60% of private equity back CEOs are replaced in their first two years, which means it's a very, very difficult environment and unlocking the secrets of the highest performing CEOs is going to make a big difference to their ultimate success. From McKinsey & Company, I'm Sean Brown and welcome to Inside the Strategy Room. That was Sasha Guy, one of our guests today, describing the reality facing today's private equity CEOs, where more than half are replaced within their first two years, and where unlocking what drives out performance has never mattered more. In this episode, Sasha and Marla Kaposi join us to discuss six practices used by top PE CEOs to drive lasting value, and will also dive into the insights featured in their recent Harvard Business Review article, which we've linked to in the show notes for today's episode. And now I'd like to introduce our guests. Sasha is a senior partner based in Toronto. He leads our CEO Alpha Service line and serves private equity firms, banks, and insurance companies on strategy, finance, organization, and technology topics. He's also former managing partner of our Toronto office and former leader of our global institutional investor practice. Sasha, welcome to the podcast. Thank you, Sean, excited to be here. And Marla Kaposi is a partner based in our Boston office. She serves PE sponsors and portfolio companies on CEO excellence and talent, and she leads our work across talent diligence, CEO onboarding, and designing and leading programs to build out performance capabilities. Marla has served global clients across industries on strategy and organization to create value. Marla, it's great to have you here today. Thank you for joining. Thank you, Sean. Sasha, let's start with you. I'd love to just first get your perspective on why you led this research and its relevance for executives of companies that are not PE backed. Thank you, Sean. I think that's a very relevant question. Why would broad-based CEOs or management teams from outside of private equity be interested in what private equity backed companies do? And I think there's a main answer to that question is private equity portfolio companies in general tend to outperform. And this is a view and an insight that has been developed over multiple ventages, over multiple time periods and multiple decades that the private equity industry tends to deliver enhanced value creation relative to the public market, comparables. Now I would go one level deeper though, because I would say that in general, in the early ventages of private equity, a lot of that value creation came from what I would call financial engineering. Think about leverage. Think about carve-outs and spin-outs and things like that. I would say these days, those types of financial engineering techniques have become commoditized. And if you look at what private equity firms and private equity portfolio companies are doing to deliver value creation now, it's really around building better and more resilient businesses. If you look at the first two years after a private equity firm has acquired a portfolio company, they tend to generate productivity gains in the order of 8% to 12% per year, which is substantially higher than what you see in the public markets, which is typically 1% to 2%. So it's that sense of how do you build a more resilient, successful, growth oriented business? That I think is what is particularly interesting and valuable for CEOs and management teams across the spectrum. In Sasha, you alluded to changes in how private equity owners have created value over recent years. Maybe you could take us through some of the general trends you're seeing in the industry. I think one of the things that is not well appreciated is how fast the private equity industry has grown over the last 20, 25 years. Most of the time people will talk about assets under management and new fund raises, but we like to look more specifically at the number of private equity backed companies that are in the market and how that has trended over time. When you look at that relative to public companies, you see a very interesting dynamic that I don't think it's talked about enough. That is the spectacular growth of private equity backed companies, just the number of companies and the number of CEOs relative to the public space. 1.7 to 1 is the ratio of private equity backed companies to public companies. That's number one. This is a very fast-scoring industry. It's large and it's growing, but what about any headwinds that you're seeing? Three big challenges we observe at McKinsey. One is the liquidity challenges and exit backlogs. That's a fancy way of basically saying it's been harder to go public. It's been harder to monetize and exit in the last several years, which means private equity firms have to hold these portfolio companies for a longer period of time, which means these portfolio companies have to deliver value over a longer period of time in order to sustain the overall internal rate of return objectives that the private equity firms have. Second main challenge is around geopolitical risk and recession risks, which includes tariffs. Many politics is not something many CEOs are used to having to deal with. We were in 20 years of a fairly benign environment. That's changed and how they grapple with that is going to determine for many companies their ultimate success. Of course, we would be remiss if we didn't talk about tech, innovation and AI, which is reshaping industries and value chains globally. When you look at these challenges and then you look at what CEOs are facing, 60% of private equity back CEOs are replaced in their first two years, which means it's a very, very difficult environment and unlocking the secrets of the highest performing CEOs is going to make a big difference to their ultimate success. If you go on to the last piece of this context story, as the cost of debt has increased relative to the initial underwriting assumptions. In