Disclaimer: This interview is for informational purposes only and should not be relied upon as a basis for investment decisions. In Practise is an independent publisher and all opinions expressed by guests are solely their own opinions and do not reflect the opinion of In Practise.

Hello and welcome. Today, we're going to discuss working with vendors, specifically primary research vendors. This is part of a series on primary research methods. One of our objectives for this session is to help analysts working with a primary research service get more out of the experience. To start, could you talk about the role primary research plays in your process, so listeners understand our perspective on this topic?

Well, I'm a bit biased because I've spent my life doing this.

Let's put that on the table. Why are you biased?

It's critical to my process. I'm biased and feel very lucky to have an almost unlimited research budget. We commercialize our research, and the interviews we conduct are typically recorded and published on a platform accessible to everyone. As long as it's in that format, we can do as many as we want, as long as they add value. So, yes, I'm biased and spend my life doing this, but it's hugely valuable. It enables me to gain perspectives across the value chain, which is crucial for learning about an industry or business.

I don't really look for opinions in these calls, which might sound simple, but many funds use this service to validate or seek different opinions. I focus on understanding how things work—how an industry or business operates. I try to be objective and look at the facts, like how a unit moves through a value chain or how a distribution network functions. Once I feel I understand an industry, I might consider someone's opinion, but very carefully. Even then, when gathering opinions, it's done in an objective manner.

I look for a story about what actually happened—a fact-based narrative that reveals how someone behaved or how something works. For example, if I'm examining how gross margins might increase or assessing management's quality or integrity, I wouldn't just ask for someone's opinion. Instead, I'd structure questions to bring a situation or event to life, allowing me to form my own judgment about the story or event.

There are many nuances in using this service effectively. We can explore these over the next few podcasts on primary research. It's critical to my process, and I believe it enhances how quickly and effectively you can learn about an industry or business.

It feels like one of the biggest shifts we've undergone in 10 years of this work, with probably 2,500 to 2,700 interviews with experts, is moving from asking people what's going on or what they think, to asking how something works. Opinions, as we look back over a decade, are pretty cheap and often deceptive. Instead, asking people to walk you through their day-to-day activities is more insightful, though it's not as glamorous as asking a CEO where they think a business is headed.

It's also very difficult to do that rigorously. It's easy to just ask where they think margins are going or the size of the market. Then there's the authority bias, which affects us all, even if we think it doesn't when listening to people with years of industry experience. I always say it's about coming from first principles. Most of us investors sit behind desks and type all day; we're not selling products or running stores. To think we know how that truly works is beyond me. I don't think I've changed much in how I do this work. I like to think I've gotten better and can spot nonsense quicker. Looking back, I've appreciated the artfulness of the process and the nuances of asking questions, what a question means, and how to listen. We can discuss these topics over the next few hours. Today, we can start with the relationship an analyst might have with an expert network. How do you submit projects to a network? How do you get the best out of these companies? From our experience, there's a lot to improve on both sides, the network and the analysts. We can discuss that today.

We will do that, and I'm very excited. As we set this up, one thing not discussed enough is how problematic this work can be. It's worth addressing that while it's valuable to spend time in the field and speak to real people, it's less discussed how dangerous it can be to have your views influenced by others. Speaking to executives early in your process can be problematic, and assessing the believability of someone from a transcript is difficult. There are many issues that can degrade the potential of this work. We won't go on about it for too long, but how do you think about the risks of doing this work?

Where do I start on this? It depends on how you use the service. I use it to learn how a business or an industry works, not necessarily to validate a thesis. The thesis or judgment typically comes from that work, from that scuttlebutt. If you need to speak to 100 executives to validate your view, it's probably not that much of an interesting opportunity anyway. Some of the best investments are no-brainers, and you don't need to speak to any executives. I use a service like ours as a learning tool to navigate and understand an industry and a business. When you get towards the end of the process, you can get more sophisticated if needed in testing specific hypotheses.

