organization; a divestiture to a strategic buyer should keep degrees of flexibility to avoid postclosing restructuring costs; a financial buyer will likely focus most on RemainCo as a stand-alone business (though likely with some differences to come, depending upon the specific acquirer). But any buyer, even a disbursed group of shareholders in the case of a spin-off, would recognize the upside in transforming legacy structures and building a fit-for-purpose G&A function.

Culture as catalyst

Precisely because the opportunities are so great in separations—when every support cost is on the table and a highly technical, bottom-up analysis is so essential—it’s possible to overlook the personal aspect that can make or break a separation. Research shows that about 70 percent of the time, transformations beyond the separation context fail, and that the human element is a critical reason why. It’s natural for people to resist change; in the context of separations, trepidation is heightened. While some jobs are added, others are eliminated or transferred; the uncertainty would put anyone on guard. Moreover, even the most high-performing, critical-to-retain employees can be subject to the same cognitive biases that are long-programmed into the human condition. These include the status quo bias (“this is the way the job has always been done, so this is what we should keep doing”) and the “prudence trap” (“this is all I can reasonably achieve, to be on the safe side”).

Research shows that about 70 percent of the time, transformations beyond the separation context fail, and that the human element is a critical reason why.

Yet just as separations are a unique opportunity for companies to shake off old perceptions about the “right” support structures and systems, the transactions can be uniquely fortuitous for employees, as well: a chance to break free from old expectations, benefit from a fresh start, and help build something new. We’ve found that it’s especially important for senior leaders, particularly at the CEO level, to lead calls to action. McKinsey research has found that respondents were nearly four times more likely to report a successful transformation when managers prioritized leading and developing their teams, more than five times more likely when leaders role modeled desired changes, and a remarkable eight times more likely when senior management communicated openly about the changes.¹“The T-word,” McKinsey Quarterly Five Fifty, March 20, 2018.

In a recent carve-out, company leaders invested significant time crafting their change stories and sharing them with immediate teams and a broader range of employees in small group discussions and in town halls. The excitement was palpable. We’ve also seen the enormous benefits that can come when leaders put words into action and role model change. Even small actions add up; for example, in one separation, the leadership team requested for the first time that HR collect upward feedback about the leaders’ own performance. Executives also moved their offices so that they would not sit among themselves but instead with their respective teams. Additionally, every key team meeting had someone play the role of “value-adding police,” empowering team members to speak up any time they felt a request for information or analysis was not value adding.

It’s natural to be skeptical of change—but it should be even more concerning when the default is for more of the same. Separations can unlock tremendous value. The odds for success improve when the separate company adapts a cost structure and culture that befits its specific needs—not those of the original conglomerate. Newly divested businesses can continue to generate and even grow revenues with a much smaller, more appropriate support structure. But it’s the employees who may reap the greatest reward. It’s exciting to be in a company that operates under its own unique business model and that isn’t just a smaller version of a larger conglomerate. After all, why be a duplicate when you can be your own best self?

This content was originally published here.

The post The power of goodbye: How carve-outs can unleash value appeared first on Matt Dallisson Global Executive Search | Leadership Consulting.

The Companies that Defined 2021

Attention is an increasingly valuable form of currency in the Information Age.

In 2021, a handful of companies stood out from the pack, dominating the conversation and influencing society in both positive and negative ways. After vigorous internal debate, here is Visual Capitalist’s list of companies that defined 2021:

We looked at a number of metrics to select these companies, including Google search and news volume, performance relative to competitors, industry-specific indicators, and more.

Many of these are digital companies, and all have massive reach, scale, and influence. Interestingly, many of these companies also faced controversies along with their success, and were caught up in movements that were bigger than themselves.

With this context in mind, let’s dive in.

Robinhood’s eventful year reached its peak when the stock trading app was caught in a frenzy involving retail traders, short sellers, and “meme stonks”. It did not take long for Robinhood to go from hero to villain in this story. As the Gamestop stock shot up past $400, trading was halted and position limits were initiated on the app.

