For the past two decades the service sector has been the fastest growing portion of the economy. Service businesses including consultants, contractors, hospitality and professional services are reshaping the business landscape. As many of these fast growing businesses mature, they are now looking to fine tune their business models. And yet, many business leaders either don’t understand or cannot articulate the economic flows that make these businesses tick, the dynamics that keep them cash-positive and ultimately enable them to grow profitably.
How can that be?
First, service businesses are both simpler and more complex – simpler because most of their levers are either people or processes – more complex because the interplay of people, process, and revenue isn’t as consistent or transparent as investment in tangible assets like inventory, materials, machinery or direct labor. Work done today and paid for as a Cost of Service in salary two weeks from now may not be revenue for weeks or months depending upon the billing cycle and may not be cash for another 30-60 days beyond that. Leaders have to understand their business economics over time.
Second, because the cost of inefficiency or poor service doesn’t show up as a tangible defective product, margins can disappear if rework is required or if the business overinvests in customer service. Profitability demands well honed processes, clear expectations on deliverables, and attention to changes in scope.
Matching supply and demand is as complex in a service business as in a product supply chain, if not more challenging. Service businesses regularly struggle with the tension of hiring in advance of demand and absorbing the possibility of excess capacity until demand catches up...or seeing demand evaporate when the business has insufficient talent to deliver.
Finally, people are people. Matching talent and resources to the work to be done means that not everyone can do every job. Training and development is a vital investment, but the impact varies widely. In addition, your investment often makes that employee more marketable, increasing the risk of turnover.
Because many of the critical decisions that impact growth and profitability in a service business don’t happen in a conference room at headquarters, service business excellence requires business acumen throughout the organization. Responses to service quality issues; to unexpected staffing changes; and to new customer needs are made at the point of service. All leaders need to understand how the business ticks to optimize those responses and, ultimately, the business performance. They have to lift the “fog” about how the business works.
Laurel Tyler is an affiliate at Insight Experience, a Boston-based firm delivering contextually rich, immersive business simulations and experiential learning experiences to accelerate and integrate leadership, business acumen and strategy execution.