It’s becoming harder for financial sponsors to find value in the investments they make, particularly in an environment of higher multiples and longer hold periods. Targets are often marketed to maximize value realization at close for the seller, potentially leaving the buyer struggling to find sustainable ways to improve earnings and returns going forward. In this environment, workforce-led value creation can be a critical lever to accelerate progress toward financial goals.
A company’s workforce is generally well aware of significant performance challenges and opportunities. With the right tools, empowerment and accountability, they can develop and execute on solutions to increase enterprise value. The most effective private equity-backed companies establish technology, culture, and governance enablers that position key leaders and teams in the workforce to take ownership of value creation strategies at the local level. For example, at a retail company expected to realize supply chain efficiencies, this might mean mobile tablet technology that enables real-time data visualization and procurement management in stores, with decision rights and incentives that empower store managers to take pride in anticipating and resolving inventory issues proactively. In a back-office environment, this could mean the implementation of technology to promote the development and sharing between employees of automation solutions for specific manual processes and reporting tasks.
There are tangible financial and organizational benefits to be realized quickly—this is not an organizational development story of long timescales and indirect results. With meaningful and sustained investment in workforce-led value creation, companies can realize an extra 10 percent to15 percent of benefit to large-scale transformation initiatives, up to 40 percent reduction in workloads on individual roles, and more than 5 percent improvement in overall workforce retention. These benefits mean more output, more opportunities to reduce existing costs, and higher customer satisfaction.
The time clock for value creation starts immediately at close, and financial sponsors want to see strategy adoption begin as quickly as possible. Three levers are key to enabling the workforce to get going:
Technology improves awareness and visibility of operational and financial performance. Sponsors are increasingly assessing technology infrastructure and tools during diligence, and this is a good starting point for understanding the potential for workforce-led value creation. A robust technology diligence should include assessment of third-party application and service licenses and their interfaces to other enterprise applications. Then, the right knowledge and experience of the technology market and landscape will help the sponsor understand whether the target’s licenses and applications are enabling or constraining its workforce’s contributions to value creation.
In order to set the stage for employees to design, implement, and scale new ways of working, it is critical to understand the existing organizational culture--how things get done, what is valued, and who has influence. Cultural assessment begins in diligence, and an understanding of an organization's core traits will inform how best to engage employees in any new value creation effort. In many organizations, workforce-led initiatives are not the norm, so they will require a shift in behavior. To get employees to act in new ways, networks of informal leaders within the organization are an often-overlooked resource to accelerate change. These are the most emotionally intuitive, motivating, and socially connected influencers at all levels, not necessarily in formal leadership roles. They excel in figuring out the ‘how’ of evolving behaviors and motivating their peers, while working adeptly within the existing culture.
Once the deal closes, act quickly. The initial weeks and months post-close provide an opportunity to find and engage this subset of key influential individuals who will determine the fate of any value creation strategy that requires a shift in how people think and act. The most effective engagement strategies combine face-to-face interactions with technology-enabled communities that let these informal leaders convene, share stories and practices, and spread their influence to help the workforce align key behaviors with new strategies. One of the most underutilized value creation strategies in private equity is the early, proactive recruitment and connectivity of an organization’s ‘informal leadership’ as architects and accelerators of desired behavior change.
It’s important to support workforce-led value creation efforts with the right governance and management practices. Governance allows for more productive and controllable collaboration across the workforce. Formal systems to track and reward progress help an organization meet the challenges of sustaining and managing workforce-led value creation efforts. It's fair to set the expectation of transparent results reporting at the board level—in terms of dollars of value created, hours saved, initiatives implemented, and numbers of employees involved. Here again technology can enable the visibility, analytics, and shared accountability.
Beyond the reporting of results, boards of directors should be aware of how workforce-led value creation activities are governed, ensuring in particular that technology-oriented improvements are structured and integrated appropriately. Finally, it's important for the company to understand which members of the workforce are contributing and investing the most in support of value creation efforts, and to prioritize their retention, connectivity, and informal leadership roles as a means of spreading positive behaviors to accelerate progress.
Organizationally and commercially, companies today operate in an environment of flatter hierarchies, geographically distributed workforces, and higher demand for individualized, tailored offerings from customers. In this situation, capable and proven senior management teams are still necessary but not sufficient. There are too many decisions to be made, too much to be managed, and too much variety to be produced and delivered. As a result, more creativity and solutions have to come from the workforce. Companies are increasingly making conscious investments in workforce skills and development in order to enable these workforce-led efforts, and the most successful companies are tapping into the capabilities and influence of employees at all levels to help design and drive the evolution.
Technology, culture, and governance can work together as mutually reinforcing enablers in the flywheel of workforce-led value creation. A targeted assessment of key technological, cultural, and governance requirements combined with a sharp focus on implementing the most strategically critical enablers post-close will invariably reduce execution risk and position the sponsor to accelerate value realization. Choices abound in all three areas, and generally these technologies are both implementable within a horizon of weeks rather than months or years, and built to exist within complicated information technology environments. They all improve a workforce’s ability to positively impact their own jobs and the performance of the company. This flywheel opportunity should be on the radar of any sponsor today, whether in diligencing the next target or in convening the next portfolio company board meeting. The capabilities and knowledge are available today to help set these efforts in motion, and now is the time to leverage them.
Principal, Private Equity Value Creation Practice, PwC US
Principal, Transformation, PwC US