Some of the best use cases of primary research for me have been work I did 10 or five years ago on a company. I spent six months learning about the industry, and then something happened relating to the industry or company performance. I felt I had the fundamentals and first principles understanding of that industry and business, which allowed me to benefit from a price drop or recent event. It depends on how you use these services. There's no doubt there are huge risks in speaking to experts including authority bias.

These risks exist when speaking to current management as well. They can be even more persuasive, and you can be in awe of their charisma and achievements. This doesn't stop with working with expert networks; it's with everything. I only know my own approach to this work, but you must be careful when speaking to anyone, whether former or current management, in terms of your own psychology and protecting it.

That's an important qualifier for this conversation. It's crucial to highlight how deceptive it can be to read transcripts and have conversations, feeling like you know something when you don't. We take intellectual humility seriously, considering we're operating at a distance and how long it takes to truly understand how an industry works.

I found myself doing this before. Historically, someone would ask me something, and I would just regurgitate what I heard from an executive. I checked myself and thought, what am I doing? It just came out. It's important to consider when and how you use this service in the research process. If you jump into calls early without knowing how to do the work, the industry, or the company, and haven't done independent research, read filings, or tracked the company, you're more likely to just repeat what you've heard. Especially early in the process, it feels like you're climbing the learning curve quickly because everything is new. But without principles or a framework to validate what you're hearing, you might take it as your own opinion or gospel. You could start repeating it or grounding yourself in something unvalidated. 

Just to clarify for our audience, when we say "blow up," we're not suggesting the industry will disappear. It's to convey that much of the work done isn't actually value-adding. People aren't learning anything incremental. Many opinions are recycled, and surface knowledge is disseminated. Looking at your process, our process, and our partner network's process, we work with funds today that do part of their learning publicly through our platform. These funds are experienced, typically some of the most experienced practitioners of this work or users of primary research in their investment process. There's a fair amount of variety in how our partners use our expert sourcing infrastructure through our partner program. We'll add nuance as we continue this conversation. For you, let's discuss starting projects. When do you initiate projects as part of your investment research on a business?

Well, after I've done a decent bit of upfront work, typically.

Could you define "decent"?

It's a wide spectrum, depending on my knowledge of the industry. For example, I can quickly ramp up on VMS, B2B software, or distributors today because I've studied many of them for a decade. However, if it's something entirely new, it will take me some time to read and understand what to look for. If it's an industry or business I'm familiar with, I can grasp it quickly. Much of the work I do involves topics I've covered and examined for years. Typically, I conduct around 300 calls a year, with four to 10 calls per company, covering 20 to 30 companies annually, plus maintenance work.

It's important to note that the work primarily involves the same group of companies, some for up to a decade. While examining 30 to 40 companies may seem like a lot, it's not new material.

You might explore a couple of new businesses each year, but much of the work involves deepening your understanding. In various industries, such as vertical market software, aero components, vertically integrated e-commerce, industrial distributors, and certain brands like Fever-Tree, which you've worked on for eight or nine years, you're continuously deepening your knowledge of an industry, business, or value chain.

To clarify, you've read all the filings and considered the industry in your own words. When we discuss preparation before submitting a project, you've thoroughly reviewed all the filings. By the time you're engaging in our case, a sourcing infrastructure, you're using the In Practise team to find people. For someone listening who's an analyst at a fund, they would engage Tegus, Third Bridge, GLG, etc.

Let's take Perimeter Solutions as an example. It's a company I'm currently working on. It's a new company for me, so I categorize it differently from older companies where I do maintenance work. The maintenance work is straightforward. It might involve reading a new filing or an earnings call that sparks a new angle, like a new competitor or concept.

An example of maintenance work is my recent project on understanding Constellation Software’s approach to organic growth. I need to review all the filings and everything Mark Leonard has said about organic growth over the past 20 years. It's a different process.

As for Perimeter, it's a specialty chemical business selling fire retardants, aerial fire retardants, and Class A and B foams to prevent wildfires. I discovered it through Nick Howley, who is the chair and former CEO of TransDigm and on the board of Perimeter. That's how I came across the company.

