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WORKING DRAFT
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April 2019
Linking talent to value in Private Equity
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Executive summary
Talent drives returns
But historically, we’ve brought less data
and rigor to talent than to everything else
We can now more clearly link talent and value, through a
combination of analytical tools and strategic rigor
2McKinsey & Company
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“It’s not what you buy, it’s what you build”
SOURCE: McKinsey OrgSolutions
Firms need to
demonstrate
sustainability
of investment
portfolios
Average holding
period for portfolio
companies has
increased, but operating
groups are resource-
and time-challenged
Capability-building is
therefore a top priority
The new priority
for success is
differentiated
capabilities
Current challenges in Private Equity
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To drive sustainable performance, the best companies must manage talent as well as they manage
money
1.0
2.0
63%
Slow Dynamic
29%
Relative TRS by degree of capital reallocation, Proportion
Probability of TRS higher than competitors, Percent
Human
capital
Mean correlation between
how capital resources are
distributed from year to year
in businesses is 0.92
On average, only 30% of
the most critical roles are
filled with top talent
Financial
capital
Rewards to bold, fast reallocation are high…
…but many companies fall
short
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In PE especially, investing with a clear focus on talent pays off
Success rate
of CEO from
start to finish
Average number
of years to
replace CEO
Cost of failure
results in 10–15x
annual CEO
compensation
44%
2.2 15x
2.5xReturn from 80% of
investments that hit
first year targets
After looking at
180 investments, a
PE fund
determined that
those that were
most successful
strategically linked
talent to value
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However, as we have heard from PE Firms directly, this is harder than meets the eye
“Investment teams
do not systematically
think about these
topics in a structured
way – leading to
blind spots post the
diligence process”
“Often we’re not
taking a data driven
approach to these
topics, with
assessments based
on meeting the
management team
rather than more
robust measures”
“We spend a lot of
time strategizing but
not enough time
thinking through the
operational
execution and what it
would take to
execute”
“This needs to be
led by the CEO, and
needs to have
management buy-in
to truly succeed”
“HR function is not
as developed as it
should be in terms of
strategically
addressing
challenges and risks
from a people
standpoint”
“People is the
number one
success factor for
us – both for the
portfolio and
ourselves”
6McKinsey & Company
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Linking talent to value provides a new lens on investing in and managing talent for value,
before and after the deal
Ongoing management
Manage talent for
value: Ensure portfolio
companies can sustain
talent management
After the deal
Link talent to value:
Get the right talent in
the most critical roles
Before the deal
Outside-in talent
diligence: Identify
talent synergies or
challenges
7McKinsey & Company
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Before the deal, publicly available data enables us to
incorporate human assets into due diligence as never before
Detailed current & historical talent data
Career
history
Aggregate across 50+ sources
400M+consolidated
profiles
Role
descriptions
Skills AwardsPublicationsCertificationsSchools/
degrees
We can now leverage a vast universe of public data – 400M professional profiles from 50+ sources
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This data can be mined to generate valuable insights on growth, talent synergies, and
organizational health
How did current and prior employees rate overall employee
experience, both relative to acquirer and to peer group?
What is the breakdown of employees in each job family
relative to peers, and how has this changed over time?
How are jobs and skills distributed geographically?
What is the company headcount relative to peers?
How has the headcount changed recently relative to peers?
Growth
Brand
Talent
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The CXO Baseball Card leverages public data to assess leadership teams before deal closure 1.0 5.0In comparison to peer organizations
ILLUSTRATIVE
3.7
3.0
3.6
4.4
Transform the biz
Stabilize sales
Boost engagement
Right-size the org
1.0
1.0
2.0
5.0
4.5
4.0
2.8
1.0
3.5
5.0
5.0
3.4
3.7
1.9
Reenergize the brand
Expand sales team
3.2
1.8
1.0
1.0
5.0
5.0
3.3
5.0
Build the digital brain
Optimize logistics
1.2
3.5
3.7
1.0
1.7
3.0
1.4
2.8Explore multi-channels
Grow the business 1.0
2.8
2.9
5.0
3.0
1.0
1. Re-structure
business
2. Scale
marketing
3. Digitize org
4. Drive
growth
CEO CFO COO CXO
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After the deal, start by determining the highest priority value drivers and size them accordingly
Incremental annual operating income by 2024Value driver
~$200M4 M&A
>$500M5 Risk management
~$500M1 Organic growth
~$200M3 Cost efficiencies
~$200M 2Technology, automation,
and analytics
Illustration with sample data
Inorganic
growth
Value
protection
Core
operating
value
A
B
C
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Rapid deployment of the best talent into the highest-value roles de-risks value capture
SOURCES: McKinsey Quarterly Winning with Talent Survey, n = 628 respondents, McKinsey client research, n = 19; PE case study
Critical roles New roles
Traditional approach to critical roles
Talent to value approach to critical roles
Key insight: Value driving and enabling roles can be found across the organization
90% of critical
talent is missed
when organizations
only focus on the
very top of the
organization
“Talent to Value” is
the disciplined
approach of focusing
your talent strategy
on the
disproportionate
value creators
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Linking talent to value provides leverage by tying business value to the most critical roles and actively
managing these roles capture value
Identify most
important roles2Get the right
talent in roles3Understand the
Value agenda 1
Create a list of 25-50
critical roles with
disproportionate
impact on value
Assess fit and match
talent based on role
requirements
Understand what will
drive value across
BUs and Functions
Prioritize development
and rigorous
performance
management of talent
in critical roles
Operationalize
and mobilize4
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Create a list of 25-50 roles with the highest allocated valueEXEMPLARY WITH SAMPLE DATA
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For each role, define role requirements and assess incumbents and successors SAMPLE OUTPUT
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Use technology to ground talent decisions in data, remove bias, and transform the conversation
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On an ongoing basis, build business accountability and HR capability to link talent to value
Make it the
CEO’s business
to link talent to
value
Coach talent to
drive value
Give HR the tools
to succeed
Build a
foundation of
people data to
drive decisions
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Do the CEOs of your portfolio companies know their most critical roles and what it will take
for them to be successful? Do you?
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Thank you