The Expanding Role of On-Demand Human Capital Models in Private Equity Value Creation

Value creation in Private Equity (PE) portfolio companies has always been dependent on time to impact, talent to execute, and prioritization of interconnected work streams. What has been changing more recently is the area of talent to execute.

The approach has been that portfolio company transformations achieving expanded multiples at exit and EBITDA growth has been mostly tied back to each C-suite hire (at least in principle). This assumption has come under heavy scrutiny in the PE business current cycle.

While talent is more appreciated as a value driver by Human Capital Operating Partners and deal team board sitters, the issue of bringing in talent below the C-suite has lacked urgency compared to C-level changes for new PE portfolio companies.

Below the C-suite, hires can be equally complex given the strategy and execution components in the role. It may take quarters before these new employees can get up to speed and deliver along priorities. For example, what would be faster to value: Hiring a RevOps (revenue operations) leader with a goal to support core sales function and compensation review or the use of on-demand consultant talent skilled specifically in those short shelf-life roles that can deliver immediately?

Two trends are driving this talent landscape change in PE portfolio company value creation:

1. Deal teams and executives at portfolio companies must move faster in a more cost-effective operating model to drive growth.
2. Operating Partners must expect more from the Human Capital Operating Partner/Operating model in PE firms and the portfolio company CHRO (chief human resource officer) function.

The new standard in value creation is to become proficient in removing talent dependencies beyond the C-suite, as well as derisking business outcomes. The on-demand task-centric model with rapid talent access for task execution is proving to be a powerful new lever in this pursuit.

Research reveals that the on-demand talent access model is a growing part of the overall global labor model, and it could have even greater potential to influence PE value creation. PE portfolio companies are beginning to look closer at how interim models and independent talents could be driving rapid transformation and acceleration of value creation. For example, Insight Partners has leveraged this new talent model to accelerate delivery of a variety of efforts, as brought to light in this interview.

On-demand talent is an attractive proposition as it’s an approach without a fixed cost impact. Inconsistently performing companies characterize the PE middle market. They’re generally demonstrated with under-invested processes and challenged C-level leadership struggling to report out KPIs of growth and value to PE owners. How have these two groups not found each other sooner? How can a revised view of this human capital model meet value creation?

Value creation definition

The measurement of value creation is the persistent challenge for each PE firm to quantify. Let’s level set a definition through a three-part functional model of value creation:

1. Top-line growth strategy (organic and M&A)
2. Finance excellence (office of the CFO)
3. Tech/tech ops functions (the pursuit of a cost-adjusted operating model)

Historically, the missing part of the strategy has been the human capital component. This impacts the velocity of a company’s output. This is especially true in the areas of go-to-market and digital transformation. These two areas require specific new skills and experience that may not be easily found nor cost-effective in a full-time role.

It’s understood in PE that human capital can have a valuable multiplied effect on driving value, as it lays over the whole value creation model. Each pillar of value creation will have its own needs in people-process-technology and how interim, on-demand, or fractional talent will play an expanding role.

These needs vary based on the perspective of the team that builds and owns execution of the value creation plan. That’s the reason the Human Capital Operating Partner must have a visible role and can contribute resources, relationships, ideas, and measurable impact beyond the C-suite. They need to be resilient and agile in how they attract and access talent for critical work streams in a task and business outcome construct.

The ability for Operating Partners in human capital to successfully access talent for core value-creating skills is more critical than ever. Two areas need to be embraced and acted upon:

1. Value creation defined and measured through the three core pillars will have individual work streams that in aggregate create the transformation.
2. The analysis of what is needed within the streams and the order of execution of activity is what we will define as taskification. An example of such taskification is illustrated here:

The more that the owners of the value creation (deal teams and executives) can work with Operating Partners to taskify roles and/or critical deliverables, the faster they can generate value creation. This is the new speed-to-value approach, and all stakeholders must expect more from the Human Capital Operating Partner group.