As well, Robinhood’s stated goal of democratizing finance came under scrutiny due to their pay-for-order-flow business model, where sensitive user trade activity data is sold to the highest bidder who then gets ahead of the trade, otherwise known as “front-running”.

Despite the controversy, Robinhood’s platform now has over 22 million users, many of whom are younger, first-time investors. While they have key attractions like zero commission trades, they were also accused of gamifying investing with features like confetti shooting across the screen after a trade is made (a feature that was removed after media criticism).

The company frequently made front page financial news in early 2021, and while the often negative press didn’t get in the way of their IPO—which commenced in late July—it has affected investor sentiment. Since their 52-week high of $70 per share in August, the stock has fallen some 70% towards the $18 range.

Furthermore, the SEC is rumored to be launching an investigation into them. With these headwinds, investing on Robinhood has probably fared better so far than investing in Robinhood.

Perhaps there was no bigger story in 2021 than COVID-19 vaccines.

Early in the year, the race to secure vaccines was on. Wealthy countries scrambled to buy stock and roll out widespread vaccination programs ahead of spring.

And the companies that managed to produce efficient vaccines saw the biggest benefits, like pharmaceutical giant Pfizer. The company’s COVID-19 vaccine, made in partnership with German firm BioNTech, ended up becoming the world’s most-preferred vaccine to fight the pandemic.

The company is forecasting revenue of $36 billion from its vaccine this year.

Competing vaccines from Moderna and AstraZeneca also saw their parent companies rise in both market cap and newsworthiness. All of the involved pharma companies have also faced constant scrutiny, with many countries in the world struggling to secure COVID-19 vaccines, and others dealing with vaccine hesitancy.

As the pandemic continues with the Omicron variant quickly spreading around the globe, Pfizer and its competitors will continue to be impactful into the new year. The company announced a COVID-19 antiviral pill that is planned to be released in the near future, and more effective vaccines and boosters against other variants are still a hot commodity.

2021 was a pivotal year for cryptocurrency. Prices reached new highs, and institutions and retail investors alike poured into the market.

With its user-friendly app and focus on security, Coinbase was well positioned to benefit from this surge in interest. The exchange started off the year by more than doubling its transacting user base as Bitcoin prices shot to new heights.

It’s easy to underestimate the influence of the company’s IPO—especially as its share price slid as the crypto market cooled off—but the exchange’s very entry into the public markets was a huge boost in legitimacy for crypto, paving the way for similar companies to IPO in the future.

Nobody captures attention and creates controversy quite like Tesla’s CEO, Elon Musk.

Most of Tesla’s actions are tied closely to the famous entrepreneur, who’s known for his brazen online presence. Musk’s social media persona is so strong, one tweet can send Tesla’s stock plummeting, like it did last year after Musk told Twitter that “Tesla’s stock is too high imo.”

While naysayers are quick to criticize Tesla and Musk, the company has some impressive numbers to back up its hype. 2020 was already a ridiculous year for Tesla—its stock surged by nearly 700%, and with a valuation of $630 billion, it became one of the most valuable companies in the world.

This momentum carried over into 2021. This year, revenue rose each quarter, and in October, the company’s market value surpassed $1 trillion.

Tesla was also intertwined within other societal narratives over the course of the year. The automaker’s move from California to Texas was part of a larger conversation about the “Bay Area exodus”, as jurisdictions in Texas and Florida looked to steal Silicon Valley’s thunder.

Musk’s Tesla stock sales generated a lot of buzz in Q4 as well.

Seemingly in response to criticism over inequality and tax avoidance, Musk ran a Twitter poll to decide whether or not to sell a significant portion of his Tesla holdings. After a majority “yes” vote, the Tesla CEO now appears to have sold off enough stock to hold up his end of the bargain.

TikTok was already popular in 2020, but this year truly solidified its status as a cultural phenomenon.

The app topped a billion users in 2021, just five years after its launch in 2016. For context, it took Facebook and Instagram nearly eight years to hit that same milestone.

What’s so appealing about TikTok? Experts have many theories, but in an interview with Forbes, John Holdridge, GM of Fullscreen, puts its simply: “TikTok’s success can be attributed to how it flips what we think of as social media on its head, while at the same time returning us all to roots of the original appeal–the ability to go viral.”

