Episode #27 - Value Creation Through GTM Systems w/Rachel Lawler

Narrator: The Lab takes the ethereal to the practical. Our, uh, podcast acts like a business school case study for private equity professionals, CEOs, operating partners, and chief transformational officers. We all know transformation is the key to differentiated alpha. Uh, here's how you actually do it. Our audience tunes in to learn from those in the field getting their fingernails dirty and driving meaningful growth through better operations, technology and data. We learned from going to business school, teaching at business schools, and applying these lessons in the real world that case studies actually help the insight stick better. Come join us.

Scott: All right, well, welcome to the next episode of the Lab podcast. We're such a global group that we scour the earth near and far to find the best talent we can. We got Rachel today that we'll let her give her background in a minute, but couldn't be more happy to have a true global citizen join us and talk about our favorite topic, value creation. So why don't we kick it off, Rachel, give us a quick overview of your background and then I'll do what I'm sure you'll enjoy and start peppering you with questions on value creation. But I'll let you kick off and give everyone your background real quick.

Rachel Lawler: Yeah, great. Thanks for having me, Scott and Nick. So I am the founder of Aperture Growth, a growth operating partner that builds bespoke commercial operating models to bridge the gap between what we've talked about, financial modeling, and the operational reality. My point of view is really informed from the last 25 years that I've been in the workforce. I grew up in a family owned business. I have been a founder, I've been in professional services, private equity, and now my own firm, specifically by looking at their operating models. So I think what's unique about Abbott Mature, it's not just me, there's a group of operators as well as about 45 different software engineers. And what we do is we own that entire life cycle of value creation. So from diagnostic to design to build and then fly. So what we're really looking to do at the beginning is align leadership and execution and technology and really do that through a quality of earnings lens and building businesses with an exit path in mind. So can this business survive without the founder? Can this business without its key sales leader? If you were to walk away from the business tomorrow, would you have your data and information and dashboards in place so that somebody could pick up and understand what's happening from the get go? And so when we look at doing that, our entire objective is to eliminate financial silos and reliance on key Individuals and find a way to integrate operations and tech stacks so that you can effectively go to market. Right. So we're not just a strategy firm. We don't sell software licenses. What we do is we come in and say, can we build a, uh, bespoke operating model fueled by technology, automation and AI in a way that doesn't make you dependent on 50 different SaaS founders? Can we do something that you own the workflows?

Scott: Let's talk about that diagnostic, because I feel like you think about the questions around value creation, operations go to market integration, tech stack, there's a lot there. So how do you think about things early? So what value creation plans, some underdeliver, some over deliver. Probably most don't over deliver, at least initially, unless they work with you, of course. Rachel. So how do we think about asking some of those questions early in that operating model? I mean, in a perfect world, you'd have perfect information before you buy a company and then you just execute. That isn't the way it works. So how do you marry getting an early look and making an assessment on which of those levers you can pull to get some early wins to then allow you the time to go back and get some of the other ones?

Rachel Lawler: Yeah, I think that's a great question. And we always take a data driven approach to how we do these types of things. I think just for framing, when we talk about an operating model. Right. Get real. Right. Because if you're talking to a tech person, operating model can mean something. So just defining what that looks like. So we are talking about a system that governs how your people, so your labor, your decisions and your information come together to give you a repeatability framework to turn that into value. And so aperture has a 22 question diagnostic. It's across four key pillars. So enterprise value creation, operations, tech stack, and then integration of how you bring that all together. And to date we've had over 50 companies with revenue between I'd say 30 million and about 250 million. Take this diagnostic. And what we do is we give that to different members of leadership to understand where they view the friction points in the business across these areas of opportunity. Specifically within the go to market strategy and sales and to understand how operations drive sales. And once we get that feedback, we start to say, okay. They answer questions like what happens when we generate a new lead? What are the systems and processes in place to convert that lead to a sale? How do we deal with ongoing customer needs? How do we sustain or increase business from existing customers? What happens when we go to delivery. I think oftentimes people forget that compliance and finance are a huge, huge part of your go to market efforts and so that you need to have a very dynamic finance function that can give you real time information and appropriate forecasting for if then scenarios on what's happening without having to go back and they come back to you weeks later. They've pulled together all these different pivot tables from different systems and go, okay, I think this is what's going to happen. So we really get that point of view from various members of the leadership team and I think what you find often is how different they view the business. Some think they, some think they have active real time dashboards, some think their tech stack is ready to go to market, others think that processes have been documented from end to end. So I think it's a good way to uncover at least leadership's perception across those four pillars what's happening with the business. And obviously a big part of that is the paradigm with what's happening with AI and tech stack and automation and how you reduce manual tasks to free up, you know, what your high value resources are, which are your humans.

