You don’t understand your business and it’s a problem - part 2

Problems emerge if you do not understand your service business

If you missed part 1, you can read it here.

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Leaders who do not understand the key differentiators of services businesses fundamentally do not understand how and nor why their organizations work. As a result, they cannot effectively make key resource allocation decisions, nor position their businesses for success.

Let’s unpack three common mistakes that arise from this lack of understanding:

• Leaders squander their time

• Leaders waste money investing in the wrong place

• Leaders have the wrong team in place 

First, leaders unknowingly squander their time.  This commonly plays out in a few ways.  There’s often an excessive focus on doing the work, rather than grooming the customer experience.  

Consider attorneys who do complex tax planning. The complexity of the planning problem and the novelty of discovering the solution makes for exceptionally stimulating work. Far too many attorneys are focused on this aspect, as opposed to how the customer is experiencing the work. 

Contrast the attorney’s perspective with their client’s. The client may be nervous about the ramifications of the planning, concerned with their own mortality, or a myriad of other things. Presenting the client with a novel, well-constructed plan may answer the question of why they engaged your firm to begin with, but does the client walk out of the conference room reassured? Confident in their path forward? Does their spouse understand the decisions made if it applies?

There is a gap between how the attorney spends their time versus what the client ultimately wants the plan to deliver.

Leaders also squander their time focusing on adding features. They will declare to all who hear about all the delightful bells and whistles they have incorporated into their work. A personal trainer can tell you about all their fancy equipment or the novel application of a new therapy to stimulate muscle growth. But clients don’t care about features, they care about results (lose weight, gain muscle, get healthy).  

Experts appreciate the nuance of a new feature. But the average person doesn’t. They lack the context to understand the implications of the feature. They just care about the big picture. An excessive focus on features misses the forest for the trees.

Second, leaders will waste money investing in the wrong place. If you don’t understand what creates value in your business (e.g. the relationship between your employees and your customers), it is hard to know what to invest in. 

Services businesses require a delicate balance in value delivered to the customer, value paid out to the employee for excellent service rendered, and value retained by the owner (whether to be distributed or reinvested).  There is a very real risk that you will pour resources into something that is not actually creating value, and simultaneously deprive the value-creating parts of your organization of the resources they need to be successful.  

If the firm takes too much, their employees will leave because they can do better on their own without the firm.  An attorney friend of mine saw this to be the case, and ultimately left a larger legal firm because that firm’s cut was far too large.  My friend left, and took essentially all his clients. Why? The firm was just a platform. The client cared little about the name on the letterhead.  

Often in services orgs, high-level management has a quality of life that they don’t want to give up. They don’t want to grow the business beyond its current dimensions because that would compromise the status quo. So they decide to stay at the size they’re at rather than growing. As a result, they often can’t retain the best people for the job, because there is not enough growth to make it worth their while.

What if the customer takes too much?  Arguably the severe downturn in technology companies in the last few years is a great example of this. For much of its life, Uber either lost or made essentially no money on the service it provided. This was a clear case of excessive customer surplus. 

Providing value above and beyond what the customer is willing to pay for is a dangerous game. In the long run, the firm can suffer acutely. In the short run, you also risk training the customer to expect certain things that are not actually economically feasible. As the saying goes, the first time someone receives something it is a gift, the second is an expectation, and the third, an entitlement.

The value the customer receives must be balanced with what is required to deliver it - namely appropriate rewards to both owner and employees.

Finally (and less commonly) if the employee takes too much of the value, there is not a lot of incentive to do anything - think academics with tenure. To provide a service, you must be willing to serve. For some, absent external incentive, they default to doing poor work or no work at all. 

Third, leaders will have the wrong team in place. Recall, service organizations are 100% about relationships—the core being between customers and employees. As a result, it is mission critical to attract the right people to the organization—people who are capable of delivering the service you want to deliver in the way you want it delivered.  But it is even bigger than that. Employees that are aligned, bought in, and are engaged often deliver extra value: they will volunteer above and beyond to serve the client. 

It is paramount to understand which types of employees translate to best customer experience.

Even if you have these right people, your compensation program may inadvertently work against the culture.  An eat-what-you-kill pay model may conflict with promoting a culture of collaboration between employees. The team can be made wrong by a misaligned way of paying folks.

Attracting and compensating the right team is frequently complicated by the presence of a singular, charismatic founder/leader. These larger than life individuals are massively important in getting a new venture off the ground. The challenge is that they may not fully understand why they were successful. For example, the founder may have a natural facility for sales or an innate understanding of the client’s point of view based on prior life experience. 

It will require work to transform this tacit knowledge into something that can be shared and scaled by a broader team. Far too often, this does not occur. While this may keep the founder in demand to step in to solve problems, it also means they can never leave.

Each of these mistakes is fundamentally about misallocating resources.  The resources of time, team, and money should be invested in the organization to generate a return. But these mistakes discussed limit the ability for these investments to pay off.

Instead they function like symptoms of a disease, keeping the patient from functioning at their full potential. Similar to how plaque prevents blood from easily circulating, the disease for service organization is an imbalance, a plaque, that limits the organization. Because of the ephemeral nature of services - created in a moment between customer and employee - service businesses require a careful balance between the firm, the customer and the employee. 

The great service organizations see a beautiful, reinforcing flow where great firms create great workplaces for their employees. These employees are ready and able to deliver a service experience that wows their customers. The firm receives the economic benefit from this service delivery. 

In the long run, satisfied customers tell their friends about their great experience and drive further growth. Each step reinforces the next, and as the firm gets better and better, the energy that emerges is best characterized as excellence.

Next week, we talk about how to avoid these mistakes.