September 28, 2020
Our work at drxDATA on leadership analytics is often seen as an exercise in measuring and predicting individuals’ chances to succeed, and on one level that is exactly what it is. We’re all about understanding the impact an individual will have in a particular business, and their capability to positively contribute to value creation.
However, the focus on the individual is a narrow one. In order to predict an individual’s success, we have to understand their complementarity to the team with which they will work. Ultimately, leadership in Private Equity is a team game. A team of all-stars will only succeed if they’re able to cover the court and work well with one another.
This then brings me to the question of leadership balance. If successful leadership is all about succeeding as a team, it is crucial to assemble a complementary team. Our research has already demonstrated that different leadership teams typically possess significantly different attributes, both in terms of size, but particularly in terms of function. The best performing teams are typically larger and have a greater number of commercially and externally focussed functions in their teams.
The profile and membership of leadership teams, however, is not simply broken down into its constituent parts. Our research has gone into further detail, attempting to understand and define the particular focus and role of each function within an organisation, in order to understand the particular dynamics of similar functions and how these functions interact with one another. In response to this, we’ve developed the leadership balance chart.
This plots the members of a senior leadership team on two axes. Firstly, there’s a tactical/strategic focus to their role, which accounts for the degree of operational focus that they’re responsible for. The secondary axis is focussed on capturing and measuring value across the business, where there is a distinct focus for different functions.
Our research then demonstrates that the best Upper Quartile businesses establish a balance within the organisations, where each of the four quadrants of the graph is covered by at least one of the senior leaders in the organisation. In particular, we find that amongst the portfolio companies which achieve the best return, there is also typically a high degree of functional clarity. This is where leaders have clearly defined functions which they are responsible for, rather than ambiguous or widespread responsibilities that combine across different functions.
By contrast, less well-performing teams will typically see that there are both fewer members of their teams to begin with, and those team members are also significantly likely to be more clustered into one quadrant of the chart. This is an important observation, as it speaks to an element of diversity within leadership teams which, from our research, can be the hardest thing to develop and cultivate. On one level, that really isn’t surprising. Nobody goes into business in order to “build a leadership team”, and when the problem of how to constitute and build that team, leaders will often look for an immediate solution within their existing frame of reference.
This is an interesting dynamic to recognise within Private Equity backed organisations and their leadership teams. In particular, it really reinforces our understanding about the importance of the overall team and the necessity of leadership by design.
The best performing companies are able to construct leadership teams that capture a diversity of responsibility and focus, but do so in a manner that achieve a balance for the overall organisation. In business, as in so much else, getting the balance right appears to be the key to success.
Director, Head of drxDATA