Ep. 143: Bob Root, Southfield Capital | Scaling Services Businesses and Building Data Moats

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1:10Grab a bunch of copies so that you can kind of consume the content together and start to apply it to your business. And with that said, let's move on to the episode. Welcome to the Private Equity Value Creation Podcast, where we interview leading investors, operators, bankers, and advisors to help you answer one question. How do we increase the enterprise value of our companies? My name is Shiv Narayanan, and each episode, I will dive deep with a guest to help you become a better value creator and capital allocator. So with that said, let's jump right in and let's get started with today's episode.

1:46My guest today is Bob Root, and he is the transformation partner at Southfield Capital. And what's really interesting about Bob and his role is that he's working with the Southfield companies to actually transform them across the board, including their technology, their go-to-market, their overall strategy, and more recently on the AI side. And I particularly liked what Bob had to share because they invest in service-based businesses in terms of how they prioritize opportunities against each other. And there's a different operational component required, especially when there's boots on the ground types of businesses, how you expand them from being regional businesses to super regional or even national companies.

2:23And also his perspective on AI and how to build moats around that inside companies that have unique data sets. So there's a lot of great takeaways, and I'm sure you will take away from it as much as I did. With that said, I'll leave you to it. Enjoy the episode.

2:43All right, Bob, welcome to the show. How's it going?

2:45Bob Root: Great. Thanks for having me. Good to see you. Yeah, excited to have you on. So why don't we start with your background and your role at Southfield, and then let's take it from there. Maybe we'll start, I guess, sort of current role. I'm a transformation partner at Southfield. We'll get into obviously Southfield, I think, in more detail, but we're just a headline there. We're a lower middle market PE firm. My title, Transformation Partner, is a slight twist on operating partner. We'll talk about that a bit. But the way that I think about myself is a bit of operating partner with a bit of a technology flair.

3:23Bob Root: And there's a lot of opportunity that I see there, really kind of based on some of my experiences. And kind of maybe rewind all the way to the beginning. I started my career at Procter & Gamble. actually shoot 30 years ago. It's weird to be able to say that. But 30 years ago, I actually started in Canada, did a variety of different jobs in finance, operations, strategy, variety of jobs all over the world, actually, really awesome experience. After that, spent over eight years at Microsoft. I joined them when they were launching the Surface hardware business. they were looking for help on how to manage physical supply chains.

4:10Bob Root: And obviously given my experience at P &G, that was helpful. And then I, and I kind of jokingly say, you know, that job and, and a couple others, frankly, that I had at P &G sort of, um, sort of set off what I call doing jobs that nobody else wanted to do. Um, but in, in practice, they're really, um, sort of transformation jobs or, you know, specific problem situations or undefined opportunity situations. And really at the end of my time at Microsoft, I was leading what is called the lifetime value group at Microsoft. That's really looking at all of the telemetry across all of the different products and lighting up solutions, either, you know, usage or educational solutions or selling solutions across both the B2C part of the business and the B2B part of the business.

5:03And that was, yeah, shoot, I guess

5:05Bob Root: I started that job about 10 years ago, did that job for three years. That involved working with a lot of really smart data science people, I guess would now be dubbed AI people, working on, you know, neural nets, et cetera, to leverage those data sets into practical solutions. um after that took some time off with my my kids were born born during covid took some time off take care of my kids then started to get back into the game doing some consulting work uh and and then ultimately spent a year at trident seafoods uh here in seattle it's a family run integrate the largest vertically integrated seafood company in north america helping do some transformation work for them.

5:54Bob Root: So yeah, I mean, I could fill in some pieces in there, but that's it. It's just sort of in general. Yeah, that background is helpful. Tell me a little bit more about this transformational partner angle because obviously operating partner is a very common role inside most PE firms. What does your role entail or how is it actually different from a traditional operating partner? Um, well, part of, I've sort of learned this aspect, Shiv, on the job as you, as I've just laid out, I didn't come out of, um, you know, PE at all or, and didn't really know what an operating partner job was. I'm sort of learning why I've gotten that sort of title.

