I finally got around to listening to Leonard’s interview on the Harris podcast and any rare opportunity to listen to the man talk is a treat. A biased view from a shareholder since ’16. 

On hiring. Leonard found 50% of senior executives hires from external sources end up working out. The caveat is that CSU has a very unique culture when compared to most companies. But I consider CSU’s culture to one of the best places for entrepreneurial, ambitious individuals to succeed. Hence, this might be true for other companies with outstanding cultures….with many mediocre ones being mistaken. 

Leonard also points out that when bringing in executives, you are essentially bringing in managers. People who hire, fire, and tell others what to do without necessarily building anything themselves. Such hires will bring in their own set of processes and frameworks to plug and play into their new company. 

The low success rate and narrowed application of senior execs seem to be why Leonard prefers to bring in doers early on and rapidly groom them up internally. To use CSU as a place where they can grow and find the kind of work they should be doing instead of putting people into specific boxes to solve specific problems. The latter seems to be the most common form as I see routine executive team turnover in younger companies that go through stages of growth, IPO, post-IPO scaling, profitability, etc… 

On promoting. Leonard makes a point about how when he promotes people and gives them more responsibility that he won’t take away their "original children" from them. He refers to Jeff Bender’s own development from leading Harris's regulatory software business to slowly taking on more of the greater Harris business until his current CEO role. Leonard mentioned he didn’t want to take Harris away from Bender and make him run a different business unit like Jonas because there are years of relationships and know-how that would be lost.

OMERs & relationships. The importance of maintaining key people in business units due to their relationship was highlighted in CSU’s relationship with OMERs as early investors. It wasn’t that OMERs saw Leonard’s vision and were stout investors. Rather, the key contact at OMERs who funded the deal was Leonard’s friend in business school. Leonard believes this is the only reason the deal had happened. Leonard’s friend eventually left OMERs as he disagreed with the investing culture. I think this was partly why CSU sought to help OMERs exit their initial investment through the IPO. CSU didn’t sell any equity during the IPO but rather sold OMERs’s original investment. Leonard points out it’s all about relationships and much of the credits are to the individuals and not to the institutions in many cases. What can’t be ignored is how CSU has focused on not diluting equity starting with the IPO process to how they operate the business today. 

Why decentralized? A key reason for my investment in CSU is their truly decentralized business model. When asked why he was so keen on decentralization, Leonard noted how he hates other people telling him what to do. He loves it when he ends up changing his mind in light of new facts but that’s so different from being told what to do. Since he hates that, he applies that to the company itself. 

What’s further evident is Leonard’s own dislike for authority. His best memory of his MBA at Ivey was calling out profs for being arrogant, ill-prepared for case studies. He built his own flamethrower. He went to university part-time so he could go to school while cashing in unemployment checks and then work in the high seasons as a mason. He did all kinds of blue-collar work from working in hotels, being a clerk for Canadian Tire, and being an office mover at night. Quite the experienced individual with a life of not flowing rules. 

VMS model. Of the 12 high-performing conglomerates (HPCs) he studied, Leonard noted how two were VMS. One was Jack Henry and the other was Roper, which became a VMS acquirer). It’s not about having an original idea but looking at what business models seem to work best. 

On Jack Henry & the price of ignoring price. Leonard pointed out Jack Henry built their moat through product add ons and cross-selling because they acquired businesses with the mindset that price was no object. A contrary approach to CSU where price is an object. What is interesting is that the lesson isn’t to ignore price. Rather, by ignoring price, Jack Henry had to cross-sell. They had to find synergies with existing companies because they paid a higher price. So, they do end up deepening and widening a moat and getting greater market share but they end up having lower ROCE than CSU. Acquiring to expand market share is a strategy but one can’t ignore the bind of having any choice BUT to make the market share capture work when one takes this strategy on. It’s a burning of all boats scenario. CSU chooses to keep a high hurdle and be price disciplined and that means they don’t have to seek out synergies and that also means they can allow their units to operate with more independence. 

Tradeoffs with CSU's model. CSU’s price-disciplined model doesn’t mean they don’t want to expand market share. Leonard’s view is that with one business unit (BU) tackling a market, the BU may maintain higher profitability (i.e. better margins). By breaking up 1 BU into 3 smaller BUs tackling the same market, you’d get lower margins but you’d address more needs in the market so you’d have gross revenues that were higher, lower revenues per person, but you’d grow faster and built bigger moats and have more long term revenues. The short-term consequence of breaking up BUs smaller is profitability but it could lead to long-term sustainability in revenue growth. 

On size. On constantly splitting up BUs to small sizes, Leonard observed reversion to the mean play out in organizations as they grew larger in his venture days. He saw people were less motivated, less focused, and less driven. He believed that was a function of size. By breaking up BUs into small units, it allows for employees to feel closer to the product, customers, and their overall contribution to the outcome. This further leads to greater drive and motivation. Size also creates more overhead as communication increases geometrically with every team member you add. Just think about Dunbar’s 150.