Making Order While Retaining Decentralization

Our General Managers run sales and operations. And they’re great. I provide “entrepreneurial services.” Some probably prefer I stand down, wild man.

When we launched, I used the phrase “we believe in decentralization” quite often. At the time, I had a vague understanding of what that meant exactly. I figured the simple definition was “Hire great people. Trust them.”

I maintained control of most of the balance sheet. Otherwise, the sales and operating strategy was largely on them. If they wanted to ask, I was a fountain of ideas. Most of my responses began with some version of “If I were in your role, I’d do something like this or that, but it’s up to you.”

I thought this was the best way for the managers to “own it” –and truly believe. What tended to happen was managers got frustrated with me because I was not as clear as they would like. I spoke in metaphors, saying things like “you just know when to do a 360 dunk” and other metacognitive level platitudes… that held deep meaning to me, but were far from a standard operating procedure or a precise playbook.

Over the last 18 months, ten of our twelve control acquisitions have gone through the 2-3 year post-close blues. (thanks, Tim Ludwig, for making me not feel so alone.) This coincided with a COVID-19 pandemic. We dug deep and made commitments and clarified playbooks for each company. Here are some big themes that I have grown clearer on:

  1. Can it be simplified? Is it necessary? – A lot of management is deciding what not to do. As a group of reasonably well-educated, aggressive personalities, we probably take on touch more than we can handle. My solution to this known habit of mine is to hire expertise before I genuinely need it. In this way, I’m not in the middle of a pandemic trying to find someone to help. Go into the unknown prepared. However, during and prior to the pandemic, my managers taught me that to over-hire is to be wasteful. The people on the team are probably way more capable than I realized. We’ve simply got to provide a reasonable mode of operation, and they’ll crush it. Together, we snipped and cut and got down to something special. We’ve now got adequate redundancies rather than unnecessary backup luggage for super low-risk events.
  2. Managers want a playbook. – When we launched, and as we acquired, I hired smart, high integrity people and asked them to do their best. They asked some form of ‘what does “best” mean? -or- ‘how far can I go?’ I did not want to provide a playbook because I wanted them to write it themselves. It’s pretty obvious (to me) that the seller had an undocumented playbook already in most of our small businesses. I’d say, ‘Look it, they do this and that, in this order or that order, and if you cannot see that, you cannot lead.’ This approach was pretty unfair on my part. Adding insult to injury, I would go ahead with some verbal ideas about how I would do things but didn’t write them down in an orderly enough manner to make them executable without a re-discovery process on their part. A colossal email or text thread here or there was not adequate. So, if the verbal plans were not sufficient, I would “do stuff” like buying a bolt-on acquisition and demand the program be adjusted or executed now that they could see how serious I was. (great boss, right? I just doubled your staff, customer count, and workload, and you’ve got at least two more systems to choose from during the integration process!) Frankly, it’s amazing they didn’t punch me in the face. Today we have a standard “LEV way” playbook format that includes a vision and mission statement, a business model canvas with profile customer types, distribution channels, and more. We’ve got org charts and job descriptions. We even have training processes by timeline for new hires and employee handbooks (thanks, team, for making me do this.) These documents are never “done,” and we don’t refer to them as often as I would prefer. But, I use them when I communicate strategic comments now. I refer people back to them. And, what’s happened, is our managers have taken root. They have suggested improvements and made tactical judgment calls that have far exceeded past practice. And, I think it’s because they know what is reasonable in their domain and what good looks like from me, for them, in the near term and the long term.
  3. Communicate on a calendar basis. – I hate recurring meetings and pushed them off my calendar as a means of maintaining a decentralized culture. A recurring meeting is a signal to me that my judgment to call the meeting is not required and I should consider delegating the aspects in it. However, like everyone else, my life is full of recurring habits. I take my kids to school. I go to church. I sit in the same chair most days. But, I choose them. I don’t want people telling me what to do, so I want to treat people how I would like to be treated. But people are different. Some people (nay, most people) want an open channel for communication with the business owner. It’s best to put this channel into a routine. We started with quarterly meetings. We’ve kept those and moved to a weekly email, which I initiate to them. In that email, I include batched-up comments or questions that are not urgent but tactical in nature. I follow it with our current Objectives and Key Results, which we rebuild together each quarter. I also include links to our playbook and/or sections of the playbook (budget, etc.) to reference and reinforce things. I’ve been so thrilled with how well this has worked. It’s non-invasive and it’s asynchronous. I’m not intruding, but I’m also expressing my awareness and care. Responses don’t have to happen on the fly by telephone or prepared huge before a weekly sit down/standup. I love to write. I think better in writing, and this gives us a way to volley current events without me sounding fire alarms in their heads… or vice versa. It doesn’t appear that they’ve lost control by replying with a counter-question to some intermediate time frame aspect that they think they know but want to double-check on. We’re both welcome to text, email or call whenever, but the rhythm of those calls doesn’t dissolve into covering everything because we both know there will be the weekly email coming again soon. The other really cool thing we’ve done is have Mikel prepare these for me. It’s not that I’m incapable of preparing these emails (I often rewrite huge sections), but him laying eyes on the sort of functions as a backstop to me speaking in too many metaphors! It also works well because I log non-urgent items to discuss in Trello, so we stay in sync throughout the week while batching up aspects that need to go to managers in a non-urgent fashion.