I enjoy reading the original S-1 filings of companies. It's a habit I find valuable. Sometimes the company has changed significantly, but it still provides insight into what the company looked like when it went public. For Perimeter, it was not long ago, in 2021. Sometimes, it requires digging back, like I did for Halma in the 1980s and other companies from the 1990s.

Sometimes you can't find them on the IR page because they might only have the last 10 years of filings. I typically like to read at least the first filing such as the S-1, the most recent 10-K, and any significant filings in between, such as a major acquisition. This initial process is about understanding what the business does, what they offer, the business model, customer base, potential moat, and having a framework for that. I also have the financials in front of me to visualize them. Additionally, I spend time looking at how the stock has traded over the last few years and the company's current life cycle. For example, with Perimeter, I came into it a few months ago. They had a bad fire season last year, and their biggest competitor in the retardant business, which was approved on the qualified product list last year, was disqualified in March. You need to get up to speed with the competitive dynamics today, what actually matters, and what's driving the stock and the investment thesis from here. You need to understand how the business and industry work, which can take months, especially if you're picking up a specialty chemical business brand new.

Obviously, things change, and how they might report changes, so you can get left behind quickly. Learning to do this effectively has been the biggest change in my process over the last five years, which comes from doing it many times. It's about reading the last filing, the first filing, recent earnings calls, and gauging where the stock is now. You then develop a framework of questions to validate how you think the business works. For the Perimeter work, many questions and interviews focused on understanding how to fight a wildfire. Retardant doesn't extinguish the fire; it builds a perimeter to stop it from spreading, hence the name. There are different types of products, and most calls were about understanding these products, how forest services fight wildfires, and the relationship between the US Forest Service and Perimeter. We then delve into the current dynamics with Fortress and more recent developments, which we publish in the analysis. This process varies slightly based on the company and industry.

We want to emphasize that going into detail on this point might feel a bit tedious, but it's important. We're suggesting there's a real caution to engaging a primary research or expert network service provider before doing this groundwork. Our experience over 10 years and a couple thousand calls shows that engaging a provider without this context can lead to low-quality calls. For us, it has significantly reduced low-quality outcomes. This might not be the case for everyone, but it has had a big impact on our work.

Now, regarding how you actually work with the research team, so you've done the preliminary work, you have a set of working hypotheses on the business, you've taken a view on what, what might seem interesting. Again, important to hold those opinions really lightly, as we know they might change pretty quickly. Or what we think might be important might turn out to be wrong pretty quickly. So we try to hold these views lightly. But as you actually engage Adrian as it is, as is the case on our side, as an analyst engages their account manager at Third Bridge, what are you actually doing and how are you submitting projects and how have you learned to submit projects?

This relates to how you're using the service. I can only really explain how I use these services. I source myself and do some quick presourcing because I've sourced hundreds of people. Before submitting something to Adrian, I can guide him on where to look and what areas to focus on. I've already done the presourcing process to understand who's out there.

One important point when submitting a project is understanding the org structure of the company you're studying. Sourcing helps you quickly figure out how these businesses are organized, which is typically not how they report in a 10K. They might try to hide things or distort the reporting. They might report by geography but are not organized that way.

There might be legitimate reasons for this. Sometimes the way the business works is genuinely complicated.

That's a generous way to put it. If you ask Amazon, Google, or Microsoft why they don't break out some of these companies, it's because...

By all means, you're absolutely right in those cases.

My point is that the way companies report in their filings often doesn't align perfectly with how things work in reality. This means that if you submit a project saying you want to speak to the head of a certain division based on how the company reports, but they aren't organized that way, that person might not exist. Understanding the organizational structure and how the company actually operates will make you more effective in finding the right person to speak to. You can be more accurate when sending that project submission to the network.

A big part of what I do is figuring out how they are organized. Are they organized by division? For example, Perimeter has fire safety and oil additives. Are they actually organized like that? Within the fire safety business, do they have separate businesses? Do they have separate sales teams, or is it the same team selling a range of products to each customer? These are questions that analysts should be able to answer or figure out themselves, which is really powerful for the network to narrow their focus.

