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Improving Private Equity Outcomes using Agility / Evidence-based Operating Systems

October 13, 2022

In this article, I’ll explore the need for and the attributes of an agile business operating system related to Private Equity (PE) portfolio companies. It hopefully helps leaders of such companies and PE professionals focused on the operations side expand their perspective on what “Agile” and "Agility" mean in their world and how they can help them improve returns realized in their investments. 

 

Dealing with common business challenges through agility

I’ve been helping companies improve their operations for more than a decade now. A repeating pattern is where a very successful company is facing growing pains affecting its ability to scale to the next level. Some examples of the challenges I’m called in to help with: 

  • Losing the Ability to Innovate You often see companies that grow successfully to the point where it seems their ability to innovate stalls. When you look deeper, you see them struggling to cope with growing technical complexity, coordination costs across teams, and leadership bottlenecks. This affects product innovation as well as GTM innovation and other key business processes. 
  • Time to Market / Time to Learn - The more complex the organization, the more time it takes to deliver value or close a learning loop. And in an environment of volatility, uncertainty, complexity, and ambiguity, this hurts your ability to compete. The bigger you are, the more you resemble the incumbents you once disrupted. Everywhere you look - product development or how the company runs its key business processes, there’s more and more friction and slowdown. 
  • Losing Key Talent - Talented people are looking for an environment where they can thrive - where they have the right level of autonomy, where they work on interesting problems with minimum friction and headaches, and where they can see the value and connect to a worthwhile mission/purpose. As companies grow, the way they operate becomes less and less attractive to talented people. They feel bottlenecked, stuck, and mired with more and more legacy and start looking for greener fields. 

Business/Organizational Agility - The New Business Operating System

Addressing these challenges by improving our ability to innovate and deliver, solving complex problems, in an environment of uncertainty, is what we call “agility.” It essentially translates to having a scalable ability to build/try/measure/learn, in fast cycles, customer-facing products as well as business/internal processes, in a way that is aligned with the company’s strategic focus. You might also call these OKRs, Distributed Leadership, Nimble, DevOps, Lean Startup, or Scrum. 

While Agile was created in the IT/Software world, more and more organizations are realizing that its principles and thinking apply broadly. Business/Organizational Agility is emerging as the term used for this new and improved “business operating system” that applies these agile approaches across the organization from product development/IT through revenue-generating activities such as Sales/Marketing all the way to how the C-suite/Senior executives are working as a team on the biggest gnarliest challenges the company is facing in executing and validating its business model.  

This new “business operating system” typically requires some virtual reorganization to teams and teams of teams that own products/experiences/value, adoption of evidence/data-driven ways of working, and a leadership style that provides clarity and empowers teams to figure out how to work and how to achieve their goals. It includes work on focus/flow, empiricism and continuous improvement at all levels of the organization. 

A useful definition of the essence of this agility is provided in the Evidence Based Management (EBM) framework created by Scrum.org. This framework can also be used to assess a company’s maturity on the journey towards being an “evidence-based managed company” or operating on an “evidence-based operating system.” The EBM framework purposefully stays away from prescribing ways of working. 

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In recent years I’ve been working with more and more companies that are applying these “Evidence-based agile operating systems” across the company. 

The trigger to “upgrade the operating system” is sometimes pro-active internal leadership. More frequently there’s a major event driving it. This can be a major new threat/opportunity, a major change in leadership, or an investment/recapitalization event. This is where the Private Equity (PE) connection comes in. 

Private Equity - Betting on improving the value of companies 

Generally, at least in my understanding, PE firms search for opportunities to “improve” assets in the form of companies. This improvement can be described as taking a company with current value (CV) and tapping into unrealized value (UV). 

These opportunities are identified and validated via a Due Diligence (DD) process. Traditionally, PE “deal teams” focus on this gap between CV/UV and forming an investment hypothesis around what might be the return on investing to realize this additional value over a certain number of years. At this point, the PE deal team has essentially a set of “bets” that if successful will create outsized value for the investors. 

Why are we saying bets/hypothesis? Because there’s a level of uncertainty around whether indeed these bets will create the value they’re intended to. There’s also uncertainty around the company’s ability to change/transform in the way these bets require. Some bets require creating products, and some change how products are sold/serviced. Some require different organizational structures. Regardless of the type of bet, one other thing to consider is that if this was such a sure bet - wouldn’t current company owners move forward on this already? In some cases, the answer is that they couldn’t without the funding brought in by the PE round. In other cases, the answer is that making the change isn’t trivial, and requires a strong capability to innovate and deliver in the company. 