The roles of portfolio company operating models and on-demand talent access

Human capital has historically been organized around keeping the selling/incumbent leadership and management engaged in newco (e.g. a spinoff, startup, or subsidiary company) with incentives that would or could align behaviors to performance metrics. The alignment of incentives is important, but delivery on metrics is another challenge.

The rigor of new reporting expectations has created the immediate need for help in a cross-functional manner to report out to PE. A growth strategy will require multiple diverse skill sets, program management, and vision of new revenue streams that have not previously existed.

There’s a point where deciding on how to deploy investment capital for human capital needs (with the additional fixed costs) meets a pivot, driven by time and priority clarification, to use of interim, on-demand, or fractional talent models. Speed to value, measuring impact, fixed versus variable cost structure, and having the right skills when needed change the value creation dynamic.

PE has been an industry of outsourced skills from its beginning, from fundraising, governance, diligence, and transaction advisory through value creation ownership and to exit planning. Therefore, a natural question must be, why, in the era of better-defined value creation and transformation streams, have interim and on-demand skills not made their way faster and more effectively into PE?

A root cause of hesitation to embrace talent innovation can be that both sides (PE and portfolio company leadership) do not have equal experiences with the model and know how to leverage it effectively. While a portfolio company CFO may have used an interim FP&A analyst, it’s unlikely that the finance Operating Partner actually knows about this or played a role in selecting the on-demand talent.

If a company has defined growth streams with specific drill-down skills specific to transformation and value creation, then why would you not take advantage of a variable cost option? It will accelerate growth in a non-fixed cost model, which will drive EBITDA.

How should human capital focused operating partners leverage on-demand models to accelerate value?

The roles of Human Capital Operating Partners in private equity can be wide. The popular ones align around:

1. Manager of executive recruiting firm
2. Playing the role of fractional CHRO
3. Executive coaching resource
4. Other roles that can be directly or indirectly related to value creation and leverage for the operating partner team

More recently, it’s become clear that their role needs to go below the C-suite to drive time-sensitive, short shelf-life roles that map to value. Value creation in middle market companies has always been a challenging work stream to measure.

Two areas compound the problem:

1. While PE and portfolio company leadership may identify needed and must-have roles, they may not be able to efficiently fill them.
2. Middle market companies with revenue levels below $100M annually will have a mix of incumbent leadership, new leadership, and people promoted into roles potentially beyond their skill set.

This sets up difficulty for speed to value. There are simply not enough “A players” to fill roles with complex skill sets when they’re needed.

The need to taskify core work streams linked to value early is important; all stakeholders need to expect more from those who directly manage the access to talent and skills in demand. The ability to grow and be market disruptive will be enabled through rapid talent access around clearly defined tasks (deliverables) where the management focuses on outcomes, not inputs such as roles or talent acquired.

This will enable companies to differentiate with faster innovation in a less fixed cost model. This is how the quick beat the slow and the small intimidate the large. This talent model acts as a force multiplier to growth and value.

The proposed approach of using on-demand human capital offers two advantages:

1. A faster path to value so that there’s focus on a specific work stream mapping to value. Examples: someone to build a digital go-to-market plan, structuring of a rev ops function for the first time, product or service development with a deep industry skill set.
2. Chunking down large initiatives and executing swiftly on success, with measurement thereof. Private equity likes to see this desired skill in their portfolio company leadership. The thinking change must embrace outputs to value at a faster rate than org chart changes.

Path to value creation and transformation

Value creation is a choice and a process. Today the value creation teams must expect more focus on leveraging on-demand talent access and learning how to apply taskification to unlock high-velocity go-to-market and digital transformation motions.

Organization around what the core impactful value drivers are and clarifying the order of the must-have skills and roles is critical. Human Capital Operating Partners can leverage on-demand models to fill critical growth and profitability tasks and work streams more easily than ever. PE wants to leverage tech-enabled value creation tools and a forward-looking use of on-demand human capital 2.0. In combination, this will create an edge to set up for early wins in value creation.