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Capitalize on Human Capital Now to Reap Dividends Later

Written by  Mark Herbick, President of Pursant LLC

10-CapitalizeHumanCapitalNowTHE SUCCESS OF A SERVICE BUSINESS IS defined by the strength of its management team. Because typical building service companies have a bottom-heavy business model—a concentration of unskilled labor delivering service at the bottom of the organization and a few managers at the top—it is even more critical for leadership to be skilled at defining strategy, communicating that vision, motivating the team, developing new business, and driving performance. Every position becomes vital to successful execution. Is strong senior talent part of your strategy, and is your team secure?

Over the past four years, the sluggish economy has given rise to employer self-preservation, and business strategy has been defined by reluctance: reluctance to spend, reluctance to hire, reluctance to make changes, reluctance to take risks. But history has shown that companies that take bold strides during and following periods of economic downturn—making sizeable investments in new strategies while others retrench—often seize market share from unsuspecting competitors. This is particularly true for investments in human capital. Companies unwilling to separate from executives that are comfortably familiar yet ineffective may find themselves leapfrogged by those that take advantage of a flush market for talent.

Why is the market so full of talent right now?

Historically, when the economy gets tough, employers get tough on their employees— even leaders. People are forced to work harder, longer hours and wear the hats of co-workers and staff that were casualties of cutbacks and layoffs. One would assume that when the economy picks up, such circumstances would be rectified, but employers get used to this modus operandi. As market conditions and margins begin to improve, employers often do not reinvest as quickly in improving employee compensation, benefits, and working conditions. The better executives and managers begin looking for new professional growth opportunities.

Another reason why the highest quality talent is increasingly available: the “4-year career” trend. According to the U.S. Bureau of Labor Statistics, the median number of years a U.S. worker has been in his or her current job is just 4.4—down sharply since the 1970s. Employers once screened job candidates to ensure a “stable work history,” which typically meant working for one or two employers over a span of 15 to 20 years. Today, a tenure of four years with one employer is common and acceptable— especially if there is a pattern of increasing responsibility and growth. We are starting to experience a surge of executive and management departures associated with the 4-year career cycle, ignited by the quest for advancement. For example, when Pursant starts a search, we begin with the assembly of a candidate pool. Our candidate pools for CFO and Vice President of Sales positions have seen a 30-percent surge in the number of viable candidates versus similar searches last year. Many people that said “maybe” to considering a job change last year are saying “yes” this year.

But times are still tough—how can employers invest in talent now? There are signs that the economy may be approaching a recovery. According to the Federal Reserve, bank loans to businesses grew 10 percent last year (mostly in the form of lines of credit) after dropping 19 percent in 2009 and 9 percent in 2010. JPMorgan Chase, Bank of America, and Wells Fargo confirmed the growth in their latest financial results. Pursant’s clients are also indicating that their capital is beginning to flow again. The availability of cash suggests that employers should (and must) become comfortable with investment in strategies—such as executive team augmentation—that prepare their company for growth.

Why invest in talent now?

One word: opportunity. We are approaching an unusual confluence of circumstances in the human capital market: the intersection of employers’ emerging ability to invest cash, the approaching conclusion of a “4-year career” cycle for a majority of executives, and shifting employee sentiment regarding the fear of job security. This situation has given rise to opportunity for both companies and executives. Companies have the chance to add high-quality talent to their management team, while executives are able to pursue positions that offer the potential for professional growth.

For BSCs, there is an additional reason to invest in people. The entire service business model is, by definition, built on the delivery of service by people. Growth is inextricably tied to how well your people can deliver. Good companies recognize this and continually seek to upgrade to people with better skill sets, experience and networks. Pursant’s client, The Rabine Group, is a conglomerate of national specialty companies that provides an array of facility services to commercial, industrial, and utility property owners and managers. President Gary Rabine lives by the philosophy that the success of his service business is in the hands of its personnel: “Growing without great people is like adding floors to a building without a foundation,” says Rabine. “Begin with an exceptional, passionate leadership team that will in turn accept nothing less from their own staff as the business grows, and you’ve ensured the future stability and growth of your company.”

Are you hungry for top-line revenue growth? Not so fast! Whether you aspire to do this organically or through acquisitions, you need to make sure you have your current house in order. Your staff must have the bandwidth and necessary competencies to operate the current business, as well as handle the integration of new clients and businesses. Too often, companies put the cart in front of the horse by investing in growth initiatives that lead to accelerated growth, which overtasks the management team, prompting ownership to then attempt to bring in the necessary management after the fact. This is a recipe for poor customer integration, poor customer and employee satisfaction, and weak profit margins.

What should you do to capitalize on this climate of opportunity?

