Mark Leonard's Lost Interview

Constellation Software has returned an insane 155x in just 17 years as a public company. That is excluding dividends and two spin-offs. We have just uncovered possibly the only existing audio interview with Mark Leonard, the company's iconic founder, President and Chairman. This 1h & 40min masterclass covers topics like corporate culture, decentralization, high-performance conglomerates, Mark's time before founding Constellation Software in 1995, and much more.

00:00:06:01 - 00:00:29:02

Unknown

Hello and welcome everyone to our latest experiment, the Harris podcast. My name is Jeff Bender and I'm here to help you better understand who we are, where we are going, and to engage you in our journey. These podcasts are intended to introduce you to our leaders, our initiatives, and to new ideas and ways of thinking. Our goal is to not only inform you, but to engage you in helping us create the enduring organization.

00:00:29:04 - 00:00:52:10

Unknown

Please enjoy this podcast. I'm going to be speaking with Mark Leonard, founder, president and chairman of Constellation Software, our parent company. Mark founded Constellation in 1995, 25 years ago, using a less than memorable initial name in his business case and pitch, referring to it simply as software. Over the 25 year period, Constellation has invested in over 500 businesses.

00:00:52:12 - 00:01:12:24

Unknown

Now has more than $3 billion in net revenue and more than 20,000 employees worldwide. CSI is currently organizing the six operating groups. Harris being one of them. I've been fortunate to be able to work with Mark for over 20 years, watching him reinvent himself and continually challenge me to be a better investor and owner of the businesses we bought.

00:01:13:01 - 00:01:43:23

Unknown

Please join Mark and I as we get to know him a little bit better and understand how he thinks about our two areas of focus. Being disciplined, employers of capital and great owners of the CMS businesses. Mark, welcome to the podcast. Thank you, Jeff. Looking forward to it. Well, I think to start with, which I know is an area you don't typically talk a lot about, but if you were from Harris, I typically will use my three kids for sure and occasionally my wife too, to illustrate a point or two to make a point.

00:01:44:00 - 00:02:27:15

Unknown

You sort of mind sharing with us sort of what your family situation is and what your kids are up to? Family situation. Wow. So my wife and I met in business school. She's French-Canadian and she's the nicest human being that I know. And everyone adores her. And she's kind and thoughtful and goes out of her way and really would not have achieved anywhere near what have achieved without her support and her taking care of the family.

00:02:27:21 - 00:03:07:14

Unknown

And as you mentioned, have four kids. They're in their early thirties to mid-thirties, now launched on their lives. We get along well. I'm visiting a couple of them right now out on the West Coast. And I guess one thing I'm kind of surprised at how open people are about themselves and their families in this Internet age, because nothing ever disappears.

00:03:07:16 - 00:03:42:22

Unknown

Yeah. So it's I learned early when I was in the venture business that whatever you say to third parties tends to get used in whatever way they wish to use it. And when I was in the venture business, I had a bad experience with the press and that really put me off talking with them and made me very careful about what information about companies we shared.

00:03:42:22 - 00:04:16:24

Unknown

And we were very careful to create full messages. And even then we recognize that you deliver full message, which means that the journalist doesn't have to work particularly hard and they can just take the whole thing lock, stock and barrel and use it and move on. But you've got a good chance of getting that full message through. But if what they're doing is trying to be sensational, they will pick and choose and misuse whatever you deliver to them and that kind of irresponsible use.

00:04:17:01 - 00:04:53:12

Unknown

It strikes me as the norm and I find even when I look at Internet chat groups of various kinds, the breadth of opinion and interpretation is extremely large. And so one of the things I try to do is insulate my kids from that if they choose to be on the Internet and known for particular things and create their own brand and to some extent some of them have in their particular realms, that's great.

00:04:53:12 - 00:05:17:15

Unknown

But but I do warn them that you don't control what happens when it gets out there. So, yes, I have four kids and they're welcome to talk about how they live their lives on the Internet or elsewhere. I find with using my kids, I find it's can often be hard to get it to become relatable to to everyone.

00:05:17:15 - 00:05:37:05

Unknown

And I think I've found that that using, you know, real life stories that I think a lot of people also experiencing can relate to. I think also sort of helps whether it's talking to customers or to employees. So again, that's the sort of, you know, a tool that that I use that I think I found sort of helpful over the time.

00:05:37:05 - 00:06:01:21

Unknown

And certainly the feedback that I've received is that people like it. But I do appreciate what you say is that certainly anything you put out there can and will be used against you at someone else's choice and discretion, which is not always not always yours for sure. Now, I wanted to just a quick observation on that. You're talking here about using storytelling and empathy as tools to communicate.

00:06:01:21 - 00:06:37:19

Unknown

And I think amongst our group of managers, you're the best I've ever seen. You're remarkable at it. And it's a it can be learned skill. And I encourage people to use it because as humans, we tend to relate to stories. And it's and certainly as we go through this, I'll try to find stories that illustrate sort of beliefs that I have and want to share.

00:06:37:21 - 00:06:57:02

Unknown

Hopefully, though also beliefs that are grounded in fact and not fiction. Yeah, I appreciate that. I wanted to pick up on something that you actually mentioned on our last board consultation board call. And this I think I can't remember where I can remember what we were talking about or whether it was just we were all waiting to start the meeting.

00:06:57:04 - 00:07:19:15

Unknown

But you had mentioned or I believe I heard you mentioned that you had just bought a mortar mixer. Could you maybe provide a little bit more color on why someone such as yourself would be buying a mortar mixer and what you plan to do with it? Yes. So I don't recall what it was, but it was probably sort of what we're doing in these COVID times.

00:07:19:15 - 00:07:54:14

Unknown

That's out of the usual. And so one of the jobs I had along the way was working as a Masons helper and it was one of those things you do to make money. And as it turned out, it was a wonderful job for me. It was one where at the end of the day you knew what you had achieved and you had a sense of accomplishment and you knew that what you did would probably be still there in a hundred years time.

00:07:54:18 - 00:08:27:03

Unknown

And so that was pretty cool work and I could work as a mason when the seasons were good and I'd figured out I could go to school on a semester at the time basis as opposed to full time. And so when I was collecting unemployment, I could go to two different schools, part time, collect unemployment and and, and then once spring rolled around, I could go back to work as a mason.

00:08:27:03 - 00:09:10:12

Unknown

So I did that for several years. And I worked with a wonderful old mason. He was always The Hills, kind of a hobbit of a human being, small and stumpy and incredibly muscled old guy with a straw hat and a pickup truck that was about as old as he was, and tools that came from the Middle Ages. And he sort of taught me the trade and he started off mixing mud and mortar for him and then dressing stones and eventually pointing stone walls and then building stone walls.

00:09:10:12 - 00:09:37:14

Unknown

And it was idyllic. I would take my breaks and read wonderful literature and then go back to being on a scaffold, three stories up in the air pointing a stone wall. It was just a remarkable time. I lived on a farm and had an old car and one of my brothers came and lived with me and worked on one of the big mills we were redoing.

00:09:37:17 - 00:10:06:14

Unknown

So halcyon days, going to school, learning, reading, being healthy, and and so I'm trying to recapture some of that. You know, maybe on weekends I can be Wally, the old Mason, and again, that sounds very, very aspirational. So could you. So when you were reading literature, was there a sort of a writer or an author that you would tend to want to read more of their work?

00:10:06:16 - 00:10:42:07

Unknown

You know, at that time I think I was reading John Fowles, who was a remarkably good writer and John Barth and those kind of folks. So it was it really was literature. It wasn't not ancient or classical literature, but modern literature. Oh, interesting. Okay. Now, obviously, you know, everybody who'll be listening to the podcast is obviously going through their own changes to their routines as a result of of COVID 19.

