Have you ever been to a party that was full of conversation, stories, and real fellowship?  Maybe cigars by the grill, good friends watching a game or even a book club where you really get to share your ideas and opinions.  A place where you feel safe, part of the group and where you can just be yourself.  Time flies, you feel rejuvenated and you develop real bonds.  Have you ever been in such a group and then a new person comes in and everything changes?  You have to watch what you say, there is drama at every get-together and the spirit goes out.

When this happens at work it can distract the company and drain the energy that should go into serving customers, each other and the collective mission.  The concept that measures the level of employee commitment to an organization is Employee Engagement.  According to Frank Heegaard, an employee engagement expert, there are 3 basic buckets for employee engagement:

• Bucket 1:  Actively engaged employees.  This describes the people that bounce into work in the morning with a clear mission, the tools to complete that mission and they drive successful customer and coworker interactions.  Up to 1/3^rd of workers normally fall into this category in relatively healthy companies.
• Bucket 2: Dis-engaged employees.  These are the people that show up, they do what they are told and not much more.  As many as half the employees fall into this category.  It is not that these are bad people, but they often just don’t see how they can make a difference, and they don’t feel empowered or motivated.  Many do not respond well to how they are managed.
• Bucket 3: Actively Dis-engaged Employees.  Depending on the year and the region this group ranges from 15% to 30% of the workforce.  These people are angry, resentful or hurt.  They feel impotent.  They feel stifled and they often blame management.  And they undo much of the good done by the engaged employees. 

Why Focus on Employee Engagement?

The concept has been around for a long time, but recently it is gaining more traction as progressive companies have demonstrated substantial improvements in all metrics.  The real question is, how is this concept relevant and actionable when working to acquire a company?  Here are some points to consider:

1. Employee engagement is measurable.  It is measurable, pre-close, even if the company does not currently measure it. 
2. The company’s current performance is an outcome of, among other things, the current actual level of employee engagement.
3. Steps can be taken to improve employee engagement (post close). 
4. Addressing employee engagement requires real work and change.   The benefits start to take shape immediately, quickly develop momentum (within months), and build on prior levels. 

I had the good fortune to visit Tasty Catering, a privately held catering company in Elk Grove Village, IL.  Tom Walter, the co-founder and “Chief Culture Officer” and his partners have nurtured an atmosphere in which 94% of employees are actively engaged in the business.  Their EBITDA % is DOUBLE their industry average. 

Studies consistently show similar patterns.  A UK study (http://engageforsuccess.org/wp-content/uploads/2015/09/The-Evidence.pdf), shows that the companies in the top quartile in employee engagement in their industry have double the EBITDA vs. their lower performing counterparts.  As you might expect, employee engagement affects more than just EBITDA.  Lead times, customer satisfaction, turnover, quality and safety follow the same pattern.

Below are some of the top reasons Private Equity firms have said led them to invest in measuring and improving their Employee Engagement.  If any of these ring true to you, this might be an actionable area for your firm to  pursue as well.

1. They were concerned because a portfolio company was experiencing high levels of voluntary turnover in management and skilled positions.
2. They were frustrated over consistently high injury rates and poor safety.  One barometer we use for evaluating operational excellence in a company is their performance around Environmental, Health and Safety (EH&S).  If the company doesn’t pay close attention and lead their team to excellence in this core area, they are also leaving other opportunities untapped.
3. They were nervous because they just didn’t know how they were doing.  Today, we measure net promoter scores and other metrics to understand how customers see us.  We can do the same thing with our employees.

Additionally, if you are looking at a deal/company where either employee engagement is critical or there are signs of employee disengagement, we can add this to our diligence work.  We have teamed with a group that can quickly assess current levels of engagement and guide you through the process of creating an engaged team that will set you apart from your competitors, increase EBITDA and grow the value of your portfolio.