Building Great Businesses | Tracy Britt Cool

Warren Buffett called Tracy Britt Cool his “fireman” due to her reputation at Berkshire Hathaway for turning around struggling businesses. Today, Britt Cool is the co-founder of Kanbrick, where she applies her knowledge to the middle market. In this episode, you’ll learn how she went from writing a cold letter to Buffett to being sent in to fix struggling Berkshire subsidiaries, how to evaluate real business performance, and how incentives, culture, and structure line up to create lasting success. * Learn more and get my 31 highlights from this conversation at: https://fs.blog/knowledge-project-podcast/tracy-britt-cool/ ----- Approximate Chapters 00:00 Intro, recent reading, and family life 03:04 Alan Mulally's Turnaround at Ford 04:22 If you're not having fun 4 days out of 5, it's time to move on 05:03 The Pampered Chef Turnaround 07:06 Value Creation is Changing from Investing to Operating 08:38 Why Companies Fail to Adapt 09:23 Upbringing, education, and early career outreach 10:09 Lessons from the Farm 15:48 Writing Letters to CEOs 16:57 Lessons from Warren Buffett 18:25 Ad Break 20:57 Buying Companies at Kanbrick 22:38 The 3 Components of Long-Term Thinking 25:11 Avoiding the Complexity Trap 26:23 Turning Around a Declining Business 28:03 Attracting Talent to a Declining Business 30:29 Matching Structure to Time Horizon 32:00 Growing Margins 33:25 The Process: What to Focus on When Operating a Business 35:10 The Three Buckets of Putting People First 37:00 How to Evaluate Talent 40:16 Avoid These People At All Costs 42:23 Sourcing Deals 43:56 The Five Lenses to Evaluate a Business like Warren Buffett 45:14 How to Evaluate a Moat 49:29 How Quantitative Analysis Misleads 50:25 A Detailed Look at Return on Invested Capital 53:18 What Makes an Attractive Market 54:33 Finding High-Potential Businesses 57:00 The Post Close Playbook 1:02:03 Repeatable Business Systems 1:04:06 Why Copying What Works is Hard 1:06:01 Mistakes in the Past 5 Years 1:10:13 Debt and Leverage 1:12:20 3 Ways to Think about AI 1:15:13 What Most People Get Wrong When Hiring 1:21:12 Businesses to Avoid 1:22:35 What Not to Do 1:24:31 Public vs. Private Company Boards 1:27:04 How Warren Buffett Taught Katharine Graham Business 1:29:28 Each Hire is a Million Dollar Decision 1:31:02 Evaluating Integrity 1:32:36 The One Word That Changes Everything & Keeps People Honest 1:35:52 Principles & Lessons from Business History 1:36:59 Inflation 1:38:46 Quarterly Reporting 1:40:22 Public Company Heroes 1:41:41 Companies & Political Opinions 1:42:46 What is Success for you? ----- About Tracy Tracy Britt Cool is the co-founder of Kanbrick and former CEO of Pampered Chef. At Berkshire Hathaway, she worked directly with Warren Buffett as his financial assistant. ----- This Episode Made Possible By: Shopify: https://shopify.com/knowledgeproject reMarkable: https://www.reMarkable.com ----- Upgrade: Get a hand edited transcripts and ad free experiences along with my thoughts and reflections at the end of every conversation. Learn more @ ⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠fs.blog/membership⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠ ------ Newsletter: The Brain Food newsletter delivers actionable insights and thoughtful ideas every Sunday. It takes 5 minutes to read, and it’s completely free. Learn more and sign up at ⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠fs.blog/newsletter⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠ ------ Follow Shane Parrish X ⁠⁠⁠⁠⁠@ShaneAParrish⁠⁠⁠⁠⁠ Insta ⁠@farnamstreet⁠ LinkedIn ⁠Shane Parrish Learn more about your ad choices. Visit megaphone.fm/adchoices

Speaker names marked ? are inferred from speaking time and the show’s known hosts — they are not voice-verified.

• 0:00Speaker 00

  When I was CEO, what I felt like was it was very lonely. It was challenging. It was hard. I was out navigating and trying to find resources, support. People would come before me who could help me in that seat.

• 0:12Speaker 01

  Tracy Britt Cool is the co-founder of Cambrik, a long-term investment partnership focused on building enduring businesses. She is best known for working directly with Warren Buffett at Berkshire Hathaway, where she served as his financial assistant before becoming CEO of Pampered Chef and serving on the board of several Berkshire companies, including Benjamin Moore and Kraft Heinz. She combines investor discipline with hands-on operating experience, bringing a rare perspective on what it takes to grow and sustain great companies.

• 0:39Speaker 00

  We only invest in one or two companies a year. We'll look at 500, so we're really selective at finding the highest-quality businesses that have a long runway. I also think a lot of investors haven't actually been operators, and so it's really hard to go into a business and say, this is what you should do to operate a business, if you've never actually operated a business.

• 0:56Shane Parrish?

  When it comes to hiring, like, what does that process look like? Like, what does that nitty-gritty look like in the details?

• 1:01Speaker 00

  We very much subscribe to the WHO process. So by GH Smart, there's a book called WHO, W-H-O. It is, I think, single-handedly the best, simple book on hiring. And there's a few components to it, and we've augmented and added our own, but the first is building a really in-depth scorecard for the role. And so a good scorecard, in our mind, has three sort of critical components. The first is... The second is... And then the third are...

• 1:27Speaker 01

  Members get access to an extended version of this conversation that goes further into frameworks, definitions, and strategies Tracy uses to build lasting companies. Sign up today at fs.blog/membership. This episode of The Knowledge Project is for informational purposes only. The views and opinions expressed by Shane Parrish or our guests are solely their own. Nothing in this conversation should be considered investment advice, financial guidance, or a recommendation to buy or sell any security. Always do your own due diligence or consult with a qualified financial advisor before making investment decisions. It's time to listen and learn.

• 2:06Shane Parrish?

  Tracy, welcome to the show.

• 2:07Speaker 00

  Thank you. It's an honor to be here and appreciate it.

• 2:09Shane Parrish?

  I want to start with what you're reading recently.

• 2:12Speaker 00

  Yeah. So on the biographies I just read, Lynda Gates, the transition book that she just came out with not too long ago, which I thought was super interesting. Reread Alan Lally's American Icon, which I think is fascinating in terms of a turnaround and the impact of that. Recently reread Katherine Graham's autobiography.

• 2:31Shane Parrish?

  Yeah, so did I.

• 2:33Speaker 00

  Yeah, it's so amazing. So that's been my focus and where I've found the most interest recently. And then also several books on parenting. So the anxious generation, obviously, a lot of people are talking about, but that has spawned me going down a path on reading more about kids and free range kids, books like that of how to think about parenting and sort of this new world.

• 2:54Shane Parrish?

  How many kids do you have?

• 2:56Speaker 00

  We have four.

• 2:56Shane Parrish?

  Oh, gosh. Okay, what are the ages?

• 2:58Speaker 00

  10, 7, 5, and 2.

• 3:00Shane Parrish?

  Okay. We had Alan on the show. I'm curious what you took away from his biography.

• 3:04Speaker 00

  I thought it was single-handedly the best book in navigating a turnaround. The time in which he did a turnaround in the business, how challenging it was, the landscape in 2008, 2009, Ford, the auto industry. I mean, really, really challenging. And just the discipline with which he did it. Everything from his team coming in and with green every week, even though he was trying to get them to celebrate having reds in the business and the challenges and how to learn from those and making mistakes is okay. So I really appreciated that insight and just how he did it, having done a turnaround at a much smaller scale.

• 3:46Speaker 00

  I was incredibly impressed with his focus on people, his focus on discipline, his focus on building a culture of continuous improvement, learning, making mistakes. I thought that was just really eye-opening and just how he did it in the backdrop at the time that he did it.

• 4:01Shane Parrish?

  One of the things that he mentioned that still sticks with me to this day is he laid out his operating philosophy. And then he said, well, if you're not partaking in that, you're choosing not to be a part of our team. And I thought that was a really interesting way of putting it back on the person that they're making a choice, whether they want to be part of the team or not.

• 4:20Speaker 00

  Yes, I couldn't agree more. I think when you're in a company and you set a culture and expectations and an operating system, then you say to your employees, is this what you want to be part of? And if not, we understand that and you can choose to leave the business. But if you want to stay here, you need to get on board. When I was CEO, we were going through transformation. And I said to our team often, and they almost told me to stop saying it was, if you're not having fun four days out of five in this new culture and environment, it's probably not right fit for you. And we encourage you to move on, we'll promote you to customer, whatever it may be. I think you want your team to be really committed, engaged, focused on driving the results, but also that it resonates with them and they care about it.

• 5:03Shane Parrish?

  And the turnaround you're talking about is Pampered Chef. Can you walk me through that? What was that like?

• 5:07Speaker 00

  It was really interesting. So I took the role of Pampered Chef, having no prior experience operating a business. I had been at Berkshire for about five years. I really had a view that the investing landscape was shifting and more value would be created going forward on the operating side, but that very few investors actually have operating experience, especially on the more buyout side. You see it more in venture, but less on buyout. And I thought I'd be a better investor if I went and got out of the boardroom, got into the war room and actually went and operated a business. So decided to become CEO of Pampered Chef. Pampered Chef was a business that was in need of transformation. It had been in decline since Berkshire bought it for about 10 years. And the fundamentals were intact. It had a really strong brand and a strong channel. So the moat was really

• 5:51Speaker 00

  there in terms of the business, but it had lost its way. Not dissimilar from a lot of ebbs and flows of consumer businesses where you grow, but your customer changes or the world changes. And in that case, the world had changed quite significantly. And the internet had come along in the early 2000s, which had fundamentally shifted the business. And then the customer started Shopping differently and shopping online. Pampered Chef was originally started 45 years ago now by Doris Christopher in the basement of her home to really solve this need of providing high quality kitchenware products to families around the country through a direct sales model. So there were consultants who sold the products.

• 6:30Speaker 00

  So in 2015 or 14, when I took over, it had 10 years of decline. So it was a interesting opportunity to come into a business that was in need of transformation, where there was this opportunity to rethink the business model, rethink the approach. But I'd never done it before. So it was a fundamentally new role for me to take on in an industry I didn't know. Ironically, I don't cook, so I had to learn the basics, but it was a really great opportunity to do that.

• 7:02Shane Parrish?

  There's two things you said there that are really interesting to me, one of which was value creation, moving from investing to operating. Tell me more about that.

• 7:10Speaker 00

  I think for a long time in the investing world on the buy outside, what you saw was there was opportunity to buy businesses at seven, eight, nine times. And then, you know, a few years later, some minor improvements, sell them for 10, 11, 12 times. I think that that has shifted because capital is now commoditized. There's a lot more capital available to sellers than there ever has been. For example, in the 1980s, there were 20, 25 private equity firms. In 2020, we got close to 20,000 in the US. So significant shift in terms of the capital that was out there. As sellers, rightfully so, gaining more of that value when they're being partnered with, that means you have to create more value after the partnership starts.

• 7:54Speaker 00

  And that means more of a focus on operating. Traditional private equity, the focus is very short term. You know, you buy a business, you're focused on selling it three to four years later. And in doing that, I think what ultimately happens is you make short term decisions about the businesses. And if you're going to really create long term value, I think there's a value of having a longer term approach. When I wanted to go become an operator, it was, I know I'm going to need to create value in companies. Once you partner with them, how do I think about that? And how do I become a better operator? It'll make me a better investor.

• 8:25Shane Parrish?

  I want to go back to something you said earlier about the changing landscape and companies not adapting. Is it complacency? Is it they're running the business on a map that's outdated? Like, why is it companies have a hard time adapting to reality?