00:10:42:09 - 00:11:13:05

Unknown

What what do you find to be the biggest sort of difference to your sort of daily or typical routine that you've had to adjust to because of COVID? Well, I think it's probably the same one that you've adjusted to, which is not being on an airplane. It's it's lovely. But at the same time, it's also a big, big change not to be schlepping out to the airport and spending time in airports and on airplanes.

00:11:13:07 - 00:11:46:14

Unknown

And I do miss those sort of, you know, seven hour flights to Europe where you get uninterrupted time. But the good side of COVID for me has been surrendering to good habits. And so I work out more regularly. I sleep more, I eat better. It's it's been it's been good. Yeah. Yeah. People ask me all the time or do you know, do I miss traveling?

00:11:46:14 - 00:12:05:19

Unknown

And I think it's still working. I think to figure out back to you said you know establishing new habits. And I realized that a lot of my thinking time and even a bit of downtime happened when I was traveling, whether it was in spending time in the airport, spending time at hotels, you know, really, really understanding how much I miss those.

00:12:05:19 - 00:12:27:16

Unknown

LONG Like you said, you know, seven, eight. I was over to Israel, you know, ten or 12 hour flights to just kind of unwind, think, reflect and do other things. Whereas now I find, you know, the days are pretty standard and they sort of, you know, they come and go pretty quickly. And I think it's it's it takes more of an effort to carve out that time to sort of be, again, more thoughtful and more reflective.

00:12:27:16 - 00:12:47:21

Unknown

So I keep I keep working on that. So I've tried to go try and get my Wednesdays now where I try not to book too many meetings on a on a Wednesday just to try and sort of give myself some time to to think about those, those types of things. So. So do you have a morning routine? Do you sort of is sort of a typical way that you know you like to start each each day?

00:12:47:23 - 00:13:19:15

Unknown

I tend to wake up between four and five and have the same breakfast and read two or three newspapers. So yeah, it's it's it's pretty standard. All right, so what? So what Newspapers, Diary. Um, you know, because we're in Canada and the Globe Mail is sort of the leading business newspaper, but for other employees around the world, you'll recognize the Financial Times from London, which I read.

00:13:19:17 - 00:13:39:09

Unknown

And if I've gotten through those too, I'll make my way into the Wall Street Journal. Oh, interesting. Okay. I know Gerry's a big fan of The Wall Street Journal, Doug. Doug Reid is a big reader of Papers of the Morning. He adds the I think it's the South China news or like to say his reading as well. He likes to sort of he likes a bit more of a global, global flavor.

00:13:39:09 - 00:14:00:12

Unknown

So he so he tells me so I know are I understand that you have your bachelor of science which I think is probably not super typical of a lot of the people that we have at at Harris or Constellation. So why did you choose to study science, especially sort of given some of your what you just explained of your of your Mason mason work?

00:14:00:14 - 00:14:36:21

Unknown

Yeah. And it to choose sounds so methodical. Oh, what I did was dabble. So I was in many different faculties in many different universities and over a seven year period I eventually ended up with a three year science degree. And, and, you know, in between I played a lot of bridge and sports and tried a lot of different faculties.

00:14:36:23 - 00:14:51:17

Unknown

Are you make me feel better now about my I give it my son grief about how long it took me or one of my sons grief about how long it took him to get his degree. Then if you could take seven and perhaps, perhaps I. Perhaps I misjudged what what he might be able to to accomplish with his.

00:14:51:17 - 00:15:25:12

Unknown

What was. Yeah. What was your sport of choice? You know, I played varsity basketball. Varsity football. And whilst whilst rugby and rugby was by far and away my preferred sport. Interesting. Okay. All right. Now back to your science degree. So do you would you say that you use what you learned in your science program today at Constellation? You know, I think there's a little something that you take from what you're studying.

00:15:25:12 - 00:15:57:19

Unknown

And I had one particular professor who had a impact upon me fairly late in my academic career, and I had a number of other profs who influenced me as well. But I think one of the characteristics of us as human beings is that our memories and knowledge has a half life. So the stuff we learn 40 years ago, very little of it is being used by us today.

00:15:57:21 - 00:16:37:20

Unknown

We're constantly replacing what we know by what is currently correct and what we currently believe to be correct. So you're going to be a lifetime learner and you've got to keep sort of filling your mind with new ideas, knowledge, and the old stuff becomes increasingly less relevant. Now that's interesting. I one of the books I read recently forgot the author's name now, but it was actually called Think Like a Rocket Scientist and it's one of the things that I took away, which I thought was interesting, and it's caused me to sort of rethink how I go about testing the hypotheses that I put forward, which really is to move away from this, test it to

00:16:37:20 - 00:17:08:07

Unknown

see if you're right to really the scientific approach, which is focused on proving that it's actually wrong. And if you can't prove it's wrong, perhaps maybe it has some some validity that you can that you can take forward. Whereas I think a lot of us get caught into that. The paradigm of proving that we're right and just looking for anything we can find that proves that we're right or well, once we hear something, we want to believe that it's right and that, you know, that not necessarily is not the best way to go about figuring out the right, the right thing to do.

00:17:08:09 - 00:17:58:00

Unknown

So a well understood human frailty, it's called confirmation bias. And if you give people ten pieces of data, they will look for the one that confirms what they want to believe. So even if the other nine say they're wrong, a lot of that research on human bias was done by Daniel Kahneman and almost Mirsky, who got to Daniel got the Nobel Prize actually for behavioral economics, and he's written a wonderful book that I recommend to everyone, quote, Thinking Fast and Slow.

00:17:58:01 - 00:18:33:20

Unknown

It came out to about a decade ago, and it's probably the book I recommend most to people inside of Constellation and to our investors. It it talks about basically the biases that we carry as humans and how we can, to some extent, understand those biases. It's very, very hard to actually truly counteract something like confirmation bias unless you frame the question in a different way, which is what you were suggesting was looking for ways to disprove a hypothesis rather than prove it.

00:18:33:22 - 00:19:03:06

Unknown

I read an article from Kahneman relatively recently and I think it somebody asked him about, you know, given that he's he's studied it and he has these these theories on it. He's won the Nobel Prize. Whether he still follows in subject to the same biases, and he's like, oh, yeah, I'm no different than anybody else. He goes, I just might be a little bit more reflective of, you know, sort of realizing it after the fact that I've actually, you know, fallen for the same same biases, which I thought was very, very authentic of him.

00:19:03:06 - 00:19:26:10

Unknown

But very sobering to your point on sort of just understanding how we humans are actually wired to just think and make decisions for sure. So my final question for you just on education was, you know, in your MBA, you know, the course that you found most interesting and what it was that made it the most interesting for you.

00:19:26:12 - 00:20:00:04

Unknown

And I saw in your notes that you wanted me to talk about this and I wrecked my brain and couldn't think of course, that I actually liked in the MBA program. Partly that was because I went to a school that uses the case method and hence they didn't really teach the principles. They taught the cases and you were supposed to extract from the cases the principles, and they weren't always very good at doing that.

00:20:00:06 - 00:20:36:20

Unknown

So would you recommend people the the MBA as a additional source of education and learning? Like what's your, what's your thoughts on what MBAs? I think a blend of theory and cases is the ideal and and I think western the school I went to was far too heavily case oriented. The other challenges that a lot of professors are not great teachers.

00:20:36:22 - 00:21:15:01

Unknown

So the most fun I had at Western was beating the professors in the case method. They had the case notes and they knew what they wanted to extract out of, you know, that 50 or 100 page tome that they had dumped on you along with three others the night before to read and as they ran the class. And the greatest fun was sort of getting them off track and away from what they wanted to deliver because they were frequently arrogant and poorly prepared group.

00:21:15:03 - 00:21:51:16

Unknown

And so that was probably my greatest joy at Western. I'm sure. I'm sure they just loved you. Yeah, a number of them. Did you know about it? So shifting over to two work experiences, I think you you shared with us some of the the missionary work you did and sort of what you found from that. Now, I read this somewhere and again, I can't remember it where I read it, but it also said that you had two other what appear to be quite interesting jobs or or things that you did, one being a grave digger and one being a bouncer.

