COMATCH: The human capital challenge for private equity firms

Cultural fit is crucial to the success of projects. That’s why the choice of consultant is vital for value creation, says Charlotte Gregson, managing director, COMATCH, an online marketplace for industry experts.

This article is sponsored by COMATCH

Charlotte Gregson
Charlotte Gregson

The term human capital has been around for decades. Some trace it all the way back to Adam Smith, although most point to economists Gary Becker and Theodore Schultz who in the 1960s believed it could be leveraged, as with other forms of capital, to increase quality, quantity or efficiency.

Today it is more common to talk about developing and accessing talent. However, the fact remains that managing people, their skills, experience, motivation and contribution is a critical element in business success. In today’s digital economy, businesses face a wider set of challenges, higher levels of complexity and accelerating change. It has changed the type of human capital we need, and the tools which we use to access and manage it.

At the same time, the ‘talent’ being managed has transformed. Many of today’s workers are neither looking for, nor content with, a ‘job for life’. They want flexibility, variety and the opportunity to pursue their own interests both within and around the work context. Sometimes this is referred to as a ‘portfolio career’ where individuals choose to do several things at the same time, balancing, for example, remunerative work, with emotionally rewarding charity volunteering.

Technology has provided the means for many to set themselves up as independents with the ability to be selective about where, when, and for whom they work. Loyalty to a single organisation is declining whilst ethics are increasingly a factor in project and client selection. So human capital has become less about attracting, retaining and deploying people within your organisation and more about identifying, and partnering with the right skills and talent to deliver projects and growth where and when needed.

Against this background, the importance of human capital in delivering returns for private equity investments has only increased. Creating value in portfolio companies has evolved as debt-backed financial engineering, restructuring and cost-cutting have all seen diminishing returns as the opportunities for quick wins have been effectively used up. These approaches offer less competitive advantage than previously and it is simply harder to generate returns using these levers alone.

Today, private equity firms are holding portfolio companies for longer with the focus on transformation. Growth is created through entering new markets, exploring new ways to exploit assets, new business models and the huge gains expected from digital transformation. All of these require specific skills and expertise that frequently cannot be found in the portfolio company. Private equity can add value by accessing the right human capital and bringing it to bear on acquired businesses. Increasingly human capital really is at the heart of value creation. But, can private equity firms access the talent they need and are they best placed to manage the increasingly broad range of expertise needed to deliver growth in today’s economic landscape?

Different approaches

Private equity firms are becoming smarter and rethinking their approach to human capital within the open talent economy. What do you do when you don’t directly employ the consultants you need to create value? How can you attract the right people, when the ‘right people’ must exhibit an increasingly diverse range of expertise and experience? Is it necessary, advantageous or even possible to employ all the talent you need?

Many have come to the conclusion that they don’t need to maintain a full-time bench to cover every eventuality. Instead, private equity firms are establishing networks of alumni and associates which they can use to find talent when needed. Others have different approaches, for example partnering with entrepreneurs across their network to access digital skill sets.

“It is important to find consultants that not only have the right expertise but also the correct personality and work ethic to be effective in the portfolio company”

Not only do these approaches give firms access to a far wider skill-base than they could viably maintain with a full-time workforce, but they only need to engage with, and pay, individuals when they have work for them to do. Importantly, for the development of human capital, it allows private equity firms to stay in close touch with valued consultants who want more flexible, portfolio careers.

There are drawbacks. It is not simple to create and manage these loose networks of associates. Simply having a spreadsheet of names and numbers is not a scalable or robust solution. Even buying or building sophisticated AI-driven software to match individuals with roles does not provide the whole solution. Deploying human capital means deploying people, and to do that well you need to know individuals and appreciate their ‘fit’ with others in the team, and with the portfolio company with which they are working.

Outsourcing human capital

One option is to outsource the management of these associate and alumni networks to third parties dedicated to their development. Some recruitment firms are moving into this space, and they bring a broad knowledge of the market and the practice of placing people with firms. Other players, including COMATCH, have come from the consulting profession, and so have a better understanding of the business of being a consultant and the cadence of independent consulting projects.

The advantages are plain. Managed networks take on the complexity of building and maintaining a consultant talent pool, managing availability whilst cultivating relationships, staying in touch, and developing an understanding of the individuals within it. As a result, these marketplaces have access to wide and deep pools of global talent. Consultants join because they provide interesting work from a number of sources and the flexibility to choose the projects and clients that they want to work with. Our own research among consultants reveals that 86 percent say this flexibility over which projects to take is important or very important to them.

For private equity firms it is important to find consultants that not only have the right expertise but also the correct personality and work ethic to be effective in the portfolio company. The independent consultant route to human capital management ensures this is the case because consultants self-select the work they want. This flexibility also allows individuals to further specialise if they wish and to hone particular skills, iterating learning from one project to the next.

The world of work has changed, but effective management of human capital remains at the heart of driving growth in businesses. Perhaps surprisingly, the digital economy has only made human capital more important. New expectations, demands and ways of working have changed the shape of human capital. Effectively assembling and deploying the right team with the skills, capabilities, experience, and personality to deliver growth and transformation is the new alpha.

People fit cube into shape

Power to the portfolio

One important aspect of successful human capital management in private equity is often overlooked: the impact of consultants on the portfolio company.

Many traditional, family-run businesses are allergic to the concept of outside consultants. Cultural fit is crucial to the success of projects, this is particularly the case for organisational transformation. Our experience suggests SMEs are more open to individuals, or small teams of independent consultants who bring real experience of a sector to the business. Ideally, we recommend that portfolio businesses are the ones to make the final selection of the consultant they want to work with.