Why PE-Backed Companies Are Preferring to Hire Fractional Executives over a Full-Time C-Suite

by Cyril Moreau, Founder & CEO, International Executive Consulting

There is a fundamental shift going on in how private equity backed companies put together their executive teams, but it's a trend that nobody is willing to discuss.

A lot can change over time and for many organizations, the way they hire for key positions has dramatically shifted. In the past, hiring a CFO or CRO involved the CEO, the entire HR team and a lengthy process involving a full search. Today, this approach is not only costly, it is also ineffective, resulting in suboptimal candidates. Why? Because those seeking talent are the very customers that we advise our clients to avoid.

While it may still be in the relatively early days for the PE world in terms of bringing in fractional C-suite executives, the trend is quickly picking up steam as more PE sponsors and the CEOs of portfolio companies turn to these resources to optimize their operations.

This is NOT a cost cutting initiative. This initiative seeks to fundamentally change the way we can work and better serve our clients.

"The value creation window is short. There is no time for a slow and drawn-out executive search."

Cyril Moreau, Founder & CEO

What's Changed and Why?

The math on hiring a CRO doesn't add up. A full-time CRO at a $20M to $80M revenue organization costs $350K to $550K per year in base, bonus, benefits, and the value of stock and options granted. A typical search takes 4 to 6 months, and onboarding can take 90 to 120 days. That's a full year before you even know if you've hired someone who can deliver the performance required to meet your investment thesis.

As a PE-backed company, you don't have time to select a leader slowly. The value creation window is short and the pressure to deliver on EBITDA, build a scalable organization, and hit IRR and multiple targets at exit is immense. There is no time to conduct a slow and drawn-out executive search.

Fractional executives solve the equation. You want a seasoned fractional CRO, CFO, or CCO in place for 100 days, not 6 months. Our executives have practiced and developed considerable pattern recognition having served as interim leaders for 10 to 20 similar growth-stage companies. We can scale faster than hiring a full-time employee. You set the level and intensity at which you need support, whether that is 2 days per week during a rapid transformation sprint, stepping back during steady state, or increasing velocity before a fundraise or exit.

The Four Situations Where Fractional Wins

Many people don't realize the variety of scenarios in which a fractional executive can bring value over hiring a full-time employee. There are 4 specific situations where a fractional executive will consistently deliver greater value.

1. Post-Acquisition Stabilization (90 Days Post-Deal)

The first 90 days post PE acquisition are operationally brutal. The original management team has often been decimated, and there is a pressing need for a bridge until a high-quality new team can be found. This is not the time to bring in an incumbent who will perpetuate the business-as-usual mentality that may have contributed to some of the company's earlier challenges. A fractional executive can keep things afloat while beginning to make the necessary adjustments to culture and operations.

2. Revenue Infrastructure Buildout

Many portfolio companies have grown from $0 to $10M to $30M organically, but they can't keep growing at that rate without building additional infrastructure: pipeline management, sales processes and tools, and a CRM. A fractional CRO who has built revenue infrastructure five times is more cost effective than a full-time CRO who has built it once.

3. Expanding into New Markets

Expanding into new markets means going into new territory, whether that be a new industry, a new country, or a new type of customer. Bringing a new market to maturity requires a unique skill set that can pull leadership team members away from their core business. A fractional executive can be empowered to lead this initiative end to end.

4. Four Months Pre-Exit

A buyer will want to understand your leadership team. A fractional CFO engaged through the QoE process will help scrub out errors in financial reporting and begin to tell a compelling story around growth and how your business will hit investors' valuations a year out. Worth every dollar in the 12 months pre-exit.

What the Best PE Sponsors Understand

While many sponsors realize the value of fractional executives, it is far more valuable to use this talent beyond just an interim role, and to incorporate this person into your overall value creation toolkit.

"What can I expect from your work?" We get this question from potential clients. The answer is we understand the scope of work from the very beginning. As a firm, we don't treat organizational design projects like consultants. We integrate into the full leadership team, are held to the same level of accountability and responsibility as the rest of the internal team, and work hand in hand with internal resources to position the organization for the future, whether that is an internal promotion or an external hire.

Measuring the model is straightforward, but most common mistakes revolve around two fundamental errors. First, organizations treat their fractional executive as a high-end consultant by not clearly articulating the model outcomes the organization is striving to achieve. Second, the organization does not fully integrate the fractional executive into its overall design process.

The Talent Math Is Changing

In addition to a demand-side shift, there is also a supply-side shift. The pool of fractional executive talent a decade ago consisted largely of people between jobs, attempting to get back into full-time employment. Today, the very best operators choose to work on a fractional basis. They have more options than ever before and prefer to work on multiple interesting projects simultaneously, bring their skills to bear on a given problem without the overhead of a permanent team, and create a portfolio of work across multiple industries.

The quality of fractional talent available to PE-backed companies is materially different than it was five years ago. You can now find an executive who has grown and exited three companies, has specific vertical experience, and is able to ramp up and deliver in two weeks. This talent was not available at scale before.

A Different Kind of Leverage

Private equity creates value through financial leverage. But most people overlook operational leverage: the process a PE firm uses to extract more value from a company by maximizing the output of employees, suppliers, and customers. Our fractionally engaged C-suite practitioners provide the exact right amount of expertise to exactly where it's needed, for as much time as is required. You get the benefit of a seasoned C-level executive without the overhead of embedding a new full-time officer into your organization.

The companies that will generate the most value over the next decade are those who recognize there is a third way between "we need to build our team" and "we will have to get by without the leadership talent we need." For an increasing number of leading PE portfolios, that third way, the fractional model, is the best way.

Cyril Moreau, Founder & CEO, International Executive Consulting (IEC). IEC provides experienced, trusted C-level and management talent on a fractional basis to growing companies, helping them grow, enter markets, and build operational infrastructure to drive sustainable growth.

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