00:21:51:18 - 00:22:25:02

Unknown

So first of all, I guess first is, you know, is this true? Yep. Yep. Okay. And then any elaboration on on on digging graves or being a bouncer or perhaps maybe how they they helped you see things differently today? Yeah, not really. I mean, along the way, I was a municipal worker too, you know, doing work in parks and painting fences and cutting weeds and all that other stuff.

00:22:25:02 - 00:23:04:22

Unknown

And I worked in a warehouse and I was a draftsman and it was a turnkey at a couple of major buildings. And I was a clerk at Canadian Tire, and I was in the Reserve and I moved furniture at night because that's when office moves tend to happen. And I did research on windmills. You kind of do what you need to do to survive and you move on and often that time isn't well spent, but it's something you don't have a choice about.

00:23:04:22 - 00:23:29:16

Unknown

You need the money and you do, like you said, what you need to do. There's But at the same time, I think then if you're putting yourself through school or learning a particular skill which you eventually become good at, you prize that more highly because of the journey, because of the things that you had to do to get there.

00:23:29:19 - 00:23:51:21

Unknown

And recently sort of feel that way. So what then? So you sort of look at some of your early experiences. They definitely seem to be more physical in nature, although if I reflect back on some of mine, they also would have been like that. Back to your point of view, you got to do what you got to do to, you know, to to pay your expenses, to pay for your education.

00:23:51:24 - 00:24:13:13

Unknown

And obviously, you know, when you don't have a lot of skills and qualifications, you know, that that type of physical work tends to to be more available. But this shift then from sort of using the physicality of your body to sort of earn income and do what you were doing to more sort of the the intellectual pursuit of becoming an investor.

00:24:13:15 - 00:24:58:17

Unknown

Like how did that like how did that shift happen? Yeah, I guess the MBA probably was the thing that took a hodgepodge of jobs and education and gave it direction. And once again, when I graduated, I took the job I had to take, which was a job in banking. But I was fortunate that I had a summer job between the years of the MBA where I had someone who is still a friend.

00:24:58:19 - 00:25:28:22

Unknown

He coached me and he basically sort of sized me up and said I was working at a bank, a British bank or Barclays in Toronto. And he said, You will be a terrible banker and why don't you go down to the files? We had all of these files, there were physical files and read about the bank's clients and figure out where you'd like to work.

00:25:29:01 - 00:26:06:16

Unknown

And so for a portion of the summer I did that. The other portion of the summer I worked on a computer system for him with a spreadsheet type program that long predated and ran on many computers, Excel and did modeling for complex leases, which was great fun. But the rest of the time I read the files at Barclays and I came across the venture capital company, one of the original sort of merchant banks that morphed into venture capital, and I decided that's what I wanted to do.

00:26:06:18 - 00:26:35:16

Unknown

So when I graduated, I tried to get a job in venture capital, but there was literally nothing in Canada. So I went to work for an American bank and it happened to be one that had a large French subsidiary. So I fought like hell to get into their U.S. venture group but failed and came back to Canada, was still working for that American bank and papered the inboxes of the whole venture community in Canada.

00:26:35:16 - 00:27:00:14

Unknown

Got to know all the key people, went to their conferences paying for it out of my pocket. When my wife and I had no money and eventually managed to crack, the venture industry got it. And I was one of 400 applicants for a job that was advertised in the Global Mail. And that was how I started the venture career.

00:27:00:16 - 00:27:33:08

Unknown

And what was it about venture capital that sort of propelled you to be so tenacious to get into it? Well, I think once you've had all those jobs that you didn't want to have and you had to have the idea of a job that you really wanted was a really attractive thing. So that probably explains the tenacity plus the support of my wife in pursuing it.

00:27:33:10 - 00:28:05:24

Unknown

What appealed to me was the stories and history of venture capital, the creation of wonderful companies that I knew of, and so was really keen to be part of that. Now, once I joined the industry, I found it wasn't really in that way, but from the outside it looked very exciting and it's certainly a attracted a group of really smart and driven people.

00:28:06:01 - 00:28:34:20

Unknown

So you had both variety and sort of intellectual leaders, and that created a fatal attraction, almost from my perspective, to the industry. And how long did it take you to realize that perhaps it wasn't what you wanted it to be? So you get in and you're working with people and then not perhaps the people that you'd ideally like to be working with.

00:28:34:20 - 00:29:37:21

Unknown

And then you sort of reorient. And eventually I found my way to Ventures West, which was at the time the cream of the crop in the venture industry in Canada and had some of the brightest folks I've ever worked with. They were absolute superstars and they were ethical and hardworking and just remarkable human beings. And so it wasn't a people problem and it wasn't the variety of the work problem, which was I mean, it was astonishingly attractive within my personal portfolio, within Ventures West I had a group of photo chemists that I worked with, and then another day I would get to work with the leading remote sensing technologists in the world.

00:29:37:23 - 00:30:30:15

Unknown

And I worked with Dr. Frankenstein of the plant biotech industry who was creating new clients by moving genes around. And it was absolutely fascinating. But after a while you want to succeed with these things, not just sort of stumble along. And I think that need for mastery and focus and becoming really good at something drove me towards focusing on what ended up being constellation vertical market software and creating a permanent capital vehicle for the vertical market software industry where you didn't have to buy and sell the businesses.

00:30:30:15 - 00:30:59:18

Unknown

You could keep them forever. You could build relationships that lasted a lifetime and you could build businesses that were intent on being around as long as their clients were in existence. And that's a very different perspective than the venture industry, which, when it comes down to it, is all about creating things that you can sell to other people, either as IPOs or as outright sales.

00:30:59:18 - 00:31:34:14

Unknown

And so there's a different business model for the venture industry. And within Canada, at least, you couldn't focus narrowly enough in any particular segment that you could be a real specialist as a venture capitalist. And so why a vertical market software? Had you did you have experience with VMs when you were at Ventures West or with This is just something that you sort of came across as you were again looking to, you know, master something into this?

00:31:34:16 - 00:32:13:20

Unknown

Yes, I did have a bit of experience with vertical market software, but the way I came to it as a path for permanent capital vehicle and the place to focus wasn't because of any particularly fascinating technology. It was really because of a high quality business model. And what led me to thinking about high quality business models was one particular individual.

00:32:13:22 - 00:32:45:09

Unknown

So at one stage, as I was exploring venture capital and trying to figure out different ways to do it, that my work, one of the ideas I had hypotheses was that you could bank great horses instead of looking for particular races in which to run. And one of the horses I banked was a guy named Steve Scotchman, and I worked with him for a number of years.

00:32:45:09 - 00:33:27:18

Unknown

He came from the Advanced Materials industry looking for advanced materials companies that we could invest in and he could run and he had a great track record and he was a very thoughtful engineer and as I worked with him, I always found that his bar on business quality was extraordinarily high. He was looking for really, really great businesses and and we'd never succeeded in finding one that he wanted to invest his life in.

00:33:27:18 - 00:33:52:24

Unknown

And I wanted to invest the venture funds capital in. But Steve had made some money from his previous venture, which got sold out from under him. And so he was also learning about investing. And as he was learning about investing, he was teaching me about investing what he learned. He passed on to me and he told me about the great investors and offered them.

00:33:52:24 - 00:34:34:07

Unknown

Munger were certainly a big part of that, but there were also other people who influenced his investing philosophy as well, including some in Canada who he introduced me to. So here I had started off as a venture capitalist. I was very tech oriented, very much into science, and suddenly the person who has become the most important mentor of my life is sort of hold me over to starting to think about really great business models and investing.

