The UK economy is dominated by the service sector, which makes up more than 80% of GDP.
Many industrialised countries are in a similar position, moving away from raw material extraction and manufacturing to an economy based on service and, increasingly, knowledge based activities.
How should we think about service businesses?
We often start by thinking of a service as something people do for other people but this doesn’t capture the full picture.
In 1978 Dan R.E. Thomas, writing in the Harvard Business Review, suggested that we need to ask two questions to understand the model used in a given service business:
- How is the service rendered?
- What equipment or people render the service?
Matching services with business models
Although the article is old, it can be adapted into a framework to help match services with business models.
On one axis, we can think of people and their skills, ranging from relatively unskilled to professionals with extensive qualifications.
On the other, we set out how they use equipment and whether it needs to be operated, monitored or can be automated.
Services that require a human operator range from mowing a lawn, which can be done by someone relatively unskilled with a mower, to heart surgery, which requires a team of professionals with specialised equipment and facilities.
Monitored services can range from overseeing equipment, such as a car wash to more complex plant operations and consulting services.
In these situations the people don’t need to get physically involved but use systems to keep track of operations and change settings as needed.
Automated services range from vending machines at one extreme that have a fairly straightforward task of dispensing products to expert systems such as a health website that allows us to diagnose ourselves and decide whether we need to go to a hospital or not.
Why knowing the kind of service model you have is important
The kind of service model we operate decides how we scale the business.
If a business depends on one person’s time to succeed, then scale can only happen by adding more similar people.
Think lawyers, accountants and management consultants.
There is a reason why most professional practices are small.
They can only grow by putting in more capital and pushing up their fixed costs base which, if revenue fails to grow as expected, means they eventually slide into failure.
There aren’t that many ways to get around this. A common solution is to find patrons – small or big.
Scaling equipment, on the other hand, may be an easier option.
As more of the service is automated, the same number of professionals can deliver a better service to customers.
Unless it spills over into self-service.
There is a crucial difference between service automation that makes things better and cheaper for users and service automation that makes things better and cheaper for providers.
Getting users to do more of the work can easily fall into the latter category.
The right blend of service and equipment
A good service business, it would seem, has a core of people with appropriate skills and scales by adding technology and automation that improves service quality to customers before adding more people.
As with most things, that’s easy to say, but not simple to do.