Welcome to our Blue Margin's Expert Insights Series. We're glad that you're here today. This series was established for the benefit of mid-market executives and private equity firms who are looking to better understand how to use data intelligence to put growth plans in action and create higher returns on investments. I'm Greg Brown, BI consultant with Blue Margin, and today on our show we host John Lanier, CEO of Middle Market Methods. John's consultancy provides value creation strategy, roadmap, and toolbox for growth, productivity, and cultural solutions to portfolio companies of private equity firms. The consultancy has helped more than 170 portfolio companies for over 65 private equity firms with more than 500 deliverables, Middle Market Methods engages client leadership teams with a road tested model to rationalize value creation priorities, formulate implementation plans, execute with the inertia of a thundering herd of bison, celebrate success, then launch the next round of prioritize initiatives. John's professional qualifications extend past his consultancy. He earned an MBA as well as a doctorate of strategic leadership to enhance his value creating credentials, an endeavor which led him to author the book Value Creation in the Middle Market Private Equity, available on Amazon. He became a certified Six Sigma Master Black Belt at GE Capital, is a change management instructor, and an Excellere Partners Project Expert of the year. John brings a wealth of experience from decades of working with private equity groups and middle market portfolio company executives. John, welcome. Glad to have you on the show here today. The pleasure is mine. I'm looking forward to the visit. Absolutely. And John, just to start us off here a little bit. Tell us about your background and what led up to the founding of Middle Market Methods. I will relate my my career to four quarters in a football game, and 20 year increments. So the formative years I grew up in a rural area, I learned values, work ethic, neighbors, teamwork, all that good stuff that modern industry consultants aren't a forging, trying to help people install, I was bred in it. The next 20 years was as an asset based lender- wouldn't trade it for anything in the world because I learned the integrity of cashflow, and working capital through the prisms of inventory and receivables. Third quarter is transitioning to fourth and is all about lower middle market, portfolio companies and private equity. And what's the transition? I am very much committed philosophically to paying forward and the knowledge transfer. So the things that I've learned which are found beneficial by my clientele are not lost when I take my dirt nap. Absolutely. That just strikes me as something that we can really relate to. Here at Blue Margin, knowledge transfer is one of the biggest pieces of any of our deliverables, in terms of ensuring that what we put in place is successful for the teams after we're gone, after you leave, so to speak. So John, tell us, you know, what's the process? What do you use in terms of evaluating? What improvements can be made in typical mid market businesses that you consult with? What does that look like? Where do you start there? Well, I go about it by asking questions. Let's call that Socratic technique, because you to have success at anything, you have to find something for which a leader recognizes is not up to par by their standards. They seek some assistance for some reason, perhaps rooted in a skill set issue or bandwidth. Then you have a basis for conversation. Invariably, it falls in four buckets. It's"what are we going to do?", which is a strategic comment. Then the manifestations of that are in the following three buckets- where's the growth coming from? Gotta grow. How do we keep up with it- which is an operational comment. Then finally, where's the talent coming from? So if you go about anything with a simple framework, it can keep you from straying off into the wilderness. That's what I rely on, a fairly simple formula. Yeah, absolutely. You know, I'm just curious in terms of those four buckets, and where companies usually fall in terms of what's keeping them up at night. What's the thing they're worried about the most? Do you see a theme there? Is it is it that you mostly encounter companies that are worried about topics in any of those four buckets, or does one stick out more often than not? Well, let me revisit the four buckets and just give you some examples, and I think you'll see how it is. You've got chapters in a book, and then you got paragraphs, or subsets of chapters in a book and analogous to that, for example, my best private equity clients make a habit of post close planning. So why the heck would you do that if you did all this investment thesis work? And the answers, pretty straightforward. To be aligned on the same priorities by the same rationale. It's something that simply should not be assumed because no diligence is perfect and perhaps some people in the portfolio company, were not even exposed to the process. And they have tribal knowledge, it is incredibly valuable, okay? So when it comes to growth, you have two subsets. It is either organic, or acquisitive, or actually could be a hybrid and often is. So where is it coming from? What markets? What products and services? What do I need to invent because it's not there, which is a product development signal. Or if It's a shortcut that can be rationalized by math, you try to buy it if it's available to buy. So those are two very vivid examples of growth. On the operations piece, there's