TikTok’s short-style video format has become so popular that it’s inspired a slew of copycat apps, especially in regions like India where TikTok is banned.

Even established companies like Meta have tried to mimic TikTok’s success. In 2020, Instagram launched “reels,” its own short-form video feature where users can create and share 30 second videos. But Instagram reels failed to overtake TikTok’s growth—instead, reels has become a place for users to share and promote their TikTok videos.

Facebook/Meta

Facebook frequently finds itself in the news, given its status as the world’s largest social network. In 2021, however, it was for two different reasons.

The first was the U.S. Capitol Riot on January 6, 2021. In the aftermath of this event, many blamed Facebook for not doing enough to mitigate the negative effects of its platform—mainly polarization, conspiracy theories, and hate speech.

The controversy reached its peak in September 2021, when internal files leaked by whistleblower Frances Haugen were published. These documents exposed Facebook’s internal struggles with combating misinformation, as well as employee dissent.

Ultimately, Facebook weathered the storm and opted to shed its baggage with a new name. Not only does this help the company disassociate from its previous scandals, it also lines up with Mark Zuckerberg’s ambitions of pioneering the metaverse.

Following the announcement, “metaverse” exploded overnight and became one of the hottest topics of 2021. The word “Meta” has also become incredibly valuable—Meta (the company) recently completed a $60 million deal to acquire the trademark assets of Meta Financial Group, a regional U.S. bank.

Honorable Mentions

While the companies highlighted above were undeniably influential in 2021, any list like this is bound to be subjective and open to debate. Here is a shortlist of other companies that we considered for the Companies that Defined 2021 list:

The surge in investment that propelled Robinhood and Coinbase to new heights was partially fueled by communities on Reddit. One of the most fascinating moments of the year came when Reddit user u/deepfuckingvalue appeared before the House Committee on Financial Services proclaiming, “I am not a cat” and “I like the stock”.

On the business front, the “Front Page of the Internet” saw double-digit user growth during the pandemic, and now has a valuation of $10 billion after a hefty round of funding.

NFTs had a Cambrian explosion alongside the crypto bull run, with OpenSea emerging as the dominant marketplace this past year. In the second half of 2021, OpenSea made up 95% of NFT trading volume on major marketplaces, and has transacted $1.42B in volume in December so far.

While it seemed OpenSea was planning an IPO after their CFO Brian Roberts commented how “you’d be foolish not to think about it [OpenSea] going public,” user backlash resulted in Roberts later tweeting that the company is not actively planning an IPO. Whether or not OpenSea does set sail onto the public markets, they’ll soon have some serious competition from Coinbase’s own NFT marketplace currently in the works.

Despite intense competition from rival streaming platforms, Netflix will finish the year on top once again. The company has a number of impressive tallies in the win column this year.

First, Squid Game was a cultural phenomenon, quickly becoming the streaming service’s number one show, and also the world’s most Googled TV show of 2021.

Next, Netflix’s Red Notice is likely the most watched new movie of 2021, logging well over 300 million hours of viewing time. Not bad, considering its tepid score of 36% on Rotten Tomatoes. It remains to be seen whether deep-pocketed competitors like Disney+ are able to dethrone Netflix, but for now, the company is as culturally relevant as ever.

The fact that Elon Musk has two companies in this conversation points to why he was named Time’s Most Influential Person for 2021.

SpaceX has made launching rockets drastically cheaper in recent years, which helps explain its massive reported valuation of $200 billion. The company, which is the top commercial launch provider in the U.S., will round out the year with 31 launches.

This content was originally published here.

The post Companies Gone Public in 2021: Visualizing IPO Valuations appeared first on Matt Dallisson Global Executive Search | Leadership Consulting.

And crisis isn’t too strong a word. In surveys conducted by AchieveNEXT in August and again in September, middle-market CFOs and CHROs said that attracting and retaining talent is their number-one challenge — cited as such three times more often than supply-chain disruptions and nearly four times more often than costs. Worse, nearly half (47%) told us that their enterprise lacks the tools to address their talent-retention problems.

