Strategic HR: Using Concrete Data and Focused Actions to Measure Organizational Strength

Human resources — or what many in the private equity space call “human capital” or talent management — is the most critical factor in determining whether a portfolio company will achieve its investment thesis.

Key to effective human resources management is understanding and acting on organizational health and, more specifically, a company’s strength.

Measuring certain types of strength is easy.

You can measure the strength of a windstorm by the velocity of its gusts. You can measure the strength of an athlete by how much weight she can lift or how fast she can run. You can measure the strength of a currency by its value compared to other currencies, or how much it can buy over time.

But how do you measure the strength of a company?

That might seem impossibly hard. Unlike those other forms of strength, there doesn’t seem to be a clear metric or benchmark that tells us whether a company is “strong.” There isn’t even a clear definition of what being strong means when it comes to an organization.

Wall Street analysts measure a type of company strength using financial metrics and ratios. But that form of strength analysis is very high level and based on past financial performance outcomes. It isn’t very useful for understanding exactly what has to change in the business to drive growth and hit future objectives.

But in fact there are ways to assess and analyze the strength of a company and its ability to achieve the investment thesis for a private equity investor.

Our Organizational Strength Index (OSI) service is exactly that: a data-driven approach that applies analytical rigor to fully understanding the complexities of organizational health. The OSI equips C-suite leaders to measure company performance and identify issues that need to be addressed for value creation. The best leaders believe in the data, organizational health is a leading indicator of company performance.

Research shows that companies scoring in the top quartile for organizational health deliver almost 3X the returns to shareholders as those in the bottom quartile. Organizations that focus on measuring and managing company strength outperform their peers at every level.

Measuring Company Strength

There is an old saying in business: You can’t manage what you don’t measure.

The saying is often mis-attributed to management guru Peter Drucker (he didn’t say it) or to the father of modern quality principles W. Edwards Deming (he didn’t say it either).

Plus there is plenty of evidence that things that cannot be measured very well can indeed be managed.

So I would flip the saying on its head: If you can measure it, you have a better shot at managing it.

That’s the philosophy behind our Organizational Strength Index .

There are characteristics of a company that relate to whether it can execute on a growth plan. There are ways to gather data and analyze the capabilities or status of the company in relation to those characteristics. There are benchmarks and targets that can tell us if the company is strong enough or deficient in each one.

Our OSI pinpoints and measures the key aspects of human capital that relate to performance and growth, such as culture, people management, infrastructure, focus and related sub-topics.

We then conduct testing, surveys and analysis to produce a measurement of each area against a desired benchmark or potential maximum.

The result is a picture of a company’s strength that identifies its greatest human resource assets and also uncovers problem areas to address.

Most importantly, the OSI puts the spotlight on the strategic value of human resources management, which is often an under-appreciated discipline when it comes to strategic planning.

HR’s Strategic Value

In the early days of private equity investing, financial engineering was key for a private equity firm to prepare a portfolio company for growth and exit and to generate an outsized return for investors.

Today good financial engineering is table stakes. Every firm employs it across their portfolio companies. The new lever of growth is human capital management.

We work with our private equity clients to build a unique understanding of the health of their portfolio companies and then make the changes needed to maximize the potential for growth.

The process places the human resources function squarely at the center of strategy where it belongs.

Getting Started with the OSI

Our OSI service gathers data and provides analysis to answer questions like:

Is the company operationally complete and does it have the infrastructure to execute on its value creation plan?

Does the company have an effective strategy and ability to execute on it?

Does the company have a culture that is geared toward success?

Through these and similar questions, the OSI report provides unique insight into what must change at the company to execute on the value creation plan.

We offer the OSI as part of our Leadership Advisory Services and it is available primarily in two ways:

1. FIT Profile: Core to our Search 2.0 methodology for recruiting high-impact executives, the FIT Profile uses management science, state-of-the-art tools and behavioral assessments to generate a holistic view of the candidate and his or her fit with the company and executive team.
2. Organizational Due Diligence: Our pre-deal service works with a private equity firm to perform human capital due diligence on a prospective portfolio company, including an OSI to identify strengths and weaknesses and areas of needed investment and improvement.

Ready to take full advantage of modern, data-driven human capital management? Get in touch today to learn how our OSI offering can position your team to drive stronger business growth.