THE CHANGEMAKER EFFECT
INVESTORS AND PRIVATE EQUITY
Human capital due diligence ahead of investments, mergers and acquisitions is usually overlooked in favour of a ‘trial and error’ approach resulting in high levels of failure and squandered investments. De-risk your investment whilst improving your financial returns using The Changemaker Effect’s proprietary science based methodology.
The Case for Investors
The capability of the CEO and the senior team is the single biggest predictor of future business and investment performance. Knowing whether a senior team is ‘big enough’ though is usually left to trial and error. In the case of mergers and acquisitions this is exacerbated further when making decisions on the leadership and structure of the new combined entity.
The Changemaker Effect’s human capital practice uses a unique science based system to address this problem and brings real rigour and objectivity to human capital due diligence. The right senior team can be configured within the right structure from the start allowing the combined entity to move forward at pace.
At the heart of the science is the notion that we are not all able to handle the same levels of complexity. Integrating two or more businesses adds considerable complexity. Even if the senior team were able to handle the complexity of their old roles they may not have sufficient ‘complexipacity’ for the new ones. Making these decisions in the absence of any due diligence can result in serious consequences as our case study below will reveal.
A family office bought Fintech A first and quite quickly afterwards Fintech B. The CEO of Fintech B was granted leadership of the combined entity and quickly exited most of the senior team from Fintech A. No independent human capital due diligence was completed on the people, the culture or the organisation design.
It took 12 months before it became clear that something was wrong and The Changemaker Effect was engaged to complete the due diligence retrospectively.
What our work concluded was that the CEO was not capable of the complexity of the combined role. The senior team he opted for were unsurprisingly lightweight as he had appointed people he could manage rather than what he needed. This included a freelance CTO despite requiring significantly more horsepower in this role in order to innovate. The exception was the Operations Director who had come from Fintech A but he was marginalised due to the predominance of ex Fintech B executives and the threat he posed. The other aspect our work uncovered was that there were considerable cultural differences between the two companies.
After 12 months zero integration had occurred yet headcount had been cut to meet the business case. Less people were required to take on more work as the work had not reduced. The CEO and senior team could not see the wood for the trees. The more time they were given the worse things became. Time is never a healer in these scenarios but it is usually always granted.
The CEO left acrimoniously and in addition to the hard costs of this exit the family office was also required to inject an unplanned £12 million. A new CEO was hired on an interim basis at considerable cost and many changes were made to the senior team at yet more cost. Meanwhile the CEO of Fintech A had by this time set up a new business in direct competition with the new entity.
Had the work been completed up front our recommendations would have been to give the CEO Fintech B the role of Chief Commercial Officer, the CEO of Fintech A the role of CTO and the Operations Director ex Fintech A the role of COO, negating the need to hire one. A new CEO for the combined entity would have been the only hire necessary. A new cultural framework from the start would also have been recommended to guide the behaviours required of the combined entity.
Our people intervention is a semi-structured, highly enjoyable experience based interview. No tests. Making full use of existing talent before hiring externally is our approach and this is always very well received. An added benefit of completing the interviews is that the discussions provide further insights which can be captured as part of the due diligence and before a final investment decision is made.