Midsize companies have weaknesses when it comes to addressing the talent issues they face — but they also have critical strengths. There are steps they can take to leverage those strengths and prevail in the toughest talent market in memory.

The Middle Market’s Talent Challenge

The talent pinch is more painful for the middle market for a couple of reasons. Compared to big companies, their appetite for talent is greater and their talent-planning capabilities are weaker. The middle market has a voracious appetite for talent because it grows faster, on average, than the rest of the economy. For example, over the last five years, midsize companies have turned in an average annual revenue growth rate of 5.64%, while the S&P 500 has grown 4.92%. Payrolls show the same pattern. Earlier this year, middle-market companies told the National Center for the Middle Market that they hoped to increase headcount by 8.9%.

Broadly speaking, middle-market companies also lack three crucial talent assets and capabilities. First, they don’t attract resumes simply by virtue of being famous — they might be great places to work, but their employer brands tend to be local and not top of mind.

Second, midsize companies don’t have deep pockets and are therefore unable to compete for talent by throwing money at the problem, at least not on a sustained basis. As one energy-industry CFO said at an AchieveNEXT roundtable in Denver, “If we’re caught in bidding wars, we’re going to be outbid sooner rather than later.” Middle-market companies’ vulnerability to poaching has risen since the pandemic as wealthy companies have become more willing to hire people regardless of where they live. For example, according to data from The Conference Board, coastal tech companies are increasingly advertising job openings outside their home metros. Furthermore, the vast majority of middle-market companies are privately held and unable to use stock or stock options to incentivize talent to come or stay.

Third, midsize company HR teams are usually small — only 18% of the companies in the AchieveNEXT survey have dedicated benefits managers, for example — and necessarily focused on day-to-day people issues. This leaves them with too little ability to address talent strategically, which might help them avoid bidding for new hires.

In general, middle-market companies shouldn’t overburden themselves with process, but in these times, HR teams feel its absence. For example, in middle-market companies, onboarding is generally informal to the point of being nonexistent (“Hey, kid, sit here and we’ll get you set up”), a weakness exacerbated by flexible and remote work arrangements. And companies that rely on outside recruiters are even encountering a shortage of them.

How to Attract and Retain Talent

Middle-market companies can’t afford to take on all of these problems at once, in either the short or long term. Ours and our clients’ experience tells us they need to roll out the following three simultaneous initiatives:

Pinpoint the problem.

It’s important for leaders to identify and prioritize exactly which talent they’re lacking — the solution for a shortage of managers is different than one for a shortage of developers.

Finding specialist and technical workers is the greatest pain point for middle-market companies. According to AchieveNEXT data, only 3% of midsize companies say it’s easy to find these workers, while 79% say they’re somewhat difficult or extremely difficult to attract. Retaining these employees is nearly as hard: About 7% — just one company in 14 — finds it easy to hold on to technical and specialist employees, and nearly 60% find it at least somewhat difficult.

For one of Jeff’s clients at PROXUS, a manufacturer with plants in four Midwestern states, the most significant talent gap is specialty machinists. The required skills are specialized enough that few schools teach them and critical enough that the company’s ability to take on new business depends on them. The positions are even harder to fill because each of the company’s plants have traditionally done their own training and recruited locally, which requires looking for rare talent in small talent pools. By identifying the company-wide nature of the problem, leaders have been able to adjust both training and recruiting and execute a recruiting strategy that’s helping alleviate the talent shortage across all plants.

Revamp the recruiting and onboarding process.

A few relatively simple changes can make a big difference in recruiting. First, rewrite ads and job descriptions to emphasize the benefits of working for you, instead of your specs and requirements. Security Risk Advisors, a Pennsylvania-based cybersecurity firm, operates in an industry that has always had a severe talent shortage. “We focus on aptitude and passion,” says Katie Calabrese, the company’s head of HR. And while specs are important, “If you don’t quite meet them, we want you to apply anyway.”