Narrator: I hope we can carve out a couple minutes for AI because I would love to hear how you're leveraging that or what you even think about it. 22 questions. So it's pretty concise to get a whole lot of very valuable information. So how did you kind of get to that? Like why is that the foundation of what you've done? And you say this to span from 30 million to about 250 million. How do you think it, how do you think it scales up market? Do you think it would be equally valuable? Like I'd love to just kind of hear your reflection.

Rachel Lawler: So uh, so I've actually had companies both in the startup phase and upwards of over a billion take this. But I eliminate them for obvious outlier reasons. But it scales, it scales across all business sizes. Right? Our focus is on the mid market because the changes that we are able to implement are so quick and drastic. Once you're able to stand up a unified commercial model that you don't just. It's not like a 10% uplift, right? It's a 5 to 10x in some cases a 16x ROI on, on the work that we do. So it scales wonderfully across all companies I would say.

Narrator: Yeah, I think, I mean down market you make a couple degrees change and like you said, you can really unlock some value. The bigger ones. I always kind of equate it to like a really giant ship like the Titanic, you're trying to just miss that iceberg. It takes a lot more horsepower than when you're talking about a true SMB or growth startup. Even middle market company, 100%.

Scott: So how do we think about, I mean who wouldn't want what you just said? It makes sense, right? Obviously you need to make these companies better. That's the whole point of the world we live in, which is private equity backed assets. What's the biggest friction point for you? Is it when you're, when you have good returns and you have good successes? Uh, are people saying I've got it, we're good enough? Because I would imagine it's never absolute. Oh, thank you Rachel. Really enjoy the learning about it. When do I start? There's always people. It's hubris get in the way, is it? Owners think they've got it figured out already. What are some of the reasons that you, the hurdles you have to get over.

Rachel Lawler: So I think, let's just be clear, this is not smooth sailing. You are going into war. You've got people, you've got processes, you've got tech stacks, in many case legacy tech stacks. Right. And so when those are taken over by private equity, there is a socialization piece that you should do pre sale with the investment team for them to understand the maturity of the operating model. But most importantly around, around the technical debt piece. Mhm. Because with, as we've talked about previously with the introduction of automation and AI and things like that, some of these legacy tech stacks can't actually host or facilitate bolting on this stuff. So if you think you're just going to, oh, we're just going to automate everything and they're using some CRM system from 15 years ago that nobody uses. The data is filthy. You've really got to. So I think first of all the biggest hurdle is working with investment teams that can price that. So I think just off the back of an envelope, typically you're, you're earmarking what, 15 to 20% of the purchase price for growth activities and sometimes in some cases the technical debt is going to exceed that, that kind of pricing and it's not going to be something that you can just allocate over the series of the hold. That's a bill you've got to pay on day one to get things working. So I think when you're dealing with the investment side, you get them comfortable with the technical debt piece. When you are dealing with founders or the CEO piece, it's really around understanding if they're open. And I think Aperture has a very specific series of how we engage. Right. So it's first, the diagnostic. What is your view of the world? I think that typically feeds into, uh, day with leadership. Do we all agree? Can we name the problem? Do we agree it's a problem? Do we want to spend money on the problem? And then we segue into a strategic review period that can be anywhere from four to eight weeks typically. And that is fast and furious. This is a picture of your business. These are the levers that we would pull if we were actually going to go into a build implementation period. And then we get to the end of that and we say, here are your recommendations and here's how much it's going to cost. Listen, it's never cheap, right? And this is not to give people the Rolls Royce version of what optimization is supposed to be. It's literally saying, if we agree that we need to remove friction throughout the business, right? So anything that can be automated should be automated. You should be capturing all information at your single point of it happening. You don't have people sending recap emails on calls. You don't have your salespeople spending weeks in researching lists or targets that should already be achieved and that should be using both internal and external signals that are coming in. You should not be spending two weeks preparing for a board meeting with information that should be ready to go in dashboards. I mean, these are just a few examples. So I think it's really just understanding if they're open and then I would go one step down into their functional leaders. You can't just talk to people that are like, at a certain altitude of the business without actually going down and talking to their soldiers and their generals and saying, is this a problem for you? Where are the friction points? Like, is compliance coming in at the right time? How's your experience speaking with finance? How's the handoff to delivery? I'll pause there.