• 8:38Speaker 00

  I think there's a few reasons it happens. One is I think change is happening faster and faster than it ever has. And it's very hard when you're managing a business and you're focused on your customer and you're focused on your product or your service to also focus on this outside world and landscape. You have things like COVID tariffs, supply chain, there's always something happening now AI. What does that mean for your business and how do you navigate it? It's also a lot of false starts. You don't know, is this one here to stay? Or is this something that's going to be gone quickly? And I think as a leader, that's challenging to navigate. I think second is if you think about most leaders, they usually grow up in a business oftentimes. And when you grow up in a business, you become an expert in that business, in that field, in that industry.

• 9:20Speaker 00

  But sometimes you don't have the perspective of seeing other industries that perhaps have come before you that are different, but similar in terms of what happened. And so you lose some of that perspective. You gain the depth of experience, but that perspective is harder to have. And I think for us is like, how do we help leaders think about that? And help them see around the curves that might be challenging. But I think those are a couple of reasons that it's becoming more difficult for leaders.

• 9:46Shane Parrish?

  Let's go back all the way to the beginning. You grew up on a firm in Manhattan, Kansas?

• 9:51Speaker 00

  Yeah.

• 9:51Shane Parrish?

  Is that correct?

• 9:52Speaker 00

  Yeah. When I went to college, people would often say, where are you from? And I'd say Manhattan, because that's what you say in Kansas. And people will start asking like, oh, are you from the Upper East Side or where? I'm like, well, there's not really an Upper East Side. And I quickly realized Kansas was sufficient in saying where I'm from, because most people don't fully appreciate. There's another Manhattan that's much smaller.

• 10:08Shane Parrish?

  What are some of the lessons you remember from growing up on the farm? And the responsibilities that you had at such a young age? And how do you think about that in relation to parenting now?

• 10:18Speaker 00

  I joke, I spent much of my life trying to get off the farm. And now I want a farm for my own kids, because I think it's such a valuable landscape to learn and to learn work ethic and commitment and problem solving, all the things that come with with being on a farm. My dad, you know, he owned this farm and he loved it. And so the first Lesson I learned, when you find something you love, it really is a passion and something that you enjoy and you're not really working. My dad worked harder than anyone I've ever seen, you know, late at night, early in the mornings, all summer long, all throughout the winter. He took a small break, but that was about it for him and it wasn't working. It was what he loved. That passion was something that I recognized and saw early on. Second, I learned a lot of independence on a farm. Just the nature of it is you're figuring things out.

• 11:02Speaker 00

  There's a lot of inherent dangers or risks. I was driving when I was, you know, 11, 12 years old on the farm, not necessarily on the road yet. But I learned how to navigate unfamiliar situations, which was an important lesson for me early on. And then I also learned, you know, in assets business from a very fundamentally young age. When I was probably in third, fourth grade, I started running my own farmer's market stand. And so my dad would take me down the morning, drop me off. I would run it for the day and he'd come pick me up at the end of the day. And we got really busy and I started hiring my friends and I got to practice. Do I pay them by the hour? Do I pay them a commission? Do I pay them a bonus? How do I get the best, you know, um, performance out of them?

• 11:47Speaker 00

  I started thinking about supply and demand and pricing. I saw as we grew watermelons, beginning of the season, they were eight dollars each when they were very limited. By the height of the season, when we had a lot, they were two dollars each. Learning fundamentals of a business was really valuable. Even if it was a farmer's market stand, I could get better and better every week. I could build the foundation of how to have a, you know, repeatable, scalable system to improve my odds of success. And I saw our farmer's market stand going from making $500 a week to a thousand to 1500 by the time, you know, I had really scaled it up, uh, which was great for me. And really just a fascinating learning experience.

• 12:24Shane Parrish?

  Was this your parents helping you or all self-driven? Like reading and applying or?

• 12:28Speaker 00

  Yeah, definitely self-driven. My dad, um, I was the youngest of seven kids. He had been married previously, so four from his first marriage and three from, from ours. And what I saw on that was like, he just let me, he let me do a lot. Um, probably more so than your average kid because he was older and he had seven kids and he's Seen it all and my brother navigated for the farming part of the business. That wasn't my passion, but the business side I did love. And so it started out small, my own farmer's market stand, but over time it was running our whole store and running more and more of the business. And I think he appreciated it. It wasn't my dad's passion either. He loved the farming side. And it was an opportunity to really learn and grow and try different things in a relatively safe space, which was really amazing.

• 13:12Shane Parrish?

  Where did the ambition come from to go to Harvard?

• 13:16Speaker 00

  It wasn't as structured or as disciplined as I would have thought. I knew I wanted to leave the farm and as much as I liked the business side, it was hard. It was very, very hard manual work and I wanted to get off the farm and, you know, go do something else. I didn't know what that something else was, but I knew I wanted to leave. In high school, decided education was the way to get there and I had always had good grades and done a lot of extracurriculars and managed a lot on a farm. But I wanted to apply to a lot of colleges and I didn't know which one, I didn't know where. I just knew I could apply to all these schools and I probably could get into one or two that I'd be interested in going to.

• 13:55Speaker 00

  So I just sort of applied everywhere because I didn't know anyone at that time who had gone to Harvard or other schools. I mean, really outside of Kansas. And so it was a great opportunity for me to just put my hat in the ring and sort of see what would come from it.

• 14:09Shane Parrish?

  And then you immediately went to HBS after. What was the decision making process like to just do an undergrad and then right into HBS? You knew what you wanted, I assume?

• 14:18Speaker 00

  I think there were a couple of components. One is I had a mentor who had done something similar at a different school. And she had really advocated if I knew what I wanted to do, that it was a path that allowed more efficiency and also not having to revisit it later in life. At that stage, I had found business, I had found investing, I knew I was passionate about those areas. I felt like I had a clear direction of what I wanted to go do. I also think going straight from college to business school, which I advise to students now, is you're really on three metrics. You need to make sure you're ready socially. You're going to be with students who are much older than you are on average. Academically, can you bring something to the classroom that's valuable and insightful? And then career wise, you're going to be competing for jobs with other people who have more experience than you.

• 15:01Speaker 00

  Socially, I'd always felt like I was older than my peers. I think the nature of growing up, again, in a farm or a family business is you oftentimes just get more independence in your age a little bit quicker. Second, I think in terms of academically, I hadn't been in a traditional career, but I had run our family business from a young age. And so I felt like I had experiences to draw from that would help me in the classroom and be relevant. And then third, from a career perspective, I didn't know where to go, but I felt like I'd figure it out and I wasn't as worried about that. That wasn't what I was going to business school for. It was to learn and grow and become a better person in terms of my own expertise and skills.

• 15:42Shane Parrish?

  And then when it came to finding a job, my understanding is you wrote a whole bunch of letters to different CEOs. Tell me about that.

• 15:48Speaker 00

  I actually started writing letters in college to CEOs and I just wanted to learn. So I wrote letters to different CEOs in business and in finance saying, can I come and pick your brain? I wrote a letter to Ace Greenberg at Bear Stearns and he graciously said, yes, come down and visit. And so I came, went to the trading floor, sat with him for a couple of hours and he just answered my questions as I thought about investing. He was obviously a legend in the finance field, but he was gracious and willing to spend time with me. And I think that was a huge lesson for me because people want to help other people and they especially want to help young people. Being a student, I was able to get access to people who otherwise probably would have said no, and they probably should have in terms of their time, they were very busy, but it was a really great opportunity. I'd written one of those letters to Warren Buffett

• 16:33Speaker 00

  to bring a group of students out to Omaha in college and got to know him a little bit through that. I wasn't actually writing letters for jobs. I was writing letters to learn. And then when I graduated, I had a full time job lined up. I'd been an intern and then come back full time at a company. When I met Warren over the student group visits, I decided to write him a letter. And so that's how I ultimately ended up at Berkshire.

• 16:53Shane Parrish?

  What do you take away from Berkshire? You worked there 10 years, right?

• 16:57Speaker 00

  I think Warren is very gracious with his learning and his knowledge and he shares it widely. He shares it at annual meetings. He shares it at annual letters. And I felt like I got a front row seat to really understanding that and seeing it in action. But I think the lessons are timeless and they're what he espouses relatively consistently through those maxims, which I think is great because everyone can learn from him. But really, the value of long-term thinking and long-term compounding, the eighth wonder of the world is compounding and the value of that. And if you think long-term and are set up structurally to think long-term, there's a lot of value in that. Second, the value of people and finding the right people with high integrity, people who care about what they're doing and then giving them the right incentives and the right encouragement. Warren gave those people

• 17:41Speaker 00

  around him, his CEOs or others, really great autonomy and high expectations, but really let people have flexibility. And I saw the value of that. And then lastly, just the value of continuous learning improvement. You, Warren reads every single day, gets smarter, gets better. Those in the Berkshire ecosystem do the same. And I think that was something that resonated with me from when I was a kid on the farm. You know, my dad also focused on getting better and continuous improvement in a different field, but it was something that I saw reinforced at Berkshire.

• 18:14Shane Parrish?

  So why leave?

• 18:15Speaker 00

  Berkshire is a phenomenal place. I mean, it's unique. It's one of a kind. I don't think there'll be another one by any means. But Berkshire is very large in terms of capital. It's hard to deploy capital. It's hard to find really great investments, but it's also especially hard when you're very large. I saw this opportunity to help mid-sized companies with a long-term approach with creating value. As much as I loved my time at Berkshire and would have been happy there forever, felt like there was this opportunity to create something new and special that was serving a market that really wasn't, I didn't think, being served well today.

• 18:49Shane Parrish?

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• 19:34Shane Parrish?

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• 19:59Shane Parrish?

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• 20:42Shane Parrish?

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• 20:57Shane Parrish?

  Let's dive into Cambreak a little, compare and contrast the framework at Berkshire and what you're doing that's different.

• 21:02Speaker 00

  It's hard to say what's similar in a sense because Berkshire is so unique and special. It's one of a kind and I don't think we think that we're going to replicate that by any means. What we're trying to do is really focus on long-term, creating a long-term structure with a long-term horizon to buy and build businesses with the right approach that we think is valuable to the companies, valuable to employees, customers, and ultimately investors. Second is finding high-quality businesses that have some sort of moat or competitive advantage. Great businesses are hard to find and when you find a great business with a moat or competitive advantage and you have a long runway, you can really invest behind that. And then I think for us in terms of one thing that we do distinctly different than Berkshire is we're much more hands-on operationally. And that came from when I

• 21:47Speaker 00

  was CEO. When I was CEO, what I felt like was it was very lonely, it was challenging, it was hard, and I was out navigating and trying to find resources, support. People would come before me who could help me in that seat. And I kept thinking like it would be so nice if there was someone who could tell me how to do a great strategic planning process, or how to improve my hiring skills, or how to build the right culture, or what does great look like in these different aspects of managing a business. And so when Brian Humphrey and I started Cambreak, we really wanted to focus on how do we build a system that we can help these mid-sized companies and be the resource that we wanted when we were operators. We built the Cambreak business system really focused on that.

• 22:32Shane Parrish?

  There's so much to unpack there. I want to go back to maybe the first jumping off point there, which is long-term. Everybody says long-term. It's become this sort of thing that's easy to say. And what's the difference between saying it and living it?

• 22:46Speaker 00

  I think of it in three different ways. One is, do you think long term? Do you have a long term horizon and perspective? A lot of people can say, I think, long term. And they may, but that's only one component. The second is, do you have a structure that actually allows you to think long term? Because if you naturally have a structure that doesn't allow for that, or doesn't encourage that, you're going to be pitting yourself with your long term horizon against your structure that is going to encourage you to make shorter term decisions. In essence, if you're focused on selling a business in three to five years, you're going to make short term decisions if your structure is going to require you or incentivize you to do that. And then the third is, I think there's differing degrees of long term.

