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Why Private Equity Firms Call Customers Before Closing · Private Equity Data Guy

• 0:00
  The cliche I always tell my private equity clients is customer perception is reality.
• 0:04
  I don't care what you believe within the four walls of your business.
• 0:07
  That is not driving purchasing decisions.
• 0:08
  What's driving purchasing decisions is the perceptions of your customers, who are ultimately the ones responsible for growing your business.
• 0:14
  What AI still really struggles with is understanding the nuance of being able to connect unstructured data.
• 0:20
  You really still need kind of human intelligence to understand.
• 0:23
  You have the opportunity to understand and pick up on things like body language or tonality, or pull out different threads and ask probing questions to really understand.
• 0:31
  Okay, what's the underlying issue here?
• 0:33
  AI doesn't really have the nuance to do that quite yet.
• 0:36
  And I think folks still value getting on the phone and just talking with a human because it shows that you value them and value their time.
• 0:42
  Behind every value creation plan, there's a data problem nobody wants to talk about.
• 0:46
  Fragmented systems, metrics nobody trusts, and decisions made on gut feel dressed up as analysis.
• 0:52
  Welcome to the PE Data Guy.
• 0:54
  Each week, host Graham Crawford talks to the operating partners, advisors and practitioners who are doing the work inside portfolio companies.
• 1:01
  If you care about what actually drives returns in the market, then you're in the right place.
• 1:05
  The PE Data Guy starts now.
• 1:08
  Dan Granger leads a private equity practice at T4, a voice of customer research consultancy that backed into PE almost by accident.
• 1:16
  A portfolio company research study landed on a sponsor's desk and the sponsor asked if they could do the same thing on a live deal in.
• 1:22
  In 30 days instead of eight weeks.
• 1:24
  That truncated product became a diligence offering that now drives a chunk of the firm's revenue.
• 1:29
  Dan has spent a dozen years in customer research from Qualitative Consulting through Medallia during its Take Private era.
• 1:36
  So another private equity experience there.
• 1:38
  And today he lives inside LOI Windows, interviewing the customers at acquisition targets.
• 1:42
  We are talking about what customers tell you that management never will.
• 1:47
  Dan, welcome to the show.
• 1:48
  I'm so glad we met and I'm so glad we were able to make this recording happen.
• 1:51
  Yeah, it's an absolute pleasure to be here.
• 1:53
  I appreciate the invitation.
• 1:54
  Yeah, likewise.
• 1:55
  I find the stuff that you do fascinating and really informative in the context of private equity.
• 2:01
  So looking forward to today and then looking forward to meeting in person in November when through our connection of viewers, we're going to be at the same conference together.
• 2:09
  So I look forward to that.
• 2:10
  Yeah, likewise, likewise.
• 2:11
  I'm really looking forward to finally getting together in person.
• 2:13
  It's well overdue.
• 2:14
  Yeah.
• 2:15
  So for anyone who wants to meet Both me and Dan Health Care and Private equity Opus Connect event in New York in November.
• 2:24
  Book your tickets now.
• 2:26
  Were a great representative set of just how awesome the audience is going to be at that particular conference.
• 2:30
  So yeah, looking forward to that.
• 2:32
  Yeah, absolutely.
• 2:32
  Can't recommend it enough.
• 2:34
  In one of the least surprising parts of that intro, you told a private equity practice that you needed eight weeks to do something and they said no, 30 days.
• 2:42
  Right, right.
• 2:43
  Isn't that how it goes?
• 2:44
  Talk to me about that.
• 2:45
  I mean, that was the birth of your PE practice at T4.
• 2:48
  So talk to me about what you had, what you went through to compress it from eight weeks to 30 days.
• 2:53
  Because I know you weren't going slow on purpose before, so you must have had to make some cuts like what did you throw away and what did you keep.
• 3:00
  Yeah, great, great question.
• 3:01
  Interestingly enough, our process is still actually fundamentally the same whether it's under a 30 day LOI period or sometimes they're longer.
• 3:09
  You know, sometimes you do have 45 days or 60 days in an LOI period.
• 3:12
  But fundamentally our approach, our process or steps are the same whether a private equity firm brings us into diligence deal or if the operator CEO came to us directly and asked us to do a voice of customer study
• 3:23
  for, for his, his firm directly.
• 3:26
  So the steps are the same, but we found is there's a couple of opportunities really though, to consolidate some of the phases.
• 3:31
  Probably unsurprising to this audience is when a deal is afoot, there's already been so much diligence that's taken place before the LOI period for sure.
• 3:39
  They often have very, very clean customer data.
• 3:41
  That's a huge time saver on our end is just the sheer number of days it takes to compile the contact list for customer interviews.
• 3:49
  And so typically if we're brought in for a VOC engagement, that may take two or three weeks just to corral sales folks and account managers and get accurate contact information for customers.
• 3:59
  But in the lens of diligence, that heavy lifting has typically already been done.
• 4:04
  And so that allows us to kind of compress our planning window by a number of weeks.
• 4:08
  And the other thing that's really a benefit to us is how our team is structured.
• 4:12
  All of our researchers are directly employed and trained by us.
• 4:15
  So we're not using call centers or grad students or AI chat bots.
• 4:19
  Right.
• 4:20
  So we have this deep bench of researchers that allows us to deploy a team very quickly.
