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Today, we're taking a deeper dive into the world of private equity, how Lean can support a particular P.E. model, and the “Ownership Works” Initiative.
Damon Baker has been implementing Lean practices in various GM & VP-level capacities for more than 25 years, but it was at Danaher, where he worked for nine years, that his passion for true business transformation was born. He was instrumental in developing Danaher's company-wide Problem-Solving Process, and was inspired to create a new, comprehensive business system that enables organizations to improve on all fronts.
Over his career, Damon has demonstrated hands-on leadership and facilitation of 500+ kaizen events in close to 100 major corporations in 16 different countries.
Today, we discuss topics and questions including:
- Private Equity 101?
- Public vs. private vs. private equity?
- Two types of P.E. firms
- Time is up and the fund exits? Means they have to sell the companies?
- Has there been a shift in the PE philosophy on extracting value vs. creating value, or do some just do it differently / better?
- Mission over margin? Conscious Capitalism?
- Lean in private equity — What does PE care about?? Vs. Public Equity
- How did you get first get involved with PE?
- Coltala Enterprise System? Which tools to apply in which business? Priorities and problem solving?
- A lean practitioner working for a PE-owned company? What to ask or look for?
- Humility and confidence – Larry Culp talked about this
- Tell us about the “Ownership Works Initiative” — KKR and other firms (TPG) – it's not ESOP model
The podcast is sponsored by Stiles Associates, now in their 30th year of business. They are the go-to Lean recruiting firm serving the manufacturing, private equity, and healthcare industries. Learn more.
This podcast is part of the #LeanCommunicators network.
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Automated Transcript (Not Guaranteed to be Defect Free)
Welcome to the Lean Blog Podcast. Visit our website www.leanblog.org. Now here's your host, Mark Graban.
Mark Graban (12s):
Hi, it's Mark Graban. Welcome to the podcast. It is episode 458. It's September 28th, 2022. Joining me again. Today is Damon Baker. He was recently my guest in episode 454. You can find that if you wanna scroll down in the podcast feed or go to lean blog.org/454, today is a, a continuation of the discussion. I don't think you have to have heard the first part for this part to, to make sense. We're gonna take a deeper dive into some of the work that he does related to lean in private equity. And we're gonna hear about something called the opportunity works initiative, which is a, a really interesting approach to, you know, helping, you know, share some of the success that comes from a growing and successful company with all of the employees.
Mark Graban (1m 2s):
So if you want to learn more about Damon and find links to him and his work, you can look in the show notes for this episode or go to leanblog.org/458. Well, hi, everybody. Welcome back to the podcast and I'm also welcoming back Damon Baker. He was a guest recently episode 454 back on August 17th. He is again the founder and CEO of the firm Lean Focus, and he is also a private equity partner at Coltala Holdings. I I've encourage you to go back and listen to that episode. It was a great discussion. You can find that at leanblog.org/454 or scroll, I guess it would be down in your podcast feed wherever you're listening to this again, look for episode 454 and Damon's website and the Lean Focus website again is leanfocus.com.
Mark Graban (1m 57s):
So Damon, thank you for coming back on for little extra bonus conversation. How are you?
Damon Baker (2m 3s):
I'm doing well, Mark. Thanks for having me. And I will try not to wear out my welcome too many times in a row for you. So appreciate the opportunity.
Mark Graban (2m 11s):
Yeah, not, not at all. You know, we, we had so much to talk about last time. We didn't get to a couple of topics that I wanted to ask you about. That's not your fault. We had great discussion, but you know, we're gonna focus today on private equity and something called the ownership works initiative. So those are the things we're gonna cover here. Damon's really, you know, well positioned to kind of, you know, help educate us about this and, and connections to lean. And so, you know, maybe first off Damon, I I'm guessing, or, you know, there may very well be a lot of people in the audience. Who've maybe heard the phrase private equity, but don't really understand what that means as an ownership model.
Mark Graban (2m 51s):
So if, if you wouldn't mind, you know, give us a little bit of, you know, private equity 101.
Damon Baker (2m 56s):
Sure. So, you know, the, the differentiating model between a publicly held corporation and a privately held corporation and a private equity held corporation, I'll try to spell out the difference. So I think we're probably all most familiar with how a public corporation works. You and I can go to fidelity and we can make an investment into our individual stock accounts, or perhaps we have as part of a 401k or an IRA. We invest in these public companies like Apple and, and Google and others. And that one's pretty straightforward if you, if, if you own a lot of stock in those corporations, like a Warren Buffet, then you have a material vote in the, the say and strategy of, of the company.
Damon Baker (3m 48s):
And, and in some point you can own so much of the company that you can be an activist investor and you can actually shape who's on the board. And again, the makeup of the company and those kinds of things. So that's kind of publicly held corporation. And then the privately held founder led business marks one I'm one, some, some equity arrangement either it's, you know, a hundred percent owned by the founder or some equity allocation amongst the individual, usually our employees or, or advisors or something like that. And then there's private equity. So private equity is, is a situation. So kind of really just kind of two types of private equity at the beginning.
Damon Baker (4m 31s):
So there's a private equity firm that has a fund, which means that they solicit investment monies from their network, which are usually high net worth individuals that are interested in investing in investment opportunities that maybe aren't available to the public. And they basically say for this particular fund that we're raising, here's the amount of, of, of funds we need in order to secure the investment, to acquire the businesses that we'd like to acquire. And the monies in that fund will be tied up for a period of time, which is predetermined by the fund.
Damon Baker (5m 12s):
And it could be anywhere between three to seven years, which is pretty typical where those funds then exit and then a new fund is initiated. So that's one type of private equity. Then the other type of private equity is which is the, the type that I'm affiliated with as well is we don't raise a fund. Each acquisition is a standalone investment that we have to fund the funds for separately. And, and usually the way these investments are funded is through debt and equity, right? So they reach out to, to, again, high net worth individuals or your friends and family, your network never.