• 23:29Speaker 00

  There is the 50 year long term, which I think is really, really long term. And then there's differing gradients of that that can be utilized and be thought about. And I don't think all long term is equal. And I don't think you need to do 50 years to be sort of long term. I think there are some in the middle that allows you to take advantage of that horizon, take advantage of that structure, but give you some flexibility where you're not locking yourself up forever.

• 23:56Shane Parrish?

  Even if you're a long term thinker, it's kind of weird, right? Because you're thinking about a longer duration, 25 or 50 years, but you have to act today.

• 24:04Speaker 00

  Yes. We always say that there's a balance of short, short term and long term. You can't only think about the long term. If you only think about the long term, you probably won't get out of the short term because you're going to miss the situations of today, the short term sort of dynamics. When we were at Pampered Chef, we were turning around the business. Brian was the CFO, I was the CEO, and we had a management team that was helping us drive this transformation. And we were a couple of years into the turnaround and the business was actually doing quite well. And then in year three, we had this sort of setback. And what we saw was we were focusing too much on the long term, our long term strategic initiatives, our investments in international growth and new categories. We had lost sight of the fundamentals blocking and tackling of today.

• 24:49Speaker 00

  And what we had thought was, hey, we had focused on those for two years. We had improved them. Now we could go set our sights on longer term thinking. But the reality is you have to manage the short term and you have to manage the long term. And I think for us is we had to refocus, really work on the sales today, the sort of challenges we were facing in the moment in order to give us the space to think about the long term as well.

• 25:11Shane Parrish?

  You mentioned blocking and tackling, and I think there's a point to be made there perhaps about how we get trapped in complexity and making things overly complicated. And sometimes it just comes down to remembering the basics. As a Smugger would say, take a simple idea and take it seriously.

• 25:27Speaker 00

  Yes. Yeah, I mean, I think that oftentimes we think of the big things we could go do. You know, what should the strategy look like? Or what's the future vision of this? Or what's it going to mean versus how do we do the fundamentals and do the fundamentals well? And I think some of the best CEOs out there focused on the fundamentals. I mean, Sam Walton at Walmart, he was all about the fundamentals and he was in a store every week and you know, multiple stores every week, focused on how do we deliver for our customers more effectively? That is a really important skill set that is oftentimes undervalued or underappreciated. And I think that's really important, especially in midsize companies where there's a lot of blocking and tackling to be done every single day. And oftentimes that rises all the way up to the management team and the CEO.

• 26:12Speaker 00

  It's not something where just your frontline can handle the blocking and tackling. Really, everyone needs to be focused on it.

• 26:17Shane Parrish?

  Was the turnaround at Pampered Chef with the same people? Or was there a changeover in a lot of the team?

• 26:23Speaker 00

  In this situation at Pampered Chef, we did change much of the team. The business had been in decline for about 10 years. And during that period, we saw a lot of probably great people in the organization leave, or they had the skill sets that we needed for the transformation weren't there or had atrophied. And so we needed an infusion of talent. So as an example, when I started at Pampered Chef, 10% of the business was digital. 90% was sold in person through in-person parties. Employees didn't even have laptops. And what we saw was, wow, the customer is shifting dramatically. They're shopping more online, they're shopping more mobile, and we're selling through an in-person party model. So we needed to shift our mindset to say, okay, how do we actually meet customers where they are?

• 27:07Speaker 00

  And what's important to them in that process? And what we found in doing that was we needed to be more digitally focused. And we needed to shift our own thinking about technology from back office and support to a true Have a new generator. And so we needed a new leader in technology and then ultimately much of a new technology team and marketing and sales to really complement that. We brought in a new leader who really transformed how we thought about technology and then how we serve the customer. We took the business from 10% sort of digital to 75%. Now, we still did that through the channels. So through the sales consultants, we didn't go on Amazon or you sell direct, but we actually really focused on how do we utilize our competitive advantage,

• 27:51Speaker 00

  which was the channel, but help them be more effective digitally. But I think it's a good example of sometimes you need a different skill set or a different experience to go where you need to go in a business. And sometimes the legacy team doesn't always have that.

• 28:03Shane Parrish?

  What was it like attracting talent to declining business? And I liken this maybe to sports, right? If you're on a team that's 0 and 17, it's really hard to attract free agents that are capable and competent and who can change the culture. They're sort of waiting to see progress before they jump in or waiting to see a critical mass. How did you go about attracting talent to

• 28:24Speaker 00

  that? It was something we really focused a lot on early on, understanding what was our employee value prop. Why would someone want to come to Pampered Chef? And what we found was people weren't coming into Pampered Chef, you know, because they necessarily loved, always loved the product or our location or some other factor. They were coming because they wanted to learn and grow. And we could give them opportunities through unimericocracy that they can learn and grow more quickly and get rewarded for that and be excited by what we were doing. And in essence, you know, we really focused on storytelling and saying, what are we going to go do? And we're transforming a business. We're going to reinvent mealtime. We're going to focus on our purpose, which was imagine lives, one meal and one memory at a time. That's what we're going to focus on.

• 29:07Speaker 00

  And that really started to resonate with sort of employees who were passionate about learning, growing, and then doing something that was unique and special. And then we focused on our culture of how do we actually accomplish that through the culture we are creating, both in terms of opportunities, promotions, incentives, growth, but also in terms of engagement, giving feedback, helping people grow and develop. And we ended up attracting a lot of people who wouldn't normally go to a kitchenware products business. I wouldn't normally go to a kitchenware products business, but saw this opportunity to build something unique and special and really focus on how could we do that here in the company as well.

• 29:45Shane Parrish?

  I love that. I want to go back to structure being a critical important to long-term thinking. I've always, as an outsider to Berkshire, thought a lot of the success resulted from the fact that nobody could come in at a certain point in time and tell Buffett to do something different. The structure aligned with what he was doing for a long-term thinking point of view. And we have a mutual friend, Brent Bishore, who set up the same thing from

• 30:10Shane Parrish?

  wouldn't call it a private equity model, but he didn't take a seven-year fund where there's a ticking clock. He made it 28 years and called it permanent equity. And that enables a lot more patient deployment of capital and enables you to make investments today that they're going to bear fruit in five or six years, but you won't do that if you're just flipping a business.

• 30:28Speaker 00

  Absolutely. I think that if your time horizon is you three to five years in a business, you know, I'm going to sell the business in three to five years. Everything that you're going to do is going to be short-term in nature, just because of human nature and how you're incentivized. So you're going to come in and say, okay, should I invest in growing into new markets? Or should I take price right now? Should I really build a strong people system and culture and engagement that may not pay back for three, four, or five years? Or should I take costs out right now, which are going to increase my short-term value? Every decision you're probably going to come up to, it's going to be really, really hard to make a longer-term decision because

• 31:07Speaker 00

  the pressures are so skewed to making a shorter-term action. And so I think that the nature of the structure just creates the wrong incentives. Any leader in a business will say, you don't usually get payback in things as quickly as you think. And so to get payback in a year, or two years, or three years, it's hard versus, okay, we're going to move into a new market. That might take us a few years to get that set up, or we're going to invest in building a new crop of talent in our organization so that they're ready to lead in five years. Those are things that are long-term in nature, but if your structure or you're incentivized on a shorter-term duration, it's just hard to make those decisions.

• 31:47Shane Parrish?

  And even when you make them, it's hard internally often unless you have everybody aligned in the same direction, because it's like, oh, we're making this for five years, but all of a sudden, the ROI is not what we thought it would be, and abandonment ship sort of mentality.

• 31:58Speaker 00

  Oh, absolutely. I mean, I've been in a number of businesses where people will say, Oh, if we can just get the margins from 10% to 12% or 12, and I'm like, well, that's, that's really hard to do. Like, that's hard to do. But I remember when I took the role at Pampers Shop, I had advised the business for about a year. So I had a pretty good sense of, I think, what needed to be done. Then I just needed to go do it. And I thought it would take me a year or two to go drive the change that was needed to get the business back on track. And it took almost three or four because everything took longer and was harder. You know, getting the right team, getting the right culture, investing in the right, you know, systems in the business. We wanted to update the marketing and update the product. All of that took a fair amount of time. And I think that if my task was

• 32:43Speaker 00

  to go sell that business in three or four years, I don't know if I would have done all the same things. I probably would have made some shorter term decisions that ultimately probably would have created less value in the business.

• 32:52Shane Parrish?

  I think that's part of the reason that culture changes are so hard is that they're longer and harder than you expect. There's a timeline mismatch as well, too, like CEO turnover, at least in the S and P 500, is as fast as it's ever been, if not faster. And so you go in, or think of a coach in a sports team, right? You go into a losing team, you're going to throw a lot of hail marys because the expectation is just that, you know, I'm not going to be here for 10 years. I'll trade away that first round draft pick. I'll do these things that maybe would pay off in three to four years.

• 33:25Speaker 00

  Yeah. And I think that, you know, we all have incentives in life. And so recognizing what the incentives are oftentimes shows what behaviors you will, will have or what decisions we'll make. And I think you mentioned culture. I think culture and people is the most foundational and fundamental aspect of any business, any size. I think in midsize companies in particular, it's incredibly valuable because you have oftentimes more limited resources, your team's smaller. And so people are doing more in terms of their scope of responsibilities or capabilities. They oftentimes are very passionate and committed, but we don't always invest in that culture. And so how do we continue? And I think the best businesses figure that out. But I think as companies scale and you get bigger, there's

• 34:10Speaker 00

  more complexity in terms of the people side of things. So we always start with people, you know, do we have the right people in the right seats? Do we have the right culture? Do we have the right engagement? Do we have the right talent development and talent management? As we think about businesses, you can really enhance a business by focusing on the people and the foundation. We focus there first. We focus on purpose. Second, what's the purpose of the business? What's the difference we make in the world? Are we aligned around that? What's the strategy to go execute that purpose and impact? And then we think about performance third. And so then we say, okay, how do we actually achieve those goals? How do we drive alignment and accountability? And how do we focus on purpose? I think if you start by focusing on performance, then I think you miss out on really these foundation settings,

• 34:51Speaker 00

  which are so critical to get alignment and to drive ultimately the most value in businesses.

• 34:56Shane Parrish?

  That's another thing that people just throw out casually. People are our most valuable asset, but it's so easy to say those words and so hard to live that because that means investing in your people. It means probably lowering your margins at certain points in time.

• 35:09Speaker 00

  It's taking a disciplined approach to how we think about people. So it's not just, you know, how do I reward people more? Or, you know, how do we have more, you know, holiday parties or whatever it may be? It's actually taking a structured, disciplined approach. We always say with our companies, typically businesses have a structured view to thinking about strategy or KPIs or budgeting. They have a calendar, they have, you know, discipline and an approach to that. We often say, where's your people calendar? What is your same level of discipline approach that you have on people? Cause you should have the same. And we put it in three buckets, you know, how do we attract the right talent? So that's everything from, you know, hiring to employer value proposition, to what are the most critical roles to get the right people in.

• 35:51Speaker 00

  So on the attract bucket, how do we develop talent? Are we thinking about where people are going in their careers? Are we helping them get there? How are we thinking about that? And then engagement, are we engaging our talent? Are we thinking about the culture? Are we thinking about incentives? Are we thinking about communication? And how are we doing that most effectively to support the, the whole organization? The whole people framework is so significant in terms of what you can do in an organization, but it usually isn't afterthought. If you look at executive teams, usually. Usually in midsize companies, there may not even be an HR leader. If they are, it's a more junior level, generalist type person versus a true talent partner. And so that weight all falls on usually the CEO to navigate it.

• 36:35Speaker 00

  But that's a lot when you're trying to navigate everything. And as you're scaling, it becomes more and more important. Because when you're small, everyone is close to the CEO. They see it, they feel the culture, they see the work ethic and discipline. As you get bigger, you need to sort of step away and have more of a system and a structure that allows for that to continue. Because not everyone's going to be sitting your shoulder to shoulder with the CEO.

• 36:57Shane Parrish?

  How do you evaluate talent?

