Plotting the correct technology strategy is critical for any business. But how do you identify people who can take private equity portfolio companies to the next level of tech sophistication?
“In terms of the talent itself, past is prologue,” observes Robert Nolan, Managing Partner at Halyard Capital. “If you can find out whether these individuals have delivered on time and on budget, that will give you a good indication.” Joining Nolan in this discussion of how to assemble a tech team are John Brittain, Senior Partner at Tatum, and Lewis Raibley, Senior Managing Director of portfolio operations at Castle Harlan.
Other topics covered include when to make the investment in better technology and better people and when to stand pat with what you already have, the differences between technological know-how and managerial savvy, and tips for recruiting the most appropriate technology talent for portfolio companies.
This is the third segment in a three-part Privcap thought-leadership series on human capital in private equity. This program also includes an expert Q&A with James Dimitriou, National Practice Director, Tatum.
David Snow, Privcap: We are joined today by Bob Nolan of Halyard Capital, John Brittain of Tatum, and Lew Raibley at Castle Harlan. Welcome to Privcap today. I appreciate your being here today.
So, we are talking all about the importance of human capital and private equity. There are lots of different kinds of people who can contribute to the success of a private equity investment. Among these are technology-focused people, and that's a fairly broad category, and we're going to be getting into the definition a bit.
But I'm interested, maybe starting with Lew and your perspective, on the kinds of challenges that, let's say, medium-sized businesses face by way of getting the technology strategy right. And then how you think about finding the right kinds of people who can help your portfolio companies get to the next level of technological sophistication.
Lewis Raibley, Castle Harlan: The biggest challenge in a small to medium-sized company is how much technology do you need? There's not a big budget for technology. If it's a manufacturing company, you want to make sure you have a good enterprise system where you can run your manufacturing plant. Maybe you don't need a lot of great customer interfaces in your technology system. Maybe you do. It's really business specific.
So our challenge when we're looking at a company is during diligence we'll look at what kind of technology do they have? Is it appropriate for the company? A lot of times you'll say, boy, I wish I had a little bit more sophistication here in terms of the systems and the people. But maybe it's appropriate for the investment. You have to decide whether or not you want to make the investment in better technology or better people.
I think we've been pretty fortunate. We've found, for the most part, a good CEO will figure out exactly what do I need in terms of technology, and what kind of technology guy do I need? And typically, we look for a guy that can run lean.
These aren't big companies. They can't afford a big technology staff. We'll look for a technology guy who is technologically savvy, but he's also managerial savvy. He knows where I actually bodies, where I can outsource. And I hate to say this, maybe where I can cut corners. We don't quite need that level of sophistication. What's fit for purpose for our organization? That's the biggest challenge we find when we're looking at technology.
And typically with the companies we look at, with a couple of recent exceptions, technology is not one of the top five drivers. We're looking for other elements to make them deal successful, but we're going to make sure the technology is appropriate for the deal.
Snow: Bob, what has been your experience with regard to thinking about bringing in the right kinds of technological talent to make your investment successful?
Robert Nolan, Haylard Capital: First of all, most of the businesses we deal with today are somehow technology-enabled. So the due diligence element up front is critical. Oftentimes we employee outside resource to help us. And in that regard, it's essential.
In terms of the talent itself, past is prologue. If you can find out whether these individuals have delivered product on time and on budget, that will give you a good indication. It might have been in a different circumstance, but nonetheless, that is critical.
Because back to what Lew said, these are companies of a certain size and maturity, and they're usually reliant on a technological change. But they're equally reliant on doing it in a timely and economic fashion. So those are the keys that we look for.
Now, in finding the right talent, that is a constant search. We have a company that I can think of right now where we have had to bring in temporary IT people to oversee their consultants by background, to oversee the team that's in there because there was a change that was required that clearly wasn't going to be implemented by those who were there. And it also enabled us to have the proper amount of time to find the right talent pool to replace them.
Yet, we had an urgency from a business standpoint, hence why we brought in outside people to sit in that role. It helped immensely. I can't tell you how much.
So it's even more important these days, because most businesses have some form of technological improvement that will enhance their business, both internally and externally.
John Brittain, Tatum: It's interesting. From Tatum's perspective, we bring in those resources that Bob's talking about in terms of interim technology executives to come in to help with needs and to assess requirements. But I have a perspective on the sort of technology from an external customer perspective versus an internal perspective.
And we have a situation with a company that we represented. It was a carve out distribution business sponsored by co-investments in large private equity firms. It was in the digital cinema business, and technology was a key driver of the business. It was a key driver for the value creation of the business, it was key driver for investors.
Technology was a focal point for debt rating with Moody's Investor Services. And we made sure, in terms of not only getting the technology right, but the people who ran the technology function were also with us side-by-side from an internal perspective. Because we had a new business, we were creating a whole distribution cycle, a whole procurement cycle, and we wanted to make sure the systems were delivered properly in terms of what our requirements were.
And to get it right, the resources that are running technology, not only in our case in this situation, understood the product and service that we were delivering, but they understood the requirements of the business internally. And that's absolutely critical.
Because for technology to work internally, you've got to have a function being run by people who understand the business, the reporting requirements, and understand how to deliver that, how to be able to say how yes, we can, not why we can't. In technology, quite often, you'll use a requirement type issue as the limitations of why we can't.
Those are not the right answers. The right answers are how can we do it and how can we deliver it. And those who are running the IT function have to understand their business, and their internal and external constituents.