Second, expand your talent pools. Proxus finds that many clients have inadequate or antiquated talent-acquisition processes that miss opportunities to seek diverse talent or to use techniques and technology to find passive candidates and career switchers. Many recruiting technologies, such as those created by Hiretual, Entelo, and Talent Bin (part of Monster.com), are well within most middle-market budgets.

Third, work your networks harder, starting with the networks of your current employees. AchieveNEXT’s data shows that employee referrals are the most effective source of new people, cited as very or extremely effective by two-thirds of middle-market leaders, followed by LinkedIn. Retained and contingency search firms continue to work well for senior leadership positions, but other traditional talent sources such as staffing and temp agencies and schools and universities scored much lower.

Craft a retention strategy.

People who leave a company almost invariably get more pay at their new company, but that doesn’t necessarily mean money motivated their departure. Many studies show that non-financial issues like engagement, close relationships with peers, and opportunities to learn and advance are important elements of an employer’s value proposition. These are too often taken for granted in the middle market.

Asked by AchieveNEXT about the intangible benefits they offer, many executives cited mentoring and access to top management. In most small and midsize companies, those are a given — in a company with 100 employees, most employees are on a first-name basis with the boss. Instead, middle-market companies should institute a four-pronged retention strategy, designed to produce long-term benefits as well as short-term relief:

While middle-market companies come to the talent competition with evident weaknesses, they bring significant strengths as well. Their talent-management processes are scanty, but the companies also tend not to be weighed down by rigid, bureaucratic processes. This should give the middle market a nimbleness when it comes to hiring and promoting — a very real advantage when you need to move fast when you spot someone you want to hire or need to keep. Because top management is closer to the rank-and-file, middle-market companies should be better able to seek and act on employee referrals. And when it comes to job flexibility, they can see what big companies offer and raise them (for example, by offering job-sharing arrangements). Midsize companies also have an inherent work-life balance advantage, something smart middle-market hiring managers have emphasized for years.

By combining these advantages with focused initiatives to pinpoint the problem, revamp recruiting and onboarding, and become planful and strategic about retention, middle-market companies can get through the current crisis and find themselves with stronger long-term talent capabilities as well.

The post How Midsize Firms Can Attract — and Retain — Talent Right Now appeared first on Matt Dallisson Global Executive Search | Leadership Consulting.

In order to better understand the findings of prior studies, we conducted a meta-analysis (together with the University of Trier’s Joern Block and Dominik Wagner of IUBH International College) that combined 204 academic studies covering 3,880,267 businesses across 30 countries. Family businesses were distinguished based on family’s involvement as owners, managers, or both. The distinction is important: while prior studies from around the world have established that family owners, on average, improve firm performance, the effect of family managers is less clear.

In all the studies we surveyed, family involvement was found to have had, on average, a small positive impact on firm profitability, with family ownership more beneficial than family management. However, some family-managed firms fared better and others much worse, which aligns with prior knowledge that some family managers are more likely to exhibit stewardship, while others display firm-damaging nepotistic tendencies.

The research showed that these differing outcomes could be best explained through a country-by-country variation in two institutional conditions: trust in family and trust in institutions.

Trust in family

In some countries, the importance of and trust in family is primary. To measure trust in family, we relied on results from the World Values Survey (WVS) variable “How much do you trust your family?” — a four-point scale from ‘Not at all’ to ‘Trust completely’ — and used the average value of all respondents in any given country.

On one end of the spectrum, if family and business needs conflict, family managers tend to prioritize the former over the latter. Families in these countries are more likely to hire less qualified siblings, children, nieces, nephews, and cousins into management roles and are more likely to use firm resources for personal matters.

Conversely, in countries where family managers place only moderate trust in the family and draw a clearer line between its needs and those of the business, family-managed firms perform much better. Corporate resources are more strictly used for professional purposes and firms face less pressure to employ relatives.

Let’s look at a direct comparison: in France, a country with comparatively moderate trust in the family, a study of listed firms shows that those with family CEOs show greater profitability than peers: an average return on assets (ROA) of 11.9%, compared to 10%. By contrast, in Spain, a country with relatively high trust in the family, another study finds that companies led by family CEOs produce an ROA of 0.3%, compared with 6% for peers.