Scott: Yeah, I feel like there's so many. When you're in the lower end of the middle market, call it 5 or 10 of EBITDA, just to pick a number. Oftentimes a founder is going to stay. Not always, but it was going to stay with the business for a little while. And he or she may be willing to take a slightly lower purchase price, multiple or slightly lower valuation because they're going to make so much more money at the second bite of the apple. When there's a firm that's able to implement all of what you've Done. Or you're talking about such that there's a J curve, you know, EBITDA or profitability is going to dip by. Pick your number when we implement this. Because if you don't have the right foundation, the right data and it's clean data and being thoughtful about that, you're never going to be able to build a meaningful company. I wonder if what happens with the companies that are P back today and are looking to be in the lower middle market and they're going to sell to a, uh, middle market firm is bringing you on maybe a year before exit, year and a half before exit, once you've done a bunch of M and A integration to set yourself up. Because if you wait for the second PE firm to do all the things you've done, they're going to price themselves out of the market because the first PE firm is going to sell for the last nickel.

Rachel Lawler: That's right.

Scott: So I'm just wondering where you find your greatest level of success for those listeners that if they're lower middle market, they can bring you on uh, early on because they've got some time and if they're middle market, maybe they want someone who's in the lower middle market to have done this a little bit so then they have a roadmap to really accentuate their growth objectives once they own it. Is that a fair way to characterize it or what else would you add to it?

Rachel Lawler: No, no, I think that's exactly so. Aperture is we get involved in due diligence. We get involved on day zero of kicking off post sale, post acquisition. And then for I just recently we've done some work for a family owned industrial services company. They want to sell in a couple years and they've come to us and they've basically been like, we've got all of our processes documented, we've got all of these things but for some reason we're still not growing. We've got flat revenue and we've increased our workforce by 10%. What do we need to change? And so Aperture comes in and says, okay, let's put our quality of earnings hat on. We're going to look at what they're going to look at when they're going to acquire you. And let's build the machine that they need so that it is independent of the founder. It's independent of um, say Janet in accounting, who's been there for the last 20 years and knows all of the clients and how to set up a bid. And you know how that works. And so no Aperture. It works at any part of the life cycle. I personally like getting involved at the due diligence stage because sometimes it's a lot easier to shape things than it is to come in and fix things. I don't have the stomach for distressed assets or things that are going particularly hectic. Like, I think it's better to get in early. I have been in a few pretty hardcore turnarounds and you get there, but you just have to ask yourself, like, how much has this aged you? By the end of it you get there, but it takes longer.

Narrator: And that tech debt that you mentioned, or the human constraints or the go to market, whatever it may be, if you can uncover that stuff in the diligence phase, like, hey, we need to go to a cloud based ERP because we're on three legacy systems right now, that's typically enough red flags for a PE operating partner to say, do we even want this thing?

Rachel Lawler: Uh, yeah, that's right, that's right.