Damon Baker (5m 55s):
And we need to raise a certain amount of the, the equity for the purchase of the company. And then the remainder of the investment to buy the company is, is funded through debt. And there could be different types of debt, subordinated debt, and mezzanine debt and so on and so forth. But so usually a combination in debt and equity is what's used to fund an acquisition in private equity and, you know, going back to the old 1980s, Drexel Burnham and lamb bear bonds, you know, that kind of stuff there was. And even Danaher where I came from was, was a leveraged acquisition.
Damon Baker (6m 35s):
Yeah. There was the term leveraged buyout. Yeah, exactly. Common. Right? Yep. So they're using debt to fund the, to acquisition of these business businesses oftentimes aggressively with, without the, the willing participation in the people who are, you know, owning the company at the moment. That's not, that becomes like a hostile takeover. Yep. Yeah. And that's not, not what we do and, and not what most private equity does either. They look for willing participants in the sale process. Right. So, so then, then you know, the two types, there's a fund and then there's individual investment that can, you can hold these companies as long as you want, but private equity generally doesn't make money unless they exit these acquisitions at some point in the future.
Damon Baker (7m 26s):
And hopefully when they exit them, they exit them at a higher valuation or, or multiples of EBITDA is the terminology that's used in private equity higher than what they acquired the business for. So you may acquire a business at three X earnings and then turn around seven years from now and sell it at 10 X earnings. And you just made, you know, a return on your investment. So, and then there's all flavors of size of private equity. So on the high end, you've got the KKRs and the Blackstones of the world. And then as you move down, the, the spectrum in what would call like the lower middle market would probably be the opposite end of the spectrum, where the earnings of the businesses, there would probably be in the five to 20 million of, of EBITDA range, whereas a KKR or a Blackstone by companies that have hundreds of millions, of dollars of EBITDA as part of the person they're gonna be competing with the likes of publicly traded corporations for those acquisitions as well.
Damon Baker (8m 31s):
Right. And, and usually they're, they're not very secret when they become for sale. They usually go out to an auction type of process where they're using an investment banking firm like Goldman Sachs or, or others to, to broker the sale of the business. Whereas usually on the lower middle market side, a lot of the times you can get really good deals by just your network and people that you know, who are ready to sell at this point in their, their journey. And those, those are called off market acquisitions, which is what we've successfully.
Mark Graban (9m 8s):
So to that first type of that, you talk about where they have a certain window, the fund is done. Does that force the private equity company to sell the companies they're holding at the end of that timeframe?
Damon Baker (9m 21s):
Yeah. So they exit those, those, those companies at that fund. So there's this productive tension that exists like day one. You're already thinking about the things you need to do to sell the business they won, because, you know, there's a predetermined time horizon that you need to exit the ownership of these, these businesses. So the value creation roadmap, or the lean roadmap, whatever terminology you wanna use needs to be very precise and surgical about what levers you need to focus on. And maybe less about the cultural aspects and the whole integrated business system approach and more about how do we just move the needle on this particular investment.
Damon Baker (10m 3s):
So there's different appetite for a lean business system in the private public corporation that
Mark Graban (10m 13s):
When, when you talk about value creation model, that second type of firm, including koala holdings, it sounds like you don't have an arbitrary timeframe. You can hold, you can improve the company, create value, hold it, as long as it makes sense to hold instead of having kind of an arbitrary tick and clock is
Damon Baker (10m 36s):
That that's, that's, it's very accurate. The one thing you are running up against is the investors at some point, want to get paid. And, and typically in these situations, there isn't any sort of earnings that are distributed to the investors during the holding period. So your money is tied up for whatever period of time that you own the business. So if you hold this thing for 10 years and it's basically like you have your investment tied up for 10 years, so you may get antsy at some point to say, well, guys, you know, I don't have forever on the planet. I'd like to like to get some sort of return on my money. So it's not infinite, and it's not, you know, defined by the arbitrary, you know, time rises of a fund per se.
Damon Baker (11m 22s):
But, you know, I'd say pretty typical, like anything beyond seven years is like, that's a long time to own a business in the private equity world.
Mark Graban (11m 33s):
So it sounds like, you know, there there's different dynamics where, well, first let me ground this and talk about, you know, principles of The Toyota Way, going back to Jeff Liker's book principle one. And I think it's probably first and not list for a reason, talks about making decisions with a long term focus. Now, what, what do we mean by long term that could mean different things to different people, making business decisions for the long term, even at the expense of the short term. So public companies often have this dynamic of, we gotta hit the quarter's numbers and there's criticism of boy there's short term focus. There's all kinds of dumb things a public company can do to make the numbers look good. Now that might damage things for the future private equity.
Mark Graban (12m 16s):
It seems like the best of that might be a mid or long term focus. How, how would you compare some of those pressures? Is it that how, you know, what's your reaction to that comparison?
Damon Baker (12m 30s):
Yeah, I, I think the intensity level in private equity is far greater in terms of what have you done for me lately type of discussion in terms of the results. And there's a natural selection process in terms of prioritization that, that you automatically say no to things that don't fit the value creation roadmap by design, which is good because you have a, you, you don't have a lot of those conversations that you might have in a company that's public trade company that you find yourself distracted with initiatives that are all well-intended, but don't move the needle in a short amount.
Damon Baker (13m 17s):
So, so I like that aspect of it, but there's, there's trade offs to everything. It's like, if you're so focused on the outcomes, then maybe you miss the importance on, on people and culture and the sustainability of the organization at exit. When you go to sell this business and your impact on society and your impact in the community, all those things are noble pursuits and, and things that, you know, any public could trade a company right now is being pressured to do by investors and shareholders. Whereas in the private equity world, there's less of an appetite for, and less of a pull for because of just how the, what the investor's expectations are.
