Systemetize Your Intelligence

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One of the biggest criticisms I hear about services businesses is that they are not scalable.  Profit margins are low, clients are demanding, and you are highly dependent upon high-cost employees with specialized skills, who could leave at any time.  In fact, this is the way most small consulting companies run.  But it doesn’t have to be this way.

There is a quote that I have heard attributed to Ray Kroc in the past, though I cannot find reference to it now.  The quote is something like this: “Build a business in which the intelligence is in your systems, not your people”.   Let’s take the restaurant industry as an example.  If you subdivide the various tasks and automated as much as you can, you don’t need a team of Michelin chefs to run your restaurant.  In the case of McDonalds, you could have a moderately paid manager and a small army of teenagers doing the work.  Sure, you may have that high-end chef help you to define the “program” and oversee it, but you do not need n-number of them to scale the business or operate day by day.

The problem with a typical consulting company is that the engagements are too open-ended, meaning there is constant inefficiency and you try to cover special case scenarios, and the business cannot systematize their own operations sufficiently.  At first this is okay because your hourly rates are high and clients tolerate the inefficiencies since there is no other choice, but eventually those skills become commoditized, the client begins demanding more for less, and you’re left still paying for the high-end talent and seeing your margins compress.

Instead, imagine taking the opposite approach.  Taking something that is already nearly commoditized, and building value around it.  What value can you offer to augment the commodity?  Apple did this well by turning commodity technology into a work of art, that happened to be a computer for example. What they’ve essentially done is spin gold out of straw.  They’ve taken a commodity, added value all around it, “programitized” their efforts and now it is scalable and controllable.

Let’s take Starbucks as another case.  They basically are just selling coffee – a commodity.  But they created a hook in that it is a great place to hang out.  They added value by making it a gourmet product (lattes with infinite choices) and nice cushy chairs.  They invested heavily into their value chain to make sure they could reliably and efficiently reproduce the experience and provide the product to the consumer.  And because they made the investments into consistently replicating the experience and product, they were able to scale worldwide with relatively low-priced and easily replaced workers.

Of course Apple and Starbucks are essentially product companies, but Starbucks in particular is partly a services company.  There are other examples that lean toward services more heavily like H&R block for taxes, and GeekSquad for computer repair. In both these instances, they provide relatively high value to customers at relatively low costs. Because knowledge is systematized within the organization, training costs are low, and the value proposition of the company is otherwise contained within the value chain of the business, not in the skills of a few all-star team members.