The most common issue we encounter when working with Middle Market companies is a lack of qualified executives in critical positions. As companies grow, their processes, systems, and strategies must also evolve. Every business owner who has lived through that evolution from a start-up, entrepreneurial environment to a more mature and established middle market business will have felt the “growing pains” of those shifts. In our experience, the area that tends to lag behind in most middle market companies is also the single most critical element for continued success. And that is the recruitment of executive talent. There are three primary reasons why this occurs.
First, most middle market companies lack strategies to recruit top talent and find themselves relying on staff in key positions that lack the experience and skills necessary to continue moving the business forward. While the inclination to remain loyal to long-term employees that helped grow the company is understandable, the hard lesson learned by many is that it often takes a different level of talent and thinking to address the complexities inherent in growing businesses. There is another psychological obstacle to recruiting new senior talent that must be overcome. New leaders may not fit in with the team, and they may cause a change (often for the better) in the business culture, which has become “very comfortable.”
Second, many owners rely heavily on “friends and family” networks when they start their businesses to source their initial employees. As the company grows, so too does the employee base—often through existing employee referrals (an extension of those friends and family networks). Eventually, all networks have a limit and can run dry, especially when the business is more geographically remote from urban centers and concentrations of talent.
Finally, the function most often required to effectively recruit talent, Human Resources, is usually given the least attention in middle market companies and is often absent in the early growth stages. A successful HR function needs to evolve with the business and move beyond administration and compliance to become a proactive business partner charged with building an engaged and productive workforce.
The most difficult hurdle when upgrading talent in a growing business is recognizing when a trusted executive has reached the limits of their experience. It is the rare business owner who is able to make these decisions in a timely fashion. The most common regret shared with us over the years was not recognizing soon enough that it was time to “pull the trigger” and make a change. Often the need for change was recognized months or even years before the change was finally made. Defining when to make these leadership changes should be a discussion with your trusted advisors, especially those who have lived through these changes in their own businesses.
Once an owner has made the decision to upgrade a key executive position, the first task is defining the role. It is critical to define what the role and responsibilities will be as the business continues to grow and not just the current role and responsibilities. What does the 1-, 3- and 5-year strategic plan look like? (Note: if there isn’t a strategic plan, it’s hard to know what skills you’ll need to get there) Will growth occur organically or through acquisitions? Will there be new markets or products/services involved in that growth? What new partnerships or industry relationships will be required? What internal changes will be required by business function in order to achieve the growth? All these questions should be factored into determining what skills are needed to continue the evolution of the business.
After determining what the role and responsibilities will be going forward, define what experience level is necessary to achieve success. Once again, define the experience level needed for the future, not the present. Owners should be honest about their own weaknesses and limitations. Seek out and surround yourself with talented people who will complement your own insight and experience. When it comes time to monetize the value of your business, having a deep bench of management talent is like “money in the bank.”
All organizations develop a unique culture over time (for better or worse), and success can be defined differently from organization to organization. Understanding the culture of an organization, and what drives success in top performers, is critical to understanding who will succeed in that environment. For example, a CFO from a Fortune 500 company in your industry may seem like a highly qualified candidate, with an impressive pedigree and loads of experience. But can that person really move from a large corporate environment where they were supported by many talented staff members to a middle market business where they have to roll up their sleeves and do the work themselves? Will they be able to operate and make decisions independently, or do they require management by consensus? Are they moving from a big city to a smaller community, and will they (and their family) be happy doing so?
Defining a culture is a topic unto itself, but most owners are simply too close to the business to truly be objective when describing the culture of their company. Seeking outside support in understanding the culture of an organization (both good and bad aspects, incidentally) can be helpful for two reasons. First, in finding the right talent to move your culture forward, and second, in identifying those things that need to change culturally for the company to continue profitable growth. This need not be a long, drawn-out process, but it can be valuable to get some objective outside perspectives from several trusted advisors.