this chronic challenge of succeeding bottlenecks, if you will. Those who are steeped in the in the discipline of lean manufacturing, for example(which is almost a misnomer, it applies to everything- lean can apply to services) is you never quit identifying and rectifying bottlenecks, because growth reveals the next one, and it is sort of like whack a mole, there's always got to be something that pops up, that needs attention. Then is not just addressing those things. It's being more productive. One of my passions is, are we measuring anything that speaks to productivity? Because that is the essence of a robust economy? How efficiently do we produce anything? Then the final thing on people? The subsets are where? Where do we find them? Which has marketing principles? How do we appeal to them, and qhat we offer here in terms of opportunity and culture, for example, so that they want to join, so It's not just finding them, they gotta want to join you. It's their decision. Then how do we keep them? This sounds oversimplified, but I could go into subsets of each of those, like a performance management is a big piece of the key. So it's a basic framework, and then drill down, but you got to have a sort of a north star before you put your sextant up to anything. Yeah, absolutely. To really understand the need before you start moving forward with that framework. Makes complete sense. John, given the current macroeconomic climate that we have here in 2023, and just what you're seeing with the companies you're consulting with, what are some of the most common challenges that are coming up just given what we're facing here in 2023? And perhaps, ongoing uncertainty about the economy and where we're going here? Sure. And I'm going to keep using the same framework, because everything that pops up that people have questions about will fit in that model. So let's just pick one by example. We first have to pay attention to the right metrics. The unemployment rate without being tempered by the labor participation rate can lead you to a false positive or false negative, depending on your perspective. So the unemployment rate per se, is in a reasonable range. However, the labor participation rate is the lowest it's been in since pre COVID. So what's going on there, and for some reason, people are not coming back to work. There are a lot of smart people trying to figure this out. So if your business model is reliant on people, you have to figure that out, irrespective of what the prevailing conditions are. By the way, if you can't figure it out, then you have to come up with a disintermediating option, which is automation. One of my favorite questions, by the way, that helps figure out where we ought to go is "what's keeping you up at night?" Because the leaders eat, sleep and drink this stuff, they have to. The easiest way to help somebody is when they want to be helped. The hardest thing in the world to do is help someone when they don't think they need any help. So I find it easier to knock out what is occupying their, their attention. And even if it in the macro sense may not be the biggest thing that arguably, ostensibly they should be focusing on- until you address that, we're humans, and we're wired for fight or flight. You got to figure that out before we can focus on anything. I could look in the mirror saying this, we all operate by some form of that phenomenon. So again- what, within the model, the framework, keep it simple, is occupying their bandwidth? Let's fix it. Even if it's not necessarily the most important thing at that moment is a gateway to get to the other stuff that may actually produce more value. It's just a necessary step and critical path. Yeah. You have to bring them along that path. You can't force them on that path. You do that by addressing what's keeping them up at night. Makes perfect sense. All right, well, switching gears here a little bit. John, I mentioned your book in my intro there, and honestly there's no shortage of material to cover in the book. It covers an exhaustive list of topics. So I had my work cut out for me in terms of picking where to go here. One of the things that stuck out to me in your book, one of the quotes, is "The portfolio companies leadership team must take ownership of the investment thesis and translate it into daily tactical execution. That ironically, they may not know it always exists." How often do you see this sort of lack of alignment between the private equity sponsor and the portfolio company team regarding the investment thesis and value creation plan? What are some of the first steps you take when you detect that kind of misalignment? There are several questions there, I'm gonna try to peel it back logically. First, it is the rule rather than the exception that there's misalignment. And that's not to panic. It's that what is the degree of variation between the perspectives? And the severity? Let's go back to something I may have injected earlier is that no diligence is perfect. The question is, what did we miss that;s relevant? And the only way you do that is by engaging. The functional leaders have the business model, however, the value chain is defined and saying, Well, What do you think, and we have to be careful about something else, we have to be careful about. Disparate dialects, I'll call it. And I can give you some easy examples. Private equity people use financial terms, they're professional investors, not the only terms they use, but they use things like value creation and investment thesis fairly frequently. And it may well be, especially if a founding