• 4:25
  I can have boots on the ground as little as 48 hours for a project kickoff.
• 4:28
  And that depth of researchers also allows us basically to just double up on, on research capacity.
• 4:33
  And so, you know, if one Researcher can do 15 interviews in a week, we can easily staff two or three researchers and really condense that research timeline.
• 4:40
  So the areas that we see, the time savings really comes from having clean data to begin with really expedites the process.
• 4:47
  As a data guy yourself, I'm sure you can appreciate that.
• 4:50
  Well, I wasn't going to wade into this arena, but I've had many customers tell me they've got clean data and find a slightly different story when I send the team in.
• 4:56
  Clean data is data that is good enough for the purpose that it's being required.
• 5:00
  And I think from your perspective, you need a good set of customers to be able to reach out to and talk to.
• 5:04
  Right, right.
• 5:05
  So in terms of like the cohort analysis and you know, the projected lifetime value and all that other sort of stuff, maybe I've let lesser importance than it might be to financial due diligence, for example.
• 5:17
  Right.
• 5:17
  Yeah.
• 5:17
  Really the data points we often need is it's a phone number and email for the customer ultimately, obviously someone who's a decision maker and has intimate familiarity with the business.
• 5:26
  And then revenue numbers are very helpful for us.
• 5:28
  They're not a must have, but especially on deals, folks want the feedback weighted by, by revenue.
• 5:34
  Typically when you have, especially in the lower middle market, there's oftentimes a lot of customer concentration.
• 5:39
  What one customer says, says may carry a lot more weight than, you know, somebody kind of from the longer tail.
• 5:45
  Yeah, indeed.
• 5:45
  That makes, that does make sense.
• 5:47
  Yeah.
• 5:48
  We could have a whole conversation about clean data, but I'll save that for another time.
• 5:53
  We'll talk about it in New York.
• 5:54
  So once you've got the, the, the data, what steps do you do then go through?
• 5:59
  And another question I want to come back to.
• 6:01
  You talked about boots on the ground.
• 6:02
  Companies deliver service and product in all sorts of different ways.
• 6:04
  Some of that is in person.
• 6:05
  Like do you ever deploy researchers in person or is it mainly virtual that you work in?
• 6:10
  Yeah, good question.
• 6:10
  On diligence, it's always virtual because the timelines are tight and it's just a heck of a lot easier to get somebody on a zoom than it is to get with them in person.
• 6:18
  We do on occasion do some new product development testing, that sort of research.
• 6:21
  Very rarely in a diligence window.
• 6:23
  It's almost always done virtually.
• 6:25
  Yeah, that makes sense.
• 6:26
  That makes sense indeed.
• 6:28
  So the findings that you come up with during that Diligence window.
• 6:32
  Do you ever get visibility into how that impacts the deal or how that impacts the 100 day plan?
• 6:36
  Post signature?
• 6:37
  Yeah, absolutely.
• 6:38
  I think when we approach our work we really view it as kind of trying to serve two masters.
• 6:42
  Right.
• 6:43
  Ultimately, the private equity firm or the capital provider is often our client.
• 6:47
  Right.
• 6:47
  We're contracted with them and they have a very different lens.
• 6:49
  Right.
• 6:50
  They're trying to understand where is the risk and the opportunity.
• 6:52
  Are there accounts that are at risk?
• 6:54
  Their perception is a little bit, a little bit different.
• 6:56
  They have typically again they brought us in a period so they already have some investment hypothesis where they think there's room for growth, where they think there may be some risk.
• 7:04
  And so that that lens that they want is a little bit different.
• 7:06
  Whereas for the operators it's all about value creat.
• 7:09
  And so I find that is a really nice place for us to sit because we, we operate in this world where we're able to deliver those insights.
• 7:17
  Frankly.
• 7:17
  Is this a good business to buy or a bad business to buy?
• 7:20
  Strictly from the customer perspective.
• 7:22
  But when you're having those conversations, if you have 30 minutes on the phone with a customer, you have all this opportunity to talk about, well, how can we help you win?
• 7:29
  Right?
• 7:29
  What do you need from us going forward?
• 7:31
  How does our value proposition stack up against the competition?
• 7:34
  And a lot more kind of granularity on the account level.
• 7:38
  That's really where a lot of our operators find the value that works.
• 7:40
  So it's almost kind of a 30,000 foot view focus.
• 7:43
  For the capital provider, oftentimes it's either challenging or confirming some of their hypotheses that already established through earlier phases of diligence.
• 7:51
  Whereas for the operators it's much more about, okay, post close.
• 7:54
  What does the value creation roadmap look like?
• 7:56
  Where is there opportunity and where might there be opportunity that we didn't already expect?
• 8:01
  And it gives us an opportunity to pressure test some of those assumptions oftentimes again, we do most of our work in the lower middle middle market.
• 8:08
  So operators are relatively resource constrained and so it's a great time for them to have a conversation with customers.
• 8:13
  Like if we suddenly had this influx of capital and could do things a little bit differently, how could we better serve you?
• 8:19
  Yeah.
• 8:20
  Which is the value of bringing the P in the first place.
• 8:22
  You know, I work in both diligence and value creation midhole with my teams and I typically find that the diligence work.
• 8:29
  I'm typically speaking to employees rather than customers.