6:32Bob Root: And I think it's a combination of my experience and what Southfield Capital focuses on. We are focused on, we're a growth equity, lower middle market PE firm. And so we're always looking for opportunities to drive outsized organic growth, you know, in addition to the classic roll up. And so really, you know, my role is coming in alongside the deal team pretty early and happy to get into that. and really evaluating with the deal team and with the founder and the management team on, hey, where do we see the growth opportunities for this business? And how do we step change that growth? And given some of my experiences that I just laid out, there was a pretty clear opportunity in the lower middle market to leverage technology to accelerate some of those outcomes.

7:31Bob Root: And my view was when I joined, and it still is, that these small and medium-sized businesses, or lower middle market as we define it in the PE context, are underserved by technology for a variety of reasons. And I said when I joined Southfield, as I said, hey, a lot of our businesses are technology businesses. They're just at different stages of understanding that. Yeah. And that's really sort of how I view my role at Southfield in transforming these companies. Yeah. Help me understand that a little bit further. So transformation can mean so many things, right? It can mean on the product side.

8:15It can mean on the business or go-to-market side. It can mean organizationally. It can mean just right now with AI, just a lot of companies are going through transformation in terms of how they view their product or their place in the marketplace. So what is your realm of expertise or where do you start even when you're looking at these companies?

8:35Bob Root: Let me take the second one. I think it's easier for like, where do we start? At SoField, we have a pretty well-defined, you know, proprietary way of looking at opportunities and specifically companies. and I get involved or the value creation team generally, not just me, but our value creation team generally gets involved, you know, once sort of at the IOI stage and we're sitting at the table at most, if not all management presentations to, you know, understand the vision that the founder has, the management team has, and what help do they need. And that's where it all starts. And And core to us at Southfield is really establishing that partnership model from the first conversation.

9:29Bob Root: In most, if not all of our cases, these founders are entrepreneurs. They have a really strong vision for where they want to take the business. And they're looking for help to do that. And that is not uniform, Shiv. Sometimes it is, hey, they want to get back to what they were doing when they started the business and it's either business development or sales or on product. They want to do less of the back office stuff. In some cases, they have a very specific opportunity that they've identified that they want to go focus on that. And we work with them to build out a management team for us to collectively go get that opportunity.

10:16Bob Root: But in all cases, we make an investment first based on partnership and culture. And then secondly, we're working really collaboratively with our founders to lay out all the different avenues of growth. And generally those fall into, you know, a few buckets, which is, you know, we are, we're acquiring a business that is a regional player. And then we see an opportunity to make it a super regional or national player, or we see an opportunity to extend the line of service, you know, of, you know, of that business into an adjacent service. Yeah. Both of those resonate a bunch. So can you, can you expand on that a little bit?

11:02So out of those big buckets, like let's say regional to super regional, I think one of the things that's unique about your firm is that you're investing in these services based businesses. And a lot of them bring a certain, I guess, in-person component to their business where they have to service these clients. And so how are you transforming them or helping them figure out, OK, I need to go from, let's say, we're just local to one state or one city to across the state or across even the country or multiple states.

11:32Bob Root: Yeah, there's obviously multiple components of this. I mean, this starts very early when we're looking at an area or a vertical within professional services or business services generally. Generally, we will have done the bench research to say, hey, the market is really, really fragmented. There isn't a super regional or regional or national player. So one, it starts very early to identify the opportunity. And that really becomes the first melding of the minds with the CEO. And then it becomes, okay, hey, I don't think there's any magic here, Shiv. It's, hey, what's the size of the prize? what does it take for us to deliver on that?

12:23Bob Root: And then we work with management to reverse engineer, okay, what needs to be true? There are a few foundational pieces that we get moving on very quickly that enable us to move faster on some of the AI transformation opportunities or the digital workflow opportunities pretty quickly. So we spend a lot of time very quickly to stand up, you know, a data architecture, data lakes, et cetera, so that not only can we scale base performance measurement on our businesses, but we can integrate add-ons quickly. And then we can take advantage of data moats that we see in our businesses to, as I sort of describe it, extend our lead, right?