order to deliver the yield that was promised to the investors, you have to increase the cash flow by almost five acts. The premium on operational value creation has never been higher. I would even call it the imperative. We'll talk about the six secrets of unlocking value creation. It's really around operational value creation because at the end of the day, that's the only way you're going to get to the return that you've promised your sponsors. Thank you, Sasha. And Marla, I understand that you interviewed more than 200 PECOs over the past two years as part of this research. What were some of the themes that emerged from that effort and were there any particular areas that leading CEOs focused on or really excelled at? The first one, not surprisingly, is talent. We hear over and over again the challenges of hiring and firing with speed and rapid decision-making, finding the right people to deliver today as well as deliver on the next phase of value creation, not to mention the future sustainability of the organization. So talent comes up all the time. This is both top team as well as talent to value expertise across the organization more broadly. The second is strategy and while within strategy, we've seen some changes from exclusively focusing on operational excellence through EBITA moving towards accelerating growth. What we're hearing about now is a strong focus on accelerating growth while at the same time delivering on operational excellence. The third, we've called private equity governance. The private equity governance model is very different, but this can be expanded more broadly to think about stakeholder management. We really see great private equity CEOs and executives fantastic at managing stakeholders, keeping them close and using them to deliver value, not using them to just check boxes or for compliance reasons. And the last is culture and we'll talk a little bit more about this. The culture is very unique because it is time-boxed within a holding period. And CEOs and executives have to make very clear choices and priorities around what they can and cannot do to change culture because they often don't have a 10-plus-year runway to make that change and see some of the value creation. Thanks, Maroa. So how are leading PE CEOs engaging with those themes? So if we think about what they believe makes them successful, we've started asking this question a lot. And there's two parts to this answer. The first is a list of things you might expect, really being a lifelong learner, being curious, having the humility to ask for help, getting those broad experiences. Again, stakeholder management is something that we see a really unique skill, resiliency, and then resilience and adaptability both as an individual and that company. And one of our favorite quotes that we heard during these interviews is being a CEO is the most intense learning experience I ever had and that was after I moved into the role. Not thinking that the role is a destination. Thanks, Maroa. So I'd like to now dig in a little bit more on the challenges that CEOs face in culture and talent. When companies are bought by private equity, you mention that any changes that they might try to make in culture are often time-boxed.
And given that is a large scale cultural transformation typically part of that process and how does that play into the overall talent strategy? - It's a great question, Sean. Thank you for that. You very rarely see a large scale culture transformation because what the CEOs are doing is really trying to marry the talent decisions with the value creation plan and making sure they have the right talent accountability to deliver against that. And then separately yet connected is the organization's ability to operate with excellence, deliver speed, make decisions, and the like. But again, if there's a change needed, then they have to be very, very careful about how much change they push into the organization and how change ready it is in that context. And that's why we think the culture lessons are really fantastic because one of the things we see a lot of our clients do as a common pitfall is too much culture change all at once, five from two shifts, six new values, and the like. And these CEOs can't do that. They have to pick one thing that's really gonna make a difference and get everyone quickly aligned against it for value creation. - Thank you. And so culture must be directly tied to the value creation thesis. So maybe you could comment on the value creation thesis as it relates to the strategy. Did these outperforming CEOs view the value creation thesis as separate from the strategy or really essentially is one and the same? - Those are really one and the same. So when you think about value creation, there's a really strong focus within private equity on, where are you driving value, where are the priorities, how are those and the strategy to deliver against them? And then what's the execution plan against that? So they're really one and the same, just with a really, really strong focus on linking everything from the mission to the vision, to the strategy, to the outcomes, to who's doing it and the accountability in it, and then what's gonna happen in the short term, medium term, and then what might be for the next buyer, as opposed for this time. And so that decision making and those horizons force prioritization in a really unique way. So Sasha, a question for you that's related to the point that you made earlier, about the high expectations in terms of growth, EBITDA and cash flow that private equity CEOs have. In your experience, do they typically meet those expectations in terms of being able to drive that growth, both on a short term and a long term basis? - Well, I think you see a distribution of performance, like you would see in any portfolio, but I would say on average, the private equity backed firms, do meet substantial double digit growth in enterprise value. And that