Private Equity markets are seeing bigger bets, increased competition, and higher risks. WeWork is not the only example of a house of cards that’s waiting to fall, resulting in billions of losses.
With a shrinking window for diligence, and growing valuations, the pressure to generate outsized returns is increasing with each transaction. Financial engineering, and growth valuation modeling are table stakes today. Differentiation now comes from consistent delivery based on building and leading a high-performance culture.
It’s after the transaction closes that the PE realizes many of the company’s issues are larger than anticipated, and some are completely unknown. Since PE firms specialize at evaluating companies, operational issues tend to be well-documented, often discovered in data-rooms. Organizational issues, however, are a much bigger problem. These often take months before the business impact can be detected, especially when issues lie a few layers below leadership. As a result, when Private Equity buys a company, it is essentially betting that the organizational system won’t significantly deteriorate. There is a hidden assumption that any issues such as, strategic alignment, collaboration, and bottlenecks, or even disillusioned influencers trading short term results for long-term performance, will be quickly recognized and resolved by the executive team. According to Harvard Business Review, “Helping new leaders understand [the company] culture and improve their “soft skills” to successfully navigate it may be the best way to increase their chances of success.”
The problem for PE firms is that the executive team is making strategic decisions, that affect the entire organization, without objective data to predict how the organization will respond. Is the overall organization agile enough? What are the strengths and weaknesses of each team? Which teams collaborate well (and which do not)? Who are the leaders and influencers within the organization (regardless of job title)? These issues only surface after a few board-meetings when initial aberrations in results is often first treated as an anomaly, rather than early symptom of a deeper issue. For PE firms, there simply hasn’t been a fast, accurate way to collect metrics that help the executive team recognize organizational problems and identify solutions.
The lack of data has significant implications because the post-M&A environment is highly charged. Regardless of previous promises, once the deal is done, the executive team starts making changes and there hasn’t been enough time to build trust within the organization. As a result, morale and motivation can swing wildly as people try to get settled and understand how their roles may change. Any missteps by the executive team will be amplified throughout the organization, especially any changes that appear to violate unwritten rules (those aspects of a business that are taken for granted as “the way we do things”). Furthermore, any uncertainty on the part of front-line managers can harm strategic alignment and organizational effectiveness, as people find excuses to resist change. Without accurate organizational insights the executive team will have a difficult time building understanding and momentum for the purpose, priority, and benefits of new strategies, and to have those messages resonate throughout every part of the company. These realities of post-M&A execution can adversely affect the PE’s growth and profit projections, which impacts the value of their portfolio.
As Sarah Sonnenfeld of Alsephina Consulting says:
“Organizational missteps pose a serious threat to value. We know that two-thirds of mergers fail for cultural reasons, and similar dynamics are in play for PE firms. But here’s also good news for investors and executives — what was once considered “soft” like culture or networks can now be seen with well-defined organizational metrics which link directly to financial performance.”
To act on these insights, the PE firm needs a fast, objective diagnostic that provides a deep understanding of the company’s organization and culture. This diagnostic data is critical during the first few weeks and should provide visibility into the strengths and weaknesses of the organization, and identify collaborators, bottlenecks, and influencers. Once the executive team can identify and engage with key influencers to share the goals and value of the strategy, that message and those initiatives will take root and permeate the organization, generating strategic alignment which drives growth and EBITDA. For PE firms, today’s M&A process carries higher risks than ever before. Before finalizing leadership and strategy changes an organizational health diagnostic delivers fast, accurate, and objective information that spotlights hidden risks, and surfaces opportunities, that will protect expected returns.
About Entromy
Entromy’s organizational health diagnostic platform (OHD) is powered by AI and natural language processing to help leaders evaluate the operational effectiveness of their organizations, which is critical for strategic alignment and business transformation. Entromy’s OHD provides specific, actionable insights about organizational capabilities, collaboration, and processes, delivering critical information to guide management decisions. Entromy’s technology identifies hidden influencers within each organization, who often have significant impact on the success or failure of business initiatives.
Entromy’s OHD platform has been successfully deployed at over 200 companies, providing detailed C-suite data that helps drive business strategy. Entromy allows leaders to understand risks and opportunities related to organizational cultures, giving executives the insights necessary to quickly deliver business transformations and build resilient organizations.
