The Diagnosis Is Worthless Without theAuthority to Act

The Diagnosis Is Worthless Without the Authority to Act

I snuck my way onto this deal.

My background was industrials and manufacturing. I had done serious pharma manufacturing work at McKinsey before moving into private equity, and when this asset came across the desk, I made myself useful to the deal team until they could not cut me out. I delivered content on pharma manufacturing that nobody else on the team had. Eventually they had to accept me.

The asset was a pharma services business. Commercial packaging, one of the largest sites of its kind in the country, nearly three thousand employees. The kind of company that looked great on paper: defensible market position, long-tenured pharmaceutical customers, solid margins. The deal team was sharp. We paid a full price.

We closed June 30th, 2016. They missed budget in month one.

What I Saw in September

After months of budget misses, I went and did site assessments in the fall. What I found was a site that had mushroomed from roughly a thousand employees to fourteen hundred, with none of the management infrastructure to support the growth. Shop-floor control was nonexistent. Scheduling was a daily fire drill. Labor was being deployed by feel, not by data.

The CEO kept saying the same thing every time someone raised the issue: we just need to hire more line leaders. It was the wrong answer. The site did not have a headcount problem. It had a management system problem. More bodies without a functional operating system just means more chaos at greater scale.

The incoming COO had no real background in lean operations or anything resembling a structured production system. The general manager at the site was over his skis. And the CEO, rather than acknowledge any of this, kept pointing to hiring as the solution and waiting for a rescue that was not coming.

I knew what needed to happen. I had seen this before. You freeze the schedule, you identify the lines covering the majority of your customer volume, you get a real operator on the ground, and you build the management system from the floor up. Stop the bleeding first, then fix the root cause.

I brought the recommendation to the deal team in October.

"You Don't Need to Fall on the Sword for This"

That was the line I got back. Roughly. The message was clear: you are a junior guy, this is not your fight, step back and let the adults handle it.

I could not understand the logic. We had all made the investment decision together. We all had the same assessment. The diagnosis was not in dispute. The question was only whether to act on it, and the answer seemed obvious to me.

What I did not fully appreciate then, but understand completely now, is how large institutional PE firms process this kind of situation. It is not that they do not see the problem. It is that acting on the problem requires someone to own the call. If you push for intervention and the situation keeps deteriorating, you are the one who doubled down on a loser. If you wait, the decision diffuses across the committee and nobody holds the bag individually. The incentive is always to wait.

So they waited.

By January 2017, the business that we had acquired at one hundred million dollars of EBITDA was running at eighty-four million on a trailing twelve-month basis. Sixteen million dollars of value, evaporated while the committee deliberated.

When it got bad enough that the numbers became impossible to defend, they relented. I got the authority I had been asking for.

Ariadne's Thread

The first tool we deployed was rapid changeover, and to understand why it mattered so much at this particular site, you need to understand what a pharmaceutical packaging changeover actually is.

This was a controlled substances facility. The site packaged branded time-release medications for major pharmaceutical companies. When you finish a run and set up for the next product, the changeover process is not just a mechanical reset. It is a full cleaning, verification, and documentation sequence designed to ensure that not a single residue of the previous product remains in the line. You cannot put the wrong compound in the wrong bottle. The regulatory consequences are severe. The patient consequences are worse.

Because of that complexity, changeovers at this site were running twelve to twenty-four hours depending on the product. On a packaging line running around the clock, that is a staggering amount of lost capacity hiding in the transition between runs.

We used a concept I think of as Ariadne's thread, drawn from the Greek myth where a thread guides you through the labyrinth. In a changeover context, the thread is a precise, sequenced map of every step in the process, designed to eliminate the searching, the waiting, the undocumented tribal knowledge that turns a two-hour changeover into a twenty-hour one. You make the invisible visible. You sequence the work. You separate the internal steps from the external steps. The hours fall away.

The second tool was Daily Direction Setting. DDS is a structured shop-floor management system that gives supervisors real-time visibility into labor utilization, production attainment, and problem escalation. Without it, you find out on Friday what went wrong on Tuesday. With it, you catch the problem in the first hour of a shift. For a site running fourteen hundred people that had been operating by instinct and hope, this was not an upgrade. It was a different world.

Two Days a Week for Nine Months

I have a joke I used to tell when pitching to LPs. I told them I should not know what salads were on the menu at the hotel near this plant. Greek salad. Chicken Caesar. Cobb. I was on a diet. I ate all three so many times I had them memorized. I use that joke to illustrate something real: I was not visiting this site. I was living there, literally and figuratively.

I flew in every week. Two days on site, usually starting Sunday or Monday, running changeover workshops, working with supervisors and line leaders, rebuilding the production discipline from the floor up. My operator, a former plant manager I had worked with at McKinsey who had since gone independent, lived there full time. He did not visit. He was embedded.

The culture work was real too. I stood in front of groups of hourly workers, supervisors, and managers and talked about accountability. Champion versus victim. The line that separates people who own outcomes from people who explain why outcomes happened to them. In a manufacturing environment that has been in chaos for months, that framing is the difference between a shift that self-corrects and one that waits to be told what to do.

Nine months. Two tools. Quick changeover and Daily Direction Setting, deployed properly and relentlessly.

We unclogged that site completely. The recovery was real, and it was fast, and the people who had been skeptical about intervention had no framework for what they were watching. That is what a focused operational playbook does when it is applied with authority and without delay.

The tools and the methodology from that intervention became part of what is now SGOS, the Swaney Group Operating System. The playbook we use at SGC today to assess, stabilize, and build operating capacity in the businesses we acquire. It was not built in a classroom. It was built on the floor of a pharma packaging plant while an institutional committee argued about the right time to show up.

The Framework: The Diagnosis-Authority Gap

There is a specific failure mode in institutional PE that I now think of as the diagnosis-authority gap.

The people closest to the operating problem see it first. They have the diagnosis. But the authority to act sits two or three levels above them, held by people whose job is to weigh the political and financial consequences of moving, not just the operational ones. By the time authority catches up to diagnosis, the situation is materially worse.

This is not a fixable bug in large PE. It is a structural feature of how those organizations manage risk at scale. I do not fault the individuals. I fault the system.

The reason I operate as a fundless sponsor is precisely this: I want the diagnosis and the authority in the same set of hands. Mine.

When I own an operating role in a business, I am not waiting for a committee to agree that the schedule needs to be frozen. I am not building a consensus deck to justify bringing in an outside operator. I do not have an investment committee to report to before I change the daily meeting structure at a site that is struggling.

I have a board. I have partners. I take input seriously. But the operating call is mine, and I can make it the day I see the problem clearly. Not ninety days later.

What This Means If You Are Buying a Business

If you are a fundless sponsor, internalize this as both a structural advantage and a structural responsibility.

The advantage: you can move at the speed of the problem. No institutional lag, no committee cycle, no career risk calculus clouding your read of what needs to happen.

The responsibility: you have to actually be right. You do not have a committee to blame if you call it wrong. The authority is yours, which means so is the outcome.

Most fundless sponsors I know came up through institutional PE or corporate operating roles. They understand what the right call looks like. They have just spent years watching it get made slowly.

The whole point of building something smaller and more direct is to close that gap permanently.

“That gap has a cost. Sixteen million dollars in this case.”

When I think about that plant, I think about the workers who spent months in a building without real leadership while grown adults in an office building argued about the right time to act.

The diagnosis was on the table in October. The authority arrived in February.

That gap has a cost. Sixteen million dollars in this case. Learn it once and you will not forget it.

Paul Swaney is the founder of Swaney Group Capital, a fundless sponsor focused on the lower middle market.