Mark Leonard

Small, human-scale businesses naturally exhibit high trust, clear priorities, and focus on growing the pie rather than dividing it. As organizations grow, complexity and bureaucracy inevitably increase faster than headcount.

At human-scale companies, talented but quirky people thrive because systems haven't had time to metastasize and trust is high. As organizations grow larger, policies and rules proliferate to handle complexity, innovation suffers, and talented people become frustrated. Mark saw this in his experience as a venture capitalist and throughout his acquisitions.

“At human scale companies, all the employees know each other. Talented people get frustrated. Innovation suffers when a business gets larger and the focus shifts from customers and markets to internal communication, cost control, and rule enforcement.”

Compound capital by taking cash flows from mature businesses without growth opportunities and redirecting them to acquire or invest in businesses with greater promise. This capital allocation flexibility is a formidable competitive advantage.

As a conglomerate, Constellation could move capital from businesses with limited incremental investment opportunities to promising acquisition targets without incurring taxes or significant costs. This structural advantage allowed for rational capital allocation impossible for single-industry competitors.

“We can, without incurring taxes or much in the way of other costs, move huge sums of money from businesses that have limited opportunities for incremental investment to other sectors with greater promise.”

Prefer organic growth over growth-at-all-costs, and ruthlessly measure whether growth initiatives are actually creating value. Most growth initiatives are wasteful because their assumptions are never tested or tracked.

By 2005, Constellation's spending on initiatives had grown to over half their combined expenditures with unclear returns. Mark implemented a system: define the assumption being tested, assign one person accountability for each initiative, and measure results. After implementing this discipline, proposed initiatives plummeted, indicating the company had been inefficient.

“Initiatives grew to account for over half of our combined expenditures by 2005, which not coincidentally was the peak of our spending. Even the best initiatives take more time and more investment than anticipated.”

Promote from within and build mutual trust and loyalty over years rather than hiring external talent. Smart, manipulative people take years to identify and remove once hired.

Mark emphasized promoting managers from within whenever possible because mutual trust and loyalty require years to build. He observed that newly hired talented but manipulative people can cause damage for years before being identified and removed. This principle directly supported his decentralized model where trust was essential.

“Mutual trust and loyalty take years to build and conversely newly hired smart and manipulative mercenaries can take years to identify and root out.”

Create a system to test, measure, and spread best practices across your business units. This multiplied learning curve becomes increasingly difficult for competitors to replicate as you grow.

With nearly 200 separately tracked business units, Constellation had a unique asset: the ability to run experiments on new business processes, measure results, and spread working ideas to other units quickly and cheaply. This ad hoc experimentation required curious managers and clever analysts, not enormous systems. The longer this continued, the stronger the competitive moat became.

“We can figure out if a new business process works more quickly and cheaply than any company that I know. Once a new best practice starts working within CSI, wide access to benchmarking information tends to rapidly breed emulation.”

Seek business practices that actually add value rather than just adding overhead. Use randomized observation and experimentation to identify truly effective practices rather than assuming conventional wisdom.

Inspired by Archie Cochran's critique of ineffective medical practices, Mark realized that business management suffers from similar issues: well-meaning but ineffective and sometimes dangerous practices become entrenched. Constellation deliberately ran non-randomized observational studies to identify business practices that genuinely added value.

“At CSI, we spend time on non-randomized observational studies trying to spot business practices that actually add value rather than just adding overhead.”

When a business unit grows too large for a single manager to operate effectively, divide it into smaller units and have the original manager run one piece while a protégé runs the other. This maintains entrepreneurial energy and accountability.

This approach, inspired by Henry Singleton and Illinois Tool Works, allows large operations to be broken into human-scale pieces. When a manager reaches their limit, division preserves entrepreneurial culture and ensures clear accountability rather than creating unmanageable spans of control.

“If a large business is not generating the organic growth that we think it should, the original business manager runs a large piece of the original business and spins off a new business unit run by one of his or her protégés.”

As the founder, align your incentives with shareholders by taking minimal salary and charging your own expenses, especially as you grow older and wealthier. This eliminates the principal-agent problem and creates a true partnership mentality.

In 2014, after 20 years as president, Mark reduced his salary to zero and stopped charging expenses to the company. This allowed him to pursue a more balanced life while his compensation remained tied solely to his ownership stake, making him a partner rather than an employee. He acknowledged changing personal preferences as he aged, now willing to pay for first-class travel.

“My compensation for being president is now tied solely to my current ownership of CSI shares. In essence, I'm your partner, not your employee. I like the feel of the partner relationship a whole lot better.”

Resist the pressure to centralize functions like research and development or sales and marketing as you grow. The marginal benefits of centralization rarely justify the loss of autonomy and motivation among managers and employees.

As Constellation grew, shareholders questioned why they didn't pursue economies of scale through centralized functions. Mark resisted this pressure based on his venture capital experience with high-performing small teams and observation that most vertical markets had multiple viable competitors with little correlation between profitability and scale.

“My personal preference is to instead focus on keeping our businesses small and the majority of the decision making down at the business level.”

Build systems that reflect your personal values and attract like-minded people. Decentralization and autonomy are not just management tactics but expressions of how you want to work and who you want to attract.

Mark Leonard designed Constellation's decentralized structure because he personally dislikes command-and-control authority. This preference shaped the entire organization and attracted talented managers who thrive without centralized direction. He was struck as a child by principles of independence, challenging authority, and choosing what he thinks is right.

“It starts with personal preference. I don't like anyone telling me what to do. I don't like anyone saying I'm an authority figure and you will do it this way. I can't think of anything that annoys me more.”

Be willing to change your strategic principles when circumstances fundamentally shift. Avoid being married to any single approach if the data and opportunity suggest a better path forward.