Trust in public institutions

The second key factor relates to citizens’ confidence in the efficacy of their country’s formal procedures and laws and their belief that police, public officials, and courts will uphold them. This variable was created by combining the value of people’s confidence in each of the following institutions in a given country:  police, courts, government, parliament, and civil services. Each of the corresponding WVS variables ranges on a four-point scale from “None at all” to “A great deal of confidence.”

If institutional trust is high in a country, families are likely to employ impartial processes to hire qualified individuals for each management position regardless of family ties. Citizens expect business owners and managers to be liable for wrongdoing and penalized for non-compliance with laws, and nepotism is discouraged. Family managers may employ relatives for summer jobs or internships, but they are more aware of the negative consequences of promoting less qualified family members over more capable non-family managers.

Conversely, if citizens lack confidence in government institutions and doubt that public officials will act with integrity, family businesses are more likely to turn inwards and employ more family members. By definition, this limits them to a smaller talent pool, increasing the possibility that they will make poor decisions.

In one study from Colombia, a country with low trust in formal institutions, firms with family CEOs turned in a performance 2.5 percentage points below the national average. Conversely, in a study of Canada, where institutional trust is high, family CEOs delivered firm profitability 5 percentage points above the national average.

High trust in both might be best

Perhaps the most interesting finding was that in countries with strong faith in both institutions and families, family-managed firms performed the best. The United States, with its abiding emphasis on family and arguably very effective business oversight, is a standout example.

A study of S&P 500 firms showed that companies with family CEOs scored an ROA of 17%, on average, compared with 15.1% for the broader group. Overall, the impact of family managers in U.S. firms was 1.62 times stronger than their impact on performance in family-run companies globally.

The lesson we draw is that a well-regulated environment pushes families to implement best practices while sanctioning misbehavior. At the same time, the social relevance of families may imply more well-functioning ones with good bench strength. However, challenges, can also arise in such countries — especially when mobilized families compete to advance their own interests at the expense of the public good — by, for instance, lobbying for the government to give them tax breaks financed by reduced expenditure on less privileged groups. Taken to excess, this behavior can undermine public trust in formal institutions, thereby increasing the risks associated with family business management.

To conclude, positive or negative prejudices regarding family-managed firms in one country do not automatically translate to others. Although the debate around the role of family managers as stewards or nepotists is likely to continue, this study’s results suggest that family-managed firms work well when stable, trusted institutions limit the downsides arising from favoritism and self-serving behavior by family managers without canceling the upside from having their commitment as long-term owners of their businesses.

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For many family businesses, having an iconic founder has enormous benefits. Building the brand of the person simultaneously builds the brand of the company. As the company has more success, the iconic founder gets more famous and more idealized by their employees and their family. What could be wrong with that?

It turns out that having a full-fledged iconic founder (or leader) is not always a good thing for the sustained health of the business. Though it might be beneficial to have an iconic founder at the helm of a business for years, it can also cause family leadership beyond the founder to be much more challenging. After all, who can live up to the image of a truly “iconic” founder who has become a kind of exaggerated character — a two-dimensional representation of the business without any visible human imperfections?

When founders become larger-than-life icons synonymous with the business itself, they begin to overshadow everyone and everything around them. Worse still, iconic founders can start to believe their own hype and hold next-generation leaders to impossible standards. They can create a “loyal” workforce that is resistant to new leadership, and potentially even cause family members to walk away from the business. Ironically, a wildly successful iconic founder can unintentionally set his beloved business up for failure in future generations.

But being part of a business with an iconic founder doesn’t have to derail the next generation if the family can find a balance between honoring what the “icon” has built and putting their own stamp on the business to help ensure that it will continue to thrive.

Where Iconic Founders Go Wrong

It’s not uncommon to see family businesses in which the founder (or a later-generation family leader) plays such a public role that they become “iconic” — their individual characteristics are submerged under an image that is “preserved” as wise, kind, heroic, generous, spiritual and/or many other idealized traits. The image that is projected out to a wider public — often even beyond the business’s customers — is carefully maintained and protected by employees and by family members. This process of protecting the “brand” can have significant downsides. The more powerful the public persona, the more pressure is felt by the family and the company to keep the founder on a pedestal.