has powered the overall industry, because at the end of the day, as many of your listeners will know, you need to clear a certain hurdle rate. So let's say the hurdle rate might be 8%, or might be 10%, before the private equity firm makes money. And so there's a very clear incentive to make sure you're able to clear that, or else it's a losing proposition. So in general, absolutely yes, but of course, there will be a distribution across the top and bottom. And what we're gonna talk about when we get into the six secrets is what the top core tile performers are doing consistently. - Got it. And Marla, in the HBR article, you write about an important enabler of PE value creation called P-E-C-E-O-Alpha, or the value created from CEO outperformance. Could you tell us a little bit more about that particular concept and why you believe it's so important? - So over the last couple years of our CEO alpha initiative, our research, our engagement with CEOs in our programs, et cetera, we really believed that there was a lever that was not being pulled for value creation, and we call this CEO alpha. Not as much of a focus was being put on how CEOs are delivering outperformance as individuals and through their teams and ultimately through their organizations. We started with McKinsey CEO Excellence Book, and we said if CEO outperformance is such a driver of value in the public sector, what does it mean in the private sector? And that's where we embarked on this initiative. We'd looked at three areas of CEO outperformance. The first one's starting with raw ambition. What is the raw ambition of a CEO? And we also don't believe that we can teach this when you think about raw ambition. People have it or they don't, and that's what we've learned in a lot of our work. On the bottom of the pyramid, you have personal leadership. This is very individualized. It requires a lot of authenticity, but the outcome needs to be the same. You need to inspire your organization. You need to set a unique vision. You need to move towards rapid decision making and the like. These operating essentials, what do those top performers do differently? And how can you apply many of these practices along the way? - Okay, so CEO Alpha is positively impacted by the CEO's raw ambition, their leadership qualities, and certain operating essentials and capabilities. And on that last point in your article, you identify six really key practices that PE leaders use to unlock value. Could you maybe take us through them at a high level first before we dive deeper into each one? - So let me introduce the six overall. What we're gonna talk about are how CEOs conduct what's called a full potential diligence continuously to scrutinize their business like an outsider or an investor. From that, how they build fit for purpose management and leadership teams to deliver against the strategy, the diligence and the value. We're gonna talk about clean sheeting labor. And we're gonna talk about this in the context of good times and bad times. This isn't something that just gets done as a cost-cutting lever, but it's also a driver of massive productivity. Eliminating bad revenue, oftentimes we hear from people, how can there be such a thing as bad revenue? So we're gonna challenge the assumption that all revenue is good revenue. We're gonna talk about executing relentlessly. I know everyone has heard this repeatedly, but there are some unique things that these CEOs do in terms of how to prioritize relentless execution. And then lastly is this concept of treating time as capital, which again, we do believe applies to every leader and all of us and we'll share some interesting insights on what surprises people and what you can do differently. - Thanks Marla, so now let's dive in deeper. The first practice that you mentioned was conducting a continuous full potential due diligence. What does that really mean in practice? - This really starts with a mindset of just making sure that you and your teams are willing to say how would an outsider look at the business and look at what we're doing? There's plenty of great CEO quotes around, someone's gonna disrupt us, it might as well be ourselves and how would an investor look at this? So when you think about a full potential diligence, this is really just looking at both the what and the how of the business. The first is what you do with your business. And these are the basic set of levers of what are your strategic levers, your commercial levers, what is your operating cost structure? How are you using CAPEX? What are you doing in terms of really looking at your capital structure, your resource allocation processes? And very, very importantly, risk. A lot of times, risk is, well, we know what the risks are, but reassessing those risks in the current environment of technology, geopolitical, the competitive climate, the speed, et cetera, matters even more going forward. The part that we often see gets left behind is how you oversee and run your business. This is all about how your driving operational effectiveness is your organization fit for purpose and prepared to deliver against what you say you're going to do in your business. And then also the governance, which is how are you making these decisions? What's really interesting is you often see companies less prepared for massive success than prepared for the downside because we always protect the downside, human nature. But oftentimes we're not as prepared for the upside or the potential scale that lies ahead. And Marla, executing a full potential diligence and refreshing it, even every couple of years, sounds like a pretty serious undertaking. So in the PE companies that you studied, who was usually responsible for this? Is it typically in the office of the CFO? Is it the CEO? And what role have you seen AI and technology play to help accelerate this? Is this something that you can now set and automate a little bit more to make sure it's happening? Or can you still maintain that focus on execution that you were talking about at the same time? Two fantastic questions. The first one is we see this being owned by the CEO in collaboration with the senior team. This has to be led by the CEO. One CEO, actually that we talked to two days ago, said he took this, ran it himself, as the investor, learned a great deal in partnership with, in particular, CFO, CHRO on the organization side. And--