• 8:31
  Right.
• 8:31
  But the people are very Compliant because they know what's going on.
• 8:35
  They're gen into the situation.
• 8:36
  They've been instructed by the, you know, the incumbent leadership team to provide all the information that's being asked for.
• 8:41
  And I find it one of the easier modes to work in.
• 8:44
  How does that dynamic change when you're talking to customers who might not, you know, understand that there's a PE acquisition going on and might be concerned about.
• 8:51
  Well, I think, like, how do you tread that line of not alarming customers?
• 8:55
  Yeah, we're very intentional about that.
• 8:57
  So there is never any mention of a deal at all through any of our work and how we're able to do that.
• 9:02
  And that's a real important reason of why we encourage our operators to always have a seat at the table.
• 9:08
  The operator is actually one that introduces us to the target, positioned as a customer satisfaction study.
• 9:13
  Again, the nature of the questions that we're asking are, again, the exact same sorts of questions we would ask if the operator was the one that brought us in indirectly.
• 9:20
  And so the nature of the conversation is all about understanding the customer experience, understanding how we can better serve you going forward, understanding where there might be deficiencies when there have been issues in the past.
• 9:31
  What was problem resolution like?
• 9:33
  And again, where's their opportunity to better serve you going forward?
• 9:36
  And so the operators make that introduction on our behalf.
• 9:40
  So they'll, you know, they'll send an email to their customers and basically say, hey, you know, we value your input as a strategic customer.
• 9:46
  We want to better meet your needs.
• 9:48
  We want to be better partners to you are.
• 9:50
  Would you be willing to give T4, 20 or 30 minutes of your time so we can better understand how to do that going forward?
• 9:55
  And so that positioning goes a long way in not just putting the customer at ease because there is no mention of a deal, they don't view it as a reference check.
• 10:01
  And so it gets you better, cleaner data because you don't have someone who says, well, you know, I've done business with Bill for 15 years.
• 10:08
  I love Bill, we're golf buddies.
• 10:10
  I want him to get a premium when he sells.
• 10:12
  So I'm going to give him a rave review.
• 10:14
  You know, it's positioned as that customer satisfaction study so you can get some of that tandem feedback about really what.
• 10:19
  Where there are deficiencies today and where the opportunity lies.
• 10:22
  Yeah, because that's what's useful, right?
• 10:23
  I mean, it's nice to hear good things about the product, but if you were trying to create value, the.
• 10:26
  The other side of the coin is probably.
• 10:28
  Is probably More useful.
• 10:29
  Speaking of the feedback, you know, this is during a diligence window is probably the best time to get feedback on the value creation plan and the hypotheses that kind of stand behind it.
• 10:39
  Is there a type of hypothesis that what you find most often contradicts versus what you most often find back something up?
• 10:46
  Where do the gaps normally appear?
• 10:48
  Yeah, it's a really good question.
• 10:50
  And there's a tendency in the private equity space for folks to be concerned that management is trying to hide something that does happen on occasion.
• 10:59
  I can give you an example.
• 11:00
  We did a deal for a packaging company based in South Africa and the financials were excellent.
• 11:07
  You know, kind of double digit growth year over year, had a slew of kind of major global food companies as the clients.
• 11:13
  It was really kind of an ideal opportunity for a private equity firm to come in and make the acquisition.
• 11:18
  There was a ton of customer concentration.
• 11:20
  You know, the top 15 accounts were probably 80% of revenue, give or take.
• 11:25
  What we found in our research was all of the kind of what the management team had shared in the management reviews was accurate.
• 11:30
  The, the firm had a great reputation, quality products, you know, lead times and delivery times were, were standard in the industry and they were competing well in the market.
• 11:39
  But what management didn't disclose was that there was some foreign imports that had hit the market coming in at 20 to 25% lower than cost coming in from Africa, Turkey and the Middle East.
• 11:49
  And so in our customer interviews, what we understood was that of Those kind of 15 top accounts representing 80% of revenue, 14 of them were already in conversations with alternative providers and expected a price concession of 20 to
• 12:01
  25% in order to continue to compete for that business.
• 12:04
  And so in that instance, that was one example, they're kind of few and far between where management was kind of aware of the situation and was trying to kind of keep it, you know, brush it under the rug
• 12:14
  and really wanted to exit because those new entrants had entered the market.
• 12:18
  And in that case, the price was renegotiated for 25 million off the, off the original asking price, which represented about 30% of the original offer.
• 12:26
  And so that deal did go through.
• 12:28
  That's an example where, you know, management was aware of the situation.
• 12:31
  You know, their reaction when we shared that it was kind of, you know, all right, yeah, you caught us.
• 12:36
  Let's, let's, you know, let's reprice this one.
• 12:38
  But that's few and far between.
• 12:39
  Oftentimes there isn't any ill intent or intentionality by management to hide anything.
• 12:44
  Oftentimes it's uncovering things that management didn't even know to be true.
• 12:47
  One of the benefits of bringing in a third party conduct this sort of research is you get a lot more candid feedback than typically folks who are often having those client conversations, whether it's a sales team or, you
• 12:58
  know, whether it might be research and development, depending on, you know, the type of business you're working with.
• 13:02
  But the folks who kind of own that customer relationship, they're often getting a very narrow, they're getting very narrow feedback from the customers, particularly on sensitive topics like the competitive environment and what the competition is doing in the
• 13:14
  space.