Sometimes the individual entrepreneur is in fact as wise and kind as the image portrays him to be. But more often, that real person is all too human. Successful business leaders, iconic or not, make mistakes in business and in their personal lives. Worse still, we have seen iconic founders who begin to believe their own publicity and consistently choose to grow their image over helping others to shine. Sometimes, they hold their children up to such high standards — standards that they think reflect their “perfect image” — that the next generation feel (rightly so) they can’t possibly meet them.

Iconic founders often lack empathy for the sacrifices others (family, employees) are making.  They often see the world through one lens, which leads them to push for business growth and celebrity at the expense of all other priorities. As family members seek the iconic founder’s approval, he or she just pushes harder to promote a super-human image. Those closest to the founder find it hard to challenge him or her in any setting, business or family, for risk of being disregarded by the icon — better to agree and stay in good graces than confront and be shut out.

We have seen difficult dynamics evolve in the families of an iconic founder. When the icon makes irrational demands or unkind judgements, everyone snaps to order — no one disagrees. Family members’ (and often employees’ and colleagues’) unpleasant experiences with the icon get buried: to discuss their pain or to criticize is to be disloyal. The iconic founder’s flaws — some of them grave — stay invisible.

Finally, the lasting effects of an iconic founder can stretch beyond his or her impact on the family to thwart the growth of the business going forward. The icon can cultivate and leave behind a “workforce of the past,” with loyal long-term employees defaulting to the icon’s preferred ways of managing at the expense of fresh ideas. They can nurture a culture of “yes” people rather than independent thinkers, and drive creative next generation family members away from the business into their own endeavors where they have more control.

One “Icon” and His Family

We know one such iconic founder who started as a talkative and charismatic pitchman for small kitchen appliances. Dale (a pseudonym) developed his own line of specialized cooking gadgets, which he grew into a national brand with a high-quality reputation. He became well-known on TV, appearing not just in ads for his products, but also on popular cooking shows. He often socialized with celebrity chefs, and he was invited to the White House several times.

Home, though, was a less comfortable environment. His wife resented what she saw as his manic focus on the company and his image; he was absent from the family outside of work most of the time. His relationship with their four children was strained. Two of the four chose to work in the company and strived unsuccessfully for Dale’s approval. Their father often told them that the business was “too complicated” for them to understand and that they didn’t have the “big imagination” necessary for leadership. The younger two lived across the country and were disengaged from the business and the family.

What’s going on this family is a typical response to a dominant iconic founder. In family businesses, there are four common dynamics connected to an iconic founder:

How the Next Generation Can Counter-Balance an Icon

When family members recognize the complexities of having a truly iconic founder, they can feel trapped. But there are steps you can take to prevent an iconic founder from overshadowing the next generation’s chance to grow and develop as individuals in your family businesses:

Dale’s family went through some tough times in the post-Dale era, especially the second generation, who never were able to work together effectively. Fortunately, the two siblings who worked in the business managed to at least hold it together, allowing the third generation to bring in a refreshed business perspective. While the cousins were distanced from the business and each other by their unhappy parents, they still felt a connection to the iconic founder’s legacy. They started asking questions about who Dale was and developed an interest in getting to know each other and the business better.

It may not be possible to shake the overbearing influence of an iconic founder until the third generation, if they aren’t aren’t paralyzed by their parents’ emotional baggage. With fresh eyes and enthusiasm, they are able to focus on what the business needs to take it forward. Family businesses can survive  and thrive even after an iconic founder fades away.

The post When an Iconic Founder Overshadows the Family Business appeared first on Matt Dallisson Global Executive Search | Leadership Consulting.

Agile is a powerful process for product development, but many organizations are taking it too far and using it to avoid careful planning and preparation. They’ll get a better result if they combine it with a different approach that we learned working as executives at Amazon. “Working backwards” can make up for agile’s shortcomings in the crucial early stages.