13:11Bob Root: We are investing in businesses, you know, we see something at a portfolio company that we love. They differentiate themselves on service or speed or whatever it is for that area. And then we look pretty critically early on and start to build all the way through, hey, what is the unique data mode of that business? And how do we expand that data mode that continues to enhance that customer promise and that customer solution? And so as you go to expand that business from being, let's just say, a local market player into a regional player, you're offering something to clients in those new regions that they may not have already.

13:57Bob Root: Yes. As a differentiator. And it enables you to differentiate either on service or cost or speed or what have you. Yeah. And that's great. I guess it's very different from, let's say, a software company or a technology company or a business services company where you can virtually handle customers in different regions. Here, you're almost like there's the geographical expansion component and there's operational complexity that comes with that. And so how are you prioritizing, let's say, geographical expansion as an avenue for these businesses versus introducing a new line of business that they can offer within their existing markets or any other growth avenues that might be available?

14:41Bob Root: A couple of things there. All of our businesses aren't, you know, field service, feet on the ground businesses. But let me let me kind of answer your question directly. It really comes down to opportunity versus lift. and what are we able to do now? What are we able to do later? And we sequence it in that fashion. But it all really starts with, hey, what's the end game that we're going for here? And what is the most logical order to tackle these? We'll get back to the show in just a moment. But before we do, one of the most common and important value creation levers that we hear about on the show from private equity investors and our own PE partners is go to market.

15:32Yet when these same PE partners bring us into their portfolio companies or new target investments that they're exploring, we find that the marketing function is quite immature, underutilized and under optimized. And so that's a huge opportunity that we see inside these companies. And if you have a portfolio company that you feel like it's scaled a lot faster to drive more pipeline and revenue or you're looking at a new investment where you feel like that could be core to your investment thesis well we'd love to explore that with you and figure out how we can partner with you to drive more enterprise value creation on the marketing side similar to the way that we've done with major pe firms like ta up data hg stg and many more at this point we've done hundreds of engagements across hundreds of industries and verticals and we have a ton of benchmarks and frameworks that we bring to these engagements to help you drive as much enterprise value as quickly as possible.

16:24So if that sounds like something that you might be interested in, you can just email me directly at shiv at howtosass.com or go to our website and schedule a demo. And we'd love to speak with you about it further. And now with that said, let's get back to the show.

16:38Bob Root: There's a great book that I reference all the time. It's called Profit from the Core. And it talks about this idea of like natural adjacencies and expanding there versus expanding too far, which kind of distracts companies from their core business. And so I'm curious how you look at that as you're prioritizing things, because in some ways it is easy to expand a business geographically while keeping the core service the same, but it adds operational complexity in a different way versus adding a new line of business that requires building the entire system of delivery, I guess, for that business unit.

17:13Bob Root: Yeah, I mean, I would say sort of on the latter point of expanding into a new line of business. We look for the conversation. It all starts with conversations with our customers. And it starts with a very simple question, which is, hey, how can we serve you better? Are there things that you would like us to do that we're not doing or other services? And obviously through that conversation, You learn about the things that you're doing uniquely well, uniquely not well. But in all cases, virtually all of the cases, and I can give you plenty of examples, the extension of these services are a half step to the right or left.

18:03Bob Root: They're not a completely new go-to-market motion. You know, I would shy away from doing, hey, a completely new operational motion or delivery and a completely new go to market motion. I will only tackle one at a time. How much of this work are you guys doing during the deal cycle versus post close? The evaluation of the opportunity we are doing before the close. So you're trying to hit the ground running. Yeah. And then what I would say is we, you know, again, I can't stress enough this sort of partnership, you know, core that we operate with. We remain flexible through our hold. It's not, hey, we came in with these three or four theses and we're going to execute them, you know, come hell or high water.

18:56Bob Root: it is very much, we start our, you know, when we, right out, let me say it this way. When we close a deal, we focus on what I call a day in the life. Is we go spend time, the value creation team goes, spends time on the ground with the businesses to learn the ins and outs. And so if it's a HOA property management business, we go down and we understand, hey, what does it take to be a property manager? What does it take to be an accountant? Let's understand that in detail, such that we can, that the value creation, we can evaluate, hey, what is really operationally, what is the feasibility of the execution of the theses that we have?

