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Bill Allen March 14 2023 10 min read

How to Avoid the Two-Step (Backwards) in Private Equity

We all know what it’s like when a company starts to stumble. It feels as if, for every one step forward, you take two steps back. Targets continue to remain just out of reach. Progress falters, halts, even reverses. Not only is this frustrating. Quite honestly, it’s exhausting. And in the world of private equity, the constant friction produced by “one step forward, two back” contributes to something we would all love to avoid: the high failure and high churn rates of our portfolio company CEOs (respectively, 56% and 58% within the first two years, according to AlixPartners’ research). 

The normal response in PE to a “backwards two-step” situation is predictable. First, there is an attempt to explain away the problem—whatever it may be—and, either internally or externally, lay the blame on some extraneous items or one-offs. However, explanations are not solutions. Unfortunately, the problem persists. More forecasts are missed. More customers are annoyed. Soon the board starts to grumble. Everyone in the portfolio company wonders, “Why can’t we get out of our own way?” With any luck, that line of inquiry, combined with general dissatisfaction with the status quo, nudges the firm and the portfolio company’s leadership to ask another, more fundamental question.

What changes do we need to make so we can consistently move forward, create value, and feel like we’re winning?


The answer, I believe, comes down to talent. What I mean by that is best illustrated by quotes from two of my friends. The first is from Frank Blake, the former CEO of Home Depot, who said, “The two most important jobs that a CEO is responsible for are the allocation of capital and the allocation of talent.” The second is from my friend and partner at CEO Works, Sandy Ogg, whose voice I hear asking, “Do we have the talent in the C suite that is up to the task at hand—and have we allocated the right talent deep in the business that will solve the problem and create value?”

These ideas align with my experience in the field. Typically, PE firms find it challenging to look with rigor at what might be wrong with the talent in their investments. Perhaps someone at the top has been an extraordinary performer in the past, but they are not up to the current task. Or perhaps there is not enough of the right kind of talent at important points of impact down in the organization. Left unaddressed, these issues increase execution risk, start the backwards twostep, and, more often than we would care to admit, leak value. Fortunately, there is a very precise way to go about addressing them.


Address Execution Risk with Talent

First up is for the portfolio company CEO to deeply understand the ambition for the business, as expressed in the form of a value creation plan. With a clear understanding of the sources of value, they can identify, along with the PE firm’s deal team, the work that will effectively deliver that ambition and the roles that will perform that work. Success, of course, will depend on also gaining the alignment of the entire leadership team and the sponsor on the value creation plan, the work, and the roles critical to successfully delivering the value. Let’s look at how this valuecentric approach to talent allocation played out at a new investment, a mid-cap manufacturing and distribution company.

The organization, struggling with pricing in an inflationary environment, had an urgent problem to solve. Two of their customers were responsible for 20% of the revenue. The leadership was reluctant to push pricing with those two customers for fear of losing their business. The alternative was loss-giving revenue, a very expensive band-aid from the private equity firm’s perspective.

Looking at the talent illuminated another path forward. We discovered there were two roles critical to value delivery in this area of the business: the Head of Sales and a pricing analyst.

Historically, the Head of Sales had been incentivized based on top-line sales. The incumbent had built an extensive network of customer relationships, including the two responsible for 20% of company revenues, and made a fantastic career based on her ability to deliver the top line. The existing incentive program had been a good deal for her but a bad deal for the EBITDA line of the business.

What might be the fewest leverage points that could drive an improvement in the bottom line—without jeopardizing those key customer relationships and their business?


The fastest path to value will always involve one or two of three possibilities: 1) “fire and hire”, 2) reconfigure the role, and/or 3) complement the talent with missing expertise. In this case, we considered the potential impact of each possibility.

Changing out the person takes time; hiring a replacement involves selection risk. With the Head of Sales role, the company would also lose the very strong relationships the incumbent had developed over many years if they let her go. On the other hand, reconfiguring the Head of Sales role by shifting the responsibility for final pricing to the CEO would add some distance and objectivity to those critical decisions. And pairing up the incumbent with a pricing analyst, someone who didn’t have a direct reporting relationship with her, meant that the analyst’s skills could truly complement her sales skills. She could be operating within the sphere of that expert’s influence, really digging in and questioning their input rather than losing out on its value in the normal shuffle of corporate politeness.

By reconfiguring the role and complementing the talent in this way, the company was able to recoup raw material inflation through price increases while maintaining strong relationships with the customers. Anything the Head of Sales presented to the CEO for arbitration was based on a more informed understanding of pricing realities. And, last but not least, in terms of improvements, the Head of Sales was able to deliver results she was proud of. All in all, a best-case outcome.

If your firm finds itself in multiple “backward two-step” situations, you might want to consider integrating this checklist as you seek to improve value capture:

  1. Where is the value leaking (top line, opex, G&A)?
  2. What work needs to be done to stem the leakage?
  3. What are the fewest steps you can take to fix the problem?
  4. Which roles are responsible for doing that work?
  5. Do you have talent in those roles that can deliver?

These five highly focused questions will help you address execution risk and escape the grip of the backward two-step!


Bill Allen

Bill Allen, Senior Partner with, has spent 20 years in CHRO roles with three listed companies (AP Moller-Maersk, Macy’s Inc., Atlas Air Holdings). This Fellow of the National Academy of Human Resources has lived nearly one-third of his career outside the United States and counts his corporate “hometown” as PepsiCo.

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