entrepreneurs built quite a successful business and attracted these professional investors, has not encountered that term before or has never had. Cause to know what it means because they made money. They knew what they were doing. They had a successful business model had attractive enterprise value. Okay. So that's the investors problem to make sure that they understand what we're talking about. It's reciprocal, by the way, let's use engineers, by example, go the other way. Engineers use terms like overall equipment efficiency, which is essential to capacity, estimation, capacity estimation and realization, because you have to figure out things like downtime for maintenance on equipment. That's not necessarily a familiar term to investors who have not been around a lot of engineers. And depending on the verticals that we invest in, you can have some first encounters and I can speak firsthand to this. Another term is something called Failure Modes and Effects Analysis it's like, ten to the third power, how bad is this thing? The three criteria are- how often does it happen? How easily detectable is it? And how consequential is it? Well, look at the O ring from the space shuttle that blew up back in the Reagan administration. Only happened once, not easily detectable, but it killed everybody on board. So there are things that both parties would bring to a "value creation" conversation that is material and relevant. But if you've never encountered it before, you don't necessarily know what it means. Punch line to this argument- this is a big thing that you've tripped over, this is a big thing you've tripped over. The phenomenon is exacerbated by a seller, typically engaging an intermediary, an investment banker who speaks on their behalf, they help put together the message and why this is worth of X amount of money, which is the price we want to sell it for. The m&a firm may be very much steeped in the financial piece. And the seller basically said, well, that's what I hired them for- they're experts, and it's completely rational. At some point, when the deal closes, there may not have been that debrief of Okay, these are some of the nuances to be aware of. And it it can be assumed that it's assimilated and acculturated. And I assure you, that's a dangerous assumption. So that's why we do the planning thing. So a needy, needy question you've asked, and it doesn't lend itself to a soundbite answer. So thanks for indulging that. No, absolutely. John, I'm wondering how many times you've encountered someone you know, in the portfolio company leadership team, for example, that might be hesitant to kind of put their hand up and just say, "I'm not exactly sure when we're referring or using this term, like value creation, what that means for our company." I feel like there could be some hesitancy and maybe that's how you help in a way in terms of being a translator, and helping to expose where someone needs more information, or they need context, they're just kind of hesitant to put their hand up and say that they do. More than you might think. And demographically there's another angle of this, it makes perfect sense. So baby boomers are almost retired, but the demographic behind them- just think about baby boomers relating to the grandchildren on stuff like this. Well, your your mid level deal team investment professional, is a highly educated- tends to be youngish type of professional with an MBA from a really impressive school. If you don't believe me, look where Harvard MBA graduates typically go, it's either McKinsey or private equity, those tend to be the big two last time I look. Okay, there's a pattern there. So these are really, really smart people. But how often do you think that someone their grandparents age, or their parents age for that matter, that built this thing didn't necessarily have the same educational experience, but they, they did that they did in the laboratory of grit? They did. That's why I love entrepreneurs, they figure out how to do it before anybody tells them it's impossible. I love these guys, and the economy needs these guys (guys a unisex term). So how do you bridge that gap? Well, guess which demographic I'm in? So I can relate to them more as a peer and and the gatekeepers to the relationship for for consultants like me and YouTube for to the extent that you pursue equity sponsors, is it the deal team, usually that's prevents resources to introduce to the portfolio company to address a certain issue. So I can go back and forth and help bridge some of these gaps without necessarily leaving any fingerprints. And that's good word of mouth advertising, by the way. So absolutely, you're hoping to align teams, you know, and that can be invaluable. Sometimes you need that outside perspective to be able to detect those things, and then align folks around the same topic or initiative or whatever it may be. So that makes perfect sense. Switching gears a little bit. John, you describe yourself as a process nerd and ask your clients to go through these rigorous processes to better understand the why. Can you tell us why and how you walk companies through process mapping exercises? What are some of the insights that usually come out of these kinds of exercises? Yeah. The the single best investor I ever had the pleasure of supporting automatically pivoted to process mapping the business model as the ink was drying on close automatically, why? Okay everything that is marketable, hasn't customer. The question is, what do they want? What are they willing to buy? There is a value chain, complemented by supply chain that