Damon Baker (14m 1s):
It's different. I wanna get my money out quick and, and make a return. And, and, but there, however, and it kind of goes in the ownership works topic that'll talk about later is there is a rising sort of movement and private equity where it's mission over margin, if you will. And, and there's also another term coined called conscious capitalism. So, you know, let's not just try to ring as much value out of each one of these acquisitions as possible to bleed them dry and, you know, keep this thing together with duct tape long enough to sell it and make money and then have it all fall apart. When we run to the bank, I think people have wisen up to that, especially the buyers.
Damon Baker (14m 43s):
Like they're more, they're, they're more adept at spotting when that's gone on. And, and I think think there's less of an opportunity in the private equity space. There was 10 or 15 years ago to, to get value creation just out of funny math, you know, financial arbitrage, putting debt on the company, doing short term sort of stuff, which is gonna hurt the business long term. And I think there's, the, the buyers are more intelligent to spot that kinda stuff. So it is naturally forced private equity care more about things now than they have in the past to make it more sustainable. Yeah. Including Al holdings where I'm a part of.
Mark Graban (15m 23s):
And when, when you say the buyers, do you mean the investors in the funds? There are the investors in the acquisitions?
Damon Baker (15m 29s):
No. I mean the, the next owner of the business.
Mark Graban (15m 32s):
Oh, after private
Damon Baker (15m 33s):
Equity. Yeah, exactly. So it could be another private equity firm that buys it from, from the previous private equity firm, or it could be a publicly traded company or somebody could get funds together and take the whole thing. Gotcha. And not have so,
Mark Graban (15m 48s):
Yeah, because on that exit. Okay. So what I hear you saying this makes sense people, the, the, the next buyer of the company is trying to make sure they're not buying something that's a shell of its former self. Like, you know, there's, again, I think this is that, that first model that you were describing of private equity coming in, like, you know, some of the major retailers, like, you know, I think Toys R Us was an example of like, you know, maybe it was a business that was facing pressure from Amazon and online purchases. But my layman's reading of, you know, some business press articles is that they were acquired by private equity, loaded up with debt, lots of money being extracted. And then it kind of collapses and people blame private equity, but it sounds like we, we shouldn't paint with too broad of a brush as you've laid up.
Mark Graban (16m 34s):
Not all private equity companies operate the same way.
Damon Baker (16m 38s):
No. And, and all those scenarios that you just detailed, you could probably find a similar scenario in a publicly traded company where a slash and burn CEO and his, or her incentives are financially tied to, you know, EBITDA or margin expansion, you know, anybody remember Sunbeam and Al Dunlap
Mark Graban (17m 0s):
Chainsaw Al he was a disciple of Jack Welch. Yeah. Yeah.
Damon Baker (17m 6s):
So, I mean, so you have it in that, that world too. So I, I think again, you know, people are savvy buyers. They, they know when the car's being held together by duct tape and, you know, there's Bondo in the door panel, the accident that happened.
Mark Graban (17m 25s):
Right. So how does lean tie in then to this value creation model? Like how, how does koala holdings, how do you use lean with the companies you've acquired to create value to the business position? A
Damon Baker (17m 49s):
First real introduction into the private equity world was in 2005, working for a turnaround consulting firm called Argo Consulting and private equity. Again, here's different flavors of private equity. Some private equity firms have an internal operations improvement group, kind of think of it like a DanaherSBusiness system, office, or a Toyota Production System office. And they're man chartered with working with these businesses that they buy to, to improve them. And sometimes depending on their size, they may not be able to afford that. So they outsource it to consulting firms. And that's what Argo did. So we worked with firms like a, which is a rather large PE firm along the spectrum, closer to the KKR model and the Blackstone model.
Damon Baker (18m 38s):
And they're very interested in value creation as it related to operations improvement. So they've already defined value creation, least partnering with a firm like ours as being in the operations realm, only the four walls of a factory, and then extend that to the supply chain. So we'd go in and, and we do a lot of what you would expect doing to improve labor utilization, which meant a lot of times Kaizen to cut heads. What, you know, looking back on, I, wasn't always proud with how that was handled, but again, it's private equity. It's like, you know, there wasn't a good sort of policy and, and sort of cultural stance internally around what do we do with people that are displaced with improvement activity, which made my job and our job even harder to convince people that Kaiser was, was a good thing, right?
Damon Baker (19m 35s):
So then you are plugging into what PE refers to as a value creation plan. So we have like a swim lane where it's operations, labor, arbitrage, inventory improvements, quality improvement, warranty expense, and go down the, the items of the P and L as relates to the operations responsibility. And we would be helping to accelerate all of those gains that were identified during diligence as an opportunity and making those opportunities uncovered during diligence a reality so that they're bankable. So that at exit, those are now things that we can count on as, as savings in the business or cashflow improvements in the business. So did that for two years and then, you know, got to Danaher and did, you know, push pause on the private equity involvement, other than, you know, when Danaher was trying to buy businesses, they would oftentimes run up against other PE firms bidding for the companies.
Damon Baker (20m 30s):
So then after Dan, I got involved with this Coltala group. So the way it works in, in our group is our lean focus team and myself are the portfolio operations improvement people. And we are involved in the entire life cycle from diligence to creating the value creation plan, to post acquisition integration and value creation activities, and all the way up to exit, but we haven't exited yet. So we've, aren't there. So we don't know what that will look like yet. So we identify during diligence what the value creation opportunities are. And they generally fall into three high level buckets, you know, growth related activities that are gonna drive organic growth and, and even inorganic.
