When I tell people we are in a services business, the first question that experienced founders ask is “Interesting, but how are you going to scale?”. From the experience I have had so far, this question is entirely valid, and a services business surviving solely on a project to project basis will likely stagnate at some point. Not to say that at this stage, the business won’t be making more than enough money for the founders, but as entrepreneurs, we are always looking to solve new problems, and a stagnating business is a failure in our eyes.

To overcome this challenge and to ensure Tailored AI scales limitlessly, I tried to root cause the reason behind stagnation.

Challenges in scaling

Even when there is a high demand for the services provided, a business may not be able to cater to it without compromising on quality, due to the founders’ bandwidth becoming a bottleneck. Founders typically need to get involved hands on in projects where there is unexplored territory, and the employees aren’t trained or equipped to handle it. 4 to 5 such projects can easily occupy the entire working day of a founder. Founder’s bandwidth constraining the growth is a challenge at every stage, but for services business, this stage comes pretty early in the journey. The quality of services that led to an increased demand is generally due to the hard skills of the founder herself, and that is difficult to replicate across the company when new hires take on the duties that were previously done by the founder.

If founders manage to outgrow this stage, the next milestone of stagnation comes in where the customer acquisition cost (CAC) becomes higher than the value of the customer, or life-time value (LTV). This happens when outbound sales is the primary driver of demand. Under the circumstances, hiring more sales people will only lose you money, so it is better to stagnate than to attempt to expand.

If a business is able to outgrow both, build a model where the founders are only involved in strategic decisions while the operations are handled by the employees, and inbound demand is driving growth, then a services business can potentially scale limitlessly.

To achieve this, I have listed a few strategies that have been used by successful services companies like McKinsey, Bain, BCG (MBB), TCS, etc. below.

Strategies to scale

To do this, these are the top 4 strategies a Services Business owner might enforce:

(A) Domain Expertise

As a part of this strategy, your company should not only be an expert at providing your core services (horizontal expertise), but must also hold domain expertise (vertical expertise). For instance, AI Development Services is a horizontal that can add value across every domain. On the other hand, healthcare, is a vertical. A horizontal service provider that specializes in a vertical is rare. For instance, an AI Development Services Provider is common, but an AI Development Service Provider specializing in the Healthcare Sector is much, much rarer. The mismatch of supply and demand allows you to scale to a certain degree without putting in marketing efforts.

The next level of scaling under the strategy comes from case study replication. When you are an expert in a field that is so rare, 80% of the problem statements you solve are replicable in the industry. This allows you to pitch problems and solutions to companies that the companies may not even be aware of, resulting in very high conversion rates. This also brings in predictability in the project delivery timeline and bandwidth, allowing founders to plan ahead.

To ensure that the founders themselves aren’t involved in project delivery, a knowledge base that can be easily consumed by a new comer is necessary, leaving only specifics for the founders to handle. The same knowledge base is also the moat of the company in this strategy.

The greatest challenge is the market size. When you choose a niche that no one else is playing in, it also means that the market isn’t big enough, and you will run out of customers. To ensure this doesn’t happen, it is necessary to keep expanding verticals one by one, bringing in domain experts at senior level if need be.

Notable firms using this strategy include BCG, an expert in Management Consulting in the BFSI domain, IQVIA, an expert in consulting in the Healthcare domain, TCS, who started out as a Technology Services provider in Healthcare and BFSI domains.

(B) Modularization of Components

This strategy involves wide scale usage of proprietary internal tools that boost the productivity of an average employee many fold. This can either happen when you are replicating entire case studies like in strategy 1, or if you are breaking the project down in several components, or building blocks that can be custom-combined to deliver new projects.

These building blocks or modules are the company’s moat. Such companies specialize in making sure that every new type of project is an investment, instead of a source of revenue. The project helps construct new modules, that can later be repurposed in subsequent projects. This strategy allows companies undertaking this strategy to outbid their competitors by a wide margin in terms of costs, helping them acquire big customers rapidly.

Additionally, constructing a structure out of building blocks is much easier than to build the blocks themselves, enabling the companies to quickly train a workforce, cutting costs throughout the employee lifecycle.

IT Services companies like Infosys, TCS, Wipro, etc. have scaled on this strategy, and now have a footprint across virtually all verticals and horizontals.

(C) Productization of Services

Productization of services is done to take away the uncertainty in outcomes and pricing, which are the primary things a founder has to cater for when building a services business. For this strategy to work, companies need expertise in putting together teams that are able to provide consistency in service quality. Next, the idea is to bundle adjacent services and offer fixed outcomes for a fixed price.