• 13:15
  When you bring in a third party, especially if you're bringing in a group that has, you know, professional researchers who are trained at building rapport and credibility and probing and pulling threads and making folks comfortable, what we find
• 13:27
  is oftentimes it's just a lot more candid insight than the management team has ever been able to collect themselves.
• 13:33
  And in terms of your fee, like 25 million off the price, that's pretty good return on investment for contracting with you, right?
• 13:40
  Yeah, yeah.
• 13:40
  25 million saved on 15 customer interviews is a pretty great ROI, no matter how you slice it.
• 13:45
  Yeah, no, and I find the same thing during the data diagnostics as well.
• 13:51
  Bad actors are actually very rare in the world and in business they do exist, but they're certainly rare.
• 13:58
  Misalignment and lack of clarity, much more common, much more common.
• 14:03
  And you get these unintentional situations.
• 14:06
  I always talk about the situation in the mid hold work that we typically do where enterprise value is flat, growth's not being realized at all, and yet the KPIs for the value creation plan are all green.
• 14:17
  And that's often because they haven't been carefully defined and people are reporting on them with the best of intentions, thinking, this is what you intended me to measure and this is how you intended me to measure it.
• 14:28
  But because, you know, glossary terms aren't defined, standardized definitions aren't in place, data dictionary is not there, data automation is not there.
• 14:35
  Like, you end up with these two things that make it look like one of these is a lie.
• 14:41
  And it's not necessarily, there's no act happening, there's no act of lying happening.
• 14:45
  It's just a misunderstanding.
• 14:46
  Lack of clarity that leads to these, that leads to these kind of issues.
• 14:51
  Back to your model.
• 14:52
  It gives the target a seat at the table during diligence and then it hands operators the same, you know, unblinded data that the sponsor sees.
• 14:59
  I think we hinted at it.
• 15:00
  It was my last observation there.
• 15:02
  But why do you, you know, keep that the same and include the verbatim transcripts?
• 15:06
  Yeah, there's a couple of reasons.
• 15:08
  One is that again, especially as you see, kind of exit multiples continue to compress in the private equity market, part of a good deal begins with diligence, obviously.
• 15:18
  But really where we're seeing value created is in value creation post close.
• 15:22
  And so if you, if you're totally blind to that, if you don't have the lens for that, you may be able to validate some of your initial investment hypotheses.
• 15:29
  But there is really no clarity from a customer perspective on how do you create that value during the holding period.
• 15:35
  And so that's part of why we always encourage our, our private equity firms to give the operator seat at the table.
• 15:40
  The other thing is what we find is, you know, there's a lot of ego in the room.
• 15:44
  You have folks who have been successful entrepreneurs.
• 15:47
  Oftentimes they've, you know, built or run their family businesses for several years, decades.
• 15:52
  You know, oftentimes.
• 15:54
  And when, you know, for lack of a better term, a suit comes in who doesn't know your business and is brand new and tries to tell you how to run your business, that could be a real challenge.
• 16:02
  You know, it's kind of the old adage of calling your baby ugly.
• 16:05
  It's a lot harder to argue when your customers are calling your baby ugly than when a capital provider is calling your baby ugly.
• 16:11
  And so what it does is it kind of, it pulls some of that ego out of the room, and it establishes a ground truth between the capital provider and the operator about what is our customer perception.
• 16:19
  You know, the cliche I always tell my private equity clients is customer perception is reality.
• 16:24
  I don't, I don't care what you believe within the four walls of your business.
• 16:28
  That is not driving purchasing decisions.
• 16:30
  What's driving purchasing decisions is the perceptions of your customers who are ultimately the ones responsible for growing your business.
• 16:36
  And so that is, it's kind of a twofold approach.
• 16:38
  It's obviously there is this intense focus on value creation in the private equity space right now, because there has to be.
• 16:43
  That's where the money is being made.
• 16:44
  But if you can remove some of that ego from the room, it provides you with a really strong foundation to build a partnership on post close.
• 16:51
  Because you have a shared understanding of what customer perception is and what you need to do about it.
• 16:56
  Yeah, exactly.
• 16:56
  And you're working in the same Direction.
• 16:59
  You know, as someone who often has to sit in that chair and you know, call the baby ugly with that analogy, it is tricky to do, but I use objective, unblinded data as my mechanism as well, albeit it's
• 17:13
  not in somebody else's voice.
• 17:14
  But the same idea is like, well, here are the numbers.
• 17:19
  Don't argue with me, argue with the data.
• 17:20
  Right, yeah, here the, here are the, here the real numbers and you know, this is what happens.
• 17:26
  Yeah, it's, it is definitely an interesting world right now.
• 17:30
  And you talked about the focus on, on value creation and yet so many private equity funds themselves do not have a bunch of value creation professionals in their, on their staff.
• 17:40
  So, you know, service service providers like us start to become increasingly important in this extended hold period.
• 17:46
  33,000 companies are stuck past the whole period, whatever it might be that's, that's, that's going on.
• 17:53
  Has the, you know, delivering unblinded data ever backfired on you or created an awkward situation that you hadn't anticipated?
• 18:01
  I wouldn't necessarily say backfired, but I think the reality is what operators do, it's, it's personal to them and so they take the feedback personally.