Snow: Lew, you brought up an interesting point earlier, which is there's a difference between technological know-how and managerial know-how. Those are very different skills. And so I'm wondering if anyone has seen, whether at your own firm or somebody else's firm, challenges in bringing in someone who clearly understands the specs, but isn't much of a people person, or is the wrong kind of a people person.
Raibley: I guess we've been fortunate. We've acquired good technology people who have these types of skills. And John, to your point, it is important. They need to understand the business requirements, need to understand how the business works. So by and large, we've not ended up replacing technology people.
I can think of one case several years ago where we just turned over, I think three or four times, a technology person. And at the end of it, your point was the key driver in each case. We got people we thought were the right people. The management team did the right diligence on them. Checked the right references. Got them in. They just couldn't get their head around the business, and they couldn't understand why this was important and that wasn't quite as important.
And you need that as well. You need someone who, again, understands what's important to the business, and not someone who wants to build his own little pet technology project.
We also use outside resources and diligence, depending on the level of technology and the scope of it to run the business. It varies by size.
We also, when we do a carve out, sometimes you'll get a carve out that's-- really you're just not taking everything, including the systems. You're taking the people, you're taking the assets, and you've got to set up the business, and maybe you've got to go find some people.
In those cases, we do go outside. We'll hire the right consultants, and say, OK, here's the requirements, help us understand what the technology requirements are. Here's our business, here's what's going to do. Soup to nuts, give us a plan. And then we'll take that say what's appropriate, fit for purpose for the business, bring in the right resources to get it up and running.
Nolan: I'm just going to add one other thing because you touched on it. The CEO is essential in this whole paradigm.
Normally, a CTO will report into the CEO, more often than not. But the CEO has to be completely cognizant, familiar, comfortable, with the technology equation. Because going back to the point. It affects both your customer-facing side, and your internal processes. And that's the person who plays every bit as important a role as the CTO does because they're going to enable the CTO to be successful.
Snow: I have a question about tech-- obviously, technology means all kinds of things and it affects every part of a business. How do you draw a line between the technology that is needed for the operations of the company itself, and then there's sort of the technology that is tied to the actual product or the services that the company is selling. Are they very distinct functions within a company, or is there a lot of overlap?
Raibley: I really think it depends on the business. I mean I'll give you two examples of companies we currently have in our portfolio. One's a manufacturing business that it sells to other companies. Producers of products. They actually, they make plastic bottles and they sell to producers who will fill the bottle. It's very important to have the technology right in terms of planning the production system, the purchasing system.
What's important on the customer side is really having the right customer service software, if you will. It doesn't have to have a lot of bells and whistles. It's not this big complicated monster, it's just right.
We have another company that its whole product is driven on technology. And you obviously need to have a very good user or customer interface there, and the ability to quickly pull up information about a particular customer, about a particular product. It's a lot more sophisticated. They're not making anything, they're providing a service, and it's key that that customer service technology is very good.
Nolan: Just quickly, internally, and the biggest issue you face is that you're on a common platform, particularly if you're dealing with a situation where you've either merged in companies, where they've acquired a company comes from a number of different mergers itself. Either way, that tends to be a common issue in getting everyone on common platform.
Second is, today, Software as a Solution or Software as a Service based companies are proliferating. So back to your point about facing the customer, it's your touch point, it's your economic model. So it's taken on a weighted importance, given the growth in that particular area. So you're going to see more emphasis placed on technology in the future.
Snow: Very quick final question-- I guess we'd call it sort of a speed round. In hiring people to fill a technology function, whether it's the CTO or the CTO team, how often are you going through the existing network of the firm, and how often do you just pick up the phone and call a recruiting agent or someone who specializes in that field?
Raibley: We try to let our CEOs and their team hire the technology guy. We'll network, but I think by and large they're networking through their own network. And in certain cases, they will hire or retain search firm, if there's a very specific need to make sure we get the right person.
Nolan: I agree it's a timing issue. I mean we will hire search firms. We've done it in the past. We'd always prefer to go through our own network, but it's a matter of finding that right person in the most timely fashion, and that will determine the best course.
Expert Q&A With James Dimitriou, National Practice Director, Tatum
Privcap: What can a private equity client expect from Tatum during the critical post-acquisition phase?
Dimitriou: We typically get a call from private equity around transaction. So some deal's going on, a private equity firm says we think we need to replace somebody. It's typically around a role. Once a few discussions take place, it becomes evident, about half the time, that it's not about just a role but maybe it's around a solution or project team.
So the first thing we do is we listen. We say, let's talk a little bit more about the situation. So let's say the half the time where it is just a role and it's confirmed that, OK, we are going to replace a CFO, we can do that. We put some resources in front of them. We walk through the profiles and we do a match and we move forward.
The other half of the time, we'll find out that it's bigger than just a role-based solution. So we'll do what we call a discovery call and we'll get the stakeholders on the phone, might be the CEO, it might be the board, it might be members of the private equity firm, and we'll walk through what their goals are. We'll look at the model and what they're trying to accomplish and where they're trying to go. We'll also look at the culture of the firm and what they're trying to do. And based on that, we'll be able to come back-- and that might be a five hour phone call, might be three five hour phone calls.
Once we've got that information, we'll come back to them with a list of two or three candidates. We'll then come back, walk them through those profiles, and say, OK, all three of these people can do the job. It's really up to you now to figure out which one of these fits your culture.
One might be really bold, kind of a bull in the china shop, maybe that's what you need. This one over here is a little bit more-- has a little bit more finesse and can walk through a little bit more mild mannered. It's kind of like the Goldilocks syndrome, right? And basically, all of them can do the job, it's up to you to pick the one that's the right culture for you.