In the world of dashboards and KPIs, how does culture influence value creation?

You’ve probably heard the expression “culture eats strategy for lunch.”

There’s truth to it. Some of the world’s most successful companies have invested heavily in their cultures, and you might immediately think of titans like Microsoft or IBM.

But culture is equally important in the middle and lower-middle market, especially at newly acquired private equity portfolio companies.

Private equity has a reputation for aggressive talent practices and a relentless focus on financial performance. But behind the dashboards and KPIs that measure value creation, there’s a group of people responsible for making it happen.

Those people need an environment where they can do their best work. They also need to stay engaged during periods of significant change, which are common following an acquisition.

Culture might not be as easy to measure as sales growth or the implementation of a new ERP system, but its influence can be felt across nearly every aspect of a business.

Here’s why it deserves a place in your value creation strategy:

Leadership turnover can derail your value creation plan

Working at a private equity portfolio company comes with a certain level of intensity.

There are ambitious financial targets to hit and a relatively short window to achieve them. In many cases, the leadership team has just three to five years to execute a value creation plan before the business is sold again.

Adding another layer of complexity is the relationship between the portfolio company and its financial sponsor. Each has its own culture, and the expectations of the private equity firm often influence how its portfolio companies operate.

These cultures need to work together. Otherwise, leaders can find themselves caught between competing expectations or struggling to adapt to a work environment they weren’t prepared for. This is where leadership turnover becomes a serious concern.

Losing a key executive midway through a hold period puts sand in the gears of your value creation plan. Recruiting a replacement takes time, and even the strongest new hire needs an opportunity to understand the business before making meaningful contributions.

Meanwhile, important initiatives can lose momentum. Delays can compound, potentially extending the hold period or affecting the company’s value at exit.

The goal should be to get leadership right the first time, which starts with a clearly defined culture.

Culture determines how your team works together

Think about the best team you’ve ever worked with. Chances are that everyone understood what was expected of them. They trusted one another to do their jobs and were comfortable speaking up when something wasn’t working.

These behaviors reflect a strong culture, and they’re especially valuable in a business undergoing significant change.

Consider a newly acquired portfolio company preparing to make its first add-on acquisition. The corporate development team might be eager to move quickly, while the operations team is concerned about its ability to integrate into another business. Both groups want the company to succeed, but they have different perspectives on how to get there.

A strong culture gives them a way to work through those differences. A weak one can turn a productive disagreement into an ongoing source of friction. Of course, culture isn’t always consistent across an organization.

The finance department might be conservative and highly structured, while the sales team is encouraged to take risks and move quickly. These smaller, department-level cultures are important to understand, particularly when hiring new leaders. An executive who thrives in one environment may struggle in another, even within the same company.

Pay attention to how people actually work. Are departments willing to share information? Do leaders follow through on their commitments? Are employees comfortable challenging decisions? The answers will tell you much more about your culture than anything written in an employee handbook.

Smaller teams make cultural problems harder to hide

Private equity portfolio companies operate with lean teams.

That can be a competitive advantage. Fewer layers of management allow decisions to be made quickly, and individual employees have more opportunities to make a meaningful impact on the business. But lean teams also leave less room for cultural problems.

Imagine a leadership team of six people. Five are committed to working together, but one consistently dismisses feedback and prioritizes personal accomplishments over the team’s success.

Other leaders may become reluctant to share ideas or collaborate on important initiatives. Over time, trust begins to erode and the team spends more energy managing internal friction than improving the business.

This is why cultural alignment matters so much when assembling a portfolio company’s leadership team. You need people who are willing to work hard and hold themselves accountable, but who are also humble enough to recognize when someone else has a better idea.

Culture is a value creation tool

Private equity investors have plenty of ways to measure the performance of a portfolio company. Revenue growth and EBITDA provide a clear picture of financial progress, while operational KPIs help identify where the business is improving. Culture is harder to quantify, but that doesn’t make it any less important.

Culture influences whether your best leaders stay with the business, how effectively departments work together and how quickly the organization can adapt to change. For private equity firms, the opportunity is to treat culture as an important part of the value creation plan rather than something to address when problems arise.

Start by understanding the culture you’re acquiring. Be clear about the environment you want to build and make sure the people you hire are equipped to succeed in it.