For years, Constellation avoided significant debt. During the 2008 financial crisis, Mark recognized that market conditions had depressed asset prices and eliminated competition. He reversed his position and took on debt to acquire underpriced businesses. He explicitly acknowledged this shift in his shareholder letter, showing openness to new information.

“Until recently, we have avoided using significant amounts of debt. Circumstances, however, may dictate a change in our capital structure.”

Make personal choices about work intensity and lifestyle based on clear values rather than external expectations. Reducing work intensity frees mental bandwidth for strategic thinking and better decisions.

In 2014, Mark reduced his involvement in day-to-day operations after recognizing he had built an organization capable of thriving without his constant 60-plus hour weeks. He maintained strategic involvement while choosing a less oppressive sense of personal obligation, allowing him to lead a more balanced life.

“Cutting my compensation will allow me to lead a more balanced life with a less oppressive sense of personal obligation.”

Assign one person ultimate accountability for each significant initiative rather than distributing responsibility across teams. Personal accountability prevents indefinite low-burn initiatives and forces clearer thinking about assumptions.

When Constellation created dedicated initiative champion positions with clear personal accountability, two things happened: the company stopped the practice of initiatives dragging on inefficiently, and the number of new initiatives proposed dropped dramatically. This indicated that without personal accountability, managers proposed initiatives too readily without proper vetting.

“We created dedicated initiative champion positions. An initiative was less likely to drag on with a low but perpetual burn rate under a part-time leader who didn't feel ultimately responsible.”

Keep individual business units small and resist the urge to centralize functions as the company scales. Size and performance of business units are nearly unrelated; agility and autonomy outweigh economies of scale.

With 125 businesses, Constellation's largest had 307 employees and the average had 44. Linear regression analysis showed size and performance were almost totally unrelated. Mark explicitly rejected creating larger consolidated units, preferring to maintain human-scale businesses where employees know each other and accountability is clear.

“I believe that these business units are small for a reason, that the advantages of being agile and tight far outweigh economies of scale. The size and performance of our business units are almost totally unrelated.”

When acquiring a distressed business from a large corporation, optimize for profitability and core business focus rather than growth. Reducing a business to its profitable core often makes it smaller but more valuable.

One of Constellation's acquisition strategies involved taking acquired businesses and reducing them to profitable cores, often resulting in smaller but more efficient operations. This approach, which Mark compared to Rick Rubin's principle of production by reduction, increased profitability and focus.

“Occasionally, the reduction of an acquired business to a profitable core will leave us with a smaller, but usually more profitable business.”

Grow your business by cross-selling additional products to your existing customer base. Vertical market software businesses have low attrition and long customer relationships, making them ideal platforms for product expansion.

With customer attrition rates around 4% in 2009, Constellation calculated that the average customer would stay for 26 years. This created the opportunity to grow revenues organically without proportional capital investment by selling additional products into the existing install base.

“We've made money by selling existing customers more products. Customer relationships that endure for more than two decades are valuable.”

Focus on acquiring vertical market software businesses where small, motivated teams can dominate tiny markets rather than competing in large, commodity markets. This is where your competitive advantages are strongest.

Rather than pursuing large, competitive markets with economies of scale, Constellation focused on vertical market software where small teams could achieve superior results in niche industries. This strategy aligned with Mark's preference for human-scale organizations and provided defensible competitive positions.

“We seek out vertical market software businesses where motivated small teams composed of good people can produce superior results in tiny markets.”

Acquire entire businesses when possible, but be willing to buy minority stakes in attractively priced public companies when the opportunity arises. The goal is to be a perpetual owner of inherently attractive assets regardless of ownership percentage.

Constellation's primary strategy is buying 100% of small vertical market software companies. However, Mark recognized that pieces of good businesses sometimes become available in public markets at attractive prices. He applied the same long-term ownership mentality to minority stakes as to full acquisitions, viewing each as a chance to be a great perpetual owner.

“Our objective is to be a perpetual owner of inherently attractive software businesses. We have the same objective when we buy a piece of a business as when we buy 100%. We want to be a great perpetual owner of an inherently attractive asset.”

Study high-performing conglomerates to understand both what works and what to avoid. Systematic observation of excellent companies reveals principles and pitfalls that internal analysis alone cannot provide.

Constellation began studying a dozen high-performance conglomerates annually, analyzing their strategies, cultures, and histories. This revealed that one prior conglomerate that pursued autonomous small business strategy eventually caved to centralization. It also revealed that maintaining trust and a long-term investment horizon are essential to resisting the siren song of consolidation.

“We study the high-performance conglomerates because they help us understand what CSI does well, where we might improve, and what alternatives we could pursue.”

Take advantage of crisis periods to acquire distressed assets. Large corporations frequently sell software subsidiaries at steep discounts after failed integration attempts. These are often your best acquisition opportunities.

Mark noted that large corporations often acquire software businesses expecting synergies that never materialize, resulting in cultural clashes. These businesses are eventually sold by frustrated corporate parents, usually during recessions when prices are lowest. Constellation capitalizes on these opportunities by acquiring and optimizing assets others have abandoned.

“The most lucrative acquisitions for us have been distressed assets. Most of our most attractive acquisitions from large corporations have happened during recessions.”

Acquire businesses from founders when possible because founder-built businesses develop cultural coherence and long-term orientation that professional builders often lack. Founder businesses require less integration and fit better culturally.

Constellation prefers acquiring from founders because a lifetime of investment in building a business permeates all aspects of the enterprise including employee selection, customer relationships, and product development. These businesses operate as standalone units under Constellation's umbrella with existing managers intact, making them a better cultural fit.

“When a founder invests a better part of a lifetime building a business, a long-term orientation tends to permeate all aspects of the enterprise. Founder businesses tend to be a very good cultural fit with Constellation.”