• 37:00Speaker 00

  Yeah, so we do a few things within our businesses as we think about talent. When we go into a new business, first of all, we really try to understand what are the mission critical roles in this business? We find most midsize companies have between 15 and 30 roles that are the most critical roles to get right. And these are the ones that are creating the most value. Each business, it may be slightly different. It may be sales in one business, it may be product development in another. It may be finance in another, depending on what they're doing and how they approach. But do we really have clarity in what those are? Do we have the right capabilities? Sometimes you might have a mission critical role that you don't have today, that you need the capabilities. So my example earlier of Pampered Chef, like when I started, a mission critical role for us was technology.

• 37:43Speaker 00

  We did not have those capabilities in terms of what we needed to go do. And so we had to build it, but really assessing what are the mission critical roles that we have. And then, once we do that, we assess, okay, who do we have in those roles today? Are they rock stars? Are there people who have, you know, a lot of opportunity in terms of their progression? Or are they people who are okay today, but maybe aren't the right people longer term? So we try to really assess that in a disciplined way. I find the best way is you go in and with someone and I can usually send, I usually send like a list of questions that are, I usually have a few different frameworks, but industry questions, company questions, department questions, you questions. And I ask those different questions.

• 38:25Speaker 00

  And what I find is you can usually get someone's sort of assessment and understanding and their view of a world. Pretty effectively by just talking to them about what they're seeing. And then that helps us learn and get better about the business as well. So that's typically when we go into business and what we do. Once we're in a business, then we really focus, okay, how do we develop our talent? And so we're using different conversations and different processes along the way to really make sure that we're aligned in doing that. For us, it starts with, do we goal set at the beginning of the year? Do we have clear KPIs? Because how do you assess people if you don't have clear KPIs? And so you have KPIs of what are we going to go achieve? And then you give people the flexibility to go achieve those. You don't tell them how to achieve them.

• 39:10Speaker 00

  You say, okay, you have the autonomy to go achieve these, but you give them the skills. So we do problem solving trading. We help support them so that they're more equipped to actually go achieve those goals. And you know, they have visibility and then they have the alignment. We're all going in this direction. These are the most important KPIs. And then we incorporate conversations or feedback where we're actually giving real time feedback on, hey, you did this really well. This is what we could do better. And then through that, you are implementing a talent management process. And then alongside of that, you're doing a leadership development process where you're identifying your leaders. You're helping them understand the vision, the expectations, the strategy. Ultimately, they're helping shape that strategy. So it's a very structured way of saying, how do we bring in people at the right stages, the right time?

• 39:54Speaker 00

  To really help them enhance their own development, their own learning, their own contributions. So that we can leverage their expertise and their, their insights even more critically.

• 40:04Shane Parrish?

  Are there tells in those interviews that you're doing with people that maybe they're not the right fit for where you're going? Or that this person isn't as good as you thought they were going in?

• 40:16Speaker 00

  I would say the biggest tell I say is called hand waving where you're talking to someone about something. You ask a question and rather than answering the question, they sort of go all over. They're sort of hand waving around or you start to drill in more and the hand waving begins where they can't really understand or explain it. Typically, people who really know their craft and know their business and know the fundamentals can really explain why we do certain things, why we don't. They may not have all the skills to. Fix it, but they understand what the issues are and what the problems are. And then our goal is to help them understand, okay, this is how we can go address that or solve it. But that usually is the biggest help for me of is can they get clear? Can they get crisp? Do they really understand what's going on in their space? And it doesn't mean they need to understand everything in the business.

• 41:02Speaker 00

  They need to understand the area that they're responsible for. I find oftentimes the best people just have a natural interest, curiosity to solve the issues, or they'll have views on things even outside of their area. Even if one of the questions I'll oftentimes ask is like, what are we not doing that we should be? And people oftentimes will say stuff in their area, but oftentimes they'll have stuff in other areas too. That, hey, I really thought if we could focus more on selling to our customers digitally, that would allow us to transform the business and we're not doing that today. Things like that help me sort of see, do they have this that innate engagement or excitement about the business and curiosity?

• 41:40Shane Parrish?

  I like that a lot. I think as you were saying that, what came to mind for me was the ability to talk at different resolutions from like the one inch level to the 30,000 foot and then transcend the same problem.

• 41:53Speaker 00

  For me and my role, it's understanding where are we in that conversation? And who am I talking to? How do we get to that level and what's the right level? And I find that people who are on the frontline may not have the 30,000 view on where we're going in the business, but they're going to be really good at that 10 foot view and understanding the problem that they're trying to solve or what's limiting them or holding them back. So really sort of figuring out what's the right level to have that conversation.

• 42:20Shane Parrish?

  How do you go about finding companies? You've acquired a few now.

• 42:23Speaker 00

  We find areas that we like. So we say, if we want to go fishing, we want to find a pond with a lot of great fish. And so we want to understand what is an industry that we think has a strong moat or competitive advantage. And we usually look at that by saying, okay, what are the returns on capital in the space? So quantitatively, can we see if there is a moat? And then qualitatively, can we understand the moat more effectively? How wide is the moat? Is it getting wider or more narrow over time? Is it durable? Is it going to withstand the test of time? So we're trying to sort of find those spaces. Once we find industries that we think are a fit there, we spend a fair amount of time reaching out to businesses, finding businesses, getting introduced to businesses. We have operating advisors who help us understand as well.

• 43:06Speaker 00

  And then we really try to get smart and find how do we add value in these companies? And then another group of businesses we have are just people who come to us, people who hear about what we're doing, who are excited. And so they'll come to us and say, are you interested in my business? Which we appreciate. And we always have the same assessment of, you know, what's the mode of the business? You know, quantitatively, qualitatively, can we assess it? And then how do we think about those areas? And what we've also done is we have built a community of 3,000 CEOs, owners and founders that we bring together to provide content and resources and support. And through that, we learn about new businesses. We learn new spaces, which help us also be better in terms of finding businesses that might be a fit for us. We only invest in one or two companies a year.

• 43:51Speaker 00

  We'll look at 500, so we're really selective at finding the highest quality businesses that have a long runway.

• 43:56Shane Parrish?

  Is that the most important part of the process, evaluating the moat?

• 43:59Speaker 00

  We call the five Ms that we look at. First is moat. You know, what is the moat? What's the competitive advantage? Second is the market. You may have a moat, but is the market growing? And do we think it's an attractive market? What is the growth rate? What are the likely dynamics of that? Third, we look at management. Does it have a strong management team today? Or is it something where we think we can help build the management team if there's opportunities? Sometimes they'll be a great business. It's got three strong leaders, but they need to build out a sales leader or a talent leader or a finance leader. Can we help them do that? The fourth is what we call more potential. And there's some opportunity that's not being fully leveraged today that we think we can help them with. It might be expanding into new markets. It might be a more structured approach to how they manage the business today.

• 44:43Speaker 00

  There are a variety of different avenues in terms of more potential, but absolutely a focus. And then for us, the fifth is margin of safety. And what we mean by margin of safety is we don't want to have to have everything go perfectly right in order for us to be successful. We want to have a little bit of flex so that if there is something like COVID or a downturn or tariffs, that we can navigate that well with the management team. And we don't put undue pressure on the business to make shorter term decisions because of something that's happening that may be outside of our control.

• 45:13Shane Parrish?

  What does moat mean?

• 45:14Speaker 00

  For us, moat is what we consider a competitive advantage. And the simple example of like why a moat is it's a castle, right? Do you have a castle that is a strong business? And then the moat you want to have around is what defends the castle? And what is going to protect the castle? A wide moat is going to protect a castle more. A narrow moat is going to protect it less. A moat can be driven by different dynamics. It might be you have a brand and a channel that in combination allow you to sort of keep customers out of your business. You might have a competitive position that allows you to be the low cost provider that then allows you to sort of attract customers and get route density in your market and then drive down prices further and costs further, which then allow you to attract more customers.

• 45:58Speaker 00

  And that will keep other people out of your business. There's lots of different types of moats. There's network effect. There's a limited supplier power, customers or a concentration that can limit or expand your moat. But we're really focusing on how do we build a business that keeps competitors or new entrants out as effectively as possible? We find that moats are changing every day. And some businesses that used to have amazing moats, like newspapers, now have eroded quite considerably. And there's other businesses where the moats are getting stronger. So trying to find those businesses where we think we can expand the moat.

• 46:35Shane Parrish?

  Where do you think moats are getting stronger?

• 46:37Speaker 00

  It's hard, you know, in the moment to look and say this moat is getting stronger because typically it's easier to look back over the course of 10 years. The moat has gotten better or gotten worse. I think AI is a good example that probably will erode a lot of moats and a lot of industries and businesses because it reduces the friction or the cost for a new entrant to come in. And they can navigate the space more effectively. I do think there probably will be a subset of businesses where AI actually makes their moat stronger. And because they already have some sort of structured system that is allowing them to have a competitive advantage. And so it might be, you know, maybe they built out a sales force with a technician base that is hard to replicate and for someone else to come into that. And now AI allows them to quote more effectively.

• 47:23Speaker 00

  Or reduce their costs or improve their productivity so that then their costs go down. And if their costs go down, then they can pass that on to the customer and sort of cycle that and to keeping more customers more effectively. I think it probably is a little early in the context of AI to see, okay, who's going to be the biggest winner, who's going to be the biggest loser? Because it's a little bit more of a crap shoot at this stage, I'd say.

• 47:43Shane Parrish?

  I've been thinking about that a little bit recently. There's a lot of service businesses where AI could, with somebody with a background with AI who has a reflexive AI mindset could come in and probably lower costs and create a temporary advantage over the next, I don't know, three to five years. But then you could use that to create this flywheel of pricing power with customers in the sense of giving better pricing so you're always booked. But also in terms of, oh, we can acquire businesses at the same multiple and get a way better return than other people.

• 48:15Speaker 00

  Yeah, and I think probably the biggest question in my mind is, you know, how temporary is it and how quick is it? Will just, it'll be a race to the bottom where now prices will just go down and then other entrants will come into the market and the customers will capture the value versus the companies. Or do you already have a moat? Or can you build a moat in a, in a time where it actually allows you to sustain it? And then you ultimately get a stronger business. And that's, I think, essentially, we're spending some time thinking about that as well, and especially in the service businesses. And I think there are some that it's just harder for new entrant to come in. If it's a regulated space where you have to get credentialed and, and there's limited number of credentials, that's harder for someone to come in. If it's, you, you have a huge sales force or, and service force

• 49:00Speaker 00

  that's going out and implementing and supporting your customers, that's harder for someone else to come and replicate, not impossible, but harder. And so do you have that aspect of your mode already that you can reinforce? And what does that look like? But I think that disruption's coming, you know, it's, I think it's going to happen pretty widely in terms of different businesses and industries. So if you have a great business today, are you thinking about that? And can you reinforce your mode and make it stronger?

• 49:25Shane Parrish?

  When it comes to quantitative assessment of these businesses, what are you looking at?

• 49:29Speaker 00

  Yeah, in essence, we're looking at like a return on invested capital. And as we think about that, is it going up? Is it going down? Is it staying the same? Do we think that that is reasonable for the space? What we find is that's one part of it. Like, you need to understand the quantitative. And typically, if you have a moat, you can see it. You can see it in your returns in the business on what you're doing and your return on capital. But beyond the quantitative is then the qualitative. Is like, can you define it? Can you explain why? Do you understand it? That, I think, becomes more important because if you looked at the newspapers, I would say, once the remote started to erode,

• 50:09Speaker 00

  quantitatively, it still looked good for quite a period of time, even though qualitatively, it was starting to erode at that stage. The financials lagged and then it caught up. But I think that's typically what we're trying to do is look at both the quantitative and the qualitative side.

• 50:22Shane Parrish?

  And when it comes to return on invested capital, what is that?

