Nearly every midsized company talks about the need to build a strong bench of internal candidates for the top management team. I agree: nothing is better than home-grown talent. However, sometimes a candidate isn’t ready to be promoted and the company simply cannot wait. In those cases, recruiting is the only option but that alternative can be rife with risk.
With that in mind, the fastest way to get great executives onto the top team of a midsized company is by having a deep bench of external candidates built up over the years by means of purposeful networking. That’s an important tool used by top-performing private equity firms to turbocharge the growth of their portfolio companies. They build a network full of plug-and-play star executives just waiting to be tapped.
So how strong is your network? Some CEOs get trapped in their own business, rarely getting out and engaging with peers and other industry leaders. Many people think they’re building a strong network when they’re at networking events, drinking wine while exchanging business cards and having light banter with people they don’t know. While meeting people is a start, at the heart of every strong network is a stable of verified heavy-hitters.
Building and maintaining a top-quality management team is one of the keys to a high-performance organization. Yet when hiring executives, most leaders of midsized companies use standard hiring practices: collecting a list of candidates they do not know, then putting them through an interview process. This is highly risky, even with the help of the best recruiters and diligent interviewing and onboarding processes. In fact, the in a recent survey by the Corporate Executive Board, they found that nearly half of the executives recruited from the outside fail within the first 18 months. Additionally, the cost of a bad executive hire is two to three times their salary in direct costs, plus potentially 8-10 times their salary stemming from bad decisions, according to Joseph Daniel McCool in his book Deciding Who Leads.
In some sense, it might be seen as crazy to hire a CEO outside of your network and trust him with a company worth tens or hundreds of millions of dollars: yet this is a common practice. In contrast, some leaders build and maintain a network of executives they have seen in action. These are people with whom they have shared a foxhole, as well as connectors: people who have a strong network themselves. When they find an ideal candidate through their network, such companies get more reliable results. Katie Solomon, director of human capital for San Francisco-based private equity firm Genstar Capital, says the firm has recruited 76% of its portfolio company executives through its network. For example, Genstar hired a particular CEO for one of its portfolio companies after he had helped them conduct due diligence on several potential investments. In another case, Genstar hired a CEO whose prior company had a longstanding vendor-customer relationship with another CEO already in the PE firm’s portfolio.
A high-performance human network has two variables. One is the breadth and diversity of the network. The second is the number of proven high performers in that network. Make a written commitment of time and money toward building your own strong human network, and put someone effective in charge of it. For midsized companies, a strategic HR leader is a natural pick.
Inventory your network of verified high-performers into categories: talk to each of your C suite executives and board members and refine your list. How many of these candidates are potential CFOs? How many potential product experts? How many prospective board members? They might not be perfect for your needs today but they could someday qualify for a leadership role in your company based on your personal experience or that of someone you highly trust. Contact the more highly-connected members of your network and do an inventory with them as well. Then identify the gaps in your network by category and set goals to reduce those gaps.
Get out of your office. Trade shows and association are ideal opportunities to meet industry leaders and find commonalities. Moreover, there’s nothing wrong with identifying an industry leader then picking up the phone to introduce yourself and to suggest getting to know one another. Most will say yes. Find or make opportunities to connect with these people. Perhaps it starts with coffee, but look for opportunities to do some work together, whether it’s an industry project, or some other activity. As the relationship with each individual develops, find a project for which you can hire them to better verify their ability.
Midsized businesses led by CEOs who haven’t had other corporate executive roles in their past often believe that outsiders-and anyone who works for them—are “enemies” and not to be trusted. This mindset creates isolation and a weak or nonexistent network. Leaders who seek growth know that many of the people who work elsewhere may shift companies in the course of their careers. Some of these executives could be the key to capitalizing on business opportunities, so they encourage a level of openness in their leadership ranks. For example, Genstar, like other PE firms, often drives growth through acquisitions. That requires its portfolio companies to regularly get on planes and meet industry leaders, driving the development of a stronger network even when no acquisition occurs.
While personally verifying an executive’s ability is ideal, any one person has only so much time. Do not underestimate the verified networks of people in your trusted inner circle. Identify people around you with very strong human networks (“connectors”) and focus your energy on building trust with them. Remember that just knowing connectors isn’t enough; they have to believe that you will treat their network well and that you deserve the benefits of decades of network development on their part. Before you hire each new leader, carefully evaluate the strength of their personal network.
Genstar illustrates this point well. Although the firm has 16 portfolio companies, they restrict investments to four industries. That enables the firm to methodically concentrate its industry knowledge in the form of what they call Strategic Advisory Boards, or SAB. Within each industry vertical, Genstar has built an SAB comprised of 6-8 of the most connected and successful industry leaders. Genstar’s SAB provides the firm and its portfolio companies with a rich source of operating experience and strategic insight. SAB members work directly with Genstar to source and evaluate potential investment opportunities as well as assist portfolio companies—frequently as board members—to develop strategic plans, expand market opportunities, source acquisitions and recruit executives and board members. Most devote up to half their time to Genstar-related activities, and the remainder on their own pursuits. Of the most recent eight portfolio company CEOs it hired, five came from the SAB network and the other three from the broader network that Genstar maintains through its principals and portfolio companies.
Genstar’s 2011 carve-out acquisition of Insurity, which was sold to TA Associates in October 2014, was originally identified as an acquisition opportunity by SAB member David Wroe. David had been working with Genstar to identify insurance software and brokerage opportunities. Following Genstar’s investment in Insurity, David subsequently served on the board and worked hand-in-hand with the CEO Jeffrey Glazer on several key projects. Portfolio company Acrisure needed to strengthen its C-suite after completing 8 acquisitions in four months. The CFO, COO and GC were quickly recruited, all through the network. CEO Greg Williams says, “I have 20 years’ experience with private equity. Plenty of them have capital, but the first criteria on my list was industry knowledge and connections. Genstar has invested in accumulating people with decades of experience in the industry, and those people are available to me; some even sit on my board.” The company is continuing to grow, making 28 acquisitions in just 16 months since partnering with Genstar.
A high-performance human network is required for high-performance business results. Like anything of value growing the strength of your network will take time. There will be missteps, as you identify people who do not qualify as high performers. However, over time the number of verified high-performing people in your network will become a crucial factor in increasing the performance of your company.