the CIO from a technology standpoint. So in doing that, he reevaluated it, wanted to make some changes, went back to the board of the PE and the PE sponsor and proposed those changes. This is the dynamic that we see the best CEOs doing is they own it and then they go back to the private equity sponsor and owner and say, "Here's what I would like to do." What we're seeing is that a lot of PE sponsors are doing this and then telling the CEO what they want to do. So what the best do is they own this process and anyone can own this process and make decisions on those strategic choices or have the right debate where the choices are getting made. And so from the standpoint of technology, it's an absolutely critical part of it. So we really see a unique partnership now between the CEO, the CHRO or Chief People Officer as well as technology happening here and that's where some of the healthy tension needs to happen is should we be investing in this? Are we moving fast enough? What's happening along the way? Through the technology officer in those four areas of expertise. Maybe I can just add one thing on the ownership of the CEO is there is a, this is one area where there is significant benefit for an independent challenger perspective, right? Because at the end of the day, the CEO could just do this and validate his or her own view on what they're trying to do. So this is one area where getting some external help could be anyone to come in and sort of oversee or drive the process or challenge the process could add a lot of value and it also has a lot of credibility in front of the owner, in front of the board that, hey, I'm just not eating my own cooking. I have somebody in here cooking along with me. And just in terms of thinking about addressing those potential biases in addition to bringing in an independent outsider perspective, are there any other bias busting practices that you see these top performing private equity CEOs apply? For example, maybe they employ red team blue team or other approaches that help create that clear eye view on the company and its overall prospects. Marava? So I think yes, they're doing all of those types of things, but I would not underestimate the power of AI in asking these questions. We use and we have, we work with the AI value creation memo and the more that you can engage, whether it is different tactics like red team blue team, but also using agent agents and other other tools to really tell you one of the most creative that I saw was two agents were created to debate the situation, to take out the bias and then the executives and the CEO watched the agents debate and then had a conversation about the debate of the agents. So lots of creativity here and again, this doesn't have to be every six months. You can do this easily with AI and technology to keep those ideas flowing because this should not be a once a year thing. You should always be thinking like an outsider. Got it. Okay, let's get back to the six practices now and move on to the second one, which is related to talent and building a fit for purpose management team. No problem. I'm going to make sure we can touch on all six. So let's move to talent and fit for purpose talent. I think this is one where if you look at the data, everyone knows the role of talent, how important it is, how important it is to select the right CEO, how important it is to get the right team members along the way. When we think about team and top team, there are four areas that we tend to focus on and that we hear executives and CEOs, the best CEOs focusing on. And that really involves configuration. Do you have the right people and the right team, the role clarity, alignment, operating model and interactions? Some of the recent research shows that there are three that really, really matter as foundational that are going to drive out performance. The first one, not surprisingly, is trust. Is you really have to have trust and psychological safety within the context of your team? And that matters a lot and you're likely to produce significantly better results. The second one is communication. Again, not surprising because a lot of times this is where things break down, not enough communication, not clarity of communication. Are you as a leader providing the clarity, not the certainty that everybody needs? And are you sure people are aligned? Because consensus and alignment are two different things. You may have to disagree and commit. And these are some of the nuances that fit into trust and communication. And lastly, I think the third one surprises a lot of executives and CEOs. And that's innovative thinking. And this is, connects with the full potential diligence, which means continuing to ask yourself, are we falling prey to the status quo? Are there orthodoxies we should challenge? Is there a better way to do this even though it's worked up until now? And do you have the open trust and psychological safety in order to do those types of things within the context of your team and beyond? And again, as I mentioned earlier, this also fits into the hiring, firing, rapid decision making along the way, which is something, you know, we hear over and over from every single leader that we speak to on the topic of talent, I think. And how much of this CEO alpha and the top team alpha, if you will, is driven by the PE firm and the fund sponsor through their governance training and coaching of the CEO versus just being really thoughtful up front about which CEOs and top teams that they invest in. And