Do formal qualifications matter in predicting management team performance?
Half the second founder-entrepreneurs we get to interview seem to start the description of their background by explaining that they didn’t thrive at school, were focused instead on sport or their social life, and so started work in mundane or improbable jobs. Recent examples of this include roles as a postman, a professional snooker player, a golf professional, ‘man with a van’, insurance clerk, electrical apprentice, and airport customer service agent. At some point, they reach some kind of epiphany about their futures, sometimes pursuing qualifications in their evenings, and then energetically grab a business opportunity which they make grow and grow.
On the other hand, large scale research by the LSE’s Centre for Economic Performance on managerial qualifications in mid-market firms finds a clear relationship between holding degrees, the likelihood of companies demonstrating effective management practices, and the important economic benefits which flow from that. Roughly speaking, the more graduates in a team, the more likely we are to find effective practices.
How to reconcile these two realities?
The first thing to note is that the LSE’s research looked at companies regardless of their performance - and identified a long tail of undynamic companies. By contrast, the businesses which Catalysis and its clients look at are almost always growing well so, on average, we are looking at a sub-set of relatively better teams.
Secondly, the economy into which private equity invests its money has changed significantly over the last 25 years. On the one hand, ‘old economy’ business models linked to physical assets (think facilities management or low-tech manufacturing which traditionally had few graduates) have decreased in importance, while more conceptual skills of the sort seen in, say, medical research and deep tech (where proportions of graduates are much higher) have been boosted. However, at the same time, the rise of self-employment and entrepreneurial start-ups has provided more opportunities for non-graduates to progress.
Thirdly, when we ask investors for views on the performance of CEOs and FDs whom we have assessed previously, their scores do favour graduates overall, but the differences are not dramatic. And we need to remember that these are averages which hide complexity and many exceptions – because the variation within any group of people or companies is almost always higher than the variation between groups (a very solid social science conclusion). So, we should be careful of judging an individual on the basis of their qualifications.
Putting those points together, what is the implication for companies we invest into?
Building better management practices typically requires some capability within a team to think through processes and policies in a structured manner. While a few brilliant people can do that from first principles, most of us absorb models from others and then adapt and incrementally improve them. So having analytical and improvement methods to make that process happen is helpful.
There are several sources for acquiring such methods. One of those is formal education. That needn’t be a university degree but it needs to be robust and stretching. Another source is exposure to structured training and development, typically through an employer willing to invest into that and/or high-quality processes. The last source is when people becoming voracious learners through their own determination – something we see in plenty of entrepreneurs. When managers responsible for process and improvement have none of those three things, our experience is that it is rare to find much innovation.
Our main unit of analysis is at team and business level – not individual. Building processes and practices is only one slice of what a company needs to do (although in high-growth companies, it is larger than in low-growth ones). So, companies don’t need everyone to be building processes and reinventing things – that would just lead to chaos. But we need at least a few people who are willing and able to take on that job while others may just ensure that business-as-usual delivery of quality outcomes to clients is ensured. Where we run into problems is when the company needs to professionalise and adapt but there is no-one with that bent of mind and capability in the management team. Consequently, it is very low levels of qualifications (or their equivalents) at team level where we have the greatest concern.
In conclusion:
Some of the skills offered by formal qualifications can be very valuable for the kind of companies we deal with. Their absence can be a real constraint.
However, those skills can be developed by other means than degrees – and we need to keep an eye out for those.
If we want people without formal qualifications to grow into leaders able to help their companies professionalise and adapt, we may need to help them more than others to develop the necessary skills. We are sad when we see companies outgrow their long-serving staff because there has been no investment into them.
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