Orit Gadiesh, chairman of the management consultancy Bain & Company, and Hugh MacArthur, the leader of Bain's global private equity practice, explain why the way private equity firms respond to market and economic uncertainties is instructive throughout the business cycle.

With credit markets in turmoil, announcements of big new private equity (PE) deals that dominated business headlines in recent years have slowed to a trickle. But the slumping economy is making the powerful, if less heralded, disciplines the best PE firms use to create value in the companies in their portfolios more relevant than ever. CEOs looking to navigate through business-cycle turbulence and position their businesses to emerge stronger when the economy rebounds can borrow useful lessons from the PE playbook. Indeed, in good times or bad, the world's top-performing private equity firms have established an unmatched record. For example, the top 25% of European PE funds raised between 1969 and 2007 have earned internal rates of return of 29% on average. Private equity masters have honed lessons that any business leader can emulate. Some may sound familiar, but, in our view, they are not being applied rigorously by businesses around the world. It is easier to do "fine" than to do the "best" a company can do. This pervasive disease of "satisfactory underperformance" can be cured by applying these six timeless PE lessons.

Lesson #1: The best private equity firms begin their drive to create operating value by building an objective fact base. They scrutinize demand, customers, competition, environmental trends and the details of how money is actually made in the business. Only then do they pursue a few core initiatives.

Lesson #2: Top PE firms develop a detailed "blueprint" that choreographs actions—from standing start to the finish line —that turns those initiatives into concrete results. Unlike traditional strategic plans, which focus on "what we want to be," blueprints spell out "how we are going to deliver."

Lesson #3: Top PE firms create a sense of urgency around delivering results. They accelerate performance by moulding the organisation to the blueprint, fostering management accountability, using rigorous programme management tools, and monitoring a few key metrics.

Lesson #4: PE masters harness the best talent to get the job done. Having recruited the right team, they create the incentives to retain and motivate these talented folks to act like owners. They also assemble decisive and efficient boards.

Lesson #5: Top PE firms make equity sweat. They force managers to treat cash as the scarce resource it is.

Lesson #6: PE leaders foster a resultoriented mindset in their organisations. Such an attitude is about creating repeatable, sustainable processes that will spur performance improvements.

Make cash king
Treating cash "like water in the desert" has always been a principle of top private equity firms. It makes executives focus on measuring what matters most—cash flow. It forces managers to manage working capital aggressively and allocate only the most necessary capital expenditures. And it compels managers to work the rest of the balance sheet hard, often by cutting pieces out of the business. In 1999, for example, DLJ Merchant Banking (the private equity arm of Credit Suisse) purchased Mueller Water Products, a US maker of fire hydrants, high-pressure valves, and fittings, from Tyco International. The price was US$938m, of which just US$231m was equity. The private equity owners closed uncompetitive foundries and brought in leaner manufacturing methods, freeing up cash to fund growth in its core businesses and establish an important presence in China. In 2004, Mueller was sold to Walter Industries for S$1.9bn, earning DLJ a 4.6 return on its equity investment.

Harness the talent
The best plans go nowhere without the right people. PE firms go beyond recruiting, retaining, and motivating to make their employees feel and act like owners. So, too, do some smart companies. Nestlé, the Swiss food giant, has become a model of PE-like discipline. For instance, it introduced short-term bonuses paid out against clearly defined targets, increased the variable part of its compensation package, and moved 1,400 people into long-term incentive plans so that key managers can became shareholders. Harnessing talent sometimes requires unconventional personnel decisions. Nestlé's chairman Peter Brabeck gave Chris Johnson, a fast-rising business unit executive—who was not an information technology specialist—responsibility for driving the Global Business Excellence (GLOBE) effort. The ambitious programme collapsed dozens of enterprise resource planning systems across multiple business units into one, establishing a common system design for the company's global operations while still allowing local market differences. Brabeck credits the success of GLOBE for transforming Nestlé from being run "like a supertanker" into an "agile fleet" that calls different business units into action to penetrate different product, customer or geographic segments. Companies that are not the clearcut market leader in their industry cannot afford to ignore how the best PE firms are transforming the business landscape. But even leaders often perform below their full potential, our research has shown. Taking full measure of the lessons of the private equity masters can benefit them greatly.