00:34:34:09 - 00:35:11:02

Unknown

And so I was pivoting and then looking back through the portfolio adventures worth for these really great business models, I realized that a couple of the vertical market software things that we'd done were ideal, except they were small, They weren't ever going to be big businesses that warranted significant capital and could be a big enough canvas on which to work.

00:35:11:03 - 00:35:40:07

Unknown

So I came up with the idea of creating a holding company for such businesses. If they were great small, medium sized businesses, why not own a bunch of them? And that was the genesis of Constellation. Now when you took this idea back to the partners at Ventures West, did they look at you like you had three heads, or how did they, you know, what did they perceive of your idea?

00:35:40:09 - 00:36:16:21

Unknown

It's interesting. They, as I mentioned, a really smart, driven people and nearly all of them have this large total available market mindset. And so big winner kind of approach to the thinking. It's what's taught in the venture capital business. But at the same time, they knew that what we were doing in Canada wasn't working particularly really well. And so it was important to experiment and try other things.

00:36:16:23 - 00:36:52:12

Unknown

And they enabled me to work on the idea. And then when we funded it and also provided some of the capital personally as individuals, and then when we took it public, many of them, I think all of them became shareholders in the IPO as well. Okay. I didn't I was not aware of that. So why then? So as we're talking about going public and maybe just a bit pre public, so why did you pick OMERS?

00:36:52:12 - 00:37:11:07

Unknown

And so for those listening OMERS is the Ontario I'm just full employment retirement savings plan. I think I got that right as a partner as a shareholder. So this is sort of the pre public time. Why did you why did you think they were a good partner like what was it you thought they brought to the table that you you did not have or could not get on your own?

00:37:11:09 - 00:37:59:21

Unknown

So I went out initially to a number of our entrepreneurial, limited partners and to some high net worth individuals that I knew to raise capital. And they got some nibbles and then I went to OMERS, who was our biggest limited partner, Adventures West, and talked to them and they were interested, but not on conventional venture capital terms and not on terms that were very attractive to any other investor, so to speak.

00:37:59:23 - 00:38:26:18

Unknown

So I had a difficult choice. I could go the OMERS route and have my fundraising done. And alongside the money, the ventures West Partners were going to put in, or I could spend a considerable amount of time trying to drum up sufficient capital elsewhere and probably not have almost played because they had already dictated the terms on which they would play.

00:38:26:20 - 00:38:59:05

Unknown

And so I took the easy way out. I took the OMERS money, which was enable us to get to 25 million Canadian and launched the business and got on with it. Okay, Interesting. All right. So there is one other thing that's probably relevant to your audience, and that's at OMERS, the person in charge of the group that invested in Constellation was someone I knew from business school.

00:38:59:07 - 00:39:37:19

Unknown

And so frequently you'll find that your acquaintances you network are important. And he knew me really well and I knew him really well and we trusted each other and liked each other. And now that worked out great. Except that at some stage he became aware of some problems inside of OMERS and tried to get them sources and that put him politically in a difficult position and he ended up leaving.

00:39:37:21 - 00:40:08:06

Unknown

And the people we ended up working with within OMERS were not a trusted relationship with senior people. And and so that's the reason why we sought another large investor. So you can have a good relationship with a single person inside of a large institution, whether it be a customer or a supplier or in this case a provider of capital.

00:40:08:08 - 00:40:40:08

Unknown

And if you lose that single point of contact, you really can be in a difficult position. So one of the things I did was diversify our sources of capital and managed to get to capital and who later became Burchill, as are the major shareholder private equity shareholder. So if you look back on first partnering with OMERS so do you think you would have done it if you didn't have the trusted relationship with with the first individual that you had met?

00:40:40:10 - 00:41:12:03

Unknown

Business School I don't think OMERS would have done it. The not have done it. But I mean, I, I was probably naive enough to have taken the check, irrespective of the fact that I didn't know who I would have been taking it from at that stage. I the So Bernie and Ruth is our chief investment officer and is employee number number one or number one or number two.

00:41:12:05 - 00:41:43:22

Unknown

How did you and Bernie meet and build a relationship that has survived 25 years, which I would say is fairly unheard of these days? I think it's just a great story. Again, it's I'm trying to think back to the exact circumstances of how we met. And firstly, Bernie was employee number two, and I am employed employee number one, because Ventures last leaned on me and said, You should have a CFO.

00:41:43:24 - 00:42:31:06

Unknown

And so I went out and got one. And that, by the way, is a good lesson. Also, if you lean on people to do something and they generally comply without doing it the way they would want to do it. And so employee number one ended up leaving is fairly quickly. Bernie was an analyst for us and I hired him into Ventures West because that was a whole lot easier to do than hiring into software CO which was not a household name at the time.

00:42:31:08 - 00:43:02:07

Unknown

And Ventures West was a reasonably well-known venture group, and Bernie was a new grad from INSEAD, a relatively new grad from INSEAD, and he was obviously very bright. He had a technical background, international experience and like most hires, it's a crapshoot. You know, when we hire from the outside into senior roles, I think we have around a 50% success rate.

00:43:02:09 - 00:43:49:09

Unknown

So it's it's not easy in this particular instance. You know, I work closely with Bernie and you're either going to end up developing respect or indifference or contempt for the person. And we were lucky. We ended up respecting each other. And it's been a great relationship the whole way through. And literally, I can't think of any major arguments we've had along the way and we've, I think, thoroughly enjoyed working together.

00:43:49:11 - 00:44:24:04

Unknown

No, it is it is a great story that I think know. I think we and anybody, again, who works with people you know, that closely, I think would cherish the opportunity to to have built such a great relationship. So we took you took constellation public in 2000 and 6yy take the company public. The capital we raised in 95 didn't really have a ticking clock on it because it was from a pension fund.

00:44:24:06 - 00:44:52:22

Unknown

But the capital we raised from Birch Hill definitely had a ticking clock on it. Their fund was a ten year fund, or at least I assume it was. Most of the venture funds were. And so I knew I had to find them an exit at one stage. And what tends to happen with private equity firms is if you don't find them an exit, they find themselves an exit.

00:44:52:24 - 00:45:31:03

Unknown

And that usually involves whistling in some eye bankers to dressing up for sale and then running an auction. So going public was one of the routes to get an exit. And so we explored it and executed it. It wasn't particularly tough. We had a reasonable story to tell. We weren't raising a lot of capital. I guess the only peculiarity was the capital we did raise.

00:45:31:05 - 00:45:59:07

Unknown

We raised by selling shares on behalf of OMERS and Burchill me, meaning the constellation did not raise any equity itself that went into the company. Was it was just for selling shareholding? Yes, exactly. It was solely for liquidity for those shareholders. Yeah. Any regrets having gone public? So obviously to your point, you felt that was something you had to do given the capital structure.

00:45:59:07 - 00:46:40:20

Unknown

But now, you know, you can reflect back and you know, it's been, you know, at 14 years. I mean, any regrets on on being a you know, on that decision? No, no. I mean, the one thing I would counsel anyone who's taking a company public and we are going to be spinning out a company shortly from within Constellation, the only advice they give you is to pick your shareholders, if you can, and to work at attracting those shareholders that you think you'd like to be associated with for the long term.

00:46:40:22 - 00:46:58:12

Unknown

And do you find that more difficult now? I think I think, you know, if you look before, I think you used to publish in some of the shareholders, I had gone back and read a bunch before in preparation for for this this chat, you know, and you talked about sort of, you know, the what started off as relatively low turnover in our shares.

00:46:58:12 - 00:47:22:06

Unknown

So, you know, people were not buying and selling shares in Constellation very often. And that number was sort of creeping and creeping and creeping. I haven't seen the latest number, but. So are you still happy with, you know, the cohort of our major shareholders today? You know, we have some shareholders who are our long term shareholders, but that cohort is much smaller than it ever was.