• 18:11
  And so I think that what we find that is just part of the nature of our job is we just have to be human and treat humans in a human way and understand that this is personal for people.
• 18:22
  You know, this is their, their pride and joy.
• 18:24
  It's the business that they've built, you know, through their own blood, sweat and tears again, oftentimes for years or decades.
• 18:29
  Sometimes it's family owned businesses.
• 18:30
  You know, there's a lot of personal connection to the organization.
• 18:35
  And so I think it's more about just your ability to be empathetic when you deliver that data.
• 18:40
  But, but also just be honest and be truthful and be willing to again, share that customer feedback.
• 18:46
  I think one of the valuable pieces of the work that we do is providing those unblinded transcripts so folks can see, okay, you know, this isn't just a pull quote from, from one specific conversation.
• 18:57
  I can go through and read the entire transcript from a 30 minute interview and really understand the sentiment of what is driving that dissatisfaction.
• 19:04
  And how thematic is it?
• 19:05
  Was it a one off that we were already aware of an issue and they were happy with how the problem was resolved?
• 19:08
  Or is this a larger systemic issue that we need to address as an organization?
• 19:12
  And so I think it's just bringing that kind of human component to sharing the data and empathizing with Folks understanding that it is going to be personal for them and it might hurt their feelings to hear things that
• 19:20
  they don't want to hear.
• 19:21
  But the business is better for it.
• 19:23
  And I think that's the important thing to remind folks of.
• 19:24
  Yeah, yeah.
• 19:26
  And I think most founder CEOs get there eventually because, you know, they haven't built a successful business that's attracted PE interest by being completely shut down to feedback about it.
• 19:35
  Right.
• 19:36
  In my experience.
• 19:37
  Absolutely.
• 19:38
  I was going to ask you about customer diligence red flags.
• 19:41
  We already talked about one where there was a huge pressure on the price and the revenue that didn't actually kill a deal.
• 19:48
  What are the types of things that pop up in your diligence other than that one that might actually end up killing a deal?
• 19:54
  Or what are some of the big surprises that get rolled out?
• 19:56
  Yeah, I do think it varies a little bit by the nature of the business.
• 20:00
  I can give you another example just to, to provide a little bit of kind of narrative and context for it.
• 20:06
  So we did a deal recently that was for a kind of.
• 20:08
  It was a custom flooring manufacturer and it drew the attention of the New York City private equity firm.
• 20:13
  And on paper it was kind of a dream acquisition.
• 20:15
  You know, double digit growth year over year.
• 20:17
  They had some proprietary technology that was differentiated in the market, you know, 24, 25% EBITDA margins, kind of all, you know, checked all the boxes of a really, really appealing.
• 20:26
  Apart from recurring revenue, maybe.
• 20:27
  Unless they had service contracts with their floors.
• 20:30
  Yes, yes, yes.
• 20:31
  And so their revenue was entirely dependent on a dealer network.
• 20:35
  And so, you know, where we spent our time and diligence, we interview 40 different dealers across North America.
• 20:40
  What we found was, despite the strong growth, because they had this proprietary technology and weren't differentiated in the market, there was high dissatisfaction across those distributors.
• 20:50
  The net promoter score came in at a negative 56, which is frankly atrocious.
• 20:55
  One of the lower ones I've seen.
• 20:56
  Yes, unfortunately not one of the lowest I've seen, but still, still pretty terrible regardless.
• 21:02
  And interestingly enough, what we found was that that dissatisfaction was actually all stemming from a failed SAP implementation.
• 21:10
  And so it was causing delivery delays chronically, kind of across the organization, poor customer service, because things were getting lost in translation.
• 21:17
  It wasn't clear about who owned what.
• 21:19
  And so ultimately the private equity firm chose to walk away from that deal, which again, if you're a financial person and you see 24% EBITDA growing, you know, revenue growth double digit, that's a very hard decision to make
• 21:29
  to walk away from, from a business like that.
• 21:31
  And so I like that example because I think it highlights that even when the financials are good, it doesn't tell a complete story.
• 21:37
  The financials are great as a retrospective look at how has the business performed.
• 21:41
  It's not a great crystal ball into what future performance might look like.
• 21:45
  And customer sentiment I think is, is really the place where you get some of that future growth outlook.
• 21:48
  And so that's an example where again the financials were great.
• 21:51
  Every, you know, every box was checked in terms of kind of the typical kind of buy box of what a private equity firm would look like.
• 21:57
  But when you see things like chronic delivery delays that are leading to frustration and leading to their large customers already shopping around for alternatives, it's an indication that it might be one to walk away from.
• 22:07
  That's a fascinating example because ultimately you pinned the root cause there basically into a failed data platform implementation.
• 22:13
  So you can see why it's caught my interest because there's nothing wrong with SAP, right?
• 22:18
  Companies have been very, very successful successful with SAP.
• 22:21
  It's about how it's been implemented, how you've structured the data, how you've managed the flows and how you've ported and transformed your business onto it, which in this case seems like it's happened very poorly.
• 22:30
  Yeah, that is a super interesting one.
• 22:33
  What about some of the smaller problems?
• 22:35
  Smaller but more typical problems, like not deal threatening problems, but what's the most common surprise that you're delivering to people?