Damon Baker (21m 18s):
So acquisitions that you can make then profit or, or margin expansion opportunities, EBITDA. And then the third leg would be working capital or cashflow improvement types of, of opportunities. And all of those opportunities are gonna map back to tools or approaches that need to be leveraged inside the business system in order to make those things real. And so lots of Kaiser events have to happen, lots of projects and so on, but then there's also just capabilities that need to be installed in the business in order for the business, just to continually improve over time, strategy, deployment needs to be installed as a process and a discipline daily management needs to be installed as a process and a discipline and all the affected departments, not only just the four walls of the factory.
Damon Baker (22m 6s):
So you're teaching the organization oftentimes a new way of running their business. That's foreign to them. Not that they haven't solved problems. Of course they have, but introducing like structured problem solving and metrics and, you know, putting together an action plan to close a gap, it's like calculus sometimes to people. Yeah. So then we provide the support. We train in the tool we facilitate, we push, we challenge, we set high expectations, but ultimately we're trying to affect the business results and then make that change real so that the, the P and L reflects the process improvement made. And, and in parallel, you've hopefully changed.
Damon Baker (22m 51s):
Somebody's thinking along the way, and you're teaching them how to lead their business in a way that would be congruent with how a lean leader would behave inside of a, a lean culture. Does it always happen to your, you know, desired level satisfaction? No. And I think in the PE space, you sort of have to pick your battles too, where maybe in a Danaher, you have this top down organization saying thou shall do all of these things. And they're non-negotiable, as in the PE world, you're working with a founder who's reinvested into the business and this critical to make the strategy go. You have to sort of pick your battles in which thing disagree with, because you're riding that horse to the finish line five to seven years down the line.
Damon Baker (23m 35s):
Mark Graban (23m 36s):
So is there a decision point for the PE firm of acquiring a company? Are you acquiring a hundred percent equity? Are you leaving a founder in place who still has some equity where you're trying to find alignment and growth and improvement together? How often does that person say, Hey, that's my exit? You know, I've built this it's time for me to retire. I'm gonna sell it. How often do those things happen?
Damon Baker (24m 5s):
Yeah. I mean, that is a, a really important part of the criteria of, of the types of businesses we target too. So when you go into the situation, you don't know what the ownership situation is on the ground. When you, when you, when you initiate contact with the potential acquisition. So let's say it's a founder, led business. He or she has grown this business over time. They've got their thumbprints on everything. They are the business in effect, if you will. And they are at a situation in their life. And, and usually it's like, they wanna preserve their legacy. So they'll say things like, you know, I want the culture to be intact. I don't want people to be, let go.
Damon Baker (24m 46s):
So they have a lot of requirements in order to sell. And they want to hear from the PE firm that they're going to honor those things, but they themselves are wanting to take chips off the table, meaning they wanna sell their business and, and live a different life than they've led for the prior decades where they've done work their ass off to get where they are. And, and that's a noble outcome. And a lot of founders choose that path. We as a PE firm, if, if we're buying a business and want to continue that relationship with somebody, it's great to have a founder that wants to reinvest, and we call it taking another bite at the apple.
Damon Baker (25m 26s):
So they get paid for the valuation of their business up until this point. And then they're invited to stay on. And oftentimes they, they just remain the CEO and they're reinvesting a significant piece of, of equity called rolling over equity into the new entity. So they have a significant enough share that their interests are aligned with the PE firm. So they want to embrace this lean business system, thinking this value creation roadmap, because the exit multiple they're gonna get five to seven years down the line is nothing compared to, you know, this one they got now is nothing compared to the one, five to seven years from now. That could be, and we're talking about generational wealth at that point.
Damon Baker (26m 7s):
And that's, that's the carrot that keeps the founder. And we like that second situation better than the first one. And there's a third situation, which we've done and, and haven't been too successful with. And we just sort of problem solve this yesterday, actually kind of postmortem is, is that founder takes the money off the table. And then you think you can bring in a leadership team from the outside that take this business to a new place. I'll just imagine all the cultural challenges you're gonna face it's like outside team comes in. We know this industry inside and out. Well, the employees that remain are probably aligned to the prior leadership.
Damon Baker (26m 47s):
And then there's this sort of internal fractions that develop that you have to be mindful of. And at the end of the day, it's like processes don't have feelings, people do, and you gotta navigate people through that change management process. And I think in private equity, oftentimes that gets discounted as being a real thing when it's an absolutely real thing. Right. And it's caused for why it change doesn't happen.
Mark Graban (27m 11s):
Yeah. And so, you know, for anyone who goes and looks at the Coltala Holdings website, it's just coltala.com all link to it in the show notes, you know, you see Damon on the team listed as a managing director / Coltala Enterprise System. So it sounds like that's your domain, that's your baby. If you will, to define, develop that kind of again, thinking back to the other episode where you talked about how important it is to have your business system, it sounds like you you've developed that based on your past influences and yeah. How, how is that different? Do you think in a private equity kind of model?
Damon Baker (27m 51s):
Yeah. I, I think you have to be mindful that each one of these businesses that you are acquiring is different. So at a high level it's like, does this company make something or are they a service business? So that's kinda like the first decision tree. And, and by Def, you know, by the answer to that question, it dictates which tools in CES apply or not. So, you know, do we really need to talk about setup reduction in manufacturing context when we're talking about a service oriented business that does he ventilation air conditioning as an example. Right. So, so differentiating.
Damon Baker (28m 31s):
So there, so there's a, a menu of tools available as the Coltala enterprise system, but we're very thoughtful in which tools we apply and which business based on the nature of the business and maturity wise and priority wise, what we need to work on right now in order to affect the value creation needed in your one year, two year three. So it's less of, we need to do all these things. Well, maybe kind of like sometimes in a corporate world where there's a business system, like we have to do it all well. And none of it sort of be half halfhearted. You're more precise and surgical about it in PE context.