are you finding that serial portfolio company CEOs who've been port co CEOs a few times are maybe more effective at this? And if you're a first time port co CEO or the CEO of a non PE company, how do you still get up that curve quickly? You know, it's a great question, Sean. And it's one of the reasons why a couple years ago, we started this initiative on CEO alpha because this is an area where if you think about being in an organization, whether it's McKinsey, GE, P and G, IBM, you're getting leadership development from the beginning on and you're climbing up that ladder. By the time you get to that role, you are incredibly prepared for it. A lot of times we see different archetypes coming into private equity. If you were a public company CEO, being a private equity CEO is very different. You might be a CXO, you might be a founder, you might be from a different place, etc. So you're coming in with a very, very different mixture of archetypes. And so a lot of times there, you know, there was not much available. And now if you look at over the last couple years, the role talent is playing in private equity. You see global talent heads, talent operating partners, a stronger focus on better search, better onboarding, etc. So this is now starting to become much more of a focus. I remember three years ago being at a talent in private equity conference and, you know, there were open seats. Now it's standing remotely. So you really see the difference in the last couple years. And what role does capability building play for the CEO on the top team? Yeah. I mean, I think it speaks to, you know, what I mentioned earlier is that a lot of this is very internal to the organization. And there was not much made available to them because again, they were expected to come in, turn something around in three years. That was not going to be part of the plan. And I think now there's much more of a focus on enabling the CEO to outperform and making sure that, you know, they are delivering and they're fit for purpose for the value creation and also making sure that they themselves are redilligencing your skill set. So we have CEOs now think about the redilligents of my skill set. And I prepared to deliver is my team prepared to deliver. And how do we start thinking about that? Because with AI and everything else that's happening, there's no way we can not avoid thinking really deeply about our own skill sets along the way. And Sasha, when I introduced you, I mentioned your role in establishing our portfolio company CEO capability building program. Maybe you could tell us a little bit more about some of the benefits that you've seen for the CEOs who've participated in that program. Yeah, one of the things that we learned early on when we started looking at CEOs of portfolio companies is that there isn't very much for them. There isn't much that's geared towards the uniqueness of this role, right? It's a lot of general CEO training, executive education, and then the role in examples of here's what GM's doing. Here's what's for soon. Here's what Microsoft is doing. Well, I'm a mid market private equity firm in Akron, Ohio. How is that relevant? And I've got to deliver a certain IRR over the next 36 months to my private equity boss that's sitting on the board. Like it's just a very different challenge. And so that what we discovered when we designed the HBS program was there's a huge demand and appetite to just learn about what does world class look like as a private equity back CEO and learn from those that have done it and monetized assets and done it over and over again in our serial CEOs. It was such a huge appetite. It's a week long immersive program where you're basically in a class with, you know, between 60 and 80 other private equity.
backed CEOs, learning from faculty about what it takes to be the most successful leader of your business. So that's effectively what the program is. Thank you, Sasha. So now let's get back to our six practices and talk about labor productivity. How are PE companies unlocking individual productivity throughout their organizations? Yeah. So Marla got the fun stuff on talent and underwriting. I get the more the more crunchy things around labor productivity and breaking bad revenue. So let's talk about labor productivity and the headline message here really is to scrutinize your labor costs and productivity with the same level of energy and focus that you would bring to CapEx. And if you think about it as in in the CapEx world, we're looking to like, you know, start a new plant or buy new equipment. The number of people that get involved to kind of adjudicate and litigate that decision in a company. It's a large number of people. You debate it, you discuss it, you think about what could go wrong. Is this really necessary? Etc. Versus in the hiring space, it's it's surprising how much freedom is provided to executives to just bring in new people and start a new team. And while I really need this, okay, go ahead. And what we find in the leading private equity companies is no, there's a there's a really big focus around are we maximizing labor productivity? Why? Because it's the single biggest cost item in 95% of businesses is people. So you want to bring that same level of scrutiny to those decisions that you bring to CapEx for a particular piece of analysis we did real company where we were evaluating the productivity of procurement specialists who are effectively creating purchase orders. And it's a very large kind of B to B business where there's a lot of purchase orders being produced on a daily basis. And what we found was if you actually stratify the people based on the number of purchase orders that they're putting out and you normalize it for complexity. You see a distribution. And what you see when you when you look at this distribution is the top half of the employees is producing 91% of the output. You could take this distribution and look at call center representatives. You