I think a first step is understanding how the company is organized and being specific in relaying that information to the network. This helps focus their search on who you really want to speak to. It prevents situations like wanting to speak to the former head of M&A when there's no M&A team because the CEO mainly handles it. These simple things can save a lot of time and make project submissions more effective.

My process involves doing this myself. I'll go on LinkedIn or use other methods to figure out former executives, management team structures, and board changes. Then I relay that information to Adrian. We've worked together for a while, so it might be as simple as saying these are separate divisions, or it's a functional org, and this is who we're looking for. Sometimes, you might want to look at a person who handles multiple roles.

Offering different avenues to explore can be helpful. Often, I see projects from funds that are narrowly focused on an idea or input for their model. For example, wanting to speak to a branch manager with 20 years of experience who left within 12 months could limit the pool to five people, even if there are 1,500 or 2,000 stores. 

Being flexible in project submission with an understanding of the org structure is key. You might say, "I'm interested in branch operations or cost structures at the branch level. I want to speak to a branch manager ideally, but they're organized like this." Every region has branch managers, assistant branch managers, regional managers, and general managers. There are six regions in the US, for example. Regional managers oversee branch managers and have a good understanding of operations.

They might be a better person to speak to because they can provide an unemotional perspective on improvements. Understanding the org structure and what you're looking for will help you identify the possibilities of who to speak to. It will direct the network to better source the person you need, who might not be who you initially thought you wanted to speak to. Often, it's not.

It's important to understand the organizational structure and have some flexibility regarding who you are willing to speak with. What have you found in this regard?

Now, let's delve into some of the challenges that come up with more complex projects. We've structured our team differently than networks typically do to source people. Let's discuss that a bit.

We never intended to get into the business of sourcing for others. It's a lot of work and quite challenging. However, an insight came when we were sourcing for ourselves. The light bulb moment occurred when we published interviews with executives we sourced ourselves. Many people wanted to speak to them because they were unique or great to talk to. It became clear that they were likely better suited to answer my questions because I was the one sourcing them and looking for specific answers or angles.

The challenge in the industry, at least from our perspective, is the significant asymmetry of information between the fund, the customer, and the network, the vendor. The fund or customer is typically more knowledgeable, having invested hundreds of millions of dollars in a company. They should be more informed about the industry and the business. A lot of information gets lost in translation when submitting projects and communicating with the network.

This makes it difficult for the network to truly find what the customer is looking for. Additionally, the way these networks are organized is very volume-driven. While volume is crucial, it creates incentives that don't necessarily align with the customer in finding true insights. We've tried to organize ourselves to limit that bias. We have a different structure with internal analysts. These analysts spend roughly 50% of their time with an unlimited research budget, conducting their own interviews, which are available on our platform. The other 50% of their time is spent serving our hedge fund partners.

This approach potentially reduces information asymmetry by allowing analysts to interpret complex projects. For example, understanding AWS, Kubernetes, and various services requires someone who is an investor or knows how to find information through filings and sources effectively. Our analyst role manages these accounts and hedge fund customers. These partners are effectively investors themselves, so you have investors speaking to investors. Our principle is that every IP customer should deal with another investor at IP. Investors serving investors.  

The point is, when dealing with a traditional network, to bridge information asymmetry, especially on more complex projects, there's a need to provide a detailed brief. You need to offer guidance on the organizational structure and provide clear lists of questions.

There's also a need to be flexible about who you're willing to speak to. Beyond that, the main point is that we're set up in a peer-to-peer manner. You can rely on us and an investment analyst to do the work, read the filings, examine the value chain, and explore various sourcing options.

When dealing with a traditional network, it's very challenging to expect much. This was our experience after being served by a network for five years as internal customers of one of the major networks. We found that you really have to provide a lot of detail in the brief because the person serving you typically does not have a business or investing background. This can be overcome with extremely detailed project briefs.

