October 15, 2020
This is the final article in a trilogy about leadership and the challenge of how companies can measure, and thus predict, the impact that leaders are going to have on their performance. The first article highlighted the difficulty in quantifying and predicting what leadership is. The second article looked at this same question in the context of how it differs (or doesn’t!) across different cultures. We also examined the increase in companies utilising human capital analytics. This third and final article will present what we are doing at drxDATA and how we feel we can substantially add value to the industry in relation to data analytics and predicting the value of every leader.
High-Quality Decision Making
Getting recruitment right makes a major difference to organisational success. Boston Consulting Group found that delivering on recruitment leads to a 3.5-times difference in revenue growth between the most and least capable companies. It is the most critical HR process in determining future organisational success, followed by onboarding and retention.[i]
Effective leaders are some of the greatest value creation levers in private equity. Human performance (learning culture, engagement and interpersonal connection) is arguably more pivotal than transactional aspects (finance, timely exiting) in generating the greatest returns. Some interesting Harvard Business Review research has found that investors allocate only about 30% of their decision-making based on the quality of the leadership, and they have much less confidence in their ability to assess leadership than in their assessments of financial performance.[ii] As a result, assessments need to go beyond isolated observations to a more rigorous and set evaluation method. There is one step beyond assessing what type of leader they are, and the possible style and culture that they will develop in the organisation; it’s predicting the potential performance impact they will have.
According to Deloitte’s 2018 Human Capital Trends Report, 85% of HR leaders rate people analytics as important, but only 42% rate their teams as ready to capitalise on this.[iii] There clearly remains work to do to turn this hype into reality. “People analytics has really taken off this year and recruitment is a space with lots of activity,” says David Green, Consultant and former IBM Global Director of People Analytics. “It’s a revolution, with data being used at each stage of the recruitment process.”
The Power of Predictive Analytics
At Drax we have developed market leading predictive analytic tools and algorithms to support private equity businesses to evaluate the value creation capability of individuals and leadership teams. Based off a unique data set across every single private equity transaction since 2010, we can benchmark individuals, teams or businesses against key competitors to determine the profile which will be most additive to a business’s value creation strategy.
One of these predictive analytic tools is called the Leadership Dynamics Report. This analysis looks at a team’s overall understanding of a sector and client base (Domain); the understanding of their roles and responsibilities within the company and their expertise in executing them (Function); and their ability, competency and experience in relevant strategic goals (Situation). The report answers 21 critical questions about leadership capability and potential to understand the likelihood of successful value creation and their combined key development areas. Additionally, this analysis compares a company’s profile to others in the market, highlighting any competitive advantages that any contending team may be able to leverage. One of these reports is called the Leadership Balance report that Samuel Robberts, Head of drxDATA, has recently written about.
The value of the Leadership Dynamics Report can be utilised both pre- and post- deal. Fundamentally this is how we can support a decision maker to better understand the leadership team from arms-length pre-deal (with a crucial comparison to their peer group), and how to optimise the team to achieve their value creation strategy. For example, answering questions like: is this team set up well against the value creation plan of the organisation; how is the value creation plan going to likely change the business; is the leadership team of this organisation set up for this change? We very much see this as a decision support process that enhances one’s capability for assimilating a read out on the human side of business, on individuals and their complementarity in a team.
To illustrate the power of these insights, when upgrading a leadership team’s senior management from average to effective, drxDATA has shown that the growth rate of that business will increase by 20%.
In short, you can produce greater enterprise value from transformational leadership teams than transactional leadership teams.
To build on this, we are also developing a proprietary tool called P.A.C.E. The PACE model of development is the only tool in the market designed specifically for private equity, recognising the key leadership behaviours needed to succeed in this environment. We aim to make this an industry standard that drives the assessment and understanding of high-performance behaviours in a PE environment. It is based on research into hundreds of private equity management teams, and more than 50 interviews conducted with CEOs, CFOs, Chairs and Investment Directors, which is four times greater than the largest previous study.
The characteristics identified are:
Pragmatism describes individuals who rise to a challenge. They are independent thinkers and are happy trading on their ideologies and morals.
Agility describes individuals who are resilient and are sensitive to their customer and market. They demonstrate gear changes and adapt to different people/ situations. They don’t slow down over details.
Curiosity describes individuals who want to understand why an event has occurred and learn what the causes were. They have a desire to continually improve and rely more on others to help them develop.
Execution describes individuals who are doers; they don’t allow analysis to create paralysis. They are goal orientated and risk takers. They live with the consequences of their actions and don’t suffer fools gladly.
Currently, with new possibilities over the last decade, and the ever-expanding amounts of information about leaders, how do we determine success? This is where psychology combined with data insights, can look at accurately projecting the impact of the leadership team in a business environment, and analytic tools like drxDATA can predict the value of every leader in PE.
To finish where I started, we at Drax believe that a high performing leadership team will drive the enterprise value of a company and is the biggest opportunity that PE houses must invest in to generate a more consistent high performing team, and ultimately higher returns. As author Patrick Lencioni puts it, teamwork remains the ultimate competitive advantage of a business, both because it is so powerful and because it is so rare.
Partner and Head of Leadership