Event Summary: Using Management Assessment Tools to Maximize IRR

Event Summary: Using Management Assessment Tools to Maximize IRR

June 3, 2008

CHICAGO - “ In the second installment of the IVCA Toolkit Series luncheon, Jim Intagliata and David Works of ghSMART discussed how private equity and venture capital firms can best use management assessment tools to maximize IRR for their portfolio companies.

The IVCA instituted the IVCA Toolkit Series luncheons earlier in 2008 as a way to help members respond to the increasingly competitive industry landscape.

In this session, which was held May 28, 2008 at Chicago's UBS Conference Center on One North Wacker and organized by Jeffrey Moss of Sterling Partners, Intagliata and Works walked through the vigorous methodology their firm advocates portfolio companies follow when sourcing and evaluating executive talent. Since 1995, Chicago-based ghSMART has advised CEOs and investors on how to best attract and retain - œA-  players to their management teams.

- œThe cost of getting it wrong is really high,-  said Works during his energetic and amusing presentation, which was delivered to several dozen IVCA members. Works cited information that indicated the cost of hiring the wrong executive is equal to 15 times that of the salary of the executive. He added: - œYou should think about investing more time up front to make sure you are making the right decision.- 

Works proceeded to identify the five most common mistakes in the hiring process (as compiled by a sample of 33 CEOs and investors) and indicated that wrong cultural fits, finding talent not matched for a particular role, minimal investment during the hiring process, not knowing enough about a potential hire and being - œfooled-  by an applicant's resume are the biggest mistakes a company can make.

He cautioned against using - œvoodoo-  hiring methods when evaluating candidates. This includes the - œart critic-  method (recognizing talent when you see it), the - œprosecutor-  method (asking tough questions about hypothetical situations and the - œsponge method-  (trying to know everything about somebody and spending an exorbinant amount of time in the process).

The best model, according to Works, is the - œairline captain-  where the hiring company puts together as much information ahead of the deal to identify what will ultimately make that hiring decision the most successful. According to ghSMART data, this model has an 80 percent success rate versus the other methods, which are all below 25 percent.

Intagliata then spoke to further specify how companies can put together a scorecard that helps them understand their target as well as their definition of success. This scorecard consists of identifying leadership, personal, interpersonal, intellectual and motivational competencies in prospective candidates. The scorecard will help hiring firms separate a candidate's box score from their reality.

The interview process itself should take three hours with questions that go back to high school and college performance. Some of the members in the room (most notably Tom Churchwell of Midwest Venture Partners) questioned the relevance of going all the way back to a candidate's high school days.

Intagliata pointed out that the process can serve as - œan icebreaker to generate rapport-  as well as to determine if an individual's management and professional patterns have remained consistent over a long period of time.

The meat of the interview, however, should be an extensive analysis of the accomplishments, low points, professional relationships and reasons for leaving of a candidate's jobs over the last 15 years.

According to Intagliata, you can learn almost everything from a candidate by asking them the three - œP-  questions. This includes comparing their performance to that of the previous year of hire, measuring their performance according to the plan at the outset and comparing their performance to other peers within the organization.

It's also essential to determine why a person left an organization (was it by choice or were they pushed out?). A nice indicator of this is how easily a candidate will provide referrals or contact information to employers from previous organizations. If they are easy with giving those referrals, it's a good bet that there experiences were positive.

If they come up with a series of corny or outlandish excuses, it might be a good idea to back off.

The presentation was also influenced by notable research from University of Chicago professor of finance and entrepreneurship Steven Kaplan. Kaplan's research, which has compared the performance of a company's management to its business plan, is also instructive for private equity investors when they determine what attributes make the right CEO.

A CEO who - œmay not be the most fun to be around-  but who moves fast, is aggressive, persistent, proactive and exudes high standards and a solid work ethic may be preferable to those who put emphasis on respect, listening to employees and is open to criticism.

Once a hiring decision has been made, it's recommended for private equity firms to encourage the CEOs of their portfolio companies to establish executive reviews three to six months between hires. Once in the position, it can be better determined as to whether an executive exhibits - œA,-  - œB-  or - œC-  skills. These talent reviews should than be conducted on an annual basis.

During the Q&A session, it was asked how firms and their portfolio companies can best source potential applicants. It was noted that a personal network is one of the most undervalued sources for finding talent. Also, as members of the IVCA, everyone is encouraged to post positions on the IVCA Web site and review resumes at its career center.
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