00:47:22:08 - 00:47:50:05

Unknown

And increasingly the index funds have become a big and important part of what we do here at Constellation. Yeah, I would definitely that, that as you said, the bigger we get, I think the more the more that tends to happen. Right. Because now we actually are in the are on the radar or in the requirements for many, many different different funds, which are.

00:47:50:07 - 00:48:19:05

Unknown

So what I go back to a comment you had you touched briefly on this sort of hiring from within. We were talking about when I'd ask you the question about birdie and so I think to your point, I think, you know, our success rate of bringing in certainly senior leaders from from outside of Constellation, I think as you put it, that is about a 5050 hit rate or success rate, which is, you know, not really great when you're thinking about the impact and how long we want to have employees with us.

00:48:19:05 - 00:48:43:19

Unknown

That's not a great track record. And he said, I mean, your sense of, though, whether we should continue to focus on just creating better paths for people within Constellation to move up to more and more senior levels or try and understand and be better at bringing in external people for some of the benefits that they would bring when they come.

00:48:43:21 - 00:49:19:02

Unknown

It's a tough one. It's I would rather hire high quality talent with a long runway and then develop them internally and give them a rapid development path, then try and go outside and bring in people who are ready to slot into some relatively senior role. And that's partly because I think what we do is different. I think we're very unusual.

00:49:19:04 - 00:50:14:18

Unknown

Firstly, you don't get many vertical market software companies that are of scale and the play in multiple verticals and do what we do in that are very investment savvy in return on capital employed oriented, while at the same time thinking about the very long term. And and so I'd much rather get someone who's smart is had a job go to knows what working is like and knows something good when they see it and then introduce them to Constellation and hopefully they find what they're looking for in a place like Constellation.

00:50:14:20 - 00:50:40:06

Unknown

Yeah, I know your site is definitely a tough one. I think when you sort of look at again, our lack of success, but then you also I think one of the things I've been struggling with lately is, you know, infusing existing thinking and ways of doing things with new and different thinking. Because I find a lot of times we just, you know, we've we've convinced ourselves, we tell ourselves the same narrative, the same story, and we believe it.

00:50:40:08 - 00:51:00:10

Unknown

And, you know, over time, it's not that the you know, the story might change totally, but it definitely changes. And I think sometimes, you know, we're not as quick or as fast as we need to be to to adjust. And I think sometimes balancing the individuals that you describe with, again, bringing in some other people, I think we just do have different ways of looking at things, different ways of thinking.

00:51:00:12 - 00:51:18:18

Unknown

I think we strike a nice balance between us finding, finding to be more successful with the, you know, the businesses that we that we own. I'm doing some work now with a company inside of Constellation and they have a metric I haven't quite figured out again how well they score this metric, but they look for 25% of their leaders.

00:51:18:18 - 00:51:50:14

Unknown

Now, again, this is again, we didn't I didn't define what leader meant, but either one new promotions from within or people brought in from the outside. They want 25% of their leaders to be different on a on each and each year. And the idea behind it is really to again, drive different thinking, bring a sort of, you know, a different focus, a different drive and momentum to keep moving forward, which I thought was an interesting way to do looking at it versus sort of always being sort of, you know, doing the same old thing the same old way just because that's how we've always done it.

00:51:50:16 - 00:52:16:05

Unknown

So it's an interesting, interesting concept for sure. Yeah. We have General Electric where you knew you had your job for 3.7 years and you were always thinking about what their next job was. And in your 3.7 years, you were keen to, you know, hit all your objectives, make your boss happy, have good reviews and get a better next job.

00:52:16:07 - 00:52:57:01

Unknown

And that led to tremendous success for General Electric. The everyone was on the same bus, but I think it also led to a lot of short term thinking and over optimizing. And eventually I think it led to book cooking and unethical behavior and that got them into trouble. And that's one of the fears of not living with the results of the decisions you make today and their implications for 5 to 10 years down the road in the software business.

00:52:57:01 - 00:53:34:14

Unknown

As we all know, the investments you make in R&D and sales, marketing today and new initiatives probably aren't going to pay off for that seven or ten years. It's So how do you think this is probably an area where you and I are probably not as not as aligned as we might be on some some other topic. So how then do you like how do you think about, you know, individuals as they come up wanting to do more and different things, being able to do those things that might require them to be separated from some of these decision?

00:53:34:16 - 00:54:12:05

Unknown

So the the way I handled that is, is that I don't take people out of a position where they own something I just create situations where they own more stuff. And so you were responsible for Harris and you're now responsible for Harris, the original utility business. You're now responsible for so much more and that only works if the people have the capacity to keep on going.

00:54:12:09 - 00:54:40:17

Unknown

But if I'd taken you and convinced you to go off and run Gary Jones when I needed managers there and to leave Harris behind, and I think we would have lost something that intimate knowledge that you built up of the people, the customers, the products within the utility space, which I believe would have been a loss for the Harris Operating Group.

00:54:40:19 - 00:55:20:22

Unknown

Now, one of the things that I believe is that ideas and practices travel in people. Absolutely. And so new people can bring new ideas. But I also believe that there's a group of people and it's not everyone who are natural consumers and adopters and observers of new ideas and if you have enough of those, you don't need to bring in people from the outside.

00:55:20:24 - 00:56:19:20

Unknown

No, I have no objection to bringing people in from the outside, but I prefer to bring in doers as opposed to managers, so to speak, people who install processes or help those things happen rather than people who hire fire set, incentive compensation, things of that nature. And what I find is when people talk about hiring outsiders, they're really talking about people who bring pereda processes or digital marketing processes or an whatever process it is they're really talking about bringing in technical specialists in particular realms.

00:56:19:22 - 00:56:46:03

Unknown

They usually talking about bringing in general managers know I very to the So switching topics a little bit to I think what I would consider to be sort of one of the foundations of the Constellation and the Harris business model, which really is decentralization, autonomy and control, how typically at the business unit levels are being core to our DNA.

00:56:46:05 - 00:57:17:00

Unknown

Obviously, this this originated with you where like what experience in your life or in your work experience? Like where did this come from? Autonomy as a concept. Yeah. And sort of I would say what I mean, a lot of people I think when we when we talk about, you know, if they find our level of decentralization and control that we put out our business unit levels almost to be extreme and don't really understand why we don't focus on synergies and trying to do a lot more things right.

00:57:17:00 - 00:58:09:11

Unknown

So I would say that the model that we follow is not very common or well understood and we try to explain. So it starts with a personal preference. I don't like anyone telling me what to do and do. I love being convinced. I love changing my mind. It's the neatest feeling in the world to have someone take you from a position in which you're entrenched and believe that you understand your position and have you convinced be convinced otherwise through a rational process.

00:58:09:13 - 00:58:44:20

Unknown

I get a little tingle when that happens it's wonderful, but I don't like anyone saying I am an authority figure and you will do it this way. I can barely think of anything that annoys me more. And that's just upbringing. You know, I grew up, I got strapped by the principal way challenged teachers. I left home early. I had a bootleg radio license.

00:58:44:22 - 00:59:22:09

Unknown

I built a flamethrower. You know, I did things that weren't acceptable to lots of people. And that ability to choose what I think is right and to defend that position, if I can, is something I prized highly. I love those license plates. Live free or die. And so I hope that we've been able to attract people who feel similarly.

00:59:22:09 - 00:59:52:08

Unknown

I certainly see an incredible sense of independence among the people with whom I work directly and I don't know if you feel this a lot of sycophants around that manager table, Jeff, but I certainly don't think so. No, I think I mean, obviously, you know, when you describe sort of why you believe what you do, and I think people have a hard time understanding that you truly do live that.

00:59:52:08 - 01:00:06:03

Unknown

I think, you know, I you know, I can't I can't remember, you know, we've worked together for 20 years. And again, I don't think I could I'd have to think really hard. And I think if I did, I don't think I'd come up with anything where you actually told me to do something. You will often try to persuade me.