could look at sales force. Any large labor force you will see a distribution in performance just by definition you will see that in our experience oftentimes is quite lopsided. And so private equity firms often do is they they look at labor productivity this way through this lens. And then they ask themselves is there a way we can reallocate work from lower performers to higher performers exit the lower performers pay the higher performers more and still generate value for the business. So that's a little bit of how they they provide that level of scrutiny to labor spend, improve productivity, also improve team scores, labor engagement scores, employee engagement scores, as people see that they're being rewarded for the great work that they're doing. Okay, so let's move on to secret number four eliminating bad or unprofitable revenue. How do PE companies and their top performing CEOs identify and reduce it and what can public companies learn from their success? This is another really interesting kind of mindset shift that we see in private equity firms versus general publicly listed companies publicly listed companies in general are very very focused on top line growth and it's a critical driver for them. They watch it, they scrutinize it, they want to be part of a growing company. It's like one of the top KPIs that the management team focuses on. What you find in private equity backed companies is an intense focus on free cash flow post capital charge free cash flow post capital charge and they're intensely focused on driving that number as fast and as aggressively as they can, which ultimately leads as we all know to true value creation sustainable value creation. And so one of the ways that they go from revenue to free cash flow is they they're very focused on cost allocations in order to kind of get to a really clear view as to how profitable the revenue is of a particular product, a particular service, a particular geography, a particular location. And so you can see how they take revenue, they strip out direct costs, they strip out indirect costs to get you to the EBITDA line, but then they go further they take out taxes, they put a working capital charge, they take a capex charge, they take a capital charge to get to that free cash flow number. We think there's no reason you can't apply this level of analysis and thinking in all types of businesses. We just don't see it as often in the non private equity space. Thank you. And what role are you seeing technologies start to play here? Bad revenue seems like something that you'd really want to keep a close eye on. And are you seeing any of these top performing CEOs employ AI agents or other tools in their organizations to help with this? For sure. So technology and automation is revolutionizing cost allocation methodologies because underlying everything I just said on both labor and revenue is cost allocation. Do we understand the cost and can we tie it to particular products, customer services, geographies, blah, blah. And yes, there are there are a number of tools that are now in the market that allow you to draw those linkages between your kind of your overall cost pools, your SGNA cost pool, your overhead cost pool, and allow you to draw, draw much better linkages down to the individual call it units that you're that you're focused on analyzing. So technology is is is is really revolutionizing that there's any number of tools that are out there to help you draw better better connections. In some cases companies are bypassing their legacy data systems, which is typically very messy and just bringing in a SaaS based product to help them help them do this. So so absolutely. On the on the AI agents piece, there are two things that Marla talked about on that on that side that's worth mentioning. One is an AI driven value creation memo. So just to be more clear on what that is is McKinsey for example has a tool where we have built an AI agent that sits on top of a bunch of proprietary data, think like benchmarking data, cost data, things like that. And by just getting the name of your company and and what your aspirations are, we can then run that agent on top of our proprietary data plus all of the traditional kind of chat GPT and theropic, uh, Grock data and pulled that in clean that data and produce a value creation memo in a matter of 15 minutes. And what we have found when we put that in front of management teams and CEOs is they typically say there's a bunch of stuff in here that isn't quite right. But if we focus on what's actually very interesting, we instead of evaluating the memo say did we learn anything from this memo universally, people find tremendous value in challenging their thinking. And Sean maybe I'll just share one example of what a CEO did after doing this analysis because it's important to also not forget about some of the traditional levers like pricing in terms of this. So a CEO found two customers that clearly were delivering bad revenue and a lot of times keep in mind the culture that's creating this type of bad revenue. Well we have to do this for this customer, we have to do this we're going to lose this customer. We have to amp up this feature set and the like which is oftentimes some of the behind the scenes that drives the bad revenue. So she went out to the two customers that had the highest revenue and she doubled the cost of her product and service. And everyone was we're going to lose them, we're going to lose them. Well what do you think happened? They just paid it and didn't even question the invoice. And so it was a real message back to her organization around pricing revenue, what we control, what the value of our products are. And it all started with an understanding that we are not making money off of these two customers and here's why. So if they want to be a customer we have to double the price, if they don't pay the price, she was fine losing them. You have to be okay with that