Organization Structure

This summer I worked at a small private equity firm as an intern and gained some unique insights into how an organization runs and its structure. Since the firm was small, the atmosphere of the entire office was more casual than expected, but at the same time interactions between the analysts and managers was much more frequent. There was a centralized structure in place with the managers having most of the power and they tightly controlled and reviewed all operations. Based on my own experiences, this structure was well suited for the organization as it was relatively new and manager input was required for decisions. Thus the centralized structure led to fewer errors and better quality of work in accordance to the managers expectations. On the flip side however, if an employee hit a roadblock, he would not have the authority to make a decision, but would need to ask the manager. This led to inefficiencies as employees would waste time.


During my short internship period, I saw the firm add another three people to its team. This was due to the expanding nature of the business and the increasing work required to be done. Seeing the hiring process, I want to talk more about it and the transaction costs involved. Transaction costs are the expenses incurred when buying or selling a good or service. In order to buy a service, ie employ a person the organization incurred many costs. Firstly, the costs paid to the various HR firms and job portals to actually post the job and find the necessary candidates. The opportunity cost of the time of current employees and management to interview the potential candidates. Other costs such as communication costs, informational cost of finding, transportation, out of pocket expenses, etc should also be taken into account. Thus even to simply hire another person there are a lot of transaction costs involved which people may sometimes overlook. These are still fundamental to consider and eliminating these costs would improve market efficiency.

**Edit based on comments.

Yes, I worked as a business analyst intern. Most of my work involved valuing potential companies based on its financial data. This valuation was done using financial techniques such as discounted cash flow models, precedent transaction models, comps, etc. The basic principle in these valuation techniques is to figure out the future cash flows of the companies and then discount it back to present value. Tho other techniques involve using ratios from similar company or transactions in terms of industry, operation, size, etc to value the target company. 

The other part of my work related to economics was running risk analysis. This was run through statistical regression models, scenario analysis and also conducting more fundamental qualitative analysis on the company.

I was not involved with the sell side work of the firm and thus do not know about the process for finding likely candidates to sell to. This work would also definitely involve a lot of financial analysis, but mostly would be regarding how to get the best price for the company being sold. 

The employees deal with the roadblocks differently depending on many factors such as the importance of the work being done, other work remaining, availability of boss, etc. Mostly, the employees are sufficiently busy to perform other tasks until the manager asks for an update, which he does periodically once or twice a day for 5 minutes with each employee. Here the employee would ask further clarifying questions and doubts. If the roadblock is significant then the employee will speak to the manager immediately to resolve it. Once the manager was stuck in a meeting for a couple of hours and one of the analysts was stuck doing nothing as he could not progress without needing the manager. I feel like this aspect of the firm could become more efficient, but would have to be gradual process as the employees understand how to run their duties better. 

I was interning along with two others. Yes, i think the long term better process would be to hire large interns and then give offers to the best performing interns. However the firm was hiring for more experienced people and thus was required to look from outside the intern pool. Transaction costs would be lower as searching for a candidate would already be done and the candidate would already be familiar with the office and people thus lowering the learning curve as compared to a new employee.

As a small company, hiring needs vary by position and there may not be so much work to have a large intern pool. Specially in a private equity firm, which is generally smaller and consists or more experienced professionals. Maintaining a large intern pool might be expensive in terms of wages and their productivity may not be what is required. Hiring just a couple of individuals with specific skill sets for a smaller company would thus be more cost effective through outside methods than having an intern program to give full time positions