Narrator: And if you guys could get involved up front and call it out and say, hey guys, this is what it's going to actually cost to get this done. And oh, by the way, also the go to market screwed up, but we can't even get there yet because there's so much disruption in tech debt. Like this is where you can come in there and really layer on. Does this even make sense from a deal thesis perspective? Right. Let alone can we hit our numbers and our multiple that we're looking for?

Rachel Lawler: Yeah, and I think that that's a great point and we have provided recommendations that say, unless you're willing to put in X, don't acquire this business. If you're really keen to lean into this other sector, here are some good alternatives that you can have a look at and approach them in a proprietary, low key way to see if there's some movement on that. So I think those red flags early on, huge to get across the line. But you got to work with investment teams that are happy to hear that because people have done a lot of work to typically get to the point where you are almost at due diligence. There's been a lot of relationship cred that people have pulled in, whether it's from, um, bankers, friends, other contacts to just get to that point. So you have to. It's a very fine line that you've got.

Narrator: It is. It's so funny you say that because like in, in the value creation space right now, no one wants to be the firm that says no. No one wants to rant on any of these people's parades because then they'll stop calling us.

Scott: Right.

Narrator: So like it's almost always yes but or yes, if. But at the same time, you don't want to take the momentum out of the deal, especially if they're excited about it. And they have, they put months and months into this. But also, um, I have seen that if you are, and this is, this sounds like exactly how you go to market. If you run your diagnostic and you're credible and you have a come from that says, hey, this is going to cost X. If you don't want to do that, it's, it's not worth your time. They actually do respect that. Again, it has to be backed by data. And it sounds like that's how you, you guys go to market, which is awesome.

Scott: Well, how do we think about. One of the things that we've talked about beforehand was we talked about. It's one of the classes that one, uh, of the topics in the classes I teach over business school, we've referenced, uh, another equally fantastic school Chicago booth study that says plus or minus 2/3 of the CEO talent doesn't make it through a whole period. 2/3 plus. Right. Some say 70%, some say more. But what have you seen in your day to day throwing the best management, the best talent at problems is what people try and do to solve it. What have you seen your day to day, which advice would you give to, uh, private equity firms that are owning a company or founders that say, hey, geez, I may be really, really great, but how about independent board director who can help me think about things that are different without having to replace me? What are some of the things that you've seen in that talent issue to help mitigate the bad math that people say exists within talent?

Rachel Lawler: Yeah. So I am, I, um, favor using existing management and holding them as long and as close as you possibly can. And pending they are open to an operating model upgrade. And even if you can just get the founder or the CEO to stay on with the first post the first 12 months of the acquisition while you were building this, as long as they are open to improving the visibility, reducing friction in handoffs and things like that throughout the business, I think that this buy and sell process, it's incredibly disruptive to business as usual. Right. Like it is the business of pe, but when you look at things, what the business is actually delivering to the market, they don't actually care who owns them. Right. They are trying to service a client base. And so I think that when you're Thinking about how to make this most effective, you just need to gauge the founder's openness to be like we now have additional resources where we can take a look at how some of the information sits in your business, how the team works together. Listen, are you going to have to prune your management team 100%? Right. That's just going to come with the nature of changing ownership and things like that. But I think you should hold that leadership team, especially if they've been working together for a while and they've known each other for years and they've been in a foxhole for many years together. That kind of synergy pending. It's a healthy environment. That kind of synergy is something that you can't easily reproduce. And while Aperture will build machines and work with the lineman, I personally think you always need a windy roads that comes in and helps assess people's openness to that, that kind of change. You do have some change management aspect of it. I think you get the technical engineering right and how all of that works, it's actually much less because you design a system so people can't opt out, so people don't have to go through and manually do a checklist, so people don't have to manually go in and update a CRM. Um, so people don't have to manually pick up the phone to compliance. That information and that activity passes through the operating system in a frictionless way so that everybody has got access to that. But you know, I think you give Wendy Rhodes a call as well when

Scott: you talked about friction. One of the things that we've discussed is the things you apply, like the stress test. Right. But say you put 25, 30% more revenue and activity through the system. What's going to break? What happens if you do 25 to 30% more through that brittle system? How do you fix that? So what's the stress test and what are the core conclusions? I think first one is, is the team open to that sort of discussion, which I imagine they would be otherwise they wouldn't be working with you. But that's part of the question. What are some lessons learned there? If people are saying, hey, this is what you're going to help accomplish?