Mark Graban (29m 13s):
Yeah. So you mentioned different tools, but then, you know, even a couple of minutes ago, you talked about within cold, as you said, we problem solved at that. It sounds like a lot of this is problem solving the business at a high level. Right. Is it a revenue and growth challenge? Is it a, a cost opportunity, quality customer service, just to look at like, what, what are the barriers, what are the causes of that business not being as successful as you think it could
Damon Baker (29m 41s):
Be? Yeah, for sure. So you think about cold as a holding company, they make or sell nothing and you one could argue that, you know, they're, non-value added, they probably wouldn't like that. But so, so, you know, the way private equity works is they get a management fee. You that's, it's not significant, you're not going to retire off of management fee retire off of the exit value of blowing it. So when I joined these guys, they were, they were, they had a thirst for understanding how to use a lean business system to drive value creation in the private equity space. And the reason they had this appetite is they had 20 years of PE experience.
Damon Baker (30m 24s):
And they've watched sort of an evolution happen in the industry where just hundreds, thousands of new PE firms cropping up access to capital is not the problem in private equity. There's a lot of money out there waiting to list it, sitting on the sidelines, but, but what they learned, which led them to this idea that CES is, is meaningful, is that they couldn't control the outcome. Meaning the, the results that they got at exit were a function of really the leadership teams that they were buying, or the lack of leadership teams that they were buying. So you had some really good ones at exit, some really crappy ones.
Damon Baker (31m 5s):
And on average, you hoped that you had a better return than the stock market, which, you know, looking back the last 20 years, one could make a case and say, would we have been better served investing in apple or Danaher stock, real stock, right. Did we really, for all that work that we did, was it worthwhile? So they wanna get out in front of that and say, look, there are companies out there who have a repeatable business system model that have shown that they can drive shareholder value creation in a public space, Danaher, UTC, Honeywell, you know, go down the list of people that would attribute their success to their business system. Why can't that be replicated in PE? And why can't that be replicated in lower middle market PE and, and even in PE you can point to some really good examples, like Vista private equity, just buy software companies has a, a business system.
Damon Baker (31m 55s):
And they, the playbook, every time they buy a, a software company and it's just like work, right. And, and the returns that they generate are far greater than their peers or their, or their comparison. So I don't think that's rocket science. I think the challenge is convincing people who may have grown up in like the investment banking space. Who've never worked in a, a company with a business system have never manufactured anything that these ideas can work in an area. And you're talking to like Harvard MBAs, Wharton MBAs, who are really successful and have a lot of money in convincing that they may have to do things different, right?
Damon Baker (32m 35s):
So this whole be a humble leader, you know, becomes challenging in a space where people have lots of dollars in their bank account,
Mark Graban (32m 43s):
Damon Baker (32m 43s):
Thankfully like this, this group that I'm, I'm working with at koala, they were just avid learners. Humble, wanted to learn. We, we taught problem solving. We taught strategy deployment. They're participating on events, they're pushing the broom. They're down on their phase. They're scraping the floor. They're doing everything that, you know, Larry Culp would say at Dan, we need to do as leaders. They're leading by example. So they're drinking the Kool-Aid right. And right. And the culture then is, is permeating the businesses that we buy because they see that in order to be successful here as a, as a hold co a holding company, we need to act this way, which sure. That's the idea.
Mark Graban (33m 22s):
So if somebody listening is, let's say looking for a new opportunity and they're, they're scouting out different jobs to be an internal lean facilitator, or let's say they've been an operations manager or a plant manager, they're looking for a new opportunity. If somebody finds a company and it says in the description, private equity owned, it seems like there there's certain key questions of, of, as you've already touched on Damon looking at like, well, what type of private equity company is it? And are, are there other key questions that somebody should ask to sort of get beyond something that sounds good on the surface, like to, to make sure they're going into a situation where if they share the values of, you know, lean leadership and like you said, not ING people out of jobs and like, what, what are some things people should look for asked to make sure they're getting into a situation that, that meets their own purpose and values and way they would want to go about things?
Damon Baker (34m 25s):
Yeah. So let's say that this individual is ha has an appetite to learn through development and through participation and continuous improvement opportunities and, and these kinds of things. So if you're going into a situation that's a PE held business, you wanna understand on a scale of one to 10, how active the PE firm is in driving value creation inside of the businesses that they acquire. So I like just keep it really simple 10 to one. You know, if, if Danaher were a 10 in terms of how involved they are in the companies that they own, you know, they're, they're kind of off the charts.
Damon Baker (35m 5s):
Berkshire Hathaway is a one, like we buy you and just leave you alone. And we expect you to write a letter once a quarter, that's it. And we don't go to your reviews. We don't question your strategy and we invite you to Omaha to participate in that's about it. So, so if you have an appetite to learn a lot through, you know, portfolio value creation opportunities, and there isn't a group that does that, because they're very hands off, you're gonna find yourself. And you're not even gonna maybe even know at times that you're in a different ownership situation, because it doesn't, doesn't land down to your level of the business. Right. So just understand how involved they are is one and, and the, the fun versus long holding period is a, is a second important question.
Damon Baker (35m 51s):
So if, if you're coming into a business, my question would be, where are you at in the cycle? So are you three years in, on a five year fund? Cause then, you know, you got two years and the amount of, you know, when you, when you go to somebody with a two years left on an investment and say, Hey, mark, you know, I need $2 million of CapEx to buy a new piece of equipment to improve our on time delivery. You're thinking about the exit multiple, and you're gonna be like, can you hold it together for another don't for equipment, right? So you may be let down when you are coming at this from a long term perspective, and they're viewing this as I need to exit and maximize return, right.