  4. Go to the front line more. – This is an area I’m still working on. In the last few weeks, I’ve had some time “in” the businesses… more than I would allow myself early on. Our glass technicians, toolmakers, and skydive instructors would tease me about “come out and spend a day with me.” And I’d laugh and say, “nay, you don’t want me screwing up your work!” And frankly, it’s true. I cannot do what they do. But, they know this. And I don’t think it’s because they want to show off and/or rub it in. I think they want me to understand the rhythm of what they go through. I might have ideas. To which I thought about but always put back on the manager. He or she has got this. They’ve got your back. While that was and is still today, I do have a unique perspective; and an exceptional talent that often comes with ownership. I tend to pivot on a dime. It usually freaks out bad employees and is adored by good ones. They know, if they show me something stupid, I’ll say “cut it.” or “replace it.” And it will happen. This centralized/decentralized tension may reduce scalability… but only sort of. In actuality, the stroke of a pen, a prompt decision is ridiculously scalable… and probably the most scalable thing in the business. Execution is far more difficult. Almost everyone else is time-bound. I’m not. I hire time. Practically no one else has that type of maneuverability. And, I can add or subtract capital items and people far more quickly. It’s an abdication of my responsibility to avoid this and/or delegate too much of it. I ought to be out on the front line more… not to make all the tactical decisions that need to be made (that’s impossible) but to help the technical teams make strategic maneuvers when appropriate and relative to the whole.
  5. Careful of organic growth initiatives in a holdco model. – Like a greedy pig, I wanted both substantial organic growth and massive acquisitive growth. It seems logically possible, so what prevents it? And, I’m not saying that it is truncated. But, it’s not reasonable to ask a controlled subsidiary to grow organically at astronomical pace is not likely. Unusual growth rates occur with a fanatical owner-operator at the helm; and disgusting growth rates (20%/mo or 2x or 3x year) only happen with the madman at the helm. Just recently, I had someone say “conservatively 2x next year,” and they were dead serious. I loved it because they were right. Different? Absolutely. Rare? Yes. Possible and proven? Yes. Within a holdco with controlling ownership, this sort of “2x-is-conservative” is possible but unfair. Managers may attempt it, but it’s unwise to expect it. In fact, it isn’t very reasonable to even ask it because it’s akin to asking a toddler to try a backflip on their bicycle. They might try it and probably will get hurt. And you, the prompter, are going to look like an idiot. So, what is reasonable? How does an owner guide this? Thanks to patient people hammering me repeatedly, I’ve come to believe that good managers know what is appropriate. It’s my job to provide a safe place for them to say what they really think. What is “realistic?” The growth must fit the opportunity set with the manager’s talent. Most managers think way too highly of themselves (myself included.) So, you’ve got to handicap that. It’s hard to do for one’s self. It’s almost impossible to do about someone else. But the keyword is “almost” impossible. Ultimately, the order is maintained by governing upside growth to some realistic objectives. I resisted this, but I think it’s a safer way to go about things. An organic growth rate governor prevents the subsidiary engines from exploding. And, ironically, in the moments I started to throttle the upside, our managers responded by beating my expectations. I don’t think they did it on purpose. I actually think our culture sort of settled down. Everyone got less jumpy because I wasn’t barking at them to attempt a backflip. They just began executing with the talent they possessed… and the marketplace liked it.
  6. Decentralization means diversification – As many long-time followers realize, I’m an old business book junky. I love digging back through bibliographies and reading the texts that inspired modern authors. Most original thoughts go back to some pretty heavy research and pretty sharp theoretical teachers or actual practitioners. I used to think decentralization meant management decentralization. It does. But, it’s actually more of a structure following a strategy that began with diversification. And not diversification as practiced and taught by beta and price wiggles, but of the process that business owners practice when their companies go from 5,300 employees to 85,000 employees in four years as DuPont did during World War 1; and 95% of the revenue was from explosives to entry of chemicals. They knew and/or hoped the war would end, as would the explosive sales velocity. This was especially true given the overcapacity that was being built by the government. They wanted to diversify to preserve their good return on invested capital record. So they bought other businesses that they strategically thought had promising futures. This strategy led to complexity, and complexity demanded specialists, and the specialists demanded decentralized management, which meant new and different ways of owning and allocating capital and time. What does good look like? Good looks like high returns on invested capital. When buying a business, the returns are usually less than when organically growing. So, look for organic growth because the incremental returns are usually highest here, where the insights and the incremental equipment are typically recovered quickly. In contrast, the premium required to enter a new line of business is often less. So, yeah. Take that standard business truth and then consider how few businesses grow at a rapid clip, and it’s imperative to concentrate on the very best. Go full Kelly, or half Kelly or whatever Kelley and have it work, and it will come to dominate your net worth. This is the way to wealth. You don’t generate unusual terms by buying the average. So, concentration is the opposite of diversification, and decentralization is the result of diversification. To get above-average results, you must own above-average companies and focus when the really juicy opportunities present. Then, diversify after a big winner’s tune plays out and/or doesn’t respond to further reinvestment… and only then. Thus, the goal is not decentralization. The goal is centralization. But it’s so dang rare and challenging to exploit at a scale that you’ve got to embrace decentralization at the edge of return on invested capital probabilities. And by this probability is the edge of centralization/decentralization found. In most cases, the people close to the action can make the best tactical decisions. However, the people close to the equity must make their decisions, too. The owner-operator moves between these exceptionally quickly and can, by information flow theory, achieve the highest possible return. He needs to make decisions that make significant impacts… and be right… and risk-wise, to stay in the game.