What's it like being a Quadshift Company?

Everyone:

"How does Quadshift manage software companies in so many different vertical markets and industries?"

Quadshift:

"We don't."

Everyone:

To centralize or decentralize, that is the question.

This version of Shakespeare's famous soliloquy in Hamlet – quite possibly the most famous soliloquy in literature, is a fitting one, as the answer to this version of the question is critical in determining the success of a large, complex business over the long term, and how we think about the management of companies in the Quadshift family.

In Quadshift's case, we do get more involved than the opening of this article suggests (in specific areas and usually in an agency-like manner similar to Vista Private Equity, described below), but we feel it doesn't make sense to manage or centrally control each business.

Others in our industry have come to similar conclusions, with some exceptions.

What we have found as a general rule is that the degree to which the companies are similar and the strength of the management team are limiting factors to how much centralization can be useful or desirable.

Within similar businesses or divisions, it's easier to spot where there are redundancies and strengths, and where improvements can be implemented across different businesses or divisions by management, successfully. However, even where businesses are similar, management's ability to execute successfully and avoid doing more damage than good relies on its competence. Even when leadership is put in charge of a new division on paper, if they are incompetent, they will not be able to get anything done.

You could probably add another dimension to this simple framework which is complexity and size. The larger and more complex your business, once again, the relative preference for a decentralized management structure. Even the strongest leaders can only directly manage a certain number of businesses/direct reports effectively. Maybe that will change when managers merge with AI and become super managers. Until that day, mere mortals can only do so much.

Constellation Software has become an interesting case study in this regard.

"Delegation to the point of abdication"

Constellation Software is a Canadian software conglomerate that acquires and holds vertical market software companies (a much larger version of Quadshift that has been doing it for decades). They are a perpetual owner, just like us, and own 600+ VMS companies. Constellation’s enterprise value today is around $57 billion as of Apr 2023 and the company has reliably compounded at 30+% a year, making it one of North America's great technology stocks of the past 20 years.

In the shareholders’ letter of 2015, Mark Leonard, the infamous yet immensely private founder of Constellation, wrote:

Head office provides the Operating Groups with capital allocation assistance and decisions, and tries to disseminate some best practices, a few clear rules, a bit of coaching, and coughs up the occasional partly trained employee for the Operating Groups. Compliance, investor relations, and handling the finance function round out the head office duties. Whenever we feel stretched at head office, we download more of our work to the Operating Groups. This delegation to the point of abdication philosophy (first discussed in the 2010 Letter to Shareholders) seems to have worked so far.

Constellation's operating philosophy of delegation to the point of abdication has served it well. We've adopted a similar philosophy, albeit with some minor tweaks that we feel suit our companies, and perhaps our size, at this stage of our company's life.

Quadshift, like Constellation, has spotted patterns in the challenge that vertical market software companies face, so Quadshift provides services to the operating companies in an agency-like manner rather than top-down dictation. We can also provide advice, take on ad-hoc projects and jump in as needed to help, usually at the request of the managers. We are careful, however, to centralize control of the business.

This approach is most similar to another legendary high performer in our business: Robert Smith's Vista Private Equity.

There is perhaps no better software investor in the world than Vista.

"Software companies taste like chicken. They're selling different products, but 80% of what they do is the same."

Robert Smith's Vista Private Equity has generated annual returns averaging 30%+ since the fund's inception in 2000. Unknown to many, Vista's combined 80+ portfolio company makes it the world’s fourth-largest enterprise-software company after Microsoft, Oracle, and SAP.

Vista's outstanding returns have been generated not only from selecting great software businesses, but from implementing Vista's best practices. These best practices have been cultivated over two decades of pattern recognition from investing exclusively in enterprise software companies. According to Robert Smith, "Software companies taste like chicken. They're selling different products, but 80% of what they do is the same."

Consequently, unlike Constellation Software, Vista does get involved, and sometimes very deeply involved. Vista even has a 100+ member in-house consulting team, Vista Consulting Group, that aims to transform their portfolio software companies into profit machines using their closely guarded 110-point playbook. As per their track record, their approach has resulted in incredibly positive outcomes for Vista.

What we can learn

Though Vista and Constellation sound quite different, both do not really centralize management, as doing so would result in suboptimal outcomes across the variety of companies they own. The degree to which they provide resources and hands-on support is what varies between their approaches.

At the operating company level of both Constellation and Vista, where the managers are able to run similar businesses, departments, or divisions, both companies, have centralized structures. In Constellation's case, they just have many more and significantly smaller "business units" compared to Vista's larger enterprise businesses.

Quadshift is somewhat of a blend of both companies, attempting to create value, but being humble and realistic with regards to how much and where we can get involved. If you want to learn more, I've recently detailed exactly how Quadshift gets involved with our companies, here.

Even if you are not a software investor, these same principles would apply to your business. Constellation, Vista (and soon, Quadshift!), provide excellent examples of winning strategies we can all learn from. I hope this brief article has helped answer the age-old soliloquy:

To centralize or decentralize, that is the question.