Rachel Lawler: Yeah. So I think in terms of framing, so we've got like a 40 day, minus 40 day checklist. Right. So when we're looking at kind of underpinning quality of earnings and what people are going to get through going through this kind of process, like the first and foremost we have four key questions. I would say where does work stall today? And that's what you're going to ask all levels of the organization. Examples of what that looks like. Manual reconciliation, spreadsheet bridges, single point of knowledge within the business, reporting that lags reality. Right. Those are just some examples. The second question we ask always with the team is going to be where does labor substitute for system design that can be achieved through automation or the practical use of AI? And what that looks like is senior people doing low value work, sales teams building lists manually delivery, reinventing the wheel every time, per client management acting as the glue. So do you have very senior management people sitting in on what they think are closing meetings and you're they're still in the qualification stage or getting involved at the 11th hour before a deal is about to come through. And oh, surprise, they've missed the compliance checklist that was manually supposed to be applied. So that's kind of the second piece, I think that point around. Okay, if you're going to pump 30% more activity, revenue activity, what's the first thing that breaks? So we do have to answer the question, does growth make execution easier or harder? And so if every new dollar is going to add coordination costs, then that tells us that the platform is brittle, that you can't repeat it without having all of these people working through that. And then I think just that final question is going to be what is the team's definition of, uh, go to market? Is it a system in their eyes or is it a set of functions? Do they think it's a funnel? Do they think it's a marketing campaign? Or do they see it as a holistic way that, you know, multiple functional teams work together to achieve revenue. And so when we're looking at that, that's going to look like disconnected teams. If marketing is chasing one set of KPI's impressions, whatever, and you've got the sales team, that's just saying, I don't care about any of that. I need to know how many decision makers I can get in front of. That's a very different thing than if management is thinking, okay, well what's our conversion rate on how that's looking? And then delivery is going, okay, well what are you promising them? What have you told them we're going to build for them? How's that going to work? So you've got disconnected teams. Do you have a shared data layer? Is that data clean? Do you have real time visibility? And is there a single source of truth? That is the most overused word I think I've ever heard. In business operations. But are we all pointing in the same direction, chasing the same KPIs with the same set of data, uh, and just depending on the answers to those questions, right, it's either going to guarantee that you'll have a smooth value creation plan or are you going to have some post close surprises. So we can give an assessment on these things. But ultimately people have got to be open to what the solution is. And knowing that having the solution isn't going to be the smoothest thing because you're going to have to work through it. Right. Like everybody's got a plan until you go out into the wild and there's some things you got to adapt to.

Scott: Yeah, well, listen, I think one of the great things about your business and this is not supposed to be tell everyone how great you are, but you do do a great job. We've heard from operating partners, we've heard from C suite executives, we've heard from board members. They all have their own motivation to work with you. It's just interesting because they're all different people pulling on levers. And so I think from the audience standpoint is maybe there's a fourth group of people that, that uh, exist or a fifth, but those seem to be the big three that have found what you do compelling. And so for those that are out, whether you are a C, uh, suite member, you're an operating party or an investing professional on the board, understanding what you have is sooner is better than later. And you're taking just uh, a mix of things that need to be attacked and synthesizing in a systematic way. To me that's been one of the greatest things to see from the outside looking in just to make it easy to understand. It's not easy to do but you know, make it easier to understand what needs to get fixed because you don't know what you can, what needs to be fixed, you can't fix it. Uh, in the old days of levering of a business, paying down the debt, it was all easy. Not easy, but you know, relatively straightforward. I think unfortunately the go to market motions that are required to actually create value are hard. So if you don't have a game plan to do that and working with you to do that has proven to be successful. So it's great that we've had you on and I'm excited to have the uh, audience get to know you and sort of have the opportunity to work with you. And thank you for joining us on um, the podcast today.