• 50:25Speaker 00

  For us, it's really looking at, you know, what's the earnings in the business? And then what's the capital required in the business to support those earnings? And so you can do the calculation and get a ratio. We typically say like an okay business is maybe 20% return on capital. A great business is probably looking at 50% plus in terms of return on capital.

• 50:44Shane Parrish?

  And when you say earnings, like, there's a lot of ways that people are defining that now between EBIT, EBITDA, operating earnings. Like, what is earnings?

• 50:53Speaker 00

  We usually look at EBIT, you know, earnings before interest and taxes. Our view on sort of EBITDA is there are some industries where it makes sense. But in most industries, depreciation and amortization is real. And so if you focus on that, I think you sometimes give yourself false confidence in terms of what the business really looks like and what it really generates, because in essence, you're trying to get a proxy for cash, cash flow and cash generation. So when we look at it, we'll look, usually look at EBIT as sort of an earnings approach. And then we'll focus in terms of what's the capital in the business. But earnings, we usually define as EBIT. In some cases, we'll look at EBITDA, but we try to be pretty selective of how we do that in the industries where depreciation and amortization are real.

• 51:38Shane Parrish?

  And how are you defining capital? Is that just equity?

• 51:40Speaker 00

  In capital, we're looking at a few different things. What's the capital actually required in the business? So what you're putting into it, your PP and E, if you need like lots of AR to support your business, really trying to fundamentally understand what capital is required to support this business, what inventory is required to support the business. Every business was a little bit different, but there might be a business where the earnings look really great, but then they have a huge inventory on their balance sheet to support that that level of earnings. And then that business is probably a little less like a less good business because you have to have this inventory to support it. And that sometimes maybe you have a lot of locations, so you need to have facilities with all the inventory.

• 52:23Speaker 00

  And maybe your customers require you to have a lot of inventory to support the business. There's a lot of different dynamics that you've played into that. But we're really trying to understand what capital is required to support the level of earnings that you have in this business. Your best businesses usually don't require a lot of capital. There are caveats to that, too. I mean, you can get a higher return on capital, but also potentially someone can enter the business more quickly if you don't have capital in the business. If you have capital in your business, that's usually harder for someone to enter. But you can get other types of modes or impacts. And I think you're seeing a shift in this. If you look at the tech businesses, historically, there wasn't a lot of capital required. Google or others, they had network effect and these other dynamics that drove the moat.

• 53:07Speaker 00

  And so you didn't have capital. Now with AI, that's shifting quite considerably. But also that probably makes it harder for someone else to come into the business as well.

• 53:15Shane Parrish?

  And when you look at market, what makes it attractive market?

• 53:18Speaker 00

  So when we look at market, we're looking for a few things. One is what's it growing? What's the growth rate in it? Is it growing at GDP? Is it growing above GDP? Do we think that that's sustaining? You know, there might be a situation where the business is growing very, the industry or the market's growing very fast right now, but you're, it's going to decline over the next five years. Or no, we think it's going to continue to grow at 20% plus a year for 10 plus years. So trying to understand what the growth rate is, how's it relate to GDP? Second, we're trying to understand what the dynamics of the Market. Is it a situation where there's a lot of fragmented players? Is there, you know, a couple of behemoths? Is it one where there's opportunity for consolidation or not?

• 54:00Speaker 00

  We're trying to just understand what the dynamics are and sort of how it works. Are the other players in the market rational? If it's, you know, more concentrated, what are, how do we think about the path forward? And what that might look like? And where do we think we would play in that market? And what do we think the path forward would be? But we're first starting with sort of growth rate and dynamics.

• 54:21Shane Parrish?

  We've already talked a little bit about management and I think most of our listeners will understand a little bit of margin of safety enough for the conversation. Anyway, what did you mean by more potential? Is that like a lottery ticket?

• 54:33Speaker 00

  No, it's less than a lottery ticket, but really like where's the opportunity to sort of grow this business? And what does it look like? So for example, we partnered with a company, Marine Concepts, sells boat covers. When we partnered with the company, it was started by Joe Man Randy Kent, based at a Lake of the Ozarks. He had a facility and a market in Lake of the Ozarks. He had great market share there, great NPS. The product was incredibly, you know, strong. He had moved a little bit and sold some in Florida, but really he hadn't expanded beyond that. So the more potential there was, can we take this company that has a great product, has a great reputation, great NPS, great margins and expand it? And in this case, we wanted to build out a dealer network. So can we expand that through a dealer network and growth? So that was the more potential in that business was how do we expand it?

• 55:18Speaker 00

  And doing something that they're not doing today versus a business where you may come in and it's already at full potential, right? The business is operating super well, not as many growth drivers or growth opportunities left. Where, what are you going to go do? Like it's growing in GDP probably like it's going to be hard to really go accelerate growth and coke. Whereas for us, playing in the midsize market, there's a lot more opportunity. Or JM Test, that was a 40 year old business that we partnered with. Family business started by the Morrison family, grew 20% a year over the last 20 years in sort of tenting branches and regions today, but an opportunity to move in geographically into new regions, increase penetration in our existing markets. And then three, look at potential acquisitions. For other family businesses that want a long term partner.

• 56:01Speaker 00

  And so for us, that was the more potential in that business. So each business is a bit different, but really understanding what's not being sort of fully optimized today. We always start with our purpose, which is helping organizations and people reach their full potential. And so as we think about a new partnership, how do we think about what that full potential may be? And then what's, what's the opportunity for us to help get, help them get there? And do we bring some sort of skill set, experience, perspective that can help accelerate that?

• 56:28Shane Parrish?

  And when you look at sort of the potential, does that factor into the margin of safety? Or no, that's like in addition to we're going to have a margin of safety anyway. This is more like an added layer to that.

• 56:41Speaker 00

  Now, I think if we think of this as like a growth potential, but it may contribute to margins of safety. If we said, you, if this business will work at this valuation, even if we don't do anything, and then we're able to go drive this growth, then that gives us more comfort and the margin of safety and where, where we are. But they can be interconnected, but it's not necessarily have to be.

• 57:01Shane Parrish?

  And so what happens? What's the playbook post-close? So you've found a company, you love the management team, you love the people. It's in a great market. You think there's potential for more day one. Now what?

• 57:14Speaker 00

  Actually, before even day one, like when we close, during the process where we're getting to know each other, we're doing diligence. We're sort of spending time with them, really understanding what are their views on the industry? What are their views on the business? What does management think the biggest opportunities are? We're oftentimes doing interviews, so our Camberk Business System team will spend time meeting with 70, 75 people in the business and understanding where they think the opportunities are as well. So we're doing that during that sort of diligence process going up to the close. Once we close with a business, we're really trying to understand where are they on their own journey? And so we have a diagnostic to assess on all these frameworks. People attracting talent, developing talent, engaging talent, strategy, KPIs, budgets.

• 57:57Speaker 00

  What's their self diagnostic on their sort of sophistication in these areas? And so they'll do that and then we'll do that. And then we'll come in and say, okay, given this, what, what do we want to go build together? What is the apply? There's a few sort of. Critical components of the initial partnership that we do. Usually it's a part of a strategic planning process. Our KBS team will come in and work with the management team to sort of really think about what's the future direction of the business and what are the opportunities? What are we doing well today? Where are there opportunities we're not doing as well today? Where can we sort of throw where the challenge is facing the business? So having those types of conversations. And that really is a collaborative, you know, hands-on experience that we're partnering with them to assess. As we're doing that, we're simultaneously saying, okay, do we have the right capabilities? Do we have the right roles?

• 58:42Speaker 00

  Do we have the right people to help support that growth? If we say, you know, we want to go expand into new markets, you know, do we have that capability? Do we, if we want to go do acquisitions, do we have that capability? If not, how do we build that capability or add that talent internally that allows us to have that sort of flexibility? And then we're really building a roadmap out for the first 12 to 18 months of, okay, what are we going to go do together and what does that look like? We say from our perspective, you know, I've been CEO and my partner's been CFO. We don't want to be the CEO and CFO again. We're not trying to do your job. We're trying to be the resource that we wanted. And so we're being helpful on the biggest strategic decisions you're making in a business and really partnering with them and then giving them feedback and help along the way in those critical areas.

• 59:27Speaker 04

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• 59:56Speaker 05

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• 1:00:22Shane Parrish?

  Talk to me a little bit more about that in the sense of you're the majority owner now, and you have a CEO founder who's run the company successfully. And you're not telling them what to do, but you're nudging? Like, how does that work?

• 1:00:37Speaker 00

  Yeah, I think it was like co-creation. So they have a view. They're going to be smarter about the industry than we ever will. They'll have the depth of knowledge, experience, what's worked, what hasn't worked. What we'll bring is outside perspective and a lot of questions. And so we'll say, have you thought about this? Or what about that? Or, hey, there's an industry that's like this that we've seen that 10 years ago, this happened, and it looks like it might be similar. What might be similar or different? So we're trying to do that together in partnership with them so that we could co-create and get to a shared vision of the world and what we want to go build and what that looks like. And so in essence, we think of it as like we're their strategic partner in assessing that. And then, once we've assessed that, we sort of come in and help them with sort of the skills and frameworks to go do it. So, for example, we have someone on our team who really specializes in sort of KPIs

• 1:01:22Speaker 00

  and the budgeting process. So he's going to help them implement a KPI process if they don't have one already. To say, okay, how do you build KPIs? What do good KPIs look like? What are the important drivers in this business? What are the right benchmarks? You know, how aggressive do you want to be or not? And sort of helping them think through that. On the budgeting, or we sort of think of it as resource allocation side, do we have the right resources to sort of fund our future growth and what we want to go do? How do we become more efficient in some areas so that we can go invest in other areas? So we're helping do that. Or we have someone on our people team who's going in on the people's side and saying, okay, we understand that we need to go drive this growth in the business. We want to drive this growth. Okay, what are the mission critical roles that we have today? Do we have the right skills in those roles and the right people in those roles? If not, what changes might we need to make?

• 1:02:07Speaker 00

  And then, oh, wow, we're going to really need to engage our middle level management if we're going to go grow and expand. Do we have the right development for them? Okay, we need to be implementing quarterly director days with that group so that we can help them become better leaders so that they can help us at this new stage of growth. Or perhaps we haven't done a lot on the engagement or communication side, and we need to implement quarterly town halls where we're helping the company understand the vision and the strategy and direction so that we can help accelerate growth so that everyone feels they understand the vision, they're bought into what we're trying to go do, and they want to sort of help us at that next phase.

• 1:02:42Shane Parrish?

  And when you say KBS, you mean the Cambrik Business System?

• 1:02:45Speaker 00

  Correct.

• 1:02:46Shane Parrish?

  And these are all the components of it that we're talking about now. Why come up with a repeatable system? And is it similar to the Danaher one or different? Maybe give me a little bit of compare and contrast.

• 1:02:59Speaker 00

  I was CEO, I wanted to go out and learn from others. And what I found was some of the best companies out there have a scalable, repeatable business system. Danaher, Marmen, Toyota. It is an integrated way of how they manage the business so that it's not piecemeal. But really, it's a holistic approach where the components of the approach reinforce each other. And if you do one in isolation, you get less value than if you do them together and they're complementary in nature. And so you could have a strategy process, but if you don't have the right people and the right skills, you're going to be less effective at implementing that strategic process. If you have amazing people and a great culture and great environment, but you don't have KPIs and alignment, you're not going to be able to achieve as much with those people.

• 1:03:42Speaker 00

  So by adding these different components and focusing on what matters most in a business, you create more value overall. And I think there's amazing examples, Danaher being one, of that's created tremendous value by having a structured, systemized way of managing a business. And what we found is that most midsize companies, they're struggling with the same things. How do I get the right people in the right seats? How do I build the right culture and right engagement? How do I get the right strategy without paying McKinsey or Bain to help me? How do I go and execute that strategy and drive accountability and action into the businesses? And so what we're trying to do is saying, rather than you have to go figure that out, we've done the work to say, hey, here are the structured ways to go do it. And this is the sequencing that works for where you are in your business that we can help you with.

