[Co-Author: Katrina Johnson, Ampersand Leadership Group]

A commercially-focused COO joins a $300M company to help professionalize the organization in preparation for a sale. Investors are impressed with his articulate and energetic demeanor, and he quickly builds rapport with the Board post-close. But his poise, charisma, and previous experience with a transaction disguise significant weaknesses in detail-orientation, analytical horsepower, and the ability to collaborate with others. Soon, rifts form within the leadership team and mistakes are caught too late, costing the company almost $1M (in just one of several examples). Could this tale have been avoided? 

Having the right leaders in the right roles facilitates rapid growth and agile course corrections. Talent upgrades (and the avoidance of talent “disasters”) pay dividends. Ineffective management teams become significant resource drains, stealing investors’ time and mental energy. Knowing the good, the bad, and the ugly up front helps investors craft a talent strategy in lockstep with the growth strategy. 

In our experience, a thorough human capital diligence will reveal:

• Leadership gaps. The diligence process uncovers talent disparities. Leaders’ skills, experiences, management style, and runway are compared against the specific objectives necessary to realize the investment thesis. For example, a leader who has made his/her mark as an execution-maverick may be phenomenal in operationally-focused roles that showcase an ability to implement a turnaround plan down to the last detail. However, the same executive may fall flat if the investment thesis calls for a strategic leader who can draw a clear roadmap under changing market conditions, react nimbly in a high growth environment, and take on a hefty dose of externally facing responsibilities. Diligence reveals such gaps sooner than later and helps investors identify the misfit. Assuming that a round peg will fit in a square hole will stymie growth. 
• Executional risks. Diligence highlights opportunities to professionalize the business and ensure best practices to mitigate risks. Examples include hiring and firing practices that lack the proper procedure and documentation, outdated compensation structures, and leaders looking the other way on employee indiscretions. In addition, diligence can expose attrition risks (e.g., high potential junior leaders who feel disempowered under a dictatorial senior executive). Identifying talent that must be retained, and examining why they may stay or go, allows investors to proactively build on the existing talent rather than rebuild after an unexpected exodus. 
• Hidden gems. All too often, a few “diamonds in the rough” are discovered. Some are high potentials stifled under an autocratic senior leader. Some lack managerial training or opportunities to develop strategic thinking. Thorough diligence can not only identify these pleasant surprises, but also offer insights on how to develop them. 
• Strengths and weaknesses of the business itself. The people who run the business day in and day out are valuable resources for understanding what makes the business tick. Diligence leverages these resources to help investors understand the current capabilities, the organization’s openness to outside help, and how to best prioritize competing needs. For example, management decries the need for expensive software upgrades to support future growth. But in reality, at least one-third of the employees lack the training or capability to use the system already in place. Technology investments may still be needed, but not before targeted training and talent upgrades to ensure the desired ROI. Beyond assessing specific capabilities, investors learn about how decisions get made, who drives the big ideas, where innovation comes from, and how vision translates into actionable strategy. 

Creating a realistic, proactive talent strategy with the right management team for the job generates financial upside and allows investors to focus on realizing new growth opportunities, rather than rehabbing existing ones. When investors think across their portfolio of assets, where are their biggest headaches? Usually, it’s people. Thus, why not apply the same rigor to the diligence of people that is typically applied to other areas of the business? And, in the process, expedite a successful working relationship from day one.

About Ampersand Leadership Group

Ampersand Leadership Group supports CEOs, Investors, Organizational Leaders, and Boards in selecting, developing, and aligning top talent to drive growth and investor returns. We partner with you, first to understand your business strategy, and then to offer relevant solutions to help you reach your goals. We collaborate with client partners that span the country, the globe, and a rich variety of industries including financial services, media, private equity, healthcare, distribution, and technology.