To be scalable, the outcomes cannot be output variables like increasing customer revenue, but input variables like “Social Media Posts per Day”, or “Number of Website Pages”, etc. However, a customer will only purchase your service bundle if you can prove to her that (1) Your input metrics actually moved the output metric (increased revenue or reduced costs) and (2) You can consistently deliver the same quality of input metrics

(1) can only be achieved if high quality work was delivered initially, and the company now has data points to show for. (2) can be achieved if the company nails its hiring and training strategy. Developing SOPs, QC processes, and hiring from reputed places are the things these companies will bank on.

Marketing and Design Agencies like Hubspot, Design Pickle, etc. used this model to scale. Marketing agencies find this convenient, as there is a lot of predictability of outcome in your promises. This is a model also used by large restaurant chains like McDonalds, Dominos, etc. who ensure similar quality of service across the globe by ensuring strong SOPs and training processes.

(D) Turning to Products from Services

In this strategy, you don’t build products to be used internally, unlike Strategy 2. You build products that you actually start selling. This is an uncommon strategy, as branding the products under a brand that is primarily service driven is a tough task. Additionally, the team that is required to build a product that customers love and a team that is required to deliver a fixed scope of work is very different.

The type of products built out by such service companies are to cater for themselves, or one of their customers. Seeing high repeatability of the use case, agencies build a product which they monetize and see revenues ranging from a $10K (Monthly recurring revenue) MRR, to even Billions in rare cases.

Notable Companies that used this strategy to grow include Atlassian, which started as an IT Services firm, and then built its own project management tools for internal use, which was later externalized. Popular Website design tool Wix started as a Web Development agency, and built a tool to streamline their own processes which was later externalized. Another noteworthy example is Mailchimp, the popular marketing and CRM tool that started out as a marketing agency.

Choosing a Strategy that is right for Your Business

Choosing one or more out of the above-listed strategies is a decision that each founder in the Services Business must consciously make at some point. She can consider the following parameters to help in evaluation:

(I) Founder’s Skillset & Passion

This is a factor that should, and does drive every decision that a founder takes right from the inception of a business idea. A founder may find that their services can be useful in the Education sector, but has no passion nor the skillset to understand and convince the players in this sector, then it may not be the best strategy to choose. Conversely, the founder’s services may not have much value for a particular sector, but the founder’s passion and skillset can help her create a space for herself in the sector.

(II) Market Trends

This includes the market size and the growth rate of the niche you are planning to go after. If you get expertise in curing Polio virus in cockroaches, you probably won’t go too far ahead in your venture, since no one is willing to pay you for the service. Hence, it is important to understand the size of the market you are targeting.

Additionally, it is a must to consider the growth attached to that size. It very well may be so, that the existing players in the industry have already partnered with experts similar to you. Displacing them is much harder than going after players that don’t have a partner yet. This requires new players in the market, and that happens when the market is growing.

(III) Operational Feasibility

Last, but not the least your plan should be feasible. If you decide to productize your service, but it is impossible to estimate reasonable outcomes of your services beforehand, it is impossible to productize your service. Similarly, if providing your service means building everything from scratch every time, you cannot modularize and monetize it. Hence, don’t make a plan that involves doing something that is currently infeasible.

In the rare case where you have figured out a new way to make something feasible which previously wasn’t, then you should consider building a product out of it that can be monetized, instead of using the knowledge internally.

What is our plan for Tailored AI?

To decide upon our plan, we eliminate the infeasible options first.

In the field of AI, it is extremely tough to productize your service. The customer’s expectations out of any AI model is for it to hit a certain level of accuracy in order to bring in any value. However, depending on the diversity and quantity of data available, attaining that level of accuracy may require 1000 to even 100 thousand hours of development efforts. Here, this strategy fails the Operational feasibility test.

Turning to products, in my opinion, is a game of chance. Services companies rarely engage actively in finding scalable product-worthy problem statements, as it does not synergize with their core business. Scouting of problem statements happens through observation of internal operations, as well as the problem statements brought forth by the customers.

What remains is case study replication through sector expertise, where we sell case studies, and modularization of components, where we are able to outbid our competition. These strategies are not mutually exclusive, and our plan is to use both to fuel our expansion.

Scaling a services business is hard, but we will attempt doing just that. If you have other ideas to scale services businesses, please write to us at contact@tailoredai.co!

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