• 1:04:27Speaker 00

  And so that very much has been our approach to how we think about it with our business system. And what we did is we went and learned from some of those best out there. From Danaher, from Marmen, from Constellation and others. And sort of took parts of each that we liked, where we thought that they were the most successful and sort of took those and distilled them into our own business system. Ours probably has more of a focus on people and culture than others. But I think that's a function of where the world is today and compared to 20 or 30 years ago, where a lot of those business systems were started. And but it has similar approaches in terms of continuous improvement or strategic planning or KPIs that many business systems have. And we feel like we're standing on the shoulders of those giants who've done a great job of building them.

• 1:05:12Speaker 00

  And we can enhance them and tailor them for sort of our types of businesses.

• 1:05:16Shane Parrish?

  Why do you think more people don't copy the Danaher business system? I mean, a great recent example of that is Larry Culp using it to turn around GE.

• 1:05:26Speaker 00

  Yeah.

• 1:05:27Shane Parrish?

  It's a proven system. It's successful. It probably takes a couple of years to implement, I would imagine, throughout the organization. But it works.

• 1:05:34Speaker 00

  So I think more people don't do it because it's really, really hard. It requires extensive discipline and structure and focus and adherence to the system for it to work. You can't just do a piece of it or one part or for six months. And you actually have to have it become part of the DNA and the culture of the business. So I think in longer term, like holds, people don't do it because it's a discipline. I think in shorter term holds, if you are, you know, private equity, you don't have the time period to get the benefits of doing it. And so why would you spend two years going and implementing something that you're not going to probably reap the full benefit in year three or year four, when you need to exit the business? And so for us, having a longer term horizon, we can invest in that and we see the value of it.

• 1:06:18Speaker 00

  And we have the team to help support the discipline and the adherence to it. I also think a lot of investors haven't actually been operators. And so it's really hard to go into a business and say, this is what you should go do to operate a business, if you've never actually operated a business. And so you're, you probably don't have the same insights or the value of that or understand the value of it. And you might have an operating team who's doing it for you. But, you know, usually a lot of firms, the operating teams are second class citizens, where they're not at the same seat of the table as the investing organization.

• 1:06:49Shane Parrish?

  So you started KBS in 2020?

• 1:06:52Speaker 00

  Mm hmm.

• 1:06:53Shane Parrish?

  What's changed over the five years? What have you learned from implementing this over the last half decade?

• 1:06:57Speaker 00

  Yeah, so we actually started it when we were at Pamber Chef. Right, that were the fun foundational pieces where we were learning and trying things. And then we formally sort of codified it when we started Cambria in 2020. It has changed a lot and it gets better every year and every season and every business we work in. And we think of it as it's living and breathing. It's not a stagnant system. You go and implement and then you'll forget about it. It really is focused on continuous improvement. And each company we engage with helps us get better at it. But the mistakes that we learned from started very early on. So when we were at Pamber Chef, we first rolled out KPIs. We rolled out KPIs to the entire organization. And we said, okay, great, we're going to do KPIs. We're going to roll it out, you know, 500 employees, we'll roll it out to everybody. And that was a huge mistake.

• 1:07:39Speaker 00

  You know, we just, it was too fast and the organization wasn't ready. They, we should have started and sequenced it and started just with the executive team in year one. Once you have the executive team understanding, aligned, working towards it, then you go to the next level. And then ultimately you go to the next level. We thought we could move faster and just roll it out because it was a small business. You know, related to that, when we rolled out our KPIs, we're like, okay, great. If KPIs, go figure them out. And what we figured, we thought was like employees will figure out how to go do it. Well, it turns out you have to help people and you have to understand problem solving and help them understand, how do I go solve a KPI? Just because you give me a KPI doesn't mean I actually understand how do I go drive it? It doesn't mean I'm not capable or I can't figure it out. But it's going to be much more effective if I give you problem solving training,

• 1:08:22Speaker 00

  help you have some case studies and examples of what this looks like in action. On the people's side, when we first started, we rolled out 360 degree feedback in year one. And what we found with 360 degree feedback, where people get feedback from not just their manager, but peers as well as direct reports, is if you're in an organization where you don't have trust or psychological safety, it doesn't work. You know, the feedback isn't very good. It's shallow, people are defensive, people attack, like it's not productive or constructive feedback. So in doing that, what we realized was, okay, organizations aren't ready for this in terms of people in year one. We need to build up to it. We need to build communication and engagement in the organization and transparency. We need to show them that. We're going to do this first. We need to explain why we're doing development.

• 1:09:06Speaker 00

  It's not to exit people, it's to help them in terms of their career progression. And so by learning those things along the way, we get better at what we're doing. In the recent years, we've realized this more simple, like clearer, less, as concise as possible. Dawson Shamblyn, who leads our KBS team, is terrific at this. He's just a natural learner and working on improving the system. And after each partnership, we reflect and say, okay, what went well? What could have gone better? What do we think needs to shift and alter? And it's also great. We'll go into businesses and we learn of what they're doing really well. And they're like, oh, wow, they actually do that better than us. Okay, can we tweak this or can we utilize them? And we see it in our community too.

• 1:09:50Speaker 00

  The group of 3,000 owners CEOs, we learn from them of how they're navigating these types of topics. And that helps us get better as well.

• 1:09:58Shane Parrish?

  I love the idea of the community. There's, you know, I think you had mentioned there's sort of like accelerators for startup companies, but there's no real accelerators or network for mid-sized businesses.

• 1:10:10Speaker 00

  Yeah, my view is that mid-sized companies are in this middle sort of gap area. On the smaller side, there's startups have accelerators, they have different programs. Bigger companies have more resources. They can bring in a consulting firm or someone to help them or pay for a resource on a specific topic. If you're in the middle, you're constrained by resources typically, both time, people and dollars. And so, but you have many of the same challenges to figure out and to navigate. And so we built the camera community for what we wanted, which was resources and people to learn from that have done this and have made mistakes and learned and gotten better. And by bringing those people together, we're sharing our own resources and content and perspective and experience,

• 1:10:55Speaker 00

  but also other people in the community are sharing theirs as well. And so that sort of shared ecosystem of learning, improving, getting better, has made everyone in the community participates better in their businesses, but also helps us as well.

• 1:11:09Shane Parrish?

  And then how do you think about that when you take over a company?

• 1:11:13Speaker 00

  Yeah, so we're pretty conservative. So back to that margin of safety, we believe if everything has to go well and to be, you know, to be successful in the business, that makes us nervous. And leverage is one of those things that, you know, the more leverage you put on the business, the more everything has to go well for that to be able to service that. So maybe a traditional private equity might put four to six times the leverage on a business. We'll probably do two or three times. We might also use a turn of like a seller note where the seller is helping finance that, which is a little bit more friendly than bank debt or some other debt option. And so we're in general, a little bit more conservative. Our view is that leverage amplifies returns on the upside, but also on the downside. And so we want to have a bit more margin of safety. We

• 1:11:55Speaker 00

  don't want to put the company at risk. We don't want to push ourselves to make short-term decisions because of a structural decision that may be juiced returns a little bit, but isn't actually what we think is best for the business.

• 1:12:06Shane Parrish?

  I have a hunch, maybe correct me if I'm wrong, but when you're buying these businesses, they don't have a lot of debt on them.

• 1:12:11Speaker 00

  No, typically not. Most entrepreneurs we meet at some point had some moment in their business where it was a bet the business type situation. And oftentimes that might have been leverage or something else where they almost lost the whole business. And when you have those situations you've gone through, typically as an entrepreneur, you're like, I don't ever want to be there again. So I'm not going to ever put myself at risk. And so oftentimes, I think some mid-sized companies are actually, you know, even almost debt, too debt adverse where, you know, they won't even have, you know, mortgage on a property or, you know, use financing on an area where it might actually be prudent. And they'd be more inclined to take equity or more expensive capital or not use, you know, the capital options they have because they're so afraid of something

• 1:12:55Speaker 00

  bad happening. And it typically is stemming from something bad happened at some stage and they almost lost their business and they don't want to be ever close to that again, which we can respect and we understand. You know, if you have a great business, you don't want to put yourself in a situation where your business is at risk because of a capital financing decision.

• 1:13:12Shane Parrish?

  You guys have embraced AI internally at Cambric. How are you using it?

• 1:13:15Speaker 00

  Yeah, so we think of AI in three different ways. One is at Cambric. How do we become, use it? And ultimately become smarter, more efficient, more productive in our own processes and how we operate. And so that's everything from you, we use it for better note taking, research on businesses, moving faster as we sort of deep dive in a space and getting smarter as we think about the businesses more holistically. We definitely are using it. The second way we're thinking about it is what are the industries and businesses where AI will affect the industry and potentially strengthen the mode as we sort of talked about a bit earlier? And are there spaces that we think are attractive?

• 1:13:59Speaker 00

  So looking in sort of what we call sort of AI enabled services, businesses where we think it can strengthen the mode of the business. That we're still earlier stages on because I think there's a lot of uncertainty of what it happens in different businesses. But we're spending time thinking about that. And then the third is in our companies and in our companies, there's two, I think, main ways we think it can be helpful. One is just structured way to help our businesses think about the key management aspects where they can be more effective. So an example would be hiring. We have a hiring process. We have a structured, you, you do a scorecard and you do this in terms of sourcing. And then you do this in terms of selection and an interview process.

• 1:14:42Speaker 00

  And if you do this, you know, it will improve your odds of success. But it's very hard to be disciplined to it because it takes time and it takes you requiring to step back and think about it. You need to build a case study. You need to do all of these things. And so can we build a hiring tool that takes away some of the work required? That allows you to still adhere to the process with discipline, but not all the time to build the process. So can we build a scorecard for a role more effectively? Can we pull from other similar type roles and pre-populate it and make you a little bit more efficient as a hiring manager? So we're spending time on AI on topics like that that will affect every business. And then we're spending time on, you know, can we think about our productive like workflows in our business? And how do we be more effective?

• 1:15:28Speaker 00

  I think people are starting with like the simple stuff, like how do I become more efficient? Or can I think about my call center? But we're thinking probably more on the revenue generating side. Can we quote you? Can right now we have a business that takes 48 hours to quote. Can we get that down to 48 minutes without sacrificing quality by utilizing AI more effectively? Are there other workflows like that on sort of the sales or marketing or productivity side? Where we can significantly improve how we are engaging with customers or making decisions or speeding up things that will then allow us to attract more customers or service our customers better? And so that's the third aspect that we're working on.

• 1:16:09Shane Parrish?

  When it comes to hiring, like, what does that process look like? Like, what does that nitty gritty look like in the details? You've you guys have recently hired a new CEO for one of the companies you had. What is that process like?

• 1:16:21Speaker 00

  Yeah, so we very much subscribe to the WHO process. So by GH Smart, there's a book called WHO. W H O. It is, I think, single handedly the best, simple book on hiring. And if you read that book, almost everyone will become a better hiring manager. And there's a few components to it, and we've augmented and added our own. But the first is building a really in-depth scorecard for the role. Most people completely skip this process. They just jump to, I'm going to write a J D, I'm going to post the role, I'm going to start interviewing, and then I'll sort of figure it out. And people usually do that because you're in pain. You're trying to fill a role and you don't have someone in the role or you don't have the right person, and so you must want to get going. And we always say by doing that, you may save your time today,

• 1:17:04Speaker 00

  but you're going to lose time down the road because you're not aligned with your counterparts on it. You don't market to the right people, you don't interview the right candidates, or you hire the wrong person, and then you've got to exit that person, and you lose lots of time and money in doing that. So how do you actually start upfront and get aligned and get clarity on what you need in the role? And so a good scorecard in my, our mind, has three sort of critical components. The first is what's the mission of the role? And so really clearly, what are you going to go drive in this role? And how do you make it like specific? You want it time bound? You want as like as measurable as possible? So if you're hiring a VP of Sales, you might say, we want to double revenue over three years

• 1:17:47Speaker 00

  by improving our industrial account management and adding large industrial contracts.

