Scaling Your Value Proposition

By?John Simpson, Svoboda Capital Partners, LLC

Part 2 in the 10 Ways to Create Equity Value in Your Services Business Series

Svoboda Capital is excited to launch our ‘10 Ways to Increase Equity Value in Your Services Business’ series! Based on our experience investing in professional services businesses, we’ll be bringing our thoughts on how to create lasting equity value in people-centric businesses. Today we publish Part 2 of the Series: Scaling Your Value Proposition.

Previous Parts:

Part 1: Don't be a Cult of Personality

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Part 2: Scaling Your Value Proposition

Are you serious? That is what I thought when I turned to the opening page of the Andersen Consulting training manual back on my very first day of professional employment in 1996. On that page was a simple diagram. It showed a keyboard, mouse, monitor and ‘CPU’ with arrows pointing to each. I could not believe that this global consulting firm thought so little of me and my new colleagues that they needed to show us what a computer was. Twenty five years later, I now know that I was the na?ve one.

In this installment of “10 Ways to Increase Equity Value in Your Services Business” we will pick up on a topic that we discussed briefly in our first segment: scaling the value proposition of a services business. After all, as operators of services businesses we are not mass producing automobiles like Ford Motor Company or serving all our customers from the same code base like Salesforce.com. No, in a services business we are deploying legions of people out into the field to serve customers in a manner that we HOPE will consistently replicate value for our clients. And that does not happen by accident, so herein we will discuss some of the key elements critical to bringing a services businesses’ value proposition to life: recruiting, training, measuring, and motivating.

Recruiting

Online shoe retailer Zappos provides the largest selection of shoes available on the internet. They do not design or manufacturer the shoes, and they do not have shoes that cannot be found elsewhere. So, what differentiates Zappos? Service. Zappos chose to differentiate by providing the best service in the industry, making buying online preferential to buying in-store. Their customer service reps have been known to spend an almost unlimited time on the phone with customers, ensuring they get exactly what they want. What Zappos understood is that critical to providing this level of service was the type of person that they hired. Zappos needed to ensure that everyone hired to serve customers had service in their DNA. In fact, they famously offered $2,000 to any employee to quit after going through the Zappos training program. The message was simple – if you are the type of person that would take the quit package, you are not the type of person that would serve Zappos’ customers.

Bringing this example closer to professional services, as CEO I noticed an interesting phenomenon in my agency. When hiring for client service positions, the one tried and true predictor of success for someone in the role was remarkably simple: If a team member had previously been (1) a college athlete and/or (2) ever worked at a country club (i.e. caddy, lifeguard, waiter, tennis pro, etc.), they were most likely to succeed in the customer services role. Sounds crazy, right? But here is what I learned over time. College athletes have tremendous perseverance as their rise to college athletics undoubtedly had setbacks along the way. They understand failure, and how hard work can overcome the bumps along the way. My theory around former country club employees is a bit different. At a country club, members pay top dollar to frequent the club. And anyone who has ever worked at one knows members can be demanding.?So, if you work at a country club, you do not have option of providing a poor experience to a member, because that same member will be back the following week, month, and year. Unlike other businesses where the customer might leave a bad Yelp review and never return to the business, the country club member is going to be in your face all the time. Therefore, only those that take a long term view of service succeed in this role. ?The point is simple and obvious – make sure you are hiring people with the “DNA” that matches with the value you want to provide your customers.

Training

Most services businesses grow organically over time. New team members learn by apprenticing with more tenured members in an informal, learn as you go model. Particularly when they are smaller and have fewer financial resources, services businesses look to transition new employees to billable work as quickly as possible. While this may make sense for short term financials, a business that can demonstrate an ability to take raw talent and systematically train that talent to provide the desired value for clients is worth infinitely more. Morgan Stanley and Goldman Sachs, for example, built an entire training program around training young advisors to work with ultra-rich clients.??“It can take hundreds of hours of lessons, sometimes spread out over years or condensed into a matter of weeks, as well as exams, case studies, and — more exams” before the banks will allow these advisors to interact with customers. ?Morgan Stanley only has a 75% pass rate for its exams.

Admittedly, Goldman Sachs and Morgan Stanley have unlimited resources to train, so let us look at how training can be applied at a smaller business. We were recently introduced to a business in the digital currency space. Now, the digital currency market is still murky to most of us. But this business built a proprietary training program that all new and existing employees would regularly complete to ensure that they stayed at the forefront of the industry, because that is what their clients valued. Not only did they invest in developing and updating the training, but they set aside weeks of non-billable time to train each staff member every year. Sure, in the short term new employees may have taken a few more weeks to become billable. In the long term, however, the business was able to scale its knowledge at an impressive rate, while also benefitting from far lower attrition.

Too often we see services businesses skimp on training. The result is that employees are less engaged, and the service provided to clients is undifferentiated and inconsistent. This reminds me of an old business fable I once heard. A CFO asked the CEO, “why are we investing so much in the training of our people, just so they can leave us?” to which the CEO replied, “what if we do not invest in our people, and they stay?”

Measuring

“You get what you measure” is a quote often attributed to famed management consultant Peter Drucker. And when it comes to scaling the value a business provides its clients, devising and continually measuring value creation helps to ensure the recruiting and training of employees has the desired effects.?For example, if a service business believes that its value add is being a ‘trusted advisor’ to its clients, it may decide to measure the number and quality of C-level relationships the business has across each client. ?A business I previously worked for prided itself on setting the bar for innovation in our industry. As such, we measured and rewarded employees on how much they contributed to thought leadership, as well as how much that thought leadership was consumed by clients and used in our business development endeavors.

Whatever the value a service business provides to its client, there is a creative way to measure it. As an organization grows, measuring value creation can serve to keep the organization accountable to itself, its clients and its people and ensure that what makes the business great at 50 people is the same that makes it great at 100 or 1,000.

Motivating

Many years ago, we had a Nordstrom executive come speak to our business and our clients. This executive was responsible for opening new stores throughout North America. It was his job to recruit and train new associates in each new store location. This is no small task as Nordstrom is known for providing a premium experience to customers. That experience is what enables Nordstrom to outpace the growth and profitability of others in the department store segment. The executive talked about the Nordstrom training program and type of people they hired, but the piece that allowed Nordstrom to truly scale its service was its culture. Nordstrom employees are motivated because they have a culture of empowering their employees to always “do the right thing” when dealing with a customer. Whether that is accepting a return without a receipt, scouring the Nordstrom network to find a product for a customer, or personally delivering product to a customer’s home, the Nordstrom team is empowered and encouraged to do the right thing. Has this mantra been abused by customers and employees from time to time? Sure. But on balance, building a culture around motivating the right value creation behaviors in its team has undoubtedly enabled the organization to fare far better than rivals in the industry. It also goes to show that when recruiting, training, and measuring are not enough to cover every situation, setting the proper motivations and culture can often ‘fill the gap.’

Wrapping It Up

As a 22 year old first time professional at Andersen Consulting, I could not understand why I was being forced to read a manual that started with absolute basics of what a computer was.?But as a former CEO and investor in services businesses, I now see the genius in Andersen Consulting’s approach. By hiring and right type of people, and building their knowledge from the absolute ground up, Andersen Consulting was putting into motion a massively scalable training program that would enable the organization to deliver value across the globe. Every Andersen Consultant received the same training, allowing the firm to throw any combination of us into any room across the world and allow us to create value for the client.?Looking back, I now understand that while Andersen Consulting may have prided itself on being a top consulting firm, its real genius was recruiting, training, and motivating its employees in a way that created real benefits for its clients.