Episode 143: Bob Root of Southfield Capital on
Scaling Services Businesses and Building Data Moats

Episode Transcript   

 

Shiv (00:13.612)

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

Bob Root (00:15.692)

Great. Good to thanks for having me. Good to see ya.

Shiv (00:18.922)

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.

Bob Root (00:26.146)

maybe we'll start, I guess, sort of current role. I'm a the transformation partner at Southfield. We'll get into obviously Southfield, I think, in more detail. But we're just a headline there. We're lower middle market PE firm. my title transformation partner is is a slight twist on operating partner. We can we'll we'll talk about that a bit. But the the way that I think about myself is a is a bit of

you know, operating partner with a bit of a a technology flair and and there's a bit of there's there's a lot of opportunity that I that I see there, really kind of based on some of my experiences. And I in in and kind of maybe rewind all the way to the the beginning. I started my career at at Procter & Gamble actually shoot, thirty years ago. It's weird to be able to say that. but thirty years ago actually started

Bob Root (01:17.778)

in Canada, did a variety of different jobs in finance, you know, operations, strategy, variety of jobs all over the world, actually. Really awesome experience. after that, spent spent over eight years at Microsoft. I I joined them when they were launching the surface hardware business. They were looking for help on how to manage physical supply chains. And obviously given my experience at

Bob Root (01:44.82)

At PG that was helpful. And then I and I kind of jokingly say, you know, that job and a couple others, frankly, that I had at PNG sort of sort of set off what I call doing jobs that nobody else wanted to do. but in in practice, they're really sort of transformation jobs or you know, specific problem situations or undefined opportunity situations. And really at my

Shiv (01:58.477)

Yeah.

Bob Root (02:11.776)

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. And that was.

Yeah, shoot. I guess 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, etc., to to leverage those data sets into practical solutions. after that.

Took some time off with my my kids were born born born during COVID. Took some time off to take care of my kids, then started to get back into the game doing some consulting work. and and then ultimately spent a year at Trident Seafoods 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. So yeah, I mean, I could fill in some some

pieces in there. But but that's it. It's just sort of in general.

Shiv (03:34.648)

Yeah.

Yeah, that that background is helpful. Tell 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?

Bob Root (03:53.874)

well, part yeah, part 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 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. And I think it's a combination of my experience and what Southfield Capital focuses on. We we are focused on we're a growth equity, lower middle market PE firm. And so we're always looking for.

opportunities to drive outsize organic growth, you know, in addition to the classic roll-up. And so really, you know, my role is coming in alongside the you know, 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

You know, how do we step change that growth? And given some of my experiences that I've just laid out, there's a there was a pretty clear opportunity in the lower middle market to leverage technology to accelerate some of those outcomes. And I my view was when I joined, and it still is that these small and medium-sized businesses or lower middle market, as we as we define it in the PE context.

Is is underserved by technology for a variety of reasons. And, you know, I I said when I joined Southfield, as I said, hey, you know, a lot of our businesses are technology businesses. They're just at different stages of understanding that. And and that's really sort of how I view my my role at Southfield in in transforming these companies.

Shiv (05:38.433)

Yeah.

Shiv (05:47.594)

Yeah. Help me understand that a little bit further. So transformation can mean so many things, right? It can mean on the product side, it can mean on the business or 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 what is your realm of expertise or or where do you start even when you're looking at these companies?

Bob Root (06:15.874)

let me let me take the second one. I think it's easier if we're like where do we start? you know, at Southfield, 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 all at 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 at Southfield is really establishing that that partnership model from the first.

From the first conversation.

Bob Root (07:17.538)

Cause in in in in in most, if not all of our cases, these are, you know, the these founders you know or 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 that is not uniform shiv. Sometimes it is, hey, they they 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 our 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, they want to go focus on that. And we work with them to build out a management team for us to collectively go get at go get that opportunity. But in in all cases, we we make an investment first based on partnership and culture.

Bob Root (08:15.85)

And then secondly, we we're working really collaboratively with our founders for to lay out all the different avenues of growth. And generally those fall into 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.

Shiv (08:49.739)

Yeah, that both of those resonate a bunch. So can you can you expand on that a little bit? So out of those big buckets, like let's say regional to super regional, I think one of 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, okay, 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.