which is not something that's easy to do. But in that case, they just paid the bill. Well that discipline sounds like it might be tough in the short term, but that it definitely results in longer term value creation. Thank you. So now we have two more secrets left. Marla, maybe you could take us through secret number five. The fifth secret is this concept that hesitation is the enemy and really outperforming CEOs are the organizations change agent. When you think about a leader being hesitant, I want to just talk for a minute about how impactful that is to everyone around the leader. It does things like reduces alignment, questions, assumptions, causes inefficiency often results in analysis paralysis because what more work needs to be done to get to that decision. The best CEOs will tell us I'd rather make a bad decision, especially if it's reversible, move on and fix it so that we are driving
that momentum and we don't stop the momentum. So superior execution really includes, as Sasha mentioned, using the AI memo and other diligence tools to think like the investor. Why? What would the investor do? For private equity CEOs, they're always thinking about the current investor and the next buyer. There's no way to not think about that. And they're also thinking about building sustainable organizations, which sort of surprises many people that PECEOs are thinking about that, but they do think around those three horizons. There's always a rigorous programmatic M&A engine, assuming that M&A is a huge part of the strategy. We rarely see where it's not, at least some part of the strategy. Making sure that the CEO creates a single source of truth in terms of communicating performance, outcomes, various decisions and the like. Making sure that the infrastructure is in place. Very often we see organizations wanting to drive transformation, but leaving the organization and the governance the same. You can't do that. There have to be swift actions there. And unlocking the engagement of the workforce. We often use the term enroll the workforce in what you're trying to achieve. And also we see more and more CEOs not using the word transformation. There's layered transformation and the constant transformation. There's a lot of change fatigue along the way as well. So when we see the organizational health dimension of it, it's impossible to ignore organizational health and culture, regardless of the organization that you are sitting in. It really drives differences in total shareholder return. And as we mentioned earlier, the private equity CEO has to be laser focused on what can I do within the organization? Where is it changed ready? How will it deliver on the investment thesis and the value creation plan? And what quite frankly are some of the things that I just am not going to do because they don't have the return on the investment and they're not going to deliver against it. And we often think that everything has to be a part of culture and they really separate those two. And in the spirit of thinking about prioritization, Sasha, let's turn to that final and sixth secret, which is around time management. How do leading PECO spend their time and make improvements to their own personal productivity? I understand you worked on this with a private equity sponsor that had more than 100 portfolio companies and wanted to determine how they could help the leaders of all of the portfolio companies become more productive with their time. We started by surveying those 100 different CEOs and asking them, what do you think is the optimal time allocation across six categories? So one is managing yourself, having a loan time to think. So think about that as thinking time as a leader. Number two is building and selling your vision and both inside the company and outside the company. So what is your vision for the company? What do you want it to be? And then how do you sell that vision? Number three is managing performance, right? Checking on reports, figuring out how we're doing, where the gaps, the variances. Number four is creating an execution plan and overseeing the execution plan. So you've got the vision, but I need to execute it. How are we doing against all the different milestones that we need to be progressing against? Number five is leading externally, spending time with customers, spending time with suppliers, and spending time with investors. That's the external side of it. And then lastly is leading internally, which is spending time and meetings and working with your colleagues and problem solving and firefighting. And so those are the six categories we came up with and they did the survey and we said, what's the optimal allocation across these six categories? Okay? That's how they thought they should allocate their time. And if you look at it, it looks pretty well distributed, right? All of these are important and it's kind of roughly equal or so waiting across all six. Then we ask them a second question, which is, how do you think you're spending your time? So number one is what's optimal? Number two is, how do you think you're spending your time? They said, you know what? I think I'm spending a little bit too much time in meetings, firefighting. That 15% went to 30%. And I'm probably spending a little more time with customers and suppliers and everything else kind of gets crunched down a little bit. That's what they, how they thought they were allocating their time. And then the last piece was the fun part. The fun part was we actually then did the dreaded calendar analysis. Then into their outlook and calendars and we actually categorized the different things that they were doing and low and behold, the managing yourself and the alone time, thinking time was pretty much zero. And they were actually spending more than two thirds of their time in internal meetings and firefighting. So what's the insight? What's the point, right? Behind us, this little, little exercise. I suspect this is not