goes from ideation through creation, to get to marketability, and hopefully remuneration. So it's concept to cash some people call it. Well all these have steps and mapping This serpentine and in some cases, highly complex flow. It is very enlightening. And I can tell you, I'm going to be very careful about a hyperbolic statement. I have never presented a cross functional process map, I'll come back to That in a minute. I have never presented a cross functional process map to a CEO. Without some variation of the following comment, colon, we really do it That way. Think about That. Think about That. So what does it tell you? By the way, sometimes I'm asked to What should my org chart look like? Understand What they want. But that's the last thing you do. You start with What the business model does, and get logical functional chunks, and then your org chart is a byproduct thereof, because It's either creating value or enabling value, the difference being say, ops versus it, Okay, it is enabling ops creates value. So, when you go back to That, Here's What you learn. When you process map, you learn the flow, whether It's the right flow or not, remains to be seen. But there are some things That we could do That better. You learn if it has the wrong owners, the beauty of cross value, cross functional value stream mapping, you do Visio is you got swim lanes for owners, and you got rectangular boxes for tasks. And you look at where these boxes are, as it goes through. And you find out who actually does the work? Well, sometimes you find out the wrong people have it or they're not really trained to do it. So how the heck did That happen? We couldn't afford That skill set 15 years ago, and they've just had it ever since. Good Soldier, not necessarily the right answer today. It can be waste, we shouldn't be doing it at all. We can have not only nobody owning it, which happens, but more than one person owning it That happens. So you get all sorts of good information here. But Here's the punchline That might might be endearing to you as a technology professional. This is wonderful input to ask, What should our system be able to produce on demand? And it tends to be in about three chunks. I'm going to be guilty of oversimplifying here. There are inputs, and the longer the business cycle, the more important That is like how long does it take to solicit business before you write an order? Well, if you have no sales forces, and It's on the web, that's automatic, but What if you have boots on the ground? It's very complex, like a a software solution. You talk a lot, you have RFI RFQ bid got all This stuff, it takes a while, Well, how much activity is in This thing we typically call a phone to get down from suspect to prospect to customer That feeds my process, then I got a capacity problem. So the first one is, What is my pipeline telling me about whether or not I'm going to have revenue a year from now? Okay. Then the process piece in the vat, the chunks of value stream all have a critical path, typically. But does the right information tell internal customers and vendors about their pipeline, so That they know how to manage their capacity know how to order raw materials know how to alert people downline about problems, because they may have to adjust their schedule. All these from these are binary, if you will, they're bits and bytes That are data elements and can be part of a magnificent ERP solution. And at the end, you typically have the finance piece That tells you now investors very, very commonly are talking in terms of revenue, margins, EBIT, margin, great. That tells me if I won the game or not, and maybe by What extent how Well did I win the game, but in a in an initial investment, That the accounting system can be sort of Spartan like QuickBooks and on a cash basis, that's got to change and It's got to be more robust like a Microsoft product dynamics. And Okay, the opposite system What What if his job shop which means highly customized, Well, can you do activity based costing? What's That? Okay, my camera system accommodates all This stuff integrates. And it tends not to be as robust as it needs to be with the initial investment, as it must be. If you expect to exit within a reasonable amount of time, and for a nice price That reflects the quality of earnings, and what's robustly scalable, so That if the diligence doesn't catch it, it only goes downhill from there. Because It's going to be complex, protracted, and It's not cheap, and cash and or opportunity cost. It's a big deal to install This. So getting an early read on That is important. But I would say That process mapping, your original question is foundational to it. But look how much we just saw. We saw immediate waste, how it should be managed, What the system should do. And now we can go through RFI and RFQ enlightened so we know how to find if somebody's got a turnkey solution, or we got to think about middleware and, and What we can bolt on to This thing. So I think It's one of the most important issues and all business. I think It's at a high level of important and small importance in small business, because It's a bridge they have to cross. That's not criticism. They did What they could afford. But they're talking about being a much larger company in it simply harder to manage absent This stuff at your fingertips. Right, right. Absolutely. It makes perfect sense, John, it makes sense. A lot of points that I could take from your response there. One thing that really stuck out to me is you have to understand all of the processes of the business and how you want to