Mark Leonard: The Mysterious Brain Behind Constellation Software

Will Thorndike’s book “The Outsiders” profiles eight CEOs who have outperformed their peers and achieved unprecedented shareholder returns. Safe to say is, if a similar book were to be written today, Mark Leonard would likely be an obvious choice to profile. He is the President and Founder of Constellation Software (CSI), a Canadian firm specializing in acquiring vertical market software (VMS) businesses. Leonard is among other things known for his unique way of doing business, focusing on long-term ownership and extreme delegation of authority to the lower operating levels. If you had invested $1,000 in CSI’s IPO in 2006, held onto your shares, and reinvested the dividends, you would have over $190,000 as of 2024. As there is hardly any information about Leonard other than his letter to shareholders (which can be argued are in Buffett and Bezos’s class) and a few grainy pictures, let’s try to understand him through the available material.

• Innovative business model: Mark Leonard's transition from venture capital to founding Constellation Software was driven by his vision to acquire and perpetually own niche vertical market software businesses, a stark contrast to the quick-exit venture capital model.

• Decentralization and empowerment: Leonard's management philosophy builds on extreme decentralization, allowing business units within Constellation Software to operate autonomously, fostering agility, innovation, and a customer-centric approach.

• Personal leadership approach: Despite achieving significant financial success, Leonard has adopted a humble and balanced approach to his lifestyle and compensation, setting a commendable example for leaders and employees within the company.

While information about him is scarce, what we know is that Leonard started his career by spending seven years at different schools and part-time jobs, for example working as a dog handler and furniture mover. He completed his Bachelor’s degree from the University of Guelph and an MBA from the University of Western Ontario, before eventually entering the venture capital business.

He began his VC stint at the Canadian firm Ventures West. During his eleven years there, while he most certainly gained many valuable lessons, he became increasingly aware of his dislike of the short-term nature of the industry. This sparked his interest in what eventually became CSI, where the focus ended up being on acquiring and holding niche VMS businesses for the long-term – or perpetually – as he stated in his Q1 2008 letter to shareholders:

Then in 1995, with a desire to create this longer-term business in contrast to the venture capital model of quick exits, Leonard established Constellation Software. His vision was to acquire niche VMS businesses, which often flew under the radar of bigger private equity and venture capital firms due to their small size. Here’s a quote from his 2016 letter to shareholders, giving us a better understanding of the CSI strategy:

Further reading: Constellation Software: Acquiring and Empowering

Mark Leonard’s leadership is a blend of hands-off management and strategic vision. Despite its size, CSI maintains a lean corporate team, avoiding bureaucracy and emphasizing operational simplicity. Leonard’s low-profile leadership style focuses on empowering subsidiary CEOs, fostering a flat management structure.

In his shareholder letters, Leonard frequently addresses the concept of decentralization, highlighting it as a cornerstone of CSI’s operational philosophy. He touches on the power of maintaining small, autonomous business units to foster agility, innovation, and a focused customer-centric approach. He also points out that as business units grow larger, they often encounter increased complexity, which can hinder innovation and responsiveness, making a strong case for the benefits of smaller, more manageable units.

Leonard discusses the challenges larger businesses face, including escalated policies, procedures, and regulations, which can stifle talented individuals and innovation. He advocates for a model where business units are small enough to enable its managers, with deep vertical experience, to effectively manage complexity and optimize for growth. The goal is to keep business units human-scaled, emphasizing the importance of size in managing teams effectively and maintaining focus on customer and market needs.

Leonard also draws parallels with other companies, an example of such is Illinois Tool Works (ITW), to illustrate the effectiveness of decentralization. He admires ITW’s approach to breaking down larger acquisitions into smaller business units, suggesting that such a strategy can lead to revitalization and enhanced performance within those units.

Furthermore, Leonard discusses the broader implications of decentralization on Constellation Software’s overarching strategy. He explains a vision where the company serves as a perpetual owner of numerous small, high-performing business units, contrasting this approach with the more conventional strategy of seeking economies of scale through centralization and consolidation.

This decentralized approach is not only a structural strategy but also a philosophical one, influencing various aspects of the company’s operations, from acquisition strategies to day-to-day management. Leonard’s insights into decentralization provide a window into the unique management style and strategic thinking that has been a key enabler of Constellation Software’s success.

And to finish things off, here is a fantastic quote by Leonard in his 2014 letter. He had reduced his salary to zero and lowered his bonus the year prior, and explains the reasons behind this as follows:

Mark Leonard’s approach at Constellation Software, blending decentralization with long-term ownership, showcases a management style focused on autonomy and sustainable growth. His philosophy underscores the effectiveness of empowering smaller, independent units within a larger corporation, fostering innovation and responsiveness. Leonard’s personal choices in compensation and travel reflect his commitment to setting a principled example for his team, embodying a leader who prioritizes the company’s and employees’ interests while maintaining a balanced life.