Bob Root (09:25.662)

Yeah, there's there's obviously multiple components of this. I mean, this starts, you know, very early when we're when we're looking at a you know, we're we're looking at an area or a a a a vertical within professional services or business services generally. You know, we will we will have done 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 and that really becomes the first melding of the minds with the with the CEO. And then it becomes okay, hey, it's the it's i I don't think there's any magic here, Shiv. It's hey, what's the, you know, what's the size of the prize? What does it take for us to to to deliver on that? And then we work with management to reverse engineer, okay, what needs to be true.

there are a few foundational pieces that we we get moving on very quickly that enable us to move faster on some of the you know the the AI transformation opportunities or the or the digital workflow opportunities pretty quickly. So we 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 we can take advantage of data moats that we see in our businesses to, you know, I call as I sort of describe it, extend our lead, right? We are investing in businesses. you know, we see something at a portfolio company that we we love. They differentiate themselves on service or speed or or or whatever it is for that 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 moat of that business? And how do we expand that data moat that continues to enhance that customer, that customer promise and that customer solution? And so as you go to a, you know, expand that business from being, let's just say, a local market player into a regional player, you you're you're offering something.

Bob Root (11:51.362)

to clients in those new regions that they may not have already as a differentiator and it enables you to differentiate either on service or cost or speed or what have you.

Shiv (11:55.776)

Yes.

Shiv (12:02.571)

Yeah. there's and that 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.

Bob Root (12:39.618)

well i a couple things there. all of our businesses aren't you know, field service, feet on the ground businesses. But but let me let me kind of answer your question directly. It it really comes down to, you know, opportunity versus lift. And what are we 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 what's the end game that we're going for here? And what is the most logical order to tackle these?

Shiv (13:23.211)

Yeah. And and when you're when you're kind of running through that, 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 d distracts companies from their core business. And so I'm curious like 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.

Bob Root (14:02.346)

Yeah, I mean I would say sort of on the latter point of expanding into a new line of business, we we look for the the conversation it all starts with cust sorry ex conversations with our customers. And it is it starts with a very simple question, which is hey, how can we serve you better? Are there are there things that you would like us to do that we're not doing or other services?

And you know, obviously through that conversation, you learn about the things that you're you're doing uniquely well, uniquely not well. but in in all cases, I would virtually all of the cases, and I can give you plenty of examples, the extension of these services are are a half step to the right or left. They are not 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.

Shiv (15:14.847)

Mm-hmm. Mm-hmm. How much of this work are you guys doing during the deal cycle versus post close?

Bob Root (15:22.518)

The the evaluation of the opportunity we are doing before the close. And yeah, and then 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.

Shiv (15:28.919)

Right. So you're trying to hit the ground running.

Bob Root (15:49.282)

Three or four theses and we're gonna execute them, you know, come hell or high water. 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 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

Bob Root (16:20.058)

HOA property management business, we go down and we understand, hey, what what does it take to be a property manager? What does it take to be, you know, an accountant? Let's understand that in detail.

Such that we can, you know, that the value creation can evaluate, hey, what is really operationally, what is the feasibility of the execution of the theses that we've that we have? 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.

Shiv (16:58.987)

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.

Bob Root (17:13.194)

Totally.

Bob Root (17:20.034)

there's you know 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 gonna do this day in the life. let's talk about your team and our readiness to execute against these. Okay, and

Bob Root (17:46.432)

This is a learning exercise. It's always a learning exercise. You know, sometimes, you know, sometimes the the management gives us an assessment of, hey, you know, I'm not really sure we're ready to do these things. And and and we get in and we are pleasantly surprised with new, you know, with the new partnership. It it changes people's view on what's what's possible at

you know, at that that employer or that portfolio company. And I think an important backdrop in all of our cases, we we signific we're a growth equity. We significantly significantly grow the employment base of our companies. I think on average we're growing the employment base by over a hundred percent through our hold. And one of the things that's really important to us is that we're creating new opportunities for, you know, the employees of these small and mid-sized companies as they

Shiv (19:10.272)

Yeah.

Bob Root (19:13.77)

And you know, the hardest part, frankly, is really the bridge between strategy and execution. And that's that's really where our s where where our where the rubber meets the road for value creation at Southfield. That's

Shiv (19:30.953)

Yeah. 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 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?

Bob Root (19:31.158)

Like that's what we're here to do.