01:00:06:03 - 01:00:27:14

Unknown

You have often provided no evidence and suggestions and recommended conversations with others to try to your point to to get me to see things differently or to to use a different lens for sure. But I mean, I'm not sure I could ever tell you a time where you you told me to do something. And that's you know, when I when we were a small business or now, you know, we are the size that we are.

01:00:27:16 - 01:00:54:08

Unknown

I think, though, when I reflect, though, I guess my question for you then is, does it upset you, though, that I probably don't live it the same way that you do, Right. Could I will I do try and I'm sorry. I do believe in autonomy and decentralization and I do try and empower our leaders to do know, to make their own decisions and to learn and even sometimes let them fail.

01:00:54:08 - 01:01:15:06

Unknown

And you'll learn from mistakes. But there there will be an occasion where I will in and probably require them to do something. Or perhaps they would feel that I am I am not giving them an alternative well, I might maybe, maybe I'm pretending that I am, but I'm not. Does it bother you that I don't always live it the same way you do?

01:01:15:08 - 01:01:50:16

Unknown

Not at all. And that's self-serving on my part. So if you do something different and Mark Miller does something different and Dexter does something different, we are always in a position where if it works, we're all going to know you're going to share that right? And that experimental approach to life is one that makes for a much healthier whole evolution is a natural process.

01:01:50:18 - 01:02:18:01

Unknown

Some things are going to work, some aren't. If you're not experimenting, if you're not trying to do things differently and we aren't going to discover the right way forward. So it's I'm delighted that you are trying different things and you don't necessarily sign up for the whole package, though, just having a transition actually into experimentation and best practices.

01:02:18:01 - 01:02:47:07

Unknown

And I think, you know, we look across one of our core strengths is our ability to to share best practices not only with the businesses within within Harris Group, across Harris, but also across the US. And I think, you know, despite the fact that when it comes to deploying our capital, there's definitely a level of competition amongst the operating groups when it comes to that, I think we've still got a really good job of still sharing our best practices to your point, what works, what doesn't work?

01:02:47:07 - 01:03:06:13

Unknown

I think that's been one of our core strengths and something that I that I keep fighting to make sure that we can keep doing. But do you I mean, do you think we do a good job at sharing best practices Like, you know, when you stand back and you look at what we're actually doing, you believe we're still doing it like we used.

01:03:06:15 - 01:03:50:21

Unknown

So firstly, the the nature of our best practices is really important. When Newton discovered physical laws, those could be replicated everywhere in every geography and every time. But when we discover best practices and we try to replicate them in a different geography or a different time or a different industry, they don't always work. You can't always replicate them.

01:03:50:23 - 01:04:40:09

Unknown

Much of what we do is context sensitive. It doesn't apply. It may send you off in the right direction, but you can't apply it like a law. And so our best practices are vague and fuzzy recipes that send you in a particular direction. You can't put them in a three ring binder and ship them off to Brazil, and hence I'd much rather they traveled in the form of Why don't you talk to so-and-so over this business unit about that particular thing?

01:04:40:11 - 01:05:09:12

Unknown

And so some of my time is spent with Robyn saying, you know, we got approached by a supplier, he wants to put up the prices by ten times for this software component that we use. How do we handle that? Who should we talk to? And I'll reach out to some people and try and find someone for him, often by phoning you who in turn say, Well, why don't you talk to so-and-so and etc..

01:05:09:14 - 01:05:50:08

Unknown

So that sort of organic have you seen a situation like this before? It looks like this here's someone to talk with is how we often share best practices, and it's because of the nature of the best practices we're sharing Now. Does that get harder as you get bigger? Absolutely. And so do you need to invest ever more in providing networking, contacts and institutional knowledge to people?

01:05:50:10 - 01:06:45:07

Unknown

Yeah. Now the fact that I can't connect Robyn's person who has this issue down in one of his business units directly to someone inside of Dexter's unit that has this issue doesn't bother me hugely because I know that within Robyn's unit there'll be some advice from some business unit that will help that person. And so the fact that the network gets a bit frail as you get a bit bigger doesn't mean that the units inside of Test Robyn's unit aren't as strong as they were inside of all of Constellation ten years ago.

01:06:45:09 - 01:07:28:18

Unknown

So I still think we can have robust best practice activities in our small portfolios or operating groups that are as good as they ever were. And the things that filter through, you and me, Jeff, would just be fewer and hopefully there'll be bigger issues and more important things that we can actually help with. The I do spend, you know, my time is actually is on connecting people like you said you know talk to so and so have you seen so and so it really actually is I find I go I spend more time there than I probably have in the past with like one I find actually quite rewarding when you when you link the

01:07:28:18 - 01:07:55:13

Unknown

people together and then you follow up on the conversations. And so it can be quite impactful for sure. So you've done a bunch of research which you've shared with certainly myself and my peers and also also with the Constellation Board of Directors on CPCs or high performance conglomerates, sort of looking at what can we learn from others who sort of at least have the organizational structure that we have.

01:07:55:15 - 01:08:23:20

Unknown

So why why bother studying what others have done if they actually aren't in vertical markets on one in all cases may be. I think that's around a dozen of the performance conglomerates. And the neat thing is that one of them was a vertical market software company was Jack Henry, still is. And the other one, Roper, was busy becoming a vertical market software.

01:08:23:22 - 01:09:12:16

Unknown

So, you know, to have the 12 best high performance conglomerates in the world, two of them end up as market software companies is pretty damn remarkable and sort of speaks to the fact that it is an inherently good business. And that said, you know, the other ten or so were not the high performance vertical market software conglomerates. They were just in other industries and businesses and the reason to study them is to try and figure out how we as Constellation are going to evolve.

01:09:12:22 - 01:09:48:11

Unknown

If there was an obvious group of companies that could look to that showed the way, that had many, many acquisitions that had continued to be successful over time, I would have gone to them. This was just sort of where I ended up when I couldn't find anyone who looked more like us within our industry. Was there a learning that sort of crosses many of them that surprised you most?

01:09:48:13 - 01:10:24:22

Unknown

It's not something that is unique to them, but it's the sort of reversion to the mean thing. This is a concept that people talk about all the time. Whenever you get exceptional performance, it tends diminish over time towards meaning performance. And we certainly saw that in all the high performance conglomerates. They all started out with extraordinary returns on capital.

01:10:24:24 - 01:10:51:12

Unknown

Once they figured out what they were doing. And then gradually over time, for instance, their returns on capital started to diminish. And so you mentioned Jack Henry. What is it about them that impresses you the most? I remember actually, when I first joined Harris, you were talking about Jack Henry, which is, you know, it's a long, long, long time ago.

01:10:51:14 - 01:11:04:23

Unknown

Yeah. In fact, Bernie wrote a piece on Jack Henry way back when, when you joined that we we still have lying around, which is kind of fun to go back and look at.

01:11:05:00 - 01:11:58:20

Unknown

I went on a road trip at one stage and met Jack as he was a very old and sick man and had the opportunity to have dinner with him at his house. And he was a character and am very kind to, you know, Semyon, when he was in such a state. The thing I loved about Jack Henry and is startling even today is that they compete in an industry where the customer base has become much, much less over time that probably half the number of small financial institutions in the United States now that they were when we first looked at them.

01:11:58:22 - 01:12:45:22

Unknown

And despite that, they have grown their revenues, profits, earnings per share and shareholder value at a remarkable rate for since the eighties, early eighties, I believe, when they went public. So that's that's an incredible record. Sure. Now, one of the things that they typically do or I think they maybe done a better job than we have, is sort of using their channel their existing customers to basically then purchase add on products or even potentially service offerings and then take that back into their into their existing customer base.

01:12:45:24 - 01:13:11:17

Unknown

As we talk about that, I mean, certainly at that I mean, my comment here might be more error specific. We haven't done that as often as I think I would like to see us do like any sort of sense as to you think why we don't do that more often. Like it seems like from our return perspective, it seems like something where we should be spending more time and it is any sense as to why you think we might struggle with doing that?

