Specialty Consulting - Market Observations from James Rekas
Spring 2024
My team and I spend all of our time in the Specialty Consulting sector, and the purpose of this recurring memo is to share some ideas that we hope are helpful to you in building your business and making investment decisions. Thank you for reading it!
“What Gets Measured Gets Managed.”
The lead-in to this section is a butchered quote by Peter Drucker, the world-renowned management expert. What he actually said was, “What gets measured gets improved.” Semantics aside, this seems undoubtedly true because incentives drive all human behavior. And having to measure and report a metric to a superior carries with it a certain resonance throughout the organization.
However, it also seems undoubtedly true that “Not everything that can be counted counts, and not everything that counts can be counted.” That pearl came from the great Albert Einstein.
Business is a game of thinking, doing, and measuring—all in a feedback loop. In most cases, the tighter and clearer the feedback loop, the better. He or she who does this the best, wins the game of business. If that’s true, then what Mr. Drucker and Mr. Einstein are telling us is that we better think hard about what we measure.
In this age of constant communication, virtually infinite compute and storage capacity—and fast-moving competitors—it’s easy to get distracted. In the frenetic business world, the tendency is to measure more, report more, and do more. Perhaps this is why, anecdotally, the private equity portfolio company CFO is such a high-turnover position. They are simply drowning in information. In all this doing, measuring, and reporting, is there much time for thinking?
To dissuade you of the notion that I’m getting too big for my britches a few hundred words into this memo, I freely admit that investment bankers are some of the worst offenders when it comes to the “more = better” mantra. Who needs a 93-page confidential information memorandum to understand a consulting business? At that point, you don’t have something designed to promote an investment, but rather, to promote the Associates or VPs on the respective deal teams associated with that investment.
But I digress. The point I’m trying to make is that, as the political scientist Herbert Simon said: “A wealth of information causes a poverty of attention.” The private investment community is nothing if not drowning in information these days. And this wealth of information might be causing many organizations to lose focus.
I’d like you to think about a world in which, once a month, you are delivered on a single sheet of paper a trend analysis for the variables that matter most to the growth rate, size, and service quality of your business. (You may have different key factors in mind). At the bottom of this single sheet of paper are the three to five things that you and your team could and should do over the coming quarter and year to improve your business.
How might that improve your decision-making? How might that improve your growth rate? How might that improve your returns on incremental investment, whether in people, branding, or technology? Furthermore, imagine having two to three hours set aside to quietly and without distraction consume, consider, and synthesize this information on a recurring basis.
I’ve been on Wall Street for more than 15 years. I’ve attended countless board meetings, produced countless analyses to support executive-level decisions, and advised countless investors on the buyside and sellside. And I have never seen such a sheet of paper. Perhaps I’ve been deemed unworthy, and my clients have been hiding them from me. This, of course, is a distinct possibility. The closest thing to this ideal is probably Costco’s quarterly earnings presentation.
This discussion is self-serving, of course (did I mention that I’m an investment banker?). On every one of our engagements—sellside or buyside—my team and I spend several weeks (often multiple months) attempting to understand our clients’ businesses with such clarity. I often ask myself why the owners and managers of these businesses haven’t done this work as part of their responsibility to their employees, customers, and communities. The best answer I can come up with is that everyone is busy. There is always some e-mail, some Zoom, or some meeting that is seemingly more important at the time.
But given that the game of business is one of thinking, doing, measuring, and incorporating feedback, I wonder if we could all benefit from more time thinking about what we’re doing, measuring, and collecting.
I’ve embarked on a similar exercise as it relates to Houlihan Lokey’s Specialty Consulting and Risk Services practice, and it’s been immensely enjoyable and insightful. I’m in the early days and still learning, but I feel as though this time is helping us maximize our potential as a team and a business.
Whether you’re building your business to own or to sell, I would highly recommend setting aside some time to think about the handful of variables that drive your company forward. Begin collecting these few variables (if it’s more than about 8, that’s probably too many; this isn’t astrophysics) in a reliable way and review them on a periodic basis. Review them yourself and review them with your team. In my experience, this will likely be a useful exercise, resulting in more clarity and a better business over time. And if (or when) it comes time to sell the business, its track record will be better, and you will be well-versed in the system and language that is your business. This will allow you to provide valuable clarity to potential investors. And this clarity will be rewarded with a higher price than you might otherwise receive.
If you are wondering how to get started, what variables you should be thinking about, or how these variables stack up against industry averages, please give me a call. This is a topic near and dear to my heart, and I very much look forward to working through this together. In my experience, it is
extremely difficult to get it right (which is perhaps why so few organizations do it), but incredibly valuable. If you already do this, I’d love to better understand how you synthesized your business down to the few key variables that matter and how you communicated this throughout your organization to drive incremental productivity and clarity of mission.
I’ll leave you with a final quote from the late, great Charlie Munger, who died with a net worth of roughly $2.5 billion and happened to be on the board of directors of Costco (the aforementioned exemplar of business measurement and reporting). Evidently, he was a master at properly thinking through what matters: “In my life, there are not many questions I can’t properly deal with using my $40 adding machine and a dog-eared compound interest table.” Wouldn’t it be something to act in business with such clarity?