1. Take care of lynchpin executives: First, make sure that your “A” players are still “A” players. Have you established Key Performance Indicators (KPI) that are aligned with your projections for growth, quality, customer retention, and profitability? Is your team meeting and exceeding these KPIs? If not, do your executives have the attitude and aptitude required to achieve these KPIs? After evaluating your team, if your executives prove to be the superstars you’ve believed them to be, secure their employment by recognizing and rewarding them. Invest in their professional growth to keep pace with the growth of your firm. Seek ways to keep them tied to the business through long-term incentive plans (LTIP) and stock-oriented plans such as phantom stock. Pursant’s studies have shown that what executives want most from their employers after compensation growth opportunities is greater responsibility and expansion of their skills. This may seem counter-intuitive, and some may ask, “Aren’t I developing my team only for another employer to gain from this?” Our clients that have the strongest manager retention rates make it a regular practice to constantly invest in their people. They have found that people remain loyal to employers who take the time to develop and care for them.

2. Build or enhance the “A” team: If you’ve determined that your leadership team does not meet expectations, you need to build your “A” team immediately to stay competitive. Now is a great time to source and secure the right talent. To begin the process of upgrading your team or filling open leadership positions, the best source of talent is “passive” candidates: people that are employed and delivering measurable results in their current roles. There is a good reason these people are still working: strong performance. Your odds of achieving success through a performing, gainfully employed executive or manager are much higher than through a respondent to a job posting or ad—typically unemployed due to poor performance. An experienced, networked executive search firm can help you tap into the passive job candidate pool. Keep in mind that talent is not always portable from one company to the next. Studies performed by Professor Boris Groysberg of Harvard Business School and author of the book Chasing Stars, shows that employee excellence depends heavily on an employer’s general and proprietary resources, organizational cultures, networks, and colleagues. There are a few exceptions, such as stars who move with their teams and stars who switch to better firms. Female stars also perform better after changing jobs than their male counterparts. Groysberg’s study suggests that talent is best portable if cultures, support systems, and work environments are similar between two companies. So when you’re building your “A” team, remember to hire slow, fire fast. Leverage a professional service firm that will take the time to build the best candidate pool and carefully screen for cultural fit, a history of success, and portability of that success.

3. Add more depth to your team: Most building service companies that we come in contact with suffer from a lack of depth in their management team. Having a limited number of people to handle critical roles or a concentration of talent with no successors in place can create numerous challenges. First, this is a major growth limiter. You cannot service more customers by spreading your “A” players thinner. This often results in a deterioration of performance, lower customer satisfaction, and low employee morale. Good employers expect their employees to pave the way for their own promotion opportunities by finding and developing their own successors. Another problem with lacking management team depth is that talent concentration creates more risk. The departure of a major customer or “A” player can be destabilizing to a company, and the morale of the remaining employees can suffer when there aren’t enough other talented managers to cover the transition. Talent concentration also effects valuation multiples in M&A transactions. Pursant’s M&A practice finds that buyers have concerns not only with the risk associated with client concentration but also talent concentration. Buyers recognize that the departure of an executive or retirement of an owner who manages a disproportionate amount of customer relationships or contributes disproportionately to business development can create EBITDA risk and customer retention risk.

4. Continually monitor the talent pool: In business, a big part of the recipe for success is staying ahead of the curve by thinking one step ahead of your competitors and anticipating future market needs. This recipe also applies to human capital. Companies that stay abreast of where the talent is and build relationships with these high performers can achieve a meaningful edge. Due to Pursant’s volume of search assignments, we are able to monitor the movement of “A” players in various industries. A good operator can and should do the same. Create a “wish list” of executives you would like to make part of your team someday, and stay in touch with them, personally and/or through a retained search firm. Taking the time to nurture the market for leaders is no less important than creating a customer wish list, developing those relationships and ultimately winning the business.

Now is the time The success of a service business is defined by the strength of its management team. The market is currently flush with facility services talent—a phenomenon unique to the slowly recovering economy—and cash is increasingly available to businesses for strategic investments. It’s imperative that operators evaluate and cull their management teams, safeguard exceptional performers, and enhance their teams with strategic hires. Early movers that take advantage of the talent opportunity now can leapfrog unsuspecting competitors.

Mark Herbick is the president of Pursant LLC. He has spent more than twenty five years starting, buying, building, operating and selling businesses in numerous business sectors, and is a seventeen year veteran of the building services industry. During his time as an operator, Herbick discovered that he excelled at and was passionate about sourcing deals and leadership talent, and that there was a void of competent firms providing such services that also knew the facility services space. In 2010, he founded Pursant (www.pursant.com)—a M&A advisory and executive search firm focused on companies in janitorial services, paving, roofing, recycling, landscaping, painting, HVAC, security, facility maintenance, facility management and more. The firm takes on initiatives in executive search, business acquisition or divestiture, growth strategies and turnaround—strategic challenges for which firms may not have the time, manpower or competencies but which, when executed mindfully, can meaningfully impact the trajectory of a business. Contact Mark at 847-229-7000.


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