• 22:41
  Yeah, I think more often than not again most of our work is in the lower middle or middle market.
• 22:45
  And so oftentimes there's just very high customer concentration.
• 22:48
  So you're highly dependent on a small number of customers to sustain your kind of existing revenue.
• 22:53
  And so while there may be growth opportunities in some kind of smaller tail accounts, oftentimes, you know, a handful of customers are what the business is really, really anchored on.
• 23:02
  And so that's where we get some value by having the operator have a seat table and having that kind of account level view is what accounts are at risk and are any of those accounts to the size or
• 23:11
  the degree or the importance that it either restructures the deal or for the operator changes how they think about value creation.
• 23:17
  Post close.
• 23:18
  Right.
• 23:18
  Want to switch and put another scenario on here?
• 23:20
  You said you typically work in diligence.
• 23:21
  I want to put you in the scenario that I find myself in sometimes with two years into hold, gross flat, restless board green KPIs and those KPIs might include NPS, which is also looking green.
• 23:30
  Right.
• 23:31
  Or customer satisfaction or some form of customer satisfaction that's also looking green in order to kind of eliminate your area as a cause for the, for the, the lack of growth.
• 23:42
  Like what are some of the questions that, that companies in, in that situation should be asking their customers that they're almost certainly not asking?
• 23:49
  Yeah, my very favorite question.
• 23:51
  It's funny actually, just had a conversation with a client about this yesterday and again this gets to kind of the, the human component.
• 23:56
  And one of the areas that I think qualitative research is, is invaluable compared to something just like a quantitative survey that gives you just.
• 24:02
  Net promoter score is kind of an open ended question of if we were to meet again and call it three, four, five years and you were to say you helped us win, what did we do?
• 24:12
  Right.
• 24:12
  Leave it up to the customer.
• 24:14
  What does the customer need more of from you in order to be successful?
• 24:17
  How can you create more value for your customer as opposed to just trying to, as as opposed to just trying to, you know, expand the next contract or renew.
• 24:24
  Renew the next contract.
• 24:25
  Taking that lens of how do we help you and how do we help you be successful, that's where we find that not just, you know, fosters customer loyalty, but that is really the fuel for future growth.
• 24:35
  It opens the door for opportunity.
• 24:36
  Yeah, I'm going to write that one down.
• 24:38
  I'll write that one down for sure.
• 24:41
  My killer question, by the way, to share back in return is the people very proudly show me reports that they put together or whatever or the outcome of some process that's run underneath.
• 24:51
  And the question I ask is how do you know that's right?
• 24:54
  I love it.
• 24:55
  That's usually my stop in the tracks question, seen as we are exchanging it.
• 24:59
  So what are some of the ways that customer satisfaction can end up looking green when it isn't actually green?
• 25:05
  I've got ways where data looks green, but it isn't green.
• 25:06
  But what would your equivalent be of?
• 25:08
  Like how might a company that's reporting good customer satisfaction actually not have good customer?
• 25:13
  How does that happen?
• 25:14
  Yeah, yeah.
• 25:16
  At the risk of just telling another story, but another narrative.
• 25:19
  Stories are great, love them.
• 25:21
  Another one that I think highlights this well.
• 25:22
  So we had a project recently that was for a visual, a visualization software company.
• 25:29
  They had a great product.
• 25:30
  Customers loved it.
• 25:31
  The Net promoter score came in at a 72.
• 25:33
  So polar opposite end of the spectrum from the negative 56 that we, that we talked about earlier.
• 25:38
  But what we found in our conversations with their Channel Partners was that the ERP software that this visualization was kind of building a UX facade on top of was was actively talking to their channel partners about building the
• 25:53
  same product internally.
• 25:54
  And so despite the fact that you had built a great product and it was beautiful and people loved it and they enjoyed working with it, the foundational bones that it was built on, we're going to show up in
• 26:03
  the market and compete with you.
• 26:05
  And so that was another example that the private equity firm ultimately chose to walk away from the opportunity.
• 26:09
  And it had nothing to do with customer satisfaction.
• 26:12
  Every KPI that you could track, whether it was wallet share or supplier rank, you know, are you the preferred provider or not?
• 26:17
  Net promoter score.
• 26:18
  Some of these metrics that we use to kind of triangulate customer satisfaction on an account level were all, you know, bright green lights.
• 26:24
  And then what came out with some of the conversations with Channel Partners was that unfortunately the ERP software that they were built on top was building a competing solution and it was just a no brainer for folks to
• 26:34
  make that switch.
• 26:35
  That one's an existential threat, right?
• 26:37
  Yes, yes, without a doubt, without a doubt.
• 26:39
  That doesn't show up on any dashboard.
• 26:42
  That is fascinating.
• 26:43
  Speaking of existential threats, actually I've been talking to people a lot, both on the podcast as well as off the podcast, about software and why software deals are dropping so much.
• 26:51
  And this is an example because some of the risks right now in software are really hard to price.
• 26:57
  There's a couple of effects that I've seen come out of it.
• 26:59
  One, I think software deals have dropped, I think year on year, comparing Q1 and Q2, I think down 65%, I think year on year compared to 2025.
• 27:09
  And that's part of the risk.