Bob Root (19:59.682)

that is that I you've just sort of you just sort of summed up that is a hundred percent of the work. it you know it it it starts and and I again I don't know how others view this shiv. I mean I talked to some of my peers, but I I don't know because I don't I don't I don't live every day in their shoes that you

This all begins and ends with trust.

So the situation for people working in these portfolio companies has changed. And you know, they you've gotta build trust with management teams, but as importantly or more importantly, the entire the entire employee base.

Shiv (20:51.552)

Yeah.

Bob Root (20:51.986)

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.

Shiv (21:18.763)

Yeah.

Bob Root (21:19.968)

Like I w I don't you know, we don't come in with as a magic knight 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, i it pretty common many times those with the best ideas, they don't they don't have all the resources to drive the execution of those ideas.

Shiv (21:55.561)

Mm-hmm. Mm-hmm. I guess that the tricky challenge there is having a team that knows what those levers 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?

Bob Root (22:20.392)

w all of that I mean we us 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 MA with slightly less organic. That level of conversation is is absolutely required for us to close on a

To close on a deal. We will we I I don't 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. There's no surprises.

Shiv (23:19.681)

what about on the AI side? Can you talk about that? Like what work are you guys doing there, or how are you guys helping the companies you're investing in navigate some of these challenges?

Bob Root (23:29.41)

Sorry, on the AI side you said? Yeah, I mean, I yeah, kind of going back to going back to some of what were some of my experience is I it it really, you know, what we do starts with the the thesis that you know these small and mid-sized businesses are have been underserved by technology. and they're also very entrepreneurial.

Shiv (23:30.826)

Yes, yep.

Bob Root (23:57.658)

And the third bucket, and I would say is that's more emerging over the last six months. There's a bit of 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 you know, these low these small and mid-sized businesses are underserved for a couple of reasons. One, they they didn't have the the dollars to invest in the data lakes.

Bob Root (24:25.354)

you know, the automation solutions that have existed for 10 years. 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 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.

Shiv (24:35.744)

Yeah.

Bob Root (24:54.996)

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 it really starts with that premise of what is the digital mode of this business? And how do we expand that moat?

Bob Root (25:24.234)

And then everything we are doing from an AI standpoint is being very, very deliberate about how do we expand that that data moat? What is in in and 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 that customer solution? And

Bob Root (25:54.634)

We work very quickly. We are now scoping this out before we close and is actually built all the way into all the way up into our proprietary deal process now of understanding MOATS. And we carry that all the way down to, you know, management presentations and everything we've just discussed to say, okay, how, you know, how are we gonna go about this?

Shiv (26:21.056)

Yeah.

Bob Root (26:21.548)

We do on the ground workshop sessions. And our belief is, and we've you know, 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 if it's gonna be differentiated, it has to have something unique.

Shiv (26:40.203)

Yeah.

Shiv (26:49.066)

Yeah.

Bob Root (26:49.17)

And if you zoom back out and look at the AI landscape, you know, 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 and it's probably best. I I I can get into some examples. 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 the backbone of of of what I see the future of private equity to be.

Shiv (27:50.05)

Mm, yeah.

Bob Root (27:50.818)

And like to that end, we've made an investment in we we acquired contextual.io. It's a an orchestration platform and full service business because these small and medium-sized businesses don't have IT groups. They don't have they don't have the infrastructure and the in-house skill to do this. And we've we we 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. So think of Lego blocks that we we put together that are that that build these the data modes and the you know in and now enable us to expand the offerings at at these companies.

Shiv (28:36.372)

Yeah, that I think that's really, really interesting. Can can you expand on the motes? Like what how do you define modes or what are some of the characteristics that you're looking for there?

Bob Root (28:47.674)

the characteristics are you know from a data I from a from a data perspective, what data do does does our company have in the performing in the performance of our service that enables that enables the rest of our our clients to benefit from

In a way that they're not going to be able to get in any other in any other place. So let me, I'll give you a real example. We have a fleet management business that's focused on material handling equipment.

Shiv (29:23.669)

Yeah.

Bob Root (29:31.212)

Fork trucks, scissor jacks, et cetera, et cetera, right? Used in warehouses all over the place. We manage tens of thousands of forklifts. As part of that service, that fleet management service, they are, you know, they are looking for us to one, pay the bills on all the maintenance and and all that. And there's there's thousands and thousands of invoices. Okay.