Damon Baker (36m 39s):
So where are they at in the cycle is, is another one. And then the third one, I would say, help me understand what is the value creation model? What is the standard work you use to, to drive improvement in the businesses that you own? And it kind of relates to question number one. So if, if they are hands on, question number two is, well, walk me through the methodology you use to be hands on. And if it's only operations focused, meaning it's labor takeout, right? We're runaway, you know, those, you start to see like how comprehensive it is to know are they really just focused on cost and cost takeout on short term?
Damon Baker (37m 21s):
Are they more mission and margin create culture that's sustainable when we exit this business? And so on right
Mark Graban (37m 29s):
Last time, you know, we had a really good discussion. You, you know, shared some thoughts and, you know, strongly held opinions and views that, you know, lean people need to better understand financial statements and the business metrics and drivers of, you know, why, why are we doing things?
Damon Baker (37m 50s):
And I put myself in my group too, by the way.
Mark Graban (37m 53s):
Sure. And I, I could understand that all better, even when it comes to hospitals and their financial statements, but is, is there, is there more need for that financial savvy, if you're gonna be working for a private equity owned company or at least willingness to develop that?
Damon Baker (38m 9s):
Yeah, it is. It is probably that on steroids, cuz you know, again, think about where these people are coming from. From a background career background standpoint, they were analysts, they were brokers, they were investment bankers. They were, you know, PE summer interns where they're looking at spreadsheets and doing, doing proforma models and things like that. So, so they are in the details of the P and L L and a lot of the questions are very financial oriented questions where it's like, Hey, talk to me about this variance here. Or talk to me about why margin is eroding on this product line, not unlike what you would expect in a well run company, but it's, there's more of a pronounced focus on that than, and oh, by the way, talk to me about the process you're improving that leads to that outcome.
Damon Baker (39m 5s):
That part of the conversation doesn't happen as much as I'd like it to in private equity. Right? So, so there is sort of a, you know, kind of the, the needle pegs more to the financial side than the process can financial side, there isn't an equal mix all the time. So it becomes even more important to understand that stuff, if you're working as a CI leader business, if you wanna with the, the be conversant in those sorts of topics and titles topics to your continuous improvement priorities so that people can see that you're aligned with their investment interest. Sure.
Mark Graban (39m 45s):
And so, you know, I, I would invite people, you know, I think it's really interesting to look at the cold holdings website at least, you know, listed right now, three very different companies on the surface choice health at home, you know, home health, hospice, things like that, Walker air plumbing and electric in the DFW area. And then my fitness store.com and you know, you, you can go and it's spelled out on the website, you know, in investment criteria and you know, I think it's interesting also, you know, to look through and say what you know, values, what, what, what are the values? What, what, what do you stand for? And, you know, imagine for anybody looking at any PE firm, you know, there's always that question to ask, how does that language really translate in the reality?
Damon Baker (40m 31s):
Yeah, so, you know, I, I did a lot of diligence before I, I signed on to work with Tal and the two founders, Edward Crawford, and Ralph Manning. Those values you see on that page are what they espouse and believe and S every day and their interactions with people, not only in their personal lives, but in the business world. So their interests, their values were aligned and congruent with mine. And, you know, if I were to add a fourth question, I know I probably shouldn't go back and rephrase my answer. It's like, understand what the values are for the PE firm. And, and I think you'd be hard pressed to, when you look at a lot of these PE firms, they actually don't articulate what those things are because they don't think of their, their company maybe as having a culture of values that are important in terms of how it drives the decision making.
Damon Baker (41m 24s):
So, so that's, yeah, that's a, a key piece for me. Why, what attracted me to the business and then each and every day, you get to demonstrate whether or not those things are meaningful to you and the decisions that you take and more importantly, how you act and behave. So,
Mark Graban (41m 40s):
Yeah. Yeah. And, you know, I think it's interesting just looking through this list. I mean, there are some that every firm might claim, like, you know, you know, being data driven, like who, who, who, these days wouldn't say their data driven, but then you see values here around blameless culture, humility, you know, high levels of integrity and transparency. And those are things that might not be the values of every business leader or every PE firm. So it's just, it's interesting to see just cherry picking from, you know, a list of articulated values there. It's really interesting to see.
Damon Baker (42m 17s):
Yeah. And it, you know, it's, and it's not lip service too. Like we start every meeting with one of those values in how we either lived, or maybe didn't live that value in how we could get better the next time. So there's like this constant reinforcement of the message inside of the work that you do that otherwise just becomes the words on a wall or on a website, this case. So I think all values are aspirational. It's like these are standards. We try to aspire to hit. And on some days you'll be on your best behavior and on others. But on balance, you hope that more days than not the organization lives, what it says is, is important. And it's up to leadership to hold people accountable to the standard and hold themselves personally responsible to adhere to the standard more importantly, right?
Mark Graban (43m 4s):
Yep. Those PDSA cycles of life or of business of identifying, if a gap is identified the difference between ideal and where we are, let's acknowledge that let's understand that better. Let's move forward in ways that close that gap.
Damon Baker (43m 20s):
For sure. Yeah. And that, that takes humility. When you have to that maybe you had done something in that.
Mark Graban (43m 26s):
Yeah. Well, makes me think of a different podcast series. I do my favorite mistake. I'll hold up my mug here of, you know, again, like, Hey, we're all human. We all make mistakes, but learning from those mistakes or those gaps or, or short moments where we fall short, I think is really, really key.
Damon Baker (43m 45s):
I, I think I can make an eight hour episode outta that.
