How private equity can overcome labor shortage challenges and seize new opportunities

Private equity dealmaking hit record highs in 2021. Spurred by the economic recovery and an abundant supply of debt, U.S. firms broke 2019’s annual record for deal value.  

At the same time, jobless claims amid the Great Resignation are at an all-time low: According to recent data from Emsi, the past year and a half has seen a 43% increase in job openings—and those jobs may not be filled anytime soon. Boomers have retired in droves, and only one-third of the more than 9 million Americans who lost their jobs due to the pandemic are actively looking for work.

Offshoring strategies alone have been proven to cut costs by 50%, while a range of other options—including outsourcing, co-sourcing, automating, near-shoring, training, and a shift to contingent workers—are all effective tools at an organization’s disposal. 

Understandably, the scope and significance of talent-sourcing decisions can often make approaching them a daunting task. Considering the following steps and strategies can help—and prime private equity firms and their portfolio companies to seize the opportunities offered by today’s labor market.  

Begin by assessing real-time data of the job, candidates, and market 

Even though labor constitutes a significant share of a company’s total expenses, those assets and expenses tend not to be managed with the same rigor as acquisitions, property, or equipment; only 15% of companies have access to the necessary real-time data they need to make decisions about labor and manage through attrition. 

This can create real blind spots for private equity firms’ portfolio companies. For instance, in the realm of contingent talent—particularly significant in today’s labor market—60% of organizations’ $460 billion spend in 2020 is not even visible to organizations’ financial or management systems. 

The problem? Labor-related data beyond headcount and salary is not readily consumable. That’s in part because it’s comprised of natural language and not aligned in a systemic way that would allow decision-makers to effectively segment it. 

Take job descriptions and skills profiles: Each function within an organization has a different way of describing various skills. Without a standardized description, the data remains unstructured, making it hard to match available resources in the hiring process. 

Only by parsing out and standardizing that data—and putting it into metadata forms—can this problem be improved and can groundwork be laid for smarter labor decisions. For instance, combining this data with hiring metrics (e.g., actual vs. anticipated hires, budgeted monthly headcount, etc.) and recruiting process information (e.g., how much effort it takes to hire for a certain role) can provide key insights into talent acquisition strategies, hiring prioritization, and recruiter incentive programs.  

The same is true when it comes to collecting and analyzing data from different geographic markets. If a company can assess real-time data from labor pools in key cities across the U.S. and then match them up with its own needs, it can make comparisons that can help company leaders more effectively and profitably source talent. 

To get started, it’s important to understand the types of information organizations need to make informed decisions. This includes:  

Candidate/job description data 

• Who do you need?  
• What is the effort required for the hiring process for each position (e.g., junior roles may take less effort than more senior roles)?  
• What can you do internally/externally? Nearshore/offshore?  
• How long does it take for new worker to get up to speed?  
• Does it require training?  
• What are current customer satisfaction levels with regards to these different functions? 

Market data 

• Who’s available?  
• What languages do they speak?  
• Who are you competing with?  
• What’s the local attrition rate?  
• Data around relevant providers/partners  

Strategically segment employee stakeholder groups 

For most successful organizations, there aren’t blanket labor shifts or decisions, even with real-time data at their fingertips. Instead, it’s about assessing the specific roles and types of tasks that they can offshore or nearshore, understanding their sourcing strategy, bringing on the right partners, and doing so to effectively control costs and ensure timely delivery to market. 

With the right data, private equity firms’ portfolio companies can create these strategies by making plans around which employee stakeholder groups they should: own; co-source; invest in from training/succession/vision perspective; outsource; near-shore; offshore; automate; or crowdsource.

We did this recently in collaboration with an American technology company that needed help assessing its talent migration decisions. We drew on a variety of variables (e.g., transition costs, travel, cost of turnover, contingent labor, productivity loss) to determine cost savings the company had achieved to date from migrating talent. From there, we outlined critical factors to consider when evaluating various migration scenarios, including service complexity, document work processes and knowledge, and business involvement.  

Each employee stakeholder group required varying levels of involvement for these factors: On-site workers, for example, needed higher levels of service complexity and business involvement, but low document work processes and knowledge; offshoring had medium levels of service complexity and business involvement, but required a higher degree of document work processes and knowledge; no-shoring (automating/digitizing) scored lower on service complexity and business involvement, but high on document work processes and knowledge.  

Other decision criteria encompassed the different categories of the company’s workers (e.g., those who can be easily transferred away from high-cost US locations or, alternatively, roles that cannot be migrated like client-facing US sales positions, senior management, etc.) and the time needed to address each group’s needs. We also factored in the qualities of existing and potential geographic labor markets (language, time zones, availability of talent, political/legal issues, etc.). 

Ultimately, this process enabled us to present run-rate savings over the near term (12 months) related to workforce efficiencies like automation, as well as savings opportunities related to offshoring and optimization over the next 3 to 5 years.  

Find the right partners who understand exactly what you need 

It takes time to establish productive provider relationships and sourcing strategies: Organizations need to know various attrition rates, the productivity of certain teams, and what you need to outsource to vendors vs. keeping in-house. 

Private equity firms can help their portfolio companies in this respect. 

Keep these three factors in mind:  

• Understanding cultural nuances: That could mean everything from time zones, to whether workers need translators, to the availability and turnover rates for certain roles in certain geographic markets. But it also involves more specific nuances: For instance, once workers in India are married, they typically won’t work the second shift any longer. 

• Know which portion of the business you need a partner for: Security needs for IT and R&D are different—and some functions are better outsourced to third parties than others. Some business units might work better with partners in different countries. In the example noted above, workers in Bogota, Columbia, focused largely on product development and sales—in part because of English proficiency and U.S. time-zone overlap. Chennai, India, on the other hand, has a robust, skilled and low-cost labor market that made it a better fit for IT administration. 

• Uncover how to operate and collaborate productively: This is where soft skills, process redesigns, and change management come into play. Weighing where an organization will need to invest time and resources in these factors—against the cost and availability of skilled talent—is key in finding the right partner. 

Conclusion 

The pandemic recovery continues to fuel dealmaking, with few signs of a slowdown. But private equity firms caught up in the frenzy can’t ignore what looks to be lasting labor market challenges. Their portfolio companies, which may lack the experiences and resources to make decisions in this arena, will increasingly rely on them for help. 

The good news is that for companies that approach today’s labor obstacles appropriately—with real-time data, insightful employee segmentation strategies, and effective partnerships—there are meaningful value-creation and EBIDTA-improvement opportunities to be had.