• 27:10
  There's potentially existential AI threats, but PE firms are having a really hard time pricing them both buy side and sell side, because who knows what disruption lies around the Corner or what ERP feature is going to appear or
• 27:23
  what ChatGPT is going to start doing for free, you know, as part of its package.
• 27:27
  And I noticed they just put like a money management feature out and they've got a healthcare management feature.
• 27:33
  I'm sure that's blown a few companies up.
• 27:36
  Yeah, just in that process.
• 27:38
  And just as kind of like software development costs seem to be accelerating towards zero.
• 27:44
  And so all of a sudden, what for the, you know, for, you know, the better part of the 2000s, software is able to build these really defensible moats just by, by building products that were really hard and really
• 27:55
  expensive to build.
• 27:56
  And all of a sudden it's a heck of a lot easier and a heck of a lot less expensive to build those.
• 28:00
  And so the moat and software is, is getting tricky.
• 28:03
  Another kind of, you know, question, because we do still do some software, some software transactions.
• 28:08
  There's great AI proof software that's based around things that can't be easily replicated, first party proprietary data credibility, et cetera, et cetera.
• 28:19
  It's just hard to measure and price those things.
• 28:21
  Yep, absolutely.
• 28:22
  That's.
• 28:23
  That.
• 28:23
  That is absolutely spot on.
• 28:24
  Let's talk about AI internally because I think when we talked about you, you said you run t force marketing and I think we mentioned the conference at the top of the top of the episode that we're going to
• 28:34
  and I think I've got this in common with you, that there's a deliberate pivot away from digital into, in person with, with, with how we're operating.
• 28:43
  And we talked about the threats in the software industry.
• 28:46
  That said, I think research itself, customer research included, is something that could stand to benefit from some AI efficiency.
• 28:53
  Humans of course, get more out of talking to other humans, but you can't talk to a thousand people in a six week or a 30 day diligence window.
• 29:02
  Other places where AI can genuinely help your capabilities without creating quality threat to the output that you provide people.
• 29:13
  Yeah, it's a great question and one that is changing every day.
• 29:18
  Not only AI gets better, but I think people's trust of AI continues to grow.
• 29:25
  But internally at T4 we're still very cautious about AI.
• 29:29
  I mean, there are some very simple benefits.
• 29:32
  It may help with transcription, it might help us save a few minutes here and there on, you know, transcripts from a particular Lear.
• 29:40
  It may help with some kind of pattern recognition.
• 29:42
  Candidly, when you're trying to pull quotes, when you're doing analysis, it's a great tool.
• 29:46
  Right?
• 29:47
  You can say, oh, I remember a distributor said this about delivery, but I can't remember who it was and I don't want to read through all 30 transcripts to go find it.
• 29:54
  Help me, help me pull that quote really quickly.
• 29:57
  AI as a tool in that capacity is helpful to us and I think is we've found some time saving there.
• 30:02
  But candidly with the, what AI still really struggles with is understanding the nuance of being able to connect loose, unstructured data to some of the investment hypotheses and kind of business objectives that are ultimately driving the work.
• 30:16
  And so you really still need kind of human intelligence to Understand, if a, you know, for example, if a respondent who is 60% of the revenue makes one comment, that comment needs to be weighted higher than the same
• 30:29
  comment coming from somebody who may represent, you know, half of a percent of your.
• 30:33
  Of your revenue.
• 30:34
  And AI just doesn't understand that nuance yet.
• 30:36
  And it also really struggles with.
• 30:38
  Although it's helpful for pattern recognition in terms of, like, sheer volume, if the same respondent complains about delivery six times, that isn't six respondents complaining about delivery.
• 30:47
  It's one person who has a bone to pick about a specific problem.
• 30:51
  And AI is not nuanced enough to understand that context yet.
• 30:54
  So we still lean on our human analyst team to do the analysis of our work for that exact reason.
• 31:00
  And on the research side, too, I think that people, as is true in the current state, people are distrusting of AI and folks, frankly, don't really want to spend time talking to an AI chat bot.
• 31:11
  And so I think part of what we do is understanding that we're representing the target to their customers when we get on the phone.
• 31:16
  And so being able to have, again, a trained professional researcher who's a, Who's a true pro at what they do to have those nuanced conversations.
• 31:23
  It makes the customer feel more valued than they would if they were to get on and get on and chat.
• 31:26
  With an AI chatbot, you have the opportunity to understand and pick up on things like body language or tonality or, you know, pull at different threads and ask probing questions to really understand, okay, what's the underlying issue here?
• 31:37
  AI doesn't really have the nuance to do that quite yet.
• 31:40
  And I think folks still value getting on the phone and just talking with a human because it shows that you value them and value their time.
• 31:47
  That may change, you know, 10 years from now when folks are, every order you place at every restaurant is through an AI chatbot.
• 31:52
  And every, you know, time you, you go, you know, every time you order anything, it's.
• 31:56
  It's.
• 31:56
  The conversation is done within a chatbot.
• 31:58
  There may be a world in the future where that's just people's preferred method is I don't want to deal with the person, I want to deal with AI.
• 32:05
  But in the B2B landscape that we play in, that is certainly not the sentiment that exists today.
• 32:09
  Yeah, yeah.
• 32:10
  It's the modern version of, like, people hammering the star button or shouting representative down the phone.
• 32:17
  Voice routers on the.
• 32:18
  Which I just spent about 50 minutes doing for a hotel in Cleveland for a wedding.
