Tips on outsourced C-suite by Joseph “Jay” Arcata III, partner, client operations, BX3
The outsourced C-suite: It’s the key reserve that comes off the bench and provides your team with the spark it needs. With the NCAA tournament upon us, let’s put things this way: Much like a basketball team leaning on a trusted veteran in advance of a tournament run, an outsourced executive team can provide small and mid-sized businesses with cost-effective and skilled leadership. The team can lengthen runway, bring fresh expertise to the company, and help preserve the capital that brought the company its success. Here’s why investors should consider adding an outsourced C-suite to their portfolio businesses, either as part of the starting lineup or as the first player off the bench.
ValueWalk's Raul Panganiban interviews JP Lee, Product Managers at VanEck, and discusses the video gaming industry. Q4 2020 hedge fund letters, conferences and more The following is a computer generated transcript and may contain some errors. Interview With VanEck's JP Lee ValueWalk's ValueTalks ·
Why the outsourced C-suite works for early-stage businesses
The concept of finding an interim executive is hardly new. But in the era of the gig economy — and its likewise Millennial cousin, the startup — the outsourced C-suite has gotten a second wind. As any fan of the hit HBO TV series Silicon Valley can attest, the startup world has its Steve Jobses and Steve Wozniaks. While having a “big ideas” person is often the reason for a new company’s existence — and the tech person is often a big part of bringing that idea to fruition, the team might not have on board a trusted person to hammer out the numbers or get the word out about the company’s offerings to the right audiences. An outsourced C-suite can fill in these roles and bring fresh, unbiased expertise to the table.
Along similar lines, an entrepreneur might feel comfortable wearing several hats in the early stages of the business: They can navigate a profit-and-loss statement and speak on TV and Tweet with aplomb. Yet as the business continues to develop, the increasing complexity of company finances may warrant hiring an outsourced CFO, for example. This is especially the case when the company is seeking outside investment. As financing grows more elaborate, investors demand more complicated financial statements and projections. And as those numbers rise, so will regulatory concerns. Enter the outsourced CLO (chief legal officer).
An outsourced C-suite will thus make your portfolio business more attractive to outside investors, as it will show you have access to the fundamental base of knowledge needed to build a company with growth potential.
Outsourced C-suites can extend runway
Beyond filling knowledge gaps, an outsourced C-suite can be a cost-effective solution to onboard a team as the business continues to scale. Executive recruitment services don’t come cheap: External headhunters often charge an upfront fee of thousands of dollars, plus a sizable percentage of the newly placed executive’s salary during the first year of hire. Considering that executives’ salaries tend to be well into the six-figure range, these fees pose a significant hit to a startup’s cash flow. When the C-suite sees fairly frequent turnover—as startups often do as they pivot and find their marketplace identity—executive search fees can be crippling over the long term.
According to a study by executive compensation data firm Equilar, in 2017, CEO tenure at large US companies averaged five years. That year alone, forced CEO turnover cost shareholders $112 billion in annual total returns. Interim executives can free up balance sheets. By definition, outsourced C-suite level employees are there for a defined period of time. They’re there to fix and remedy problems, rather than linger. They are hungry and ready to tackle a company’s issues and once handled, ready to move out of the way.
Moreover, outsourced C-suites can be remote, meaning that companies who desire an experienced and affordable leadership team are not affected by geographic restrictions—or potential relocation costs.
When a company needs leadership with a different skillset
An early-stage business can reach a point where it has grown to its fullest potential with the resources it has on hand. Many startups draw their initial staff from people they know: tech people bring on fellow tech people; an accountant might seek out fellow experts in all matters tax and balance sheets. Running a business requires more than a great tech stack or numbers savvy, though. When something on your plate, whether that be financials, streamlining your coding team, or developing a marketing strategy, needs a bit more expertise than what your present crew can provide, it’s time to research what an outsourced C-suite can bring to the table and help spur transformation.
Preventing burnout: When a start-up needs fresh direction
Generally founders are willing to admit when a skillset is out of their wheelhouse. When the skill in question is leading the company they founded, relinquishing direction can be a bit more fraught.
The prospect of having to give up equity to an executive who may or may not be a good fit can be daunting. A founder who takes on more than they are equipped to handle can lead to career burnout on the personal level and put the company’s long term success at risk. An outsourced CEO might be the way for a new business to gain well-honed business leadership without having to commit to finding a new CEO. It can give the founder time to recharge and outside investors a sign that the company is serious about its direction. It also allows private equity and venture capital firms to focus on their core competencies—managing program costs and delivering stronger returns.
An outsourced CEO can right the ship in the wake of internal conflicts within the business regarding the direction of the company, or to revamp the sales or operations functions. Along those lines, outsourced CEO can also assist with succession planning or transition management. The bottom line is that an outsourced CEO should be viewed as a complement to the entrepreneur or founder—not a replacement.
It is never too early in the business lifecycle to consider executive outsourcing. If your portfolio business is stuck in the middle of the pack, a conversation with an advisory firm offering these services could pay huge dividends in the long run. The strategic outsourcing of key C-suite executives puts the team in a position to secure the big win and send your investors home happy.