19:48Bob Root: And what are the base operational gaps we need to close before we start to before we start to execute on those theses and there's always those things yeah how much of that is is rooted in the people inside the business i'm curious because some of these things require or you almost it's mandatory to have people in the right seats and so i'm curious like how you look at that during during the deal cycle and how much of that is going into the planning? That is one of the first conversations that we have during, you know, pre-close is, Hey, we have these, you know, theses, we're going to do this day in the life.

20:32Bob Root: Let's talk about your team and our readiness to execute against these. Okay. And this is a learning exercise. It's always a learning exercise. You know, sometimes, Sometimes, you know, sometimes the management gives us an assessment of, hey, you know, I'm not really sure we're ready to do these things. And we get in and we are pleasantly surprised with new, you know, with the new partnership. It changes people's view on what's possible at, you know, at that employer or that portfolio company. And I think an important backdrop, in all of our cases, we're a growth equity. We significantly grow the employment base of our companies.

21:24Bob Root: I think on average, we're growing the employment base by over 100 % through our hold. And one of the things that's really important to us is that we're creating new opportunities for the employees of these small and mid-sized companies as they scale regionally. And we've got plenty of examples where people have, you know, we've done some expansion either geographically or to a product, and that has provided opportunity for people. But kind of going back to the core of your question, that is always the number one question that we have with management and with employees. And the hardest part, frankly, is really the bridge between strategy and execution.

22:12Bob Root: And that's really where the rubber meets the road for value creation at Southfield. that's yeah like that's what we're here to do right how much you know given that you guys are buying or investing in these founder-led businesses and they're earlier in their journey before they've become fully scaled how much of a challenge is that to take them through some of these transformations and people changes like there's obviously I'm assuming a lot of loyalty and, you know, legacy inside these companies, like how much of the work is that? You just sort of summed up, that is 100 % of the work. It starts, and again, I don't know how others view this, Shiv.

23:00Bob Root: I mean, I talked to some of my peers, but I don't know because I don't live every day in their shoes. This all begins and ends with trust. So the situation for people working in these portfolio companies has changed and you've got to build trust with management teams, but as importantly, or more importantly, the entire, the entire employee base.

23:30Bob Root: And really the opportunity is to help the organization transition from being, you know, founder led to system led. And that system really starts with enrolling people in what that end state is and having them come forward with the ideas. Yeah. Like I, I don't, you know, we don't come in with as a magic night with, we have all the ideas. Our view is our view is the, the best ideas are within the company. And once we have got all those ideas together, then we get to, okay, now let's get to execution. And, you know, pretty common, many times those with the best ideas, they don't have all the resources to drive the execution of those ideas.

24:30I guess the tricky challenge there is having a team that knows what those lovers are, And then you obviously have your own investment thesis, right? That makes the investment make sense for you. So how much of that are you guys spearheading versus like vetting the company's own ideas and saying, okay, this is actually a company we want to back or we want to back their vision?

24:52Bob Root: All of that. I mean, we have those discussions ironed out before we close. And it's not the details of the execution, Shiv. It is, hey, we see an opportunity to take this company from being a regional or super regional or expand a product line. We see this as primarily an organic play or it's this is, you know, a M &A with slightly less organic. That level of conversation is absolutely required for us to close on a deal. I can't think of an example where we've closed on a deal. That's, for us, the partnership and the agreement up front. There's no surprises. Right. What about on the AI side? Can you talk about that?

25:44What work are you guys doing there? Or how are you guys helping the companies you're investing in navigate some of these challenges?

25:51Bob Root: Yeah. I mean, I am kind of going back to going back to some of where some of my experience is. It really, you know, what we do starts with the thesis that, you know, these small and midsize businesses are have been underserved by technology. And they're also very entrepreneurial. And the third bucket, and I would say, is that's more emerging over the last six months. there's a bit of AI paranoia or fear of, hey, I'm getting bombarded with this. I don't really know what to do. And these small and mid-sized businesses are underserved for a couple of reasons. One, they didn't have the dollars to invest in the data lakes, the automation solutions that have existed for 10 years.