How Agile Companies Get Ahead of Themselves

Agile might seem perfectly suited for when a company is developing a product or service that doesn’t exist and is looking to move quickly. In these cases, it’s difficult to simply interview customers or watch them in action, because they can’t respond to a hypothetical product.

The solution is to develop a prototype, or minimum viable product. Through a series of sprints, typically lasting two weeks, a product team puts together something that’s good enough to show customers and get their reaction. If the idea bombs, well at least the team got that information quickly and with only a small investment — and maybe they’ll uncover a better idea in the process. If it gets traction, then the team can quickly iterate to create an even better product.

Contrast that with the working backwards approach, which is all about planning. Working backwards emerged in 2004: Amazon’s e-commerce strategies had proven successful, and the company was aggressively seeking new opportunities with a large potential market. Where should it look?

Rather than jumping into developing a plausible product — what an agile mindset might encourage — the company preached going slow to go fast. CEO Jeff Bezos often called himself the “chief slowdown officer,” and he got involved when he thought teams were moving quickly into coding without clearly defining the customer problem and an elegant product solution.

The working backwards approach requires a fully realized vision of a proposed product, embodied in a written press release for the product’s launch. This felt wrong, even unnatural, to software developers and product managers who wanted to get going on coding already. Teams typically spent weeks, if not months, hashing out this press release — along with an FAQ that explained to colleagues, customers, and senior management how Amazon could create this wonderful offering at an affordable yet profitable price. Only when the executives were satisfied with these documents could anyone start writing code and actually assemble the product.

The practice has stuck: To this day Amazon works backwards from what it thinks will delight customers, even if it currently lacks the capabilities to make that product. The Kindle e-reader, AWS cloud computing services, and the Echo voice assistant with Alexa all came from working backwards, at a time when Amazon had little experience in making devices or hosting other companies’ activities on its servers. Yet all three of these offerings became hit products. Over time each has attracted competitors, but they continue to hold the largest market share.

Speed Isn’t Everything

The fundamental problem with agile, as many companies use it, is that its relentless pace biases developers. They want to get out a minimum viable product in only a few weeks, so they skimp on scoping out just what the product should accomplish. Or worse, in our experience, they make two kinds of compromises.

First, rather than take the time and uncertainty to develop a new capability, they go with the skills they currently have. They accept their existing constraints, which automatically limits the potential for a high-growth offering.

Second, they curtail their ambitions on the product. Instead of a major breakthrough, they tend toward only incremental improvements on existing offerings. Or if they do go bold, their minimum viable product isn’t really viable at all, so customers can’t give realistic feedback. The developers haven’t had time to do their homework and prepare something that’s sustainable.

The team tells itself that whatever information they get is still valuable toward some future breakthrough product. But that future rarely comes. Too often, the process of two-week sprints becomes the thing, and the team never gets the time and space to step back and obsess over what is needed to truly delight customers. Teams think in bite-sized chunks based on the resources that they already have — there’s no time for the careful thinking that breakthroughs require.

Agile proponents worry that a working backwards approach takes the authority and urgency away from teams to launch new code, get feedback from customers, and iterate rapidly. But speed isn’t everything, especially when it comes to breakthrough products. Don’t confuse writing code with making progress per se. By working backwards, you can actually get a successful product to market faster.

How to Make Agile Work Better

We’re not arguing that companies should throw agile out the window. It’s still a highly effective tool for product development, especially software-driven offerings. Many of its principles and processes have been used successfully by Amazon and other companies. After all, most product development involves only incremental changes. You don’t need a lot of thought around these improvements. Just put together two rough alternatives and try them out in the real world, where you’ll get vital feedback.

Teams with breakthrough products can benefit from agile as well, once they’ve done the kind of advance work involved with the working backwards approach. When you’re in the coding and product construction phase, you want to move quickly and avoid getting bogged down. Sprints keep you on track and ensure that you actually get something to market.

The best solution, then, is to combine agile with something like working backwards. Amazon, for example, has learned to use the working backwards process for idea development, but then follow agile to build and ship the product. If a giant like Amazon can switch course like that, then even startup companies can follow suit.

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