• 1:17:56Speaker 00

  And we want to build a team of farmers or we want to build a team of hunters, whatever it may be. And by doing that, what do you want to achieve? What's the time you want to achieve it? And some level of the how. And the how is important because sales leaders are very different. Like if you're going to sell through Amazon, you probably need a different sales leader than if you're going to sell direct or if you're going to sell through large customers. And so can you, are you clearly articulating what you need? So that mission's important. The second is the outcomes. So three to five really clear outcomes of what you're going to go drive. So that might be growth and revenue, but it also might be we need to grow margin or we need to, you know, improve from four national accounts to 10, whatever the outcomes are that you need for that role as clear and crisp as possible.

• 1:18:38Speaker 00

  And then the third are competencies and what are the competencies needed for this role? And we think of competencies on two levels. One is functional. So there's some roles where you, you need a certain type of competency. So you might need analytical or you might need a relationship based, whatever it is for that role. And then there's company to be cultural competencies. We need everyone to be humble or open to feedback or aggressive, whatever it is for your business. And so the scorecard is putting those things together. The hiring manager puts those together and then shares that with their counterparts. And so other stakeholders, and then you beat it up. And what you'll find is people will say, well, you think we need to grow through national accounts? I think we should be going to mom and pops. And that conversation is had early in the process where you can get alignment, have

• 1:19:22Speaker 00

  disagreement, but then move forward on what you want to go do. Once you have that scorecard, then you have the hiring manager or the recruiter or the search firm know like, okay, this is what the person needs to go do. I can find people who can go do this. I can build a JD that's going to market to people who want to go do this and I can more clearly articulate it. And then that scorecard then flows through the interview process and now I have to know how to interview. So that's the first component is the scorecard. The second component is the sourcing. And so most sourcing in most companies is very reactive. You know, I, I post the job and people apply. And my view is like oftentimes the people applying aren't always the people you want, right? They're the people usually who don't have a job or unsatisfied in their job. Oftentimes, your best performers are happy in their job and they're doing really well.

• 1:20:07Speaker 00

  And so you need to go find those people. And so having the hiring manager or the recruiter reaching out and taking ownership of that to actually find the people that you want to have and not just waiting for people to come to you. So really diving into more specifics of how do you go source? And then the third is around selection and how do you improve your selection process? And this is what most people think about when they think about hiring is the selection part. Our selection has a few different sort of components to it. So the first is actually like the hiring manager, we do a screen with the recruiter, but then the hiring manager going deep on different areas that we think are important in the role from the scorecard. So the outcomes, the competencies in that first interview, and then actually having an interview

• 1:20:49Speaker 00

  panel that have different people interviewing different areas. So what we find, most interviews start with like, tell me a little bit about yourself and you know, tell me about your background. And then 20 minutes later, then you've had that same conversation or that candidate's had that same conversation with three or four different people versus saying, you know, your job is to interview on outcomes and all you're going to focus on are these outcomes. Your job's to focus on functional competencies. All you're going to focus on is are they analytical? If that's what you're looking for.

• 1:21:15Speaker 01

  Right.

• 1:21:16Speaker 00

  Relationship based. And then the one person focusing on cultural, I'm like, and your interview comes in, you're not worried about what their past role is or how competent they are in terms of the outcomes. You're worried about their culture. And so having the interview set up from that. And then we augment those interviews with a behavioral assessment. So we usually do behavioral and cognitive, which we think helps us better understand some of the cultural and aptitude aspects. We usually do a case study, which is a deep dive on real topics that we're facing. And then we usually do a top grading interview, which is a in-depth, usually 90-minute to three-hour interview where we're going through every past role that they've done, what were the outcomes or the scope or responsibility? How did they perform?

• 1:21:58Speaker 00

  What would their manager say about them? Those types of conversations. So it's a pretty in-depth process, been followed based on sort of who, but it significantly improves your outcome of success.

• 1:22:08Shane Parrish?

  One of the businesses you're not interested in acquiring is insurance. I'd love to hear more about that.

• 1:22:14Speaker 00

  Yeah, I think there's a lot of industries we don't invest in. Healthcare, financials, insurance, real estate. Typically, we want to focus on what's our circle of competence. Where do we think we have value and expertise that's going to enhance what we're doing? So we focus on services, industrials, consumer, both by our background, but also where we think there's attractive opportunities. Insurance is a, it can be a really good business, but a lot of capital has come into it in the last 15 years. And so it probably is a more competitive business. There's more risk in it than there has been. And there probably will be times where it's a really good business, but there'll be times where there's more capital, so the pricing gets less disciplined. And then it ends up being less attractive of a business.

• 1:22:59Speaker 00

  There are other dynamics that are attractive, like if we ever found the perfect insurance business. It's not saying we wouldn't do it, but it's probably not a focus for us for those dynamics. And the fact that where we are playing, there's a lot of opportunity. And so there's just more there than we see sort of possible in insurance or some of these other sectors. And some of them are just more complex, the risks are higher. If you misprice in insurance, you don't understand your costs for a long time, but it can be very, very difficult to an organization and you can erode all your profits if you misprice.

• 1:23:31Shane Parrish?

  You've been on a lot of boards. So you've been on the Dairy Queen Board, John Mansfield, Kraft Heinz. I would love to hear about what you've learned from those experiences and then how you took that and you're applying that now at Cambridge.

• 1:23:46Speaker 00

  Yeah, so I'd say in each board I've been on, I've learned different things, both in terms of what to do, sometimes what not to do. And some of them have been unique where it was the CEO reporting to me directly and not a formal board, and other times a more formal public board or private board. And what I find is, for the most part, most boards don't add a lot of value to the businesses. And I think they oftentimes go too deep on areas that are less critical and not enough time on the areas that are most critical, that they can provide the most value. So within each business, really understanding what are The three to five big levers that are going to shift and create the most value in this business? And how do you spend your time talking about those levers versus all the smaller things that

• 1:24:31Speaker 00

  might be urgent, they might be happening, they may be important, but they're not going to fundamentally change the direction of the business. And so I think the best boards figure out what those are, focus on them and drive conversation around them and then provide insights or value to the management team. I think most management teams would come out of most board meetings and say that wasn't a good use of my time because I was just updating and telling them what I did for the last quarter or whatever it may be versus more forward thinking, this is what I'm struggling with. And most boards don't have the context in the business enough to be able to add value. So how do you make sure the board is knowledgeable enough about the business and can also ask the right questions, even if they're not going to be as deep as the CEO or the management team?

• 1:25:14Speaker 00

  And I think it's a fine line of getting that right balance, but those are some of the things that I've learned as I've thought about different boards and how we think about our boards.

• 1:25:21Shane Parrish?

  And do you think the role of the board is different in public companies versus private companies?

• 1:25:27Speaker 00

  Yes and no. I mean, absolutely. Like there's a public dynamic where you have a fiduciary responsibility, there's a enhanced governance and some other dynamics that are important and regulated in terms of where you need to spend your time. I think there's some that's less valuable earnings and quarterly reports. I think that's probably less valuable to value creation in the business. I think on the private side, people set up their boards in different ways. Sometimes it's set up more as governance and oversight and shareholder management. Other times it's set up more as advisory or insights. And I think different private boards do it differently. I think our view is that you probably want somewhere in the middle where

• 1:26:09Speaker 00

  you're having some governance, but at Camberk we provide most of that. But really, it's the valuable insights, perspective, relationships, introductions that are going to create the most value that we want our boards focused on.

• 1:26:20Shane Parrish?

  Is there a moment without naming the company where you were in a board meeting and you were just? Taken back by what was happening or?

• 1:26:27Speaker 00

  Like in a bad way?

• 1:26:28Shane Parrish?

  Yeah.

• 1:26:29Speaker 00

  Yeah, I mean, many of them. Uh, and some of them good boards, but I remember there was a, a board meeting we were in and we were like assessing the packaging of the products and, you know, in detail, which I think that's very important. The packaging of the product is very important. I don't know if the board is the best people to be assessing and commenting on the packaging of business. Like, I think that's what the, the, the management team and the marketer should be doing. And I think those are, you, conversations you have to be like thought about. Or, you know, you're on, in a slide deck and it's slide 112 and, you know, you're being read the slides and like, really? Like this is how we're going to use this time? Like, I don't think any slide deck should be 112 for a board.

• 1:27:10Speaker 00

  I mean, usually there's 20 slides, maybe that get to the heart of the most important topics you're facing at a time. And then most of the time should be discussion and not presentations, not a dog and pony show. But I think it's set up typically for the management team to come up and say all the things that we've done and how smart we are and how talented we are and how you should be applauding us. And the board, you know, is doing that on the other side versus that is going to create the most value versus, hey, these are the three biggest issues we're facing right now. This is what we're struggling with. This is what we need your help with, and this is what we want your perspective and insights on. Now, that's a completely different dynamic. You need to have psychological safety. You need to have trust. You need the management team to be open to receive the feedback.

• 1:27:53Speaker 00

  You need to have board members who are capable of providing valuable feedback. You need all of those dynamics to, to come together.

• 1:28:00Shane Parrish?

  You mentioned Catherine Graham and her biography earlier. I want to circle back to this because it just brought back a little bit of a memory. Uh, and it involves Buffett, but it was interesting. She had mentioned something, if I can get this right, where he had brought all these annual reports to her and he was teaching her sort of like the financial aspect of running the Washington Post. And one of the things he mentioned that stood out to me was he was just showing her a balance sheet over five or 10 year period of time. What can you learn from a balance sheet? Just a pure balance sheet over that period of time? What insights do you get?

• 1:28:32Speaker 00

  I mean, you can see a lot in a balance sheet. Can see how much inventory do you have? You can see what capital is required. You can see are your accounts receivables like are they going up or they going down like? There's a lot of insights that you can see from all three financial statements. And then if you if you start to understand the business drivers of the business, you can understand this as well. And I think what typically you'll see is that most leaders don't always, I think we assume they understand all of that in a business. And I think some do and understand it fundamentally really well. Some understand it, you know, tactically well. Sometimes people understand it in their like in practice, but not necessarily the theoretical, like how it actually works.

• 1:29:16Speaker 00

  And you win, I think it's really valuable though for your leaders and not to assume your leaders understand all of that because some people are more financially literate or financially like have more financial acumen than others. And it doesn't mean they can't learn it, but if you equip them with those skills, they're going to be better. If you think about a CEO, for example, oftentimes CEOs are great operators. They usually have come from sales or marketing or operations. They seldom come from finance and it's not usually the the career trajectory. And so have they actually learned those aspects and where along the way did they learn them and do they understand? And oftentimes in a business, you're making really important operational decisions, but you're also making really important capital allocation decisions.

• 1:30:00Speaker 00

  And you can really ruin a good business with poor capital allocation decisions. And we think of big ones, acquisitions being the biggest where we destroy value often by acquiring a business that isn't a very good business or paying the round valuation for it. But there's capital allocation decisions every day in a business. Should we invest in this factory? Should we open this distribution center? Should we move into this new market? We think of hiring with the same level of complexity, like it's not a capex decision, but if you thought about it as a capex decision, if you're going to hire someone for a hundred grand, right? A year and you think the you discount the value of that, like, you know, it's a million dollar investment that you're making in that person. If you're, you can fire them, but you probably won't.

• 1:30:45Speaker 00

  Organization. So do you have that same level of discipline and rigor in your decision making on all those types of topics? And CEOs who are more equipped at like fundamentally understanding capital allocation usually can make better decisions in their businesses. Now, a lot of entrepreneurs, they do that instinctively. They've had to do it and they figure it out. But sometimes just taking a step back and helping a leader, making sure a leader understands it. When I started a CEO, we took all of our leaders through a business driver meeting and training that we did once a year, which was what are the business drivers? Let's go through an income statement and let's understand what are all the components of an income statement.

