Transformation is not just an option when things are going poorly – it is happening more and more with strong, growing assets. A recent PwC Pulse Survey underscores the urgency and complexity of this imperative, highlighting the challenges and opportunities that lie in the path of reinvention. For Lancor, an executive search and advisory firm specializing in Chief Transformation Officer (”CTO”) searches, understanding the intricacies of this process is vital. This blog delves into the significance of transformation in high growth, strong margin, PE-backed assets – not just those in need of a major turnaround – and how Lancor has played a pivotal role in determining the pillars of the specific investment thesis, working to find the right executives to drive the needed improvement and then collaborate to execute the Process Improvement Plan (”PIP”). Often, PE firms hire a CTO in the first 100 days to either augment the firm’s Operating Partner (”OP”) capabilities (and therefore see a smaller drain on the PE firm’s expenses as the role is paid for by the port co) or provide asset-specific improvement at the new portfolio asset when OPs are not an option.
The Imperative of Transformation
The business environment is becoming increasingly risky and competitive, with a significant portion of CEOs (34%) believing that an average competitor will be out of business within three years if it doesn’t change its business model. This stark reality is echoed by 76% of business executives who say that companies must transform or face obsolescence within the next decade. The pressure is even more pronounced among U.S. CEOs, with 82% asserting that the average company in the U.S. will not survive the next ten years without significant changes – even when their current business is growing.
For PE-backed companies, which often operate under intense pressure to deliver rapid returns, this need for transformation is even more critical. These firms must continually evolve to stay ahead of the curve, leveraging their unique position to implement bold changes proactively rather than reactively. As these assets have a precise time horizon (~4 to 5 years) to turbocharge growth, the game plan needs to be developed and pressure tested asap (often before the initial close) to allow the needed internal rate of return.
The Role of Chief Transformation Officers
Executing transformation at the required pace and scale is a formidable challenge, with 84% of executives acknowledging this difficulty. This is where the role of the CTO becomes indispensable. In a recent study of transformation efforts, 90% of respondents believe hiring a Chief Transformation Officer dedicated to implementing the pillars of the investment thesis is essential for top decile returns. A CTO is responsible for spearheading the transformation process, ensuring alignment across the leadership team, and driving strategic initiatives that can reposition the company for success.
However, the PwC survey reveals a significant gap in executive alignment, with only 41% of executives agreeing on how to achieve their company’s future vision. This misalignment can be a critical obstacle to successful transformation. Therefore, the CTO’s role includes fostering consensus and collaboration among the C-suite and the board, creating a culture that supports change, and ensuring transparency and trust throughout the organization.
Furthermore, because transformation is often a finite process, CTOs can be utilized repeatedly across various portfolio companies or evolve into roles such as Operating Partners or Independent Board Directors. This flexibility allows PE firms to leverage their transformation expertise across multiple investments, driving consistent value creation.
Proactive vs. Reactive Transformation
The survey also highlights the importance of proactive transformation. Companies that transform from a position of strength have a broader set of options and are better positioned to avoid the short-term pressures of restructuring or shoring up their balance sheets. For instance, a financially strong company can explore new technologies or markets proactively, rather than waiting for a crisis to necessitate change.
For PE-backed firms, this proactive approach can translate into significant competitive advantages. By anticipating market trends and adapting early, these companies can seize new opportunities, enhance their value proposition, and deliver superior returns to their investors.
Investment in Technology and Innovation
Investment in new technologies is a key driver of transformation, with 51% of executives planning to invest in new technologies, including generative AI (”GenAI”). The focus is shifting from cost-cutting measures to strategic investments that enhance performance and drive growth. This trend is particularly relevant for PE-backed companies, which need to leverage technology to optimize operations, innovate their offerings, and improve customer experiences.
However, the cost of adopting new technology is cited as a significant challenge by 42% of executives. PE-backed firms must navigate this hurdle by strategically investing in technologies that offer the highest potential for return on investment and competitive advantage.
Overcoming Roadblocks to Transformation
Despite the readiness to transform, several roadblocks persist. Cybersecurity risks, regulatory challenges, and the high cost of technology adoption are major concerns. Moreover, the lack of alignment within the leadership team and between the CEO and the Board can hinder the transformation process.
To overcome these obstacles, it is crucial to establish robust change management capabilities as early as possible, foster a culture of healthy debate and collaboration within the C-suite, and ensure clear and consistent communication throughout the organization. Lancor’s expertise in CTO searches can help PE-backed firms find leaders who are adept at navigating these complexities and driving successful transformations.
The Path Forward
For PE-backed companies, the path to successful transformation involves a combination of strategic foresight, robust execution capabilities, and a willingness to embrace change. The role of a CTO is central to this journey, ensuring that the company not only adapts to the current business environment but also anticipates and prepares for future challenges.
Lancor, with its focus on executive search and advisory services, is well-positioned to support PE-backed firms in this endeavor. By identifying and placing visionary CTOs who can lead transformative initiatives, Lancor can help these companies achieve sustainable growth and long-term success.
In conclusion, transformation is not merely a survival tactic but a strategic imperative for PE-backed assets. With the right leadership and a proactive approach to change, these companies can navigate the complexities of the modern business landscape, outpace their competitors, and deliver exceptional value to their investors.