26:43Bob Root: AI has completely democratized that, made it very, very, you know, much, much easier to do that. The second is, and I think even more importantly, is they don't have the institutional friction that a Fortune 50 company has. The ability, you know, the entrepreneurial spirit is still alive and well. So the ability to affect change very, very quickly is there. So, you know, we have been on this path. I mean, I've been here three and a half years now. We've been on this path since I've joined and actually a little bit before when I started consulting with one of the Southfield companies. And it really starts with that premise of what is the digital mode of this business and how do we expand that mode?

27:33Bob Root: And then everything we are doing from an AI standpoint is being very, very deliberate about how do we expand that data mode? What does that mean? Let me kind of back up from that. What does that mean? What is this company uniquely doing that others cannot do? And what data is it using to deliver on that customer solution? And we work very quickly. We are now scoping this out before we close and is actually built all the way up into our proprietary deal process now of understanding moats. And we carry that all the way down to management presentations and everything we've just discussed to say, okay, how are we going to go about this?

28:29Bob Root: We do on-the-ground workshop sessions. And our belief is, and we've made investments in this space, to build purpose-built AI solutions to be able to expand on that data mode. Why purpose-built? Well, if it's going to be differentiated, it has to have something unique. And if you zoom back out and look at the AI landscape, every ERP provider, CRM, there's tools popping up everywhere that automate tasks. That's fantastic. Those are fantastic for commodity-based workloads in your companies. And we leverage plenty of those. We're rolling them out all over the place. But for your core differentiation of your business, building a purpose-built solution that enables you to expand on that data mode, and it's probably best I can get into some examples.

29:29Bob Root: I think it'll bring it to life. That is, that's what drives differentiation. And that becomes, that is becoming the value creation backbone of what I see the future of private equity to be. Mm-hmm. Yeah. And like to that end, we've made an investment in, we acquired contextual.io. It's an orchestration platform and full service business because these small and medium-sized businesses don't have IT groups. They don't have the infrastructure and the in-house skill to do this. And we've made this investment and built a set of repeatable patterns that we see in our businesses that we're able to quickly deploy.

30:17Bob Root: So think of Lego blocks that we put together that build these data moats and enable us to expand the offerings at these companies. I think that is a really great insight. And I think that is the moat for most companies that you have this proprietary data set or access to customers or access to information that nobody else has access to and none of the other AI platforms have access to. And building around that creates a huge advantage in the marketplace. Yeah, most definitely. I mean, we've been at this now for a better part of two years or over two years. And we have been launching new services out of our portfolio companies sort of every other month as this continues to accelerate.

31:16Bob Root: And it always starts with, as we've gotten into these levels of transformations, the question I often get is like, hey, where to start? That sounds great, but it sounds pretty overwhelming.

31:34Bob Root: And as I said, we've been doing this for a while. We're, you know, our approach is very consultative with management and say, hey, let's start with a problem. Like, what problem are you facing? What is the biggest barrier for you to get after being the consumer reports of forklifts? Yeah. And we start with that one problem knowing that you get these second and third order benefits that ultimately ladder up to it. you don't kick off eight projects at one time because what I've just described is, you know, that's a lot. There's a lot that went into what I've just described. I oversimplified the work that the team has been at for a better part of a year.

32:22Yeah, no, I totally get it. And I think there's a ton of value in that, even for everybody listening to be doing this with their companies. Bob, we're coming up on time here. I wish we had had a chance to keep talking. But before we close up, what's the best way for anyone that's listening to potentially get in touch with you or Southfield?

32:38Bob Root: You can go to our website. My contact information is there. My email address is rroot at southfieldcapital.com. Awesome. Yeah, we'll be sure to include all of that in the show notes. And with that said, Bob, thanks for coming on and sharing your approach and how you guys are transforming companies at Southfield. I think it's super interesting, especially for service-based businesses, us being a service company as well. There's a lot of great takeaways and I hope the investors listening can help their portfolio companies as well. So I appreciate you doing this. Awesome. Thanks for having me. Thanks for listening to today's episode.

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33:55So with that said, I hope you enjoyed today's content and we'll see you on the next episode.