• 1:31:27Speaker 00

  And we just did it for everybody, just because it's also something that people assume they should know. And so if they don't, they oftentimes feel embarrassed or they don't feel like they should ask.

• 1:31:36Shane Parrish?

  Right.

• 1:31:36Speaker 00

  And so we would go through it and explain what everything is because ultimately, finance is just a vocabulary and a language that you, people if explained to can understand. But if you've never been explained to it, it's can be tough to understand and you, you just need someone to walk you through it.

• 1:31:54Shane Parrish?

  How do you evaluate integrity when it comes to hiring?

• 1:31:58Speaker 00

  We think of it as in one of those like cultural competencies and how do you assess it? So one, you can try to get to situational questions. Tell me about a time you, you know, struggled with something. Tell me about a time you made a mistake. Tell me about a time, you did the wrong thing, whatever it may be and see what people share. We use it through our behavioral assessment. So like the, it's actual way to, get at sort of motivators and drivers and some of those things come through like integrity or others. And then we get it at it through reference checks, you know, both ones they provide, but also ones that they don't provide. Our view is like the hiring process is fundamentally, you're trying to learn as much as you can about a person and how they'll behave in a role.

• 1:32:40Speaker 00

  You don't actually know until they get into the role, but you can improve your odds of success by being disciplined on some of those dynamics.

• 1:32:48Shane Parrish?

  I remember that when I got hired at a three letter agency and they were doing my background check. They talked to numerous references that I hadn't provided and I always found that an interesting insight because the ones that you provide are the least likely to give insightful information.

• 1:33:03Speaker 00

  Yeah.

• 1:33:03Shane Parrish?

  And so they would go and they. They just talk to anybody in my life who would have been around, like including a neighbor to my, my house and like, does he party? What times is he coming? Oh, I don't know what questions to ask, but I always found it interesting because my neighbor came over one night to my mom and she's like, I always knew that boy of yours was gonna get in trouble. And it was just a background check, like, and it was a reference check. And it was a really interesting way to find out information about people.

• 1:33:30Speaker 00

  Yeah.

• 1:33:30Shane Parrish?

  In a non-controlled sort of.

• 1:33:32Speaker 00

  Yeah, it can be really helpful to see what people share. We also, in our interview process, based off of WHO, also, when you go through the top grading exercise, you know, I go through each role you've had, what your scope was, what you did, what were your outcomes. But then I ask who your manager was. I write that person's name down. And so if you say your manager is Sally Smith, okay, okay, what, what years was Sally your manager? You know, write him down. And what was Sally's role? Okay, she was the manager of this. And then when I call Sally, what is she going to say about, you know, your biggest strengths? And what is she gonna say about your biggest vulnerabilities? And just shifting that from when, from if, like if I call versus when I call.

• 1:34:12Shane Parrish?

  Yeah.

• 1:34:13Speaker 00

  People shift what they say. They're more honest.

• 1:34:15Shane Parrish?

  Yeah.

• 1:34:15Speaker 00

  And also just by writing down Sally's name, like I, I know who your manager was now versus, you know, oftentimes you don't know who their manager was, so you couldn't even get to it if you wanted. And so getting people to be more, not necessarily more honest, but more direct and more forthright with what they're sharing is a way to also get some of that out. And then ideally you do verify it and have those conversations and see if what they said and what Sally said match up. It's really helpful.

• 1:34:42Shane Parrish?

  This whole world is so interesting to me because I, for 15 years, I effectively worked with people you could trust by default. There wasn't, it was a non-representative portion of society. And then getting outside of that and learning, you know, not everybody has integrity and not everybody does the right thing and not everybody is trustworthy. And it's so weird just coming from an area where I would say, you know, a disproportionate percentage of people were, had integrity and trustworthy and all of these things that we look for on the outside. And then you go outside and it's like, whoa, that's, that is a non-representative sample of the population.

• 1:35:18Speaker 00

  Yeah, I think like I by and large think people want to do the right thing and want to do good and are trustworthy. But I think people have blind spots about themselves. They, as you're talking, they want to impress you. You know, it's a bit like dating where you're not always you, you're covering up a little bit and putting your best foot forward. And we want to disarm people and try to get them to be as honest as possible. Because what we find sometimes is you could be a great person and really talented, but just not be the right fit for what we need in this role. And so try to get people to be as upfront and honest and then ideally screen out those that perhaps aren't. But you know, our, our view is we want to help everyone find the right role and the right fit for them.

• 1:35:57Shane Parrish?

  Do you keep tabs on those people after? So it's like, oh, this person was great. They're not a fit for this role. But you know, somebody comes up in six months, you're like, oh, yeah, think of this person again.

• 1:36:07Speaker 00

  Yeah, we love to keep a talent bench, both people we've interviewed, but also people that we just know and we think are impressive that you if we have this type of role or in this geography that we can reach out to, we think it's a great way to cultivate talent and sort of see opportunities. But we definitely like will get to know people. And then a year, two, three years later, there might be some role that's a fit that we end up working on. I always say life is long, you know, people could come back in and out of your life in different ways. And when you meet really great people, you try to keep them close because really great people, just not only from a cultural or integrity perspective, but also from a competency and a capability perspective, are rare to find that combination. So when you find them, you how do you keep them close?

• 1:36:48Shane Parrish?

  You've studied a lot of business history. I'm curious about some of the principles, lessons and stories that you constantly find yourself thinking about.

• 1:36:58Speaker 00

  Oh, there's I think too many to tell. I mean, I think we've talked a lot about long term. You know, one thing that Warren always said to the CEOs is like, think about this business as if it's your family's only asset, and you can't sell it for 50 years. Make decisions with that in mind. And that to me embodies like true long term thinking, how to think about your business. And that's one that I sort of come back to. Now, maybe you not be thinking about every business for 50 years. But I think that's something I think a lot about. But I feel I learned through those types of examples and those types of stories like most of us do, I think. And so trying to remember those is really valuable. Or Warren's comment on your reputation and if you lose money, I'll be understanding. But if you lose a shred of reputation, I'll be ruthless.

• 1:37:43Speaker 00

  We think about that. Or the newspaper tests, like if this were on the front page of the newspaper by a fair, critical reporter that your family would read, how would you feel about it? Things like that always stand out to me.

• 1:37:55Shane Parrish?

  I want to speak just a little bit about inflation. How do you think about inflation in relation to investing?

• 1:38:00Speaker 00

  Yeah, I mean, I think that a few things. One is when we think about businesses, we try to find businesses that we think, and this goes back to like has the moat, is that typically they're a little bit more insulated from inflation because they usually can pass it on to their customers. If you have a better business that's higher quality, that has a moat, you usually can pass on inflation. And so it's less, it's an issue, but it's less of an issue for the businesses that can do that. And so we're trying to be thoughtful about that. Second, with our businesses, even if there is inflation, we don't want to pass it on or pass on all of it. It's like, how do we improve productivity in our business so that in essence, we're combating some of the inflation we may be experiencing?

• 1:38:44Speaker 00

  And we think most businesses can improve productivity, you two to 5% a year, every year, just by being disciplined about it. And so that's a way to also counter some of the impacts with it. But I think that's like the level of how we think about it in our businesses. You also have, as you think about your new investments, what that means in terms of your willingness to pay, the consequences with that ultimately translates into interest rates as well. Those are all things that we factor in. That being said, like, I've never been a macro investor. I think it's hard to predict the macro. It's hard to invest based on that. And so I'd much rather focus on the fundamentals

• 1:39:23Speaker 00

  of find high quality businesses at reasonable valuations that have good dynamics and aspects of the business. And then you can absorb more dynamics like inflation or tariffs or things like that that are going to inevitably probably happen at some time in some space.

• 1:39:42Shane Parrish?

  The president today came out and suggested that financial reporting should move to six months instead of quarterly. So I'm wondering how you think about in terms of quarterly reporting versus annual reporting and how that affects behavior of CEOs?

• 1:39:59Speaker 00

  Quarterly reporting, especially in the public markets, is a net negative for companies, for investors. I think it's intended to provide transparency, but it ends up doing short-term thinking. What am I going to do to drive the results this quarter? And you see it all the time, right? I'm going to try to move sales into this quarter. I'll get a discount if you you buy my product this quarter. I need to like hit my number. Or I'm going to invest in something that I can do this quarter or next quarter to achieve it. So I think it fundamentally doesn't support what's best for the company and what's best for the investor. That being said, I think that you want someone, presumably I think the CEO can do it, managing the business more frequently than every six months or

• 1:40:43Speaker 00

  every year. Like if you only get to look at your financials or your performance once a year or once every six months, I think you're going to miss opportunities to make adjustments where needed in the business. But I don't think you necessarily need investors to do that if you have the right management team and you have confidence. I think the challenge is if you don't have the right management team, are you getting visibility into that and how to navigate it? I would probably err our side of not having quarterly earnings because of all the negative aspects. But I think you've got to solve that other issue in terms of are you managing the business close enough?

• 1:41:18Shane Parrish?

  Are there public companies or public company CEOs that you admire?

• 1:41:22Speaker 00

  Yeah, of course. I mean, I think there's businesses that like, I think there's different things that I'd say in terms of admiring. So I think if you look at like Danaher, that business, Mitch Rales and Steve Rales, and ultimately the CEOs that have followed, is remarkable. Both the performance of the business, the success of the business, how they've done it, their system, incredibly, I have a lot of respect for them. If you look at Nick Howley of TransDigm, like the performance, he's no longer CEO, but the performance during his CEO tenure was significant. I mean, remarkable performance and he had his own business system in terms of how he was doing that. I think there's other people I have tremendous respect from like what they've accomplished. I mean, if you look at Bezos built at Amazon, I mean, that's incredibly remarkable in terms of the world and the impact that it's had.

• 1:42:07Speaker 00

  I learned a lot from other people who have come before us in terms of how they manage and what they do. I think the pressure is there's a lot for any CEO, especially public CEOs in terms, especially right now, of what they're expected to have a view on, what they're expected to manage, what the consequences of having those views and everything, I think is particularly challenging for any CEO, but especially those in the public, public view.

• 1:42:32Shane Parrish?

  How do you think about the role of politics in sort of companies? Should companies have political opinions?

• 1:42:37Speaker 00

  I don't think there's a right answer or a wrong answer to that. I think you need leaders who are authentic and genuine. And if they are people who have views and share those views or want to share those views, and that's key to who they are in the business, I think that I can understand why they do that and the benefit of that. That being said, I think we're in a very divisive time right now. And I think sometimes people have a lot of views and they share those views and they assume their customers have the same views. And sometimes I think there's businesses where that may not be the best approach for the companies. By and large, my approach is I think that CEOs should be really thoughtful before they have views on topics publicly,

• 1:43:19Speaker 00

  especially if those are topics that their customers or their employees may have differing views. But if it's, you know, a founder or someone who has strong views, I don't think they necessarily have to cover those up either. So I think it's a little bit of a it depends answer, which is feels like a cop out, but it's hard.

• 1:43:36Shane Parrish?

  I think that's the best answer I've heard in a long time. Tracy, we always end these interviews with the same question, which is what is success for you?

• 1:43:44Speaker 00

  Yeah, I mean, success for me is really. Leaving things better off than I found them. And that is both in terms of the companies I work with, the people I engage with, my family, building my own life and building the lives around me, of the people around me to be something great, that they care about, that are special, that are impactful and that are sort of creating value for them and creating value for those around them.

• 1:44:06Shane Parrish?

  That's a beautiful answer. Thank you so much for taking the time today.

• 1:44:10Speaker 00

  Yeah, of course.

• 1:44:11Shane Parrish?

  Thanks for listening and learning with us. Until next time.