All the way through to helping them with leasing and buying solution and when should they lease and buy, et cetera, et cetera. And in the middle there, they're expecting us to audit against all of the maintenance contracts to ensure that they're getting built the right, right? And manage their cost savings. The promise that we were able to deliver on is we're able to save them 20% on their total cost of ownership for the material handling equipment.

Why? Well, because some equipment's not being used, but they don't have visibility to it. It's not a it's not a primary asset for them, right? It's it's a relatively small part of their balance sheet. And they don't have, you know, they don't have the the time or resources to go do all of that, you know, all of that comparison and benchmarking, et cetera. So where does the data moat come into place, come into play? Well, we

Bob Root (30:56.962)

You know, we we have all of the maintenance history for thousands and thousands and thousands of forklifts. Okay. And so our view is: hey, we we are actually really our aspiration, and we're pretty close to delivering on it, is w we are the consumer reports for forklifts.

Shiv (31:04.47)

Yeah.

Bob Root (31:20.672)

Right. And so if you view it that way and not through the lens of tasks, you make different decisions. If I view this through the lens of tasks, it's like, okay, well, I'll just go buy an off the self shelf off-the-shelf solution and I'll automate the payment of invoices. That's a missed opportunity. Those work orders and invoices have every detail. Why was the work order? Is it because it was an abuse? Did someone else accidentally run into a post?

Bob Root (31:49.344)

Was it a preventative maintenance? How many hours were on the machine? What was the exact date of service versus the date of billing? And once you have all that data cataloged, now you can get to what we call second and third order benefits, which enabled you to build that data moat. So we can auto you know automatically compare work orders and invoices versus contract versus.

Shiv (31:56.371)

Yeah.

Bob Root (32:19.614)

Maintenance providers that may be 60 miles away, so that we can recommend to our clients, hey, it may make sense for you to use a different maintenance provider and pay the mileage charge because it's going to be X dollars an hour cheaper, and that's a net savings for you. And then laddering all the way up, you know, we've built machine learn model machine learning models that we can now recommend to our clients based on their usage situation. Is this a

Bob Root (32:48.138)

Is this a piece of equipment that's used in a refrigerator versus you know a gravel parking lot? Is it a four high pick? Is it a six high pick? And we can recommend to them the best equipment for the for the total cost of ownership for that application. And that's a data moat that that nobody else has. And we are brand agnostic. So whether it's a Mitsubishi or a Hyster or what have you,

Shiv (33:04.395)

Yeah.

Bob Root (33:15.426)

We have the ability to make those recommendations in a holistic fashion while being very diligent and efficient with some of those individual, you know, what what other people would think of as tasks, but we think of as the core building blocks to with the data mode.

Shiv (33:35.602)

Yeah. I think 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 that building around that creates a huge advantage in the marketplace.

Bob Root (33:59.86)

Yeah, most definitely. I mean, we've been at this. we've been at this now for better part of two years or over two years. And we've, you know, we have been launching new services out of our portfolio companies sort of every other month as this continues to accelerate. And it always starts with in in, you know, kind of

Shiv (34:21.738)

Yeah. Right.

Bob Root (34:28.258)

As we've gotten into this, you know, these these levels of transformations, the question I often get is like, hey, where to where do this start? That sounds great, but it sounds pretty overwhelming. And we've as I said, we've been doing this for a while. We're we're you know, our approach is very consultative with management and say, hey, let's let's start with a a problem. Like, what problem are you facing?

Bob Root (34:57.59)

What is the biggest barrier for you which for you to get after being the consumer reports of forklifts? And we start with that one problem, knowing that you get these second and third order benefits that ultimately ladder up to it.

Shiv (35:04.299)

Yeah.

Bob Root (35:14.37)

We don't we don't kick off eight projects at one time because what I've just described is you know, that's a lot there's there's a lot that went into what I've just described. I I oversimplified the the work that the team's been at for for a better part of a year.

Shiv (35:31.786)

Yeah, no, I 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 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 or Southfield?

Bob Root (35:49.594)

you can you you can be you can go to our website. my contact information is there. I'm not I'm happy to include it in a in a link here if you want if you want as well. Shiv, I d I mean I can I'm happy to kind of state my email address here if you want me to. yeah, my email address is R root.

Shiv (36:12.308)

Yeah, yeah, please go for it.

Bob Root (36:17.694)

At Southfield Capital dot com.

Shiv (36:20.35)

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. Like 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.

Bob Root (36:41.77)

Awesome. Thanks for having me.