optimize those- get that picture nailed. Then you can start looking for the systems and the ways to capture information and data that will in the future, tell you how those processes are going. If they're really sticking to the plan, and the layout and organization that you wanted to have for the business. Of course, if you come up with that, if you go through process mapping and decide, here's all the things we're going to change, it's important to have a way to measure and monitor that going forward so that you don't lose progress in six months, that it wasn't just a lot of good ideas and conversation that the leadership team doesn't have a way to oversee in the future. So it makes complete sense. Now, you mentioned one thing that I want to follow up on, John. In terms of, you know, how you approach tech diligence, information, diligence for this kind of business that has been, you know, grown organically and by a founder. And like you said, they've done what they can do in terms of putting systems and what works in place, they have a bridge to cross in terms of scaling up as a company in fulfilling you know, the investment thesis in the whole period. But in diligence when private equity firms are looking at tech and systems, What kind of risks are introduced, that maybe you've seen play out if firms don't thoroughly diligence these areas in terms of tech and systems? So I'm going to talk about the two biggest gremlins from my perspective about why I don't do this type of diligence. But I can help people with their statement of work for the questions that ought to be answered to know what they they really have versus what they need. All that type of diligence. The best vendors I've ever worked with and worked for, I should have said intermediary. Between the investor wanting to diligence and who they hired to do the diligence is what does it do? What does it not do relative to the investment thesis, which just over gave you a good soliloquy on that? What will it cost to fix it? You can come in between what with priority. So what does it do? What does it need to do relative to what we want? And What order should we fix This? How long is it going to take and how much is it going to cost? That is a technology roadmap? Okay. And it is a great value add a tremendous value add there's something that needs special mention is is one of the heads of the two headed monster we need a much deeper understanding even a paranoia about cybersecurity, That I'm not sure the economy at large understands to the extent it should. I was amazed by some of my behind the curtains, epiphanies about how many people had paid ransomware and nobody knew about it. Okay, that's that's a an indicator. It's real. And just the awareness training for spearfishing type targeting. It is is worth it. But Andy Grove was right, only the Paranoid Survive. And never ever, ever let your guard down on cybersecurity. You can't afford to they can wipe you out. Okay. And then the other thing we have sort of talked about, so I'm just going to give it a name of moniker but I'm not going to retread old term. It's having the right fingertip information in the hands with people who can do something about it. Do something about it, how can I possibly hold a production person accountable for productivity, a subset of which is quality, if they don't know anything about their capacity, their scheduling, the production rate, the scrap, they have to be informed, or else the bar from Drucker we're literally setting people up to fail. Okay, nobody reports to work fail. Maybe a small portion of people who are just masochistic, and like to be hurt, but I'm not one of them That I've ever met one. Nobody reports the work to fail, why should leaders set their their people and I think is unwittingly set them up to fail by not? If they have the information, not sharing it or need the information and not supply? Right? It reminds me of a conversation I had recently with a private equity firm, they were asking, "are we giving the right information to our leadership team? We feel like we could really bypass a question over do we have the right leaders in place?" I mean, not that you don't need to examine that sometimes. But their point was that if we had the right information in the right people's hands, similar to what you're saying, they would make the right decision. So our question is not so much now around the leadership and skill set, That always is going to matter. But we're questioning more now the information we're supplying to them, because we really feel like if we get them the right information, the right decisions will be made. And they're able to make those decisions, because they have That kind of visibility. This kind of ties into something else That I was gonna bring up, John, you know, broadly, when you think about business, intelligence and reporting, it can provide leaders That kind of visibility into how the company is performing or how their department is performing. And, you know, you can have reports and dashboards with all kinds of different data visualizations, and summarization. And in terms of financial reporting, which you touched on. This is, like you said, This shows us That we won the game, This is the sort of end result of all of our efforts and initiatives and work across a month or a quarter or whatever time interval, It's That end result. We look at opportunities here at Blue margin to provide companies visibility into the leading indicators of future financial performance. So teams can kind of course correct in real time, they're not waiting until the