01:13:11:19 - 01:13:53:21

Unknown

I'm thinking that you could identify right now three or four companies in the utility software space that you would like to own if price were no object now. And I don't think Jack Henry let price be an object. So they paid up for the acquisitions that they bought and because they paid out, they had to have synergies, they had to do cross-selling, they had to achieve some things with those assets.

01:13:53:23 - 01:14:49:06

Unknown

That's when we take our capital and go out and invest in some new vertical that isn't utilities we don't have to do. And if you look at Constellation is results. We generate a higher return on our capital than Jack Henry does. Now, if we were seeing lower rates of return across the board or if we used a lower hurdle rate, I believe we would own more utility software businesses because I think you would have stretched and found a way and driven for synergies and done cross-selling and all those other things to enable you be more strategic about what you do as opposed to opportunistic about what you do.

01:14:49:08 - 01:15:17:02

Unknown

You would have ended up in less verticals, would have had lower returns on capital, but you probably would have built within utilities a higher market share business with a larger around it than your existing businesses, which are still pretty extraordinary businesses. You know, that's a fair reflection. Yeah, I'm just like I'm saying you're thinking. So I think the answer is yes.

01:15:17:02 - 01:15:46:12

Unknown

But so then would you do you consider then Jack Henry to be less disciplined employers of capital than we are? I guess when you look at pure return, I guess the answer is simple. The answer is yes, but the question is who's created value? I, I think we've created more value, you know, by a long shot. But they've created astonishing amounts of value, returned a lot of capital to shareholders.

01:15:46:14 - 01:16:05:19

Unknown

We haven't returned a huge amount of capital to shareholders. I mean, it's not trivial, but we've redeployed more capital. Yeah, I know. It's interesting this concept of, you know, what, what would the businesses look like, how deep with the moat, with the moats actually be if we you know, if we had a you said a different a different approach.

01:16:05:19 - 01:16:36:20

Unknown

And I do think I do agree with you that they would be much deeper, more diversified, but likely you're right, the consequences second or third consequences, the returns would likely also be lower. No, it's it's a it's a very interesting way to look at it. That's probably actually a good segue way into which I think will be of interest to a lot of our businesses, which is this sort of this profitability, organic growth, trade off that something that we often speak to.

01:16:36:22 - 01:17:04:00

Unknown

You've written before. I think it's a quote from one of the the shareholders letters that, you know, that you believe organic growth is the toughest management challenge in software. So why, why, why do you believe that? Why do you believe that organic growth is the toughest management challenge? It's often it started with my experience in the venture business where we were looking to create new businesses, new markets, new products, and it proved incredibly difficult.

01:17:04:02 - 01:17:54:07

Unknown

And we then inside of Constellation did a long empirical study of our own initiatives over a five year period and demonstrated to ourselves that we too, we're doing a poor job of deploying capital in new initiatives. And I knew it was tough, but it wasn't until I across Philip Tetlock research that I understood why it was tough. So Tetlock is the most famous researcher in the area of forecasting and wrote a book and I hate the name of the book because it sounds like hype called Super Forecasters.

01:17:54:09 - 01:18:40:22

Unknown

Yeah, but I love his research, which I had come across before the book, and his original Ph.D. took forever because he followed a series of gurus and forecasters and people who claim to be visionaries and know the future who were making publicly that he could then track and as to the accuracy of the forecasts and visions. And these were economists, they were political analysts, they were all kinds of people.

01:18:40:24 - 01:19:23:24

Unknown

And eventually, when he managed to compile all the research he published an article that got a fair amount of press and along with him his Ph.D., that the average guru was no better than a dart throwing chimp at forecasting the future. And as his profile and people got to know him, the US government took an interest in his research and provided him with significant funding to extend his work on forecasting, which he did, and which led to a lot of the work in the super Forecasters book.

01:19:24:01 - 01:19:50:09

Unknown

And the outcome of that is that there are, it turns out, a tiny group of people who are capable of good forecasts. Now it's important to understand what Tetlock means by a good forecast and the kind of people that are good forecasters. And I won't go into that here, but if you're tempted, it's definitely a good book to read.

01:19:50:11 - 01:20:21:02

Unknown

And you can also find some articles that encapsulate what's in the book. But the the main finding that you won't find advertised in a whole lot of places because it isn't really the thesis of his book but has tremendous relevance for us is that even the best forecasters, his super forecasters, can do a good job out maybe two years, maybe three years.

01:20:21:04 - 01:20:47:21

Unknown

But there are no super forecasters who can forecast five years and ten years. They don't exist. So visionaries, people who either say a lot of different things and one of them works out and they get known for it, or they're the person who says something outlandish and we happen to end up with an outlandish event. And then they become known as being a visionary.

01:20:48:01 - 01:21:18:03

Unknown

So unless you have this ability to see far out into the future, how do you make long term investments? It's incredibly difficult stuff. And the most obvious way you can do it is by listening really closely to customers. So instead of you making forecasts, you let your customers be your co developers. And it's one of the ways that we've been able to improve what we do.

01:21:18:03 - 01:21:59:17

Unknown

On the initiative side, we have a variety of techniques that we use for doing so. One of the high performance conglomerates that we study studied was Illinois Tool Works and it took co-development to the extreme working with clients to actually get patents jointly that were owned by ICW, Illinois Tool Works and the client. So co-development is one of the great ways to develop products that, you know, will have a market rather than just forecasting that there will be demand for them.

01:21:59:19 - 01:22:25:04

Unknown

And do you think there's a reason why or do you think there's something we could do better to support our leaders in our businesses to be to be willing, I guess, to to to take more risk, to to find these potential ways to drive organic growth, realizing sort of again, that it's not going to be decision today, growth tomorrow scenarios.

01:22:25:06 - 01:22:45:23

Unknown

I struggle with trends just trying to get them to you know, people to think a bit more longer term to be willing to make some of the the shorter term trade offs to to be able to drive it. I just think it gets harder and harder, I find as the businesses grow and even, you know, realize a little bit of success, they become less risky.

01:22:45:23 - 01:23:14:05

Unknown

I find I become more risk averse and you and I and various other people and Mark has had a big hand in this have come up with some rules of thumb. One is that you need a full time champion for a particular initiative. It can't be something that people do in their part time. Otherwise, you know, making the we make in the quarter becomes the overriding priority and you never get around to working on the initiative.

01:23:14:05 - 01:24:06:10

Unknown

And I'm as guilty of this as anyone. I have a dozen initiatives running personally and I always get roped into the treadmill of quarterly stuff. And so having dedicated champions and ideally dedicated teams is your best way to go about this. And then separating the financials for those dedicated initiatives from your core business so that your core profitability is still obvious and is still the everyday concern of whoever is running those core activities is an important part of what we do and tried to do.

01:24:06:12 - 01:24:39:06

Unknown

Now, one of the problems is that initiatives that are small don't easily fall into that paradigm of full time initiative champion and a separate team who can work on the initiative. And so I think there's a certain minimum scale that you need to make this kind of approach work Well. The idea of trying to run initiatives with percent of your time or 10% of your time or 20% of your time, and, you know, this is Friday.

01:24:39:06 - 01:25:16:01

Unknown

Therefore I work on initiatives. I haven't seen it work anywhere. I've heard people talk about it, but I haven't heard that it is a permanent and satisfactory process. No, I would agree with you. I think we call it the grind. To get the grind of the business will just will suck all the way over, suck away most of that so that for for any of those types of things, if you're not if you're not, you know, when you you know, I often talk to our leaders and employees about, you know, when you wake up in the morning, you know, you're going to a lot more successful if you know exactly what you're focused on.

01:25:16:04 - 01:25:33:16

Unknown

So I think that applies to two initiatives as well, as opposed to waking up in the morning and saying, you know, what is it I'm supposed to do today? That can be a much less effective way to go about doing things. If you're trying to achieve something, something specific or something that definitely takes more than a few cycles of time, for sure.