Mark Graban (43m 51s):
No, you, no, I was, no, you're not overstay your welcome, but we could do an episode of that sometime too, cuz I, I do appreciate when people, you know, it's this combination of, you know, it takes strengthen humility to, to be willing to talk about mistakes or gaps and always appreciate that when, when we can have conversations like that.
Damon Baker (44m 14s):
Yeah. Larry always said, Larry colo said humble, but confident, you know, the right balance of humility and confidence. So it's not like humility, isn't being deferential and being meek and sort of a wallflower it's, I'm also confident in what I believe in, but I'm not you knowing the football on the one line,
Mark Graban (44m 37s):
Right? Yeah. There's this balance. It would of let's say for example, I have the confidence to try a new idea, but I have the humility to realize I might be wrong.
Damon Baker (44m 49s):
Mark Graban (44m 52s):
So one other thing we wanna talk about here today, you know, and, and thank you Damer for giving us an overview of, you know, some examples of different ownership models, publicly held companies, privately held companies like Kinaxis, I'm wearing their shirt today, you know, and then private equity owned companies. I think one really interesting model is when you have employee owned companies and different models for that. And when you talk about the ownership works initiative, it seems like it's sort of in that category and maybe there's, there's some overlap in different dimensions here, but, but tell us about the ownership works initiative and, and what that means in terms of company culture and employee partnership.
Damon Baker (45m 39s):
Yeah. So it's, it's not a ESOP employee stock owned company where, you know, 100% of the, the equity and the business is owned by the employees and there's only, you know, a certain amount build all that kind of thing. So it's not that. So, so I think so ownership works. It's a nonprofit organization and their, their charter or their, their mandate or their aspiration, if you will, is to engage the workforce inside of these companies, you have to, to make them feel like there's skin in the game, man, there's an ownership piece into the company, right?
Damon Baker (46m 22s):
So you think about, you know, let's say it's your business and every morning you wake up mark and, and of course you're motivated because you know that every activity that you engage in and every extra hour, a minute of the day that you put in will, will come back to you in some sort of return, which, you know, you're gonna be the benefactor of the financial. So, so then those, those same founders get frustrated when they can't unlock that same level of engagement inside of people. And it's the answer I tell those people, it's like, it's your company. They're never going to get as motivated and excited by something they, they don't own. You're, you know, you're, you're treating them like employees, not, not owners.
Damon Baker (47m 4s):
That level of commitment will never be what you want it to be. So I think this ownership works as an attempt to align the incentives with the workforce so that there is something in it for them to want to engage in continuous improvement. So KKR in particular, which is one of the PE firms that have signed on to ownership works has designed the acquisitions to set aside a pool of equity for the employees of the businesses that they're acquiring and, and it's, and it's, and it's not insignificant either.
Damon Baker (47m 46s):
So you can actually go through and, and watch some of the videos where they film town hall meetings for like ch I overhead doors, which was one of their businesses that they just exited. And when Pete STAs who leads the KKR industrial's platform is announcing the average paycheck that all these employees are getting. You see mouths literally like gaping open and falling on the floor, not realizing like how much value creation that they've realized through their full scale adoption engagement and participation in, in all the value creation priorities that they've identified over the, the period of they own that business.
Damon Baker (48m 28s):
And it's an engaged workforce because they're making decisions like owners make decisions because Hey, if, if I could save some money here, that's more money that's gonna, so they, they connect the activity to the reward and, and they try to draw in the timing of that as, as much as possible. And then just remind people at these monthly town halls, like, you know, here's what your invests worth, here's what your investments, what your invests worth. So that, that creates the, the engagement. So the initiative ownership works is, is a recognition in our us society that maybe capitalism hasn't benefit at all. And if you look at average CEO pay versus, you know, the hourly workforce or wage, it's like, it's, you know,
Mark Graban (49m 14s):
It's a growing gap.
Damon Baker (49m 15s):
Yes. Nothing but separate. So this is an attempt to try to rectify some of that, not the only answer obviously, but it's an attempt to that. And it's a pledge where not only PE firms, but ever publicly or held corporations could sign onto and, and commit to make equity ownership, part of how they engaged their workforce by making them shareholders. Yeah.
Mark Graban (49m 43s):
So, cause I mean, how often have we heard the phrase? We want employees to think like owners, like, well, let's not make that a theoretical exercise.
Damon Baker (49m 53s):
Yeah. Like an owner.
Mark Graban (49m 55s):
Well, and so when you talk about setting aside that pool, or, you know, the website here, ownership works.org, encourage people to check it out. One of the case studies featured on the front page, I'm gonna go watch the video after we're done here. It's about Ingersol Rand. Like that's a pretty old guard. Like there's a long history, like, you know, in lean
Damon Baker (50m 17s):
Mark Graban (50m 17s):
Right. Of what with lane of,
Damon Baker (50m 19s):
Of also doing lean too, by the way.
Mark Graban (50m 22s):
And you know, it says here, you know, the company made all 16,000 of its employees, owner of the company. So is that initial equity pool? I dunno if gift is the right word, is it given to the employees as part of their compensation then? So the right
Damon Baker (50m 39s):
Word. Yeah. I don't know the, the internal strings attached, whether or not there's a vesting period, you know, I wouldn't surprised if there was, and then, and then further, I think Ingersol ran in that example, even did another grant of, of equity down the road after the initial one as well. And again, I don't know, every organization's different whether or not they vest a hundred percent at, at allocation or there's a vesting period over three years or five years, whatever it is. But
Mark Graban (51m 13s):
Yeah, but you know, as the website here, you know, points to the need or the opportunity building wealth for all within the company and you know, some of the goals here, you know, it talks about, you know, the power of shared ownership, excuse me, creating economic opportunity, advancing racial equity. So there there's that idea of wealth creation for all of, of going across all dimensions of society and an employee base and then, you know, enhancing employee engagement. Right? So a lot of this does sound very similar to what we might describe as lean or concepts of respect for people and, and that engagement piece and, you know, a culture where there's, there's alignment where we're part of the same team, as opposed to, like somebody mentioned the movie Office Space earlier, like there's a famous scene there where, you know, Peter Gibbons is telling the consultants, you know, basically like, well, you know, why should I put in any extra effort because I don't make any more money I'm, I'm paraphrasing.
