Stop Making Excuses for NOT Assessing Talent During Due Diligence
Previously the due diligence period was focused on the numbers and was primarily an operational and financial game that tested the risks associated with an investment deal. However, in recent years, due diligence has evolved beyond the numbers, now examining the talent and capabilities of the management team and the human capital side of the organization as a whole. Yet, I continue to be amazed at the reasons talent and human capital assessment is not pursued during this critical phase.
Below I highlight some of the reasons Summit Leadership Partners has encountered resistance to performing talent due diligence, and of course, the reasons why everyone should consider them.
1. We do not want to upset the Management Team!
Clients often express concern about putting more pressure on the management team and worry it could spook them from moving forward with the deal. Yet, they also tell us that when things go wrong with a deal, it typically means they did not fully understand the people side of the equation. They are then left trying to fix an already bleeding wound that has taken precious time, not to mention costs, spent with the wrong leader or team for the investment thesis. To combat these fears of making the deal “go south”, we propose connecting with the CEO early on in the process to establish that we are not there with a “gotcha” mentality, sharing the process and requirements of the team (typically 2-3 hours of their time), and what they gain from us at Summit getting involved early on. That’s right… they get something from this too. We are there to make sure the deal is a success for all parties involved. If the deal goes through, we connect 1:1 with the CEO and some of the management team to provide valuable feedback regarding what we learned about them individually and collectively to set up for success at the next stage of growth. While our ultimate client is the PE firm, we also want to make sure all parties get something from the time spent at this critical step and that the deal can be better as a result. A recent example, even when a deal did not go through for a financial reason, with the blessing of the PE firm, we continued to work with the portfolio company to help support their leaders’ growth for their next investment opportunity.
2. We can replace everyone after the transaction.
Sometimes we learn post-acquisition that the deal team did not conduct a talent due diligence, as they believed they could replace the leaders if needed and were primarily focused on the product or service the company provided. We usually hear from these clients around 6 months into the hold period, realizing that a leader or management team has created more issues with the performance and culture of the company. They have now lost key time to make the switch required to scale and are trying to hire new leaders. This creates another loss of up to four to six months to find, assess, and assimilate the right leader. By doing the upfront rigor of talent assessment, the deal team enters the equation knowing what needs to happen to scale the company and the leaders- whether it be coaching and development, team effectiveness, restructuring, or identification of the right talent for the role.
3. We don’t have enough time.
Far too often, deal partners are in a race to close the transaction and don’t think they have enough time to do assessments. The truth is, there is always time to get a proper read on the talent you are investing in. With a week or two of notice, a quick online assessment, and a couple of hours with each of the key leaders in the target company, you can get a proper assessment of individual capabilities, management team dynamics, any watch-outs, and the readiness to scale with an investor. This does not have to be an exhaustive month-long activity, and in fact, saves significant time for all once the deal has closed.
4. I am a great judge of talent, especially when I spend time with the team during dinners.
Most people believe they are good assessors of talent or judges of character. However, time after time experience has demonstrated that what is presented in the early honeymoon phase of a deal is not what you will get when push comes to shove. Talent decisions often involve greater complexity than other acquisition decisions (e.g., products, markets, customers) yet are made with less rigor, discipline, and data. Our approach is to holistically assess a leader, the team dynamics, and at times, even the organization’s performance. This aids in understanding exactly what the risks of a deal are and what is going to be required to address those risks. We employ validated personality, derailer risks, and critical thinking assessments to quickly understand the profile of the leader (beyond their own potential self-awareness gaps that they may highlight in an interview). We then interview the leader 1:1 in a comprehensive leadership and organization interview, assessing individual capabilities through pointed behavioral questions as well as alignment and support for the strategy and investment. Within that interview, we talk to each of the leaders about their perspectives of each of their respective management team members- their strengths and development areas in scaling the company. This allows us to get a holistic view of the organization.
Additionally, in some due diligence assessments, we also survey the entire organization with our Organization Performance diagnostic through our exclusive partnership with Entromy. This allows us to gather data about the organization and employee base at the same time we are speaking 1:1 with the management team; answering key questions such as are employees empowered to make decisions or might things be stalled due to inefficient processes or hierarchy? Are employees able to be flexible in meeting customer needs? How do they view the management team? Are they engaged and producing at the pace needed to scale? By assessing the organization and culture early within the diligence phase, once the deal goes through the team is equipped to take swift action to capitalize on the strengths and address the opportunities.
Thorough, focused, and rigorous evaluations of leaders and key human capital priorities early on ensure that the talent decisions are optimized to meet the current and future needs of the organization as it scales. As all firms who engage in significant deal activity have learned over time, it is the people who most often make or break the success of the deal, not the business or operating model. The bad excuses companies give for not assessing talent due diligence just don’t cut it when time is of the essence to scale and grow a company.