• 32:23
  So one dig against Marriott, but Oh, I love it.
• 32:28
  I love it.
• 32:28
  I had a couple of things.
• 32:29
  Well, first, an example from my last guest, Regan, that him and I talked about.
• 32:33
  He's assessing how aligned a company is on culture and objectives through different management layers.
• 32:39
  And we talked about monitoring anonymized version of people's slacks and email messages.
• 32:46
  And I made the observation to him, which is 100% true, that the phrase I love my job, and maybe I've been with more British people in New Yorkers than the average person in my life, but anytime someone has
• 32:56
  typed the phrase I love my job in a slack message to me, it has been 100% sarcastic.
• 33:00
  I mean, yes, right, Absolutely.
• 33:03
  Yes.
• 33:03
  And a human knows that intuitively.
• 33:06
  An AI would never.
• 33:07
  Yeah, exactly.
• 33:08
  Exactly.
• 33:08
  Perfect.
• 33:08
  I do love my job, though.
• 33:11
  Likewise.
• 33:11
  Likewise.
• 33:12
  Onto yours.
• 33:13
  Like, you have a really powerful methodology for like, understanding customer satisfaction.
• 33:17
  Like, do you use your.
• 33:18
  Do you eat your own dog food?
• 33:20
  Like, how do you check your own customer satisfaction?
• 33:22
  Do you use the same techniques with your own customers?
• 33:24
  Yeah, good question.
• 33:25
  We do.
• 33:25
  Yeah.
• 33:25
  We conduct on a rolling basis every year.
• 33:28
  We conduct what we call post project interviews.
• 33:29
  And it's the exact same structure that we use here.
• 33:33
  We have a couple of contractors in our team who we use for kind of capacity reasons when.
• 33:37
  When needed, who own and operate their own market research firms.
• 33:40
  And we trust to do really good quality research.
• 33:43
  And so that's how we kind of thread that needle is.
• 33:45
  We bring in some of those contractors to conduct interviews with our own customers.
• 33:48
  We certainly do drink the, drink our own Kool Aid.
• 33:51
  You know, every staff meeting is.
• 33:53
  Is bookended with quotes from our post project interviews directly from our customers.
• 33:57
  What feedback are we getting?
• 33:58
  What can we improve?
• 33:59
  What's our net promoter score?
• 34:00
  How has it changed?
• 34:02
  We certainly drink the voice of customer Kool Aid.
• 34:04
  Yeah, I love that.
• 34:05
  And that's a much better analogy than eating your own dog food as well.
• 34:10
  There should be modern versions of everything.
• 34:11
  I heard a modern version.
• 34:12
  Are you familiar with kill two birds with one stone?
• 34:15
  Oh, absolutely.
• 34:16
  So I read a modern, much nicer version of that, that is feed two birds with one scone.
• 34:24
  I think you'd feed a lot more than two birds with one scone.
• 34:26
  To be honest.
• 34:26
  It's easier to feed several birds with a scone than it's going to be to kill a couple with.
• 34:31
  With one rock.
• 34:31
  Yeah, I've never tried to throw stones at birds, but I imagine they'd be pretty good at dodging them anyway.
• 34:36
  Small target.
• 34:37
  Yeah.
• 34:37
  Well, yeah, it depends what sort of bird, but yeah, if you're throwing stones at an eagle, then you've probably got a different set of problems to deal with.
• 34:43
  Right?
• 34:43
  Yeah, I.
• 34:45
  Yeah, all the conservation people, never mind the big beacon talons.
• 34:48
  Anyway, I.
• 34:50
  Before I go completely off track, I want to thank you for your time and thank you for coming on, Dan.
• 34:55
  It's been great to connect again.
• 34:57
  Looking forward to connecting in person in New York in November, if not before.
• 35:00
  For folks listening who are thinking, I gotta have this right.
• 35:03
  I need this voice of customer research.
• 35:05
  I'm doing a deal right now.
• 35:06
  I need to know or I'm two years into the whole period and I.
• 35:09
  And I need a deeper read on this.
• 35:10
  Like, what's the best place to find you?
• 35:12
  Yeah, you find me on our website, keyforassociates.com you can book a time with me directly to talk about your deal and talk about the opportunity.
• 35:18
  I'm also found on LinkedIn.
• 35:20
  You can find me via email or phone.
• 35:22
  I don't know if you have.
• 35:22
  If you can kind of post that on your channel, but happy to share my email and phone number there.
• 35:28
  I'm always accessible.
• 35:29
  Reach out to me, whatever vehicle is easiest for you, be it LinkedIn, the web or calling me directly.
• 35:34
  I'm pretty easily accessible these days.
• 35:36
  Excellent.
• 35:36
  I will pop it in the show notes for you.
• 35:38
  And Dan, thanks so much for coming on and I will.
• 35:41
  I'll talk to you very soon.
• 35:42
  Yep.
• 35:42
  Thanks so much for having me.
• 35:43
  It was a pleasure.
• 35:43
  All right, take care.
• 35:44
  Cheers.
• 35:45
  Thanks for listening to the PE Data guy.
• 35:48
  The place where private equity meets data.
• 35:50
  Please forward this episode to your favorite private equity friend.
• 35:54
  Thanks for listening.
• 35:55
  See you next time.