end of the month to discover That, oh, we could have we should have done a lot better in a certain area. Just curious how, how often do you see in consulting with your clients, That they're lacking visibility into the leading indicators of future financial performance, they might have That financial reporting, it might even be working really Well. But they don't have that visibility into those leading indicators. They could really benefit from that kind of visibility. So I heard two high level questions. But I'm gonna preface my my response by saying keep in mind, my target market is lower middle market private equity. It's a It's a really nice area of opportunity for value creation in relative terms, Okay. But you got to build a lot of this stuff, because it doesn't tend to come with the package. So I'm going to say is frequently I encountered the two questions I heard. All right. So one, if if I walked in and asked operators and by the way, my comments That come out of my Yap are sympathetic and empathetic, not critical period. If I walked in and asked him, Do you have the information you need? That is the wrong question, and will give me a worthless answer. And What do you think about That? If I walked into an Amazonian rainforest, and encountered a tribe for the first time That had never seen anybody like me ever? And I said, Would you like a car? You get What I'm talking about. Alright, so if you have to position by What Einstein said, It's more important to know, or ask the right question than to know the right answer. And that's where I'm going with This. If you had access to anything, you want it right now on demand to help you do your job more easily. What would it be? So It's not necessarily a data question, but you back into it. Another way to do This. And again, I have to read This the environment and the people to help craft the right question. So where are you spending most of your time on This stupid manual scheduling thing? Could you show it to you Okay, you and I both know That there are a lot of modules where it gives you a draft of This based on how you, you load it. And It's like press a button. Okay. So how do we get on their frequency and see the world? The way they see it through their prism. And if we can't do That, we're really not going to get to the more likely right answer. You also asked about the stuff relative to What I would regard as inputs, process and output metrics, Okay. And the great ERP top solution addresses all of That, not necessarily on the same platform, but you can integrate some of these things. And I will make a statement That I'll bet my professional reputation on That, depending on who your listeners are, they're gonna scratch your head, but hopefully they will think about it. Because their initial reaction is not if I had the in a long cycle business model, if I had the data I wanted, when I want it on inputs, like the pipeline, and ops, I don't care about financials, because I already know What they're going to be. Okay, there's a there's a mold undercurrents in That That I've got, whether It's activity based or standard based accounting. I've put a premium on cost accounting skills. I don't want to know I lost the game by 50 points after everybody's taking a shower in the locker room. I want to adjust my game plan at mid first quarter, something's not working right. football analogy. Forgive me. But the but the point is That the we live in a dynamic world. And how could we hope to thrive in business? Unless we we have That common denominator, I have What I need on demand relative to my span of control. And the code dependencies within our particular business models ecosystem, I've got to know That I've counted. And the message is more profound in a global economy. Because there there are places on earth That will always have cheaper labor than Western countries, always. The question is, when do I know That that's my only option? And where is it? But I want to go down swinging on how Well I can refine my processes, how productive I can make it get the waste out. And and my way we should ask our people, what's not working in their business models? Because they know. And he's Okay. Why don't we try This? And if they call for the solution, you get automatic change management. So we are sitting on tribal knowledge That is priceless, That if there's one takeaway on all This, if sea levels are listening to This, That have we asked the people closest to the work, What they would change, if they could could if they were empowered to do it, and why. And we might surprise ourselves What we learned. Yeah, absolutely. Absolutely. It's great stuff, John. Really appreciate you being here today and sharing all your insights with our audience. What's next for you? And how can folks get in touch with middle market methods? Well, if there's no other takeaway from this visit, then the following soundbite- I love this stuff. I pull for the little guy, I love this stuff. I'm one of you. So I always ask something to the effect of what keeps you up at night. If it's something that's in my strike zone, they know it? If It's not, I don't leave them hanging. I'm part of an unofficial nerd network, and I will not leave them guessing about their options, I will introduce them. So if that type of resource has any value for solutions provider, quote, unquote, the easiest way to find me is go to the website, www.middlemarketmethods.com. That's a mouthful. Perfect, John. Hey, thank you so much for being on the show today. We really appreciate it. The pleasure was mine. I thoroughly enjoyed this. Good luck!