Validating Change Readiness as part of the PE Investment Hypothesis

One inherent but sometimes implicit bet is whether the company is change-ready. Does it have the culture and operating systems needed to execute the investment thesis? While traditionally PE firms focused mainly on the financials, more and more are realizing the importance of assessing and thinking about culture, team health, and other operational aspects as part of the investment thesis. Looking at modern due diligence processes, you might recognize elements of Lencioni’s 5 Dysfunctions of a Team framework (or The Advantage), eNPS/Glassdoor results, or other cultural / talent-oriented aspects. The EBM framework described above provides an additional facet to explore and think about. 

If gaps are identified, working to become a lean, mean, agile change-ready company using an evidence-based operating system should be considered part of the PE “100 days plan” -  as an enabler for working on other elements of the business transformation plan. 

Focusing Agility Where It Matters The Most

Having a company-level evidence-based operating system doesn’t mean every activity in the company should be managed in an evidence-based manner. This way of structuring/working is especially useful when working on developing - developing products, services, or generally “developing company #2” (the company you want to become). Running ongoing operations might or might not require this way of working. 

One exercise that a PE deal team can run with the leadership team of a portfolio company is to assess each element/bet in the investment thesis and categorize bets according to uncertainty, complexity, dependency, and impact. Then, based on this analysis, choose the ones that would benefit the most from an “evidence-based management approach” and plan how to manage them this way. This might mean organizing a cross-functional, empowered, focused team of the portfolio company employees and external SMEs (if relevant) that will work in short cycles to create useful increments of value in this area and review them frequently with other stakeholders. It might mean creating high-level “Goals” and providing people with clarity on the Bet while giving them the space to explore alternative ways to achieve the desired outcomes via trial and error in the trenches. 

The Day-to-Day Challenges of the 100 Days Plan

Some interesting challenges typically stress the business operating system when executing a transformation. 

People struggle to balance their day job (Company #1 the current company that needs to continue running) and transformation work (Developing Company #2 - the one we are working to create) - how much capacity to assign to each? Does it make sense to manage the day job and transformation work as part of the same bucket? Who’s in charge of each type of work? Who mediates when there are conflicts? What I hear from CEOs in these situations is that frequently these conflicts between the day-to-day and the transformation go all the way up to their table, resulting in delays, frustrations, and feelings of disempowerment in times when people are already sensitive to any cultural changes and there’s increased challenge to retain top talent.

Another common friction/frustration area is goal-setting. What should we focus on now? what’s realistic to achieve? Are we involving people who will do the actual work in goal setting? OKRs are a popular goal-setting mechanism. But they're not as trivial to implement as they might seem... One common anti-pattern is to set too many OKRs, top-down. ( A better way is to provide alignment via Objectives and let teams come back with realistic Key Results. There's much more to say about the effective usage of OKRs in a PE environment, maybe later...)

This balancing act between operational and transformational work, alignment and autonomy, is a key area of focus for business/organizational agility. In my experience, Patterns such as "product ownership" and "developers", while they sound very IT/product-centric can come in very handy.

Organizing around Bets

Another common sign of trouble is when teams are overly dependent on other teams to the point that their progress is frequently blocked and spend precious time coordinating and managing across the organization rather than executing. This can manifest as leaders of teams being extra busy in trying to coordinate the complicated network of dependencies and the desire for more and more “coordination/management layers” such as PMOs, project managers, and the like. 

A preferred play is to reorganize around value - rethink team structure and bring together the people collaborating closely in executing the transformation, into empowered focused teams that self-manage with minimal overhead. These teams might include people from different functions - for example, Product Management, Marketing, Sales Enablement or Finance, Legal, and HR. This virtual team structure should be aligned with the key initiatives the company is focused on. 

Continuing the conversation

Disclaimer: If it's not obvious by now, I’m not a PE expert. I wrote this article based on my experiences as an agility coach in the trenches with PE portfolio companies, conversations with former clients who went through a PE transaction later on, conversations with CEOs, and my research into the PE space (I found the ParkerGale Private Equity FunCast especially useful btw). I’m sure I’m butchering some PE lingo and process. Please, call me out on it! 

Hopefully, this article, as imperfect as it is, convinces you to take a different look at agility as something you or others in the PE ecosystem you work with should care about. If it has, or if it hasn't, I'll be happy to hear your reactions or comments and am of course happy to help you explore further.


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