There isn't a magic bullet; it's still challenging. However, over time, we believe our structure tends to source higher quality executives more consistently, providing a better experience for the hedge fund. Ideally, this builds more trust with our customers. It's not just about the sourcing process. If you're an analyst or a customer of an expert network, you should provide as much detail as possible regarding the organizational structure, what you're examining, and the flexibility required.

From the network's perspective, there's still a lot of work involved. Even with a good brief, you must engage with the executive correctly, ask the right questions, and conduct an effective introductory call. You need to connect with them effectively. If you don't understand what Kubernetes is, how can you assess the quality of this person? Our structure is designed not only to find the right person but also to train our team to have engaging conversations that help determine if this person is suitable for the customer. Can they provide the insight the customer needs?

There are two elements. There's sourcing the right person, do we have enough information and do we have the expertise internally for In Practise to search through these channels, through distribution channels, through the suppliers, through big customers? Do we understand what we're looking for? Do we understand how Kubernetes is sold to customers? Do we understand what Kubernetes even is and how customers use it? What is it integrated with? Do we have the expertise to do that and then find the person? And then can we have engaging conversations? Can we actually ask them the right questions on the introductory call that gets enough information that says, this is the guy you want to speak to because of XYZ? And that's a difficult process.

Additionally, when you consider the incentives, if there are executives already in the network, there's less motivation for expert networks to search for a better person if you can simply send the existing contact and get paid for the volume. We need to be aware of this and organize and incentivize our team to always find the best person for the customer. It's tricky and requires a lot of effort to find these individuals.

It is extremely challenging and time-consuming. Assessing the believability of the operator is crucial. It's about having the internal capacity to evaluate whether this person's expertise is relevant, especially since people often exaggerate their skills.

Let's discuss titles. It's a common issue when a project requests to speak with someone holding a specific title that either doesn't exist or is extremely rare, perhaps only held by someone who's been in the company for 25 years.

Another aspect is that everyone tends to embellish their titles. If you don't understand Kubernetes or what you're sourcing for, how can you comprehend what a title means? For instance, what does "Product Manager" mean at Google or any major company? It's important to get granular and understand these businesses to truly grasp what these titles entail, even in sales. That's where we try to focus. Titles alone don't convey what a person does daily. Titles rarely mean much. 

Not taking titles at face value means ensuring your vendor isn't just asking experts to self-certify. It's not just about asking them if they have certain expertise; it's about digging deeper. As investors, especially earlier in our careers, we often saw projects submitted to vendors who then passed questions to experts. The experts would claim they could discuss topics for a high fee, promising great value. However, the calls often proved unhelpful.

To address this, vendors should conduct phone-based pre-qualification calls, lasting at least 15 minutes, sometimes up to 45 minutes. This helps determine an expert's competence by exploring their daily tasks and reporting structure.

To illustrate, if you're researching Perimeter, you might want to speak to a sales representative, for example. Typically, the network would simply ask if they can discuss products like Phos-Chek, its growth, and margins over email. Most executives will claim they can, for a fee. Anyone can say yes to a set of five questions without providing any substance. Instead, the network should be calling them and asking what products they sold, their annual sales, targets, regions covered, and major customers, especially if public. This helps gauge their actual sales volume and product revenue. Also, inquire about their position within the sales structure, who they reported to, and who reported to them.

Regarding the organizational structure, if you've done your homework, you should know how the sales team is structured. Ideally, if you're looking to speak to a salesperson, you should know that the sales team is structured geographically, with each region having a product line. This structure rolls up into one P&L managed by the country GM.

To understand this better, you could approach the country GM for clear visibility over the product or the product line manager for a specific region. Internally, when a project comes in, we do this work ourselves to figure out the organization and team structure. We identify the people who could add value to the project.

Specifically, if you're sending this to GLG or Third Bridge, ideally, show them the org structure and explain how the business is organized and who you want to speak to. The challenge is that understanding the organizational structure takes time and effort.

You need to be motivated to do it. As we wrap up this part of our conversation, let's consider how experts are presented. What have you learned over the years to ask of our team that an analyst could explicitly demand from a vendor if they weren't working with us?