01:25:33:18 - 01:26:16:21

Unknown

And I think it'll be fascinating to observe. Topic is the company that tests is just buying. This is a company that has over 1000 employees that has grown organically without outside capital, largely through initiatives. And so trying to understand it better is one of my high priorities over the course of the integration period the next year or two, and share some of those best practices if possible and encourage some of the key managers contribute ideas and approaches to the rest of Constellation.

01:26:16:23 - 01:26:43:16

Unknown

No, and I think that I think, you know, having Robin and his team, who I think of done in a relatively short period of time, I guess it's not that sure anymore. They've been around for a while. But I I've always been so impressed by his willingness to embrace best practices and share even to this day. I would say they still, I think, do the part one of the best jobs across constellation of sharing best practices, having their leaders attend and interact with other businesses and do that.

01:26:43:16 - 01:26:57:21

Unknown

They've been actually very helpful for us as we've been sort of digging into some of our M&A business development functions. They've been more than willing to share and what you know, what they're doing, what's working more importantly, you know, what what hasn't worked, you or you you might not want to do this because we tried and it didn't work.

01:26:57:21 - 01:27:25:23

Unknown

They've they've been great. So I think if anything, anybody can grab that that value, which would be tremendous value for all of us. I do think Robin and his team are a great a great group to to do that. But actually, speaking of Robin and his team and I would also say Mark and his team at Polaris. So one of these other things I think that you talk about where again, you know, you and I may not always be fully aligned is, well, you'll readily admit that the data doesn't fully support smaller sized businesses.

01:27:25:23 - 01:28:01:10

Unknown

So basically this means a business unit that keeps its scale somewhat reduced and therefore potentially then you need to consider breaking up larger business units into a numbers or into one or two or several smaller business units versus the opposite of holding larger ones in. Why do you believe that's so important? And again, my, my, my thought here was obviously I think market Polaris and both Robin it says have done some some really good things with breaking up some of their smaller sort of some of their larger businesses into smaller businesses and seeing some good results.

01:28:01:15 - 01:28:30:01

Unknown

So why do you like what's your your sort of your your sense as to why small is better than large. In my early experiences in the venture business were sort of part and parcel of that. And if you go back even further, it relates to my experiences playing team sports. I adored team sports. To me, it was a it was life changing.

01:28:30:03 - 01:29:35:09

Unknown

When I got to school and started playing team sports, I loved that environment. I loved the level of intensity that came out of it. I Love great coaches who could extract incredible performances from a bunch of relatively inept players such as myself. And when I got into the venture business, it was almost expected that people would be investing themselves into their job at a level of energy and enthusiasm that you just don't see inside of your average corporation, except in a few highly modern, very ambitious general generally managers or salespeople.

01:29:35:11 - 01:30:24:01

Unknown

So that sort of all hands on deck, the whole team trying to help things succeed that you see in the average venture backed company I saw in the in some of the early businesses at Constellation. And Trapeze, for instance, was like that. And I no longer see that and any of our businesses. I told the story of tuning up for an early meeting at one of our businesses and getting in there and sitting in the corrals waiting for the managers to arrive and to the chat amongst the employees as they drifted in.

01:30:24:03 - 01:30:52:08

Unknown

And they weren't coming in early and they weren't buckling down and they weren't excited, excited about work. But I certainly got to hear a lot about their personal lives and it was just so different than the early days of volaris of Trapeze and the intensity was so diminished. I was so disappointed. And I'm convinced that it's a function of size.

01:30:52:08 - 01:31:39:17

Unknown

It's, you know, a reversion to the mean. You're not going to have those high performance teams when you get extremely large nuts. Those are personal observations. And there is some really good research. So when you want to look at high output teams, there's been research done since the 1800s on this topic. I'm talking about scholarly research and what you'll see is that as you add people to a team, a small team, you get diminishing output per person and the terms for this like social slacking and things of that nature.

01:31:39:19 - 01:32:24:11

Unknown

And when you have complex work activities that require coordination between teams, there are other factors that diminish output per team member and communicate. An overhead is one example. It's an in minus one factorial and is the number of nodes in a network the amount of communication overhead builds close to geometrically as you add people to the team. And from what we can see over time, technology has not been particularly good at making team size increase effectively.

01:32:24:13 - 01:33:11:09

Unknown

And then there are sort of empirical observations on team size. If you look at Agile teams in the software world, what you'll find is team sizes from 6 to 9 may be 5 to 10 and almost common and that seems to be the right sort of span for teams. Now you can obviously stack 5 to 10 person teams one over another and have one person from the team above oversee the team below, etc. etc. etc. And that for sure works both.

01:33:11:13 - 01:33:51:10

Unknown

What happens is the distance from the top of the stack to the bottom in the stack becomes increasingly large and so the knowledge of what's happening in the field becomes increasingly distant, and the empathy with the field person and the person at the top of the stack becomes increasingly distant. And I just feel that if you get much beyond that sort of 50 to 100 level, you start substituting systems for knowledge and systems for empathy.

01:33:51:12 - 01:34:37:24

Unknown

And systems by their very nature tend to be bureaucratic and one size fits all. And so you not looking for and working with the slightly warped and stunted but enthusiastic and perhaps brilliant average employee and start working instead with the ideal employee who is a figment of your imagination because they don't exist and you end up with a sort of lowest common denominator ideal employee, which leaves an awful lot of untapped resource in the organization.

01:34:38:01 - 01:35:28:12

Unknown

So once again, this isn't particularly the research bank, but I'm personally willing to trade off the inefficiencies of not having larger scale for the autonomy of a small, tight, agile team. I don't know if this is an instance where I have confirmation bias, but I have a feeling that within topic is what we're going to find. A lot of the initiatives that have been the drivers of success, of the growth of that business have been relatively small teams that eventually over time end up growing to become bigger, to take advantage of the opportunity.

01:35:28:14 - 01:35:54:02

Unknown

But in the early throes of the opportunity development had a few extraordinary people on a small team. So it is the trade that Mark, when you talk about sort of the efficiency you think is it is it profitability that you're trading off or like or just overall market size? Market share? Like what? What is that like? What's the trade off?

01:35:54:03 - 01:36:34:18

Unknown

You think? Well, what is the inefficiency, the business inefficiency is probably of market size for a particular. Well, here's an example of how I would take a market of exercise if you ran it with one be you, I think you would probably get higher margins and higher revenues per person and the market would grow at X rate if you took that same market and addressed it with free to use.

01:36:34:20 - 01:37:23:10

Unknown

My gut feeling is that you can get lower margins, but you eventually end up addressing more needs of the marketplace and so you end up with gross revenues that were higher. You'd have lower revenues per person and lower margins. But I think grow faster. You'd build a bigger moat and you have more long term revenues. Yeah, that's a that's a very interesting actually comes to Mike is actually just do we just Jerry actually just did something with one of one of our larger health care businesses where we broke actually we broke two pieces of it off and actually brought in a new EVP to create to create a new business.

01:37:23:10 - 01:37:48:11

Unknown

But like you said, that the short term consequences, that is certainly to profitability. I think the long term is, you know, giving this this new business, you know, the oxygen and the ability to to grow and to try and do something and not be weighted down by the larger the larger business for sure. So I think with that, I'm going to to wrap it up and thank you very much for so much of your time today.

01:37:48:11 - 01:38:20:07

Unknown

I really appreciated that. Thank you for your very thoughtful and considered answers and thank you very much as great to do it. Jeff and I always look forward to talking, admittedly, indirectly, indirectly, with your employees. Encourage any of the managers who report up to you to reach out to me. If you'd like to have a similar sort of conversation about any topic, really.

01:38:20:09 - 01:38:23:08

Unknown

Thanks so much. Okay. Just but.