Four Steps for Mitigating the Risk of Making a Bad Hire
The clock is ticking the minute the deal closes. How quickly can you execute on the value creation plan and work toward your new private equity backer’s investment thesis?
Every portfolio company CEO then must ask the critical related question: Do I have the right team to make that happen?
Data we collect and analyze in our work with private equity-backed software companies shows that virtually every portfolio company requires at least one new or changed member of the C-suite.
For example, recent research by growth advisory firm SBI found that many CEOs lack confidence in their Go-to-Market team’s abilities to drive growth in the current economic climate. This means there is a good chance that CEOs of recently acquired portfolio companies will be looking to bring on new Chief Revenue Officers and Chief Marketing Officers.
Therefore, the CEO of the newly minted portfolio company now faces one of the biggest risks they will encounter: making a bad hire.
In a moment, I’ll share four strategies for mitigating this risk. These strategies are based on the processes we have developed over the years that enable us to achieve our 99% placement success rate.
But first, let’s look at the costs and ramifications of making a bad hire.
The Costs of a Bad Hire
Let’s assume a mis-hired C-level executive will be in the role for at least nine months before the need to make a change is clear.
During that time, the mis-hired C-Suite leader probably has implemented unsuitable strategies or processes. Once it is clear a change is needed, those ineffective strategies or processes need to be undone, which leads to staff confusion and lower morale.
Tack on the time to hunt for a new executive to replace the departing one, and you have lost a year or more of precious execution runway.
That has a massive impact on the investment thesis and the projected hold period for the private equity backers.
If you hired a CTO to eliminate the company’s technical debt, you are now a full year behind in that critical project. If your CRO implemented the wrong Go-to-Market process and strategy, then you’ve lost a year of growth.
No matter the role, the C-level mis-hire puts the company a year or more behind and the investment thesis in jeopardy.
Of course, you have also lost several hundred thousand dollars in compensation on the mis-hired executive. But this is actually a minimal cost when compared to the impact on the business and the value creation plan. That can amount to tens of millions of dollars in delayed growth.
There’s also a lasting impact on the brand and reputation.
An ineffective executive may undercut the quality of customer experience, leading to lost customers and damage to the brand.
Author Douglas Adams once said, “Nothing travels faster than the speed of light, with the possible exception of bad news.” Negative reviews resulting from a poor customer experience can affect a company’s reputation and ability to attract new customers for years to come.
If a C-Suite leader is let go, it can cause disillusionment, confusion, panic, pessimism, and loss of motivation among employees. That could lead to lower productivity and subpar execution, affecting the bottom line and a portfolio company’s overall value growth trajectory.
Avoiding Bad Hires
Here are four techniques in the hiring process that can mitigate the risk of making a bad hire by providing access to more candidates and deeper insight into a given candidate’s fit with the role and the company.
1. Analyze Broader Candidate Pools
Indeed, finding an executive who has successfully performed the precise role in a private equity context would be ideal. But competition is stiff for these executives. By focusing too narrowly on this profile, you might miss a slightly different leader who will be extraordinarily effective in the role.
That’s why we bring our clients access to the most extensive network of executives with private equity experience, but we also identify executives outside of the space with high potential.
Our aggregated decades of experience in private equity leadership advisory enable us to find executives with skills that will translate into private equity. For example, an executive from a successful public company may have a proven ability to deploy the latest cloud or SaaS technologies to bring products to market faster for accelerated value creation.
In addition, Bespoke has become known for its exclusive focus on private equity software executives. We are continuously in contact with recruitable leaders across the sector and will have insight into availability you cannot get anywhere else.
The goal is to widen the pool of candidates so you can lessen the effect of the tight talent market and can identify high-impact executives that the traditional approach to recruiting will miss.
2. Utilize “Advanced Scorecarding”
When scoping the role, it’s important to clearly define the specific skillsets and experience that will support your value creation plan and capture them in the scorecard.
The approach we call “Advanced Scorecarding” will base these parameters on the skillsets necessary to execute a value creation plan to achieve the investment thesis.
Maybe you need a finance executive adept at orchestrating M&A and navigating the complexities of rolling up multiple add-on acquisitions. Maybe you want somebody who has mastered Go-to-Market processes to drive revenue expansion. Or maybe you want a tech revolutionary, the kind who comes in and makes sweeping changes such as tech enablement of key internal processes and service delivery.
Advanced Scorecarding is the process of aligning and prioritizing the desired skillsets and experience around the investment thesis specific to the private equity-backed software company.
3. Employ Backchannel Referencing
Backchannel referencing is the technique of digging deeper into the accomplishments and workstyle of a candidate. We call our approach “Deep Validation,” and we use our extensive network of software industry contacts to learn more about how candidates performed in prior roles.
Did the executive play an essential role in the accomplishments they listed on their resume?
How did the executive fit with the company culture and executive team?
These are the types of questions backchannel referencing can answer, providing a level of insight that standard reference checks will not.
4. Conduct Behavioral Assessments
The “soft skills” of how a leader operates often are more critical to success than their technical knowledge of the role. A technically adept leader who fails to mesh with the rest of the executive team or who struggles to inspire others will never make the most of those technical skills.
That’s why our FIT Profile process employs Hogan Assessments to uncover how candidates will fit with the company’s culture and the rest of the executive leadership team.
Will a candidate be able to collaborate effectively with the other leaders? Do they have behavioral traits that complement those of their peers? Will the team be cohesive and execute together?
Our data shows that executives who have been placed with our FIT Profile process are 20% more likely to be in the position for at least two years, a key sign of a successful placement and that the FIT Profile works.
Working With An Exclusive Focus
The four strategies I mapped out have been proven to mitigate hiring risk
across hundreds of placements. They are central to our 99% success rate in executive placements, which we define as a placed executive who has been in the role for at least two years.
Not only do we identify the right leaders who will stay and execute, but we do so very quickly, typically closing searches in half the industry average time.
This is possible because we focus exclusively on executive search and leadership advisory for private equity-backed software companies. No other firm can offer a better process for reducing the risk of a bad hire in our space.