Mark Graban (52m 13s):
But, you know, he says, you know, basically it's not that I'm lazy, it's a matter of motivation or something like that. Yeah. We can create that alignment where when a company has an exit, everybody gets a windfall from that if they've contributed to the improvements and the value creation.
Damon Baker (52m 32s):
Yeah. Yeah. And I think there's just too, there's just a lot of misunderstandings about the economy. So like the stock market is not the economy, so, and when people say, you know, geez, you should be really happy because the stock is doing well or the stock market's doing well, well only like 58% of the United States owns a share of stock in a company.
Mark Graban (52m 57s):
Damon Baker (52m 57s):
So, so when we talk about that, we're really talking about, you know, like little over half the company that's in that position and half that isn't, so that racial equity piece won't solve all that equation, but it helps to. And then, and you can even take that 58% and go, well, what's the 80 20 of that. And of all the shares held, you know, what's the, what's the number of people that own the most stock it's, you know, it's probably not you and I, right. It's more, more buffet and, and others, you know, that the, the ownership. So, so this is again to close the, the, the, the 42% gap on the other side ownership works helps, helps with that and aligns those, those interests and creates a, an avenue for wealth creation beyond just, you know, the, the annual merit increase or bonus if you will.
Mark Graban (53m 47s):
Yeah. Yeah. And it's, it's, I think it's exciting to see leaders and organizations that, you know, bucking some past trends and, you know, moving things in this direction. I mean, I, I think of, let's say, you know, Bob Emiliani and others who, who, who describe lean, I think Bob in, in particular describes it as progressive management and that, that word progressive can be a loaded term and don't mean for it to be political, but progressive in terms of like, you know, moving forward, doing things differently based on some, some values that, that go beyond just the bottom line or the wealth of a few.
Mark Graban (54m 27s):
I, I, I think that's interesting as a way of, you know, how do we prevent people from giving up on capitalism as you raise you, raise the point capitalism has, has, you know, there, there, there are criticisms, but let, let's not let things get to a point where people are willing to throw that aside. And I say that as an MBA and somebody who's started a company and I would call myself a capitalist, but, you know, I, I think you raised, you know, kind of the interesting phrase there earlier of conscious capitalism. Yeah. How do we have mission and margin?
Damon Baker (54m 58s):
Absolutely. Yeah. That's, that's the key and, you know, I think it's, it's one of the, it's one of the, the secrets to unlocking real employee engagement. So, you know, you go to most organization that is, if not the number one topic it's in the top three, like how do we improve employee engagement and, and always turn back on them and, and, and talk about employee engagement is really a function of employee equity, meaning being treated fairly. So when not equity in the, the form of ownership, but just equity, how you treat people right.
Mark Graban (55m 36s):
Damon Baker (55m 37s):
Yeah, exactly. You walk into an organization. And the first thing you notice in the parking lot is there's a reserve space for the president and his, or her direct reports that is a cut against being equitable. And when, you know, the hourly workforce has had their pay frozen for years yet, we've seen executive compensation gone up, you know, over that same period of time, is that equitable? And are we surprised at why people aren't engaged in totality because feel like they're being treated differently, then, you know, maybe it's left few that all the spoils go to. So it, it's hard to ha talk about engagement without also having a very frank open and candid conversation about compensation and reward and performance and all that kinda stuff.
Damon Baker (56m 24s):
And it, it seems to be the conversation that most companies don't wanna have, because it requires financial changes to be made. And somebody, somebody gives up something to give something, which we all we all don't want to do. Right. The not in my backyard sort of mindset. Right.
Mark Graban (56m 41s):
But if we're creating value, it, it's no longer a zero-sum game.
Damon Baker (56m 46s):
Mark Graban (56m 47s):
But we can all benefit from
Damon Baker (56m 49s):
It's a leap of faith. Yeah. And I think, you know, more of these companies like Ingersoll Rand and C I, where we see that the model works, the less of a leap of faith people will, will construe it as yeah. So, yeah.
Mark Graban (57m 1s):
Well, Damon, I'm, I'm, I'm glad you're willing to have, you know, the conversation about these topics and, you know, different way, different models, different ways of engaging and compensating people. So thank you for bringing the ownership works initiative to my attention. I'm, I'm glad we were able to explore that today. You know, in, in addition to everything you've shared, you know, very helpful, very educational when it comes to private equity and connections to lean. So Damon really appreciate you being here again.
Damon Baker (57m 30s):
My pleasure, mark, it's always a joy.
Mark Graban (57m 33s):
Yeah. So it's been again, Damon Baker. You can find Coltala Holdings at… oh gosh. I lost it. My most recent mistake, coltala.com. I don't know why I was thinking.org. It's ownershipworks.org. That's where I got those things confused. And again, you can also learn more leanfocus.com. Damon Baker. We'll do this again sometime. Maybe not again as soon, but certainly look forward to it and thank you for everything you shared today.
Damon Baker (58m 4s):
Thanks, Mark. Take care.
Mark Graban (58m 6s):
Announcer (58m 6s):
Thanks for listening. This has been the lean blog podcast for lean news and commentary updated daily visit www.leanblog.org. If you have any questions or comments about this podcast, email Mark at firstname.lastname@example.org.
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