unique. But by being more intentional about how you want to spend your time and being more honest with yourself on how you are spending your time, you can start to put practices in place to get closer to optimal. For example, delegating more. For example, being more ruthless on which meetings you actually need to attend versus you just feel you should attend. Being a investing in a great executive assistant or personal assistant who can help you take control of your schedule, making sure you budget time for yourself and thinking maybe 15 minute increments between meetings or that hour at the beginning of the day, whatever works for you. Be intentional. Thank you, Sasha. And in terms of support mechanisms, you mentioned that you could have an executive assistant who really focuses on this. But this also seems like something that could lend itself well to some technology assistance to help you determine whether you're actually living up to the aspirations that you set in terms of how you manage your time. Do you have any examples of that that you can share where the CEOs leverage technology to make this leap back to the benchmark for how they invested their time? Yeah. I mean, just on your point of technology, there's very easy agents that can be built that basically look at keywords in your calendar and do the categorization for you and then give you pragmatic ideas as to how to do a better job at allocating your time. You can also work with it with your assistant when things are getting booked in your calendar to label things accordingly. And then the agent can then more easily crunch the numbers and tell you what's working and what's not working. The other thing that can be done on meetings is I think many of the familiar with AI products that can take minutes and notes and synthesize the outputs of meetings. You kind of carry a little microphone, either on your lanyard or your phone. And I know of CEOs that say, I don't know, I no longer go to those meetings, but I get the AI synthesis of what happened and what was said. And I can quickly take a one hour meeting that I did not attend. So I saved an hour and in five to seven minutes, I can get the gist of what was said. So there's a lot of productivity tools in the marketplace that you could leverage. And maybe I'll share one example from a CEO, Sean that brings together what you mentioned on clean sheeting and calendar is he decided to clean sheet his calendar. So after a year as CEO, he wiped every single meeting off his calendar. And I mean, he said every single meeting and started over from scratch said that through what Sasha described the prioritization, the intentionality of it saved himself 65% of the time he was spending before the clean sheeting. And he said his entire team was horrified when he did this because it was just you can't do that. There's this you can't you can't clean sheet your calendar. And he said, watch me and did it. And then everyone else on his team did the same thing. So it was a really great usage of those two combinations. So clean sheeting one's entire calendar sounds like a very interesting note to end on for our podcast. But before we close, I'd love to know what's next for the CEO of a research. Maybe you can give us a preview of where you're headed. On CO alpha more broadly, there's a few things we've learned over the last few years as we've been building out this capability. The first thing is this is not just applicable to CEOs. This is applicable to CFOs, CTOs, CIOs, even folks one layer down or two layers down. So we're thinking about what does the CFO excellence look like or the C suite excellence. So you're probably going to see a lot more kind of customized modules that are built for functional leaders over the next couple of years. The other thing that we've learned in our last Marla to talk a little bit about this, which is the importance of next-gen and CIO succession as being a really critical issue in the industry. Marla, I don't know if you want to mention that. Yeah, that'd be great. Thanks, Sasha. Is, you know, what we're hearing from private equity sponsors? Think back to the growth in private companies.
There's not enough qualified CEOs to fill those slots. So many of the sponsors have said, "Okay, let's make not take our own talent within our ecosystem. We have hundreds of companies." And so we're already starting programs for the 25, 30 real CEO succession candidates, whether they're a candidate, and this is what's interesting within their own company or another company in the portfolio. Because they're thinking more broadly about the ecosystem. And so getting those leaders early, helping to get them prepared and building their capabilities to really step into this role is one thing that we're seeing a great deal about of Sasha mentioned the different functional pieces. We're also hearing a lot on governance and stakeholder and how to come together because the role of the CFO is another really, really significant talent challenge for private companies. The role of the CHRO and people officer is becoming increasingly important. Then you have, as we mentioned before, technology and transformation. And so CEOs are saying, "Do I listen to my CFO or my chief technology officer because one's telling me to move fast on AI and the other one's telling me we can't get a return." And so this tension is creating more that everyone needs to understand everyone's job more so than they ever did in the past. So I think those are some of the things that you'll see coming up from us more. Going forward. Awesome. Marla, Sasha, thank you so much for taking the time to share your insights with us today. Really appreciate it. Thank you for the great questions. It was really fun. And thank you to all of our listeners for joining us today. We hope you enjoyed the conversation and we welcome your feedback and ideas for future podcasts. Just email us at
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