I think it ties nicely with what we just discussed. I don't necessarily focus on the title, although I do look at it. For example, if someone is a product manager, I want to know exactly what they were doing. Were they selling the product, manufacturing it, distributing it? How much were they managing? Were they writing code or not? Being specific about their daily tasks is very valuable to me.

If someone has direct P&L control and they were building, selling, distributing the product, and managing the P&L, that's a very different conversation from someone who is only doing marketing, which is common in big tech companies where others write the code or integrate with different products. Our notes on how we present executives have evolved to be much more granular, detailing what the person has done and why it's valuable, making it relevant for the investment firm or company.

For example, if you're speaking to a salesperson, it's important to know how much they sold per year, which customers they dealt with, and how representative that customer base is of the total group. This helps the partner understand how to interview this person. Otherwise, they might spend 10 minutes of the interview just figuring out which customers they managed—big, small, or medium ones—and how representative they are. If they only managed small tech-focused customers, which might be only 1% of the revenue, that's not relevant to me.

The intro call process requires getting granular to understand not only what the person did but also how relevant it is to what the customer is looking to understand. If you're finding someone who manages a small product line that's just scaling and doing $1 of revenue, it's probably not relevant. Understanding that is crucial.

This approach is central to doing this work properly. To clarify for our listeners who are not familiar, when we say partner, we mean what a typical expert network would call a customer, which is an investment fund. In practice, partners are professional investors only.

They expect a clear articulation of everything we've discussed—how someone fits into an organizational structure, what they do today, their core strengths, evidenced by what they have told us they have done. This minimizes the risk of a low-quality interaction, and we find that this approach really works.

This is very challenging. You also have to consider what the person truly thinks about the company. Did they leave on good terms or bad terms? There's a subtle side to this that we haven't discussed yet. Firstly, there's the objective reality of doing this work well and conveying what the person has done. Then, there's providing information to our partners or customers, like whether someone didn't leave on good terms, so they might have specific views because of certain reasons. There's a significant role that the network can play in effectively providing a bio or notes from the executive to the customer to help them conduct a better interview. It starts with understanding their daily activities and title, and then you delve into the subtleties.

Understanding the subtle aspects of what motivates an expert and how to bring out the best in someone is crucial. People need to be treated differently. Some value $500, $600, or $1,000 an hour, while others are indifferent to the fee and seek something else from the interaction. Understanding this is essential, and we've realized how difficult it is to do this work unless you genuinely care. Every project is different, and every executive is a unique individual requiring a different approach to build a connection, trust, and get them to open up and share the information needed to assess believability. We've found that there's no other way to do this work at an acceptable level than to have someone who genuinely cares doing the sourcing. If you want it done at a high level, you need people who truly care.

Yes, it's really hard. Part of what we've learned over the years is that we use the term "partner" for a reason, not "vendor." Even though we've mentioned vendors, we like to think we partner with our partners, whereas most of the industry considers themselves more as vendors or behaves that way. We see this often with some funds that send projects to multiple vendors, viewing the service as commoditized. This might come from the old private equity world where speed is crucial. But if we talk about the work we've discussed over the last hour—understanding the organizational structure, knowing who to speak to, being flexible, and being clear about what you're looking for—you need to trust and partner with someone. If you're sending a project to five or six people at once and having them race, it's hard to build the relationship required to do this work at the level we aspire to.

There may be very legitimate reasons for someone to be in a rush. To be clear, that's a different kind of work and relationship. Major networks can add plenty of value when you're in a rush and need to quickly speak to a pool of people.

As you mentioned, there are long-term, fundamental, concentrated investors. These investors typically own fewer stocks and have a reduced watch list. The bar to add value is much higher for them than for other types of investors.

In cases where the bar is higher, the investor might have been working on the business for years. We've found that a sourcing infrastructure staffed by people who can interpret and bridge the gap of asymmetry is essential. It's hard to do this work otherwise.

It's not easy. Give it a shot.

It's not easy, but it's a lot of fun. Thank you for listening in today.