Determining what defines success amongst your top performers may also require an outside perspective. Fortunately, the science of testing has advanced significantly in the past 50 years. Skills testing of all types is available for most key functions and can be helpful in determining the real abilities of potential candidates. More esoteric are the tests to determine soft skills and personality traits, but these testing options can also be valuable. In implementing these types of tools, it is best to benchmark what success looks like using your current top performers. This creates a profile that can be helpful in determining who may have the skills needed for the job and which traits that are most likely to make them successful in YOUR environment.
Recruiting, like most business activities, had rapidly changed with the advent of the internet. What used to be done through research and cold calling, can now be done much more easily by browsing through LinkedIn or keyword searching through massive resume databases. Executive recruiters specializing in industries or functions abound and can be well worth the expense when time is limited or competition for talent is heavy. Given the critical importance of finding the right leadership talent, it often makes financial sense to hire a specialized retained recruiter, many of whom have been following the careers of talented people in your industry for years. Recognize that the best candidates may currently be working for a competitor, and looking at a competitor’s website can often reveal potential candidates. However, online and other available recruiting choices can be overwhelming, and having a talented and HR professional on staff can simplify the decisions and ensure the tools chosen are used to their maximum effect.
There is another valuable option for leadership recruiting that is often overlooked. Most business owners are constantly expanding their own professional networks. Usually the purpose is to develop new business opportunities, but those networks can be a valuable source of referrals and talent. In leveraging those networks, though, it is imperative that you first have a clear understanding of the need, success traits, and cultural fit—and that you communicate them to outside networks.
The difference between good and great leadership talent can mean millions or tens of millions of dollars in a company’s Enterprise Value. Most business owners want “A” players on their team, but paying for that level of talent can be a bit of a shock to some owners. Truly understanding your local market and industry benchmarks for compensation of various roles is important, but don’t make the mistake of skimping on compensation packages or lowballing a potential star player. The one characteristic of almost all high-performing companies is the high caliber of leadership talent at the top.
That does not mean an owner has to offer top of scale salaries, but it does mean designing a compensation plan that incentivizes an executive to achieve the results you’re looking for, and that drives the behaviors you’re seeking. If that means designing bonuses, stock option plans, earn-ins or other creative structures; a properly motivated executive can mean the difference between success or failure. It can also be difficult for business founders to view themselves objectively and to recognize that what it took for you to get the company to where it is today usually isn’t what it will take to get the company to the next level. Making the investment in talent is as important as the capital investments or acquisitions needed to grow the company.
Human resources as a business function has developed more slowly than other executive management functions, but that has been rapidly changing over the past 50 years, in line with the growing importance of human capital. However, that professionalization has occurred less uniformly in the middle market. In the past, when we spoke of “land, labor, and capital,” the focus was on factory and “management” labor. But as business has become increasingly complex, the need for personnel who can grow and innovate within their roles is essential. And these talented workers are in high demand for many industries. An owner who seeks strong human resources leadership will find they can more easily define, identify, and attract the talent needed in other roles as the entire company grows and evolves over time.
Recruiting, developing, and retaining A-level players for a growing middle market business—and hiring the right people at the right time—is a critically important process, that is challenging for many middle market business owners. This is especially true for owners who have “grown up” within their business and have never surrounded themselves with an executive team capable of leading the business in their absence. Your employees and leadership team are your most valuable asset when growing a company, and the development of your leadership organization should be approached as a business process that requires focus and resources. For private business owners, we recommend you seek out best practices from established peers and professionals, and you will reap benefits for years in the future.
That is what we do at FortéOne. We provide business owners with access to experience operating executives across multiple industries and business functions that can assist them in professionalizing and growing their businesses. We work with our clients to help them assess, train, and in some cases, replace members of their leadership team. Our people know what great performance looks like, and that is the standard we work to achieve for our clients.
Give us a call and let us help professionalize and upgrade the level of your management team.
Author: John Gengler