257: Scaling a Services Business (Challenges)

Steli Efti:

Hey everybody, this is Steli Efti.

Hiten Shah:

And this is Hiten Shah.

Steli Efti:

And in today’s episode of The Startup Chat we’re going to talk about the challenges  of scaling a services business. So, here’s why I wanna talk to you about this,  Eaton. Beyond the fact that both you and I have run services businesses before and  had run software businesses, so hence lots of people come to us with the question  of transitioning and we recorded an episode about that prior and people can search and  find that. I’ve had, I have had a number of cases recently where either friends  of mine are shutting down their services of consulting business or their currently pondering or  considering starting one. And, I’ve heard myself repeatedly talk about some of the challenges that  people should anticipate and they are always surprised by those challenges. And I realize we  never talked about A) these challenges and B) ya know, ways to deal with them. Right? As you wanna scale it. So, here’s the deal. Like, a year ago, one  and a half years ago I had a friend that wanted to start a growth  marketing agency for startups. He was a founder, has done two successful startups before, one  sold for, I don’t know, $60 million or something, had managed a big marketing team,  knows a lot about marketing, founder, awesome guy, smart and all that, and when he  started consulting startups on growth market again and stuff like that, he was seeing that  there was a ton of demand for his time and there was a ton of money ready to be made in that space. So, he was like you know what  maybe I should not just do this myself, maybe I should just hire a bunch  of people and make this a real business. And when you start at the early  days where it’s super exciting, everything was awesome and anytime you talk to me about  this I always told him the one challenge I think that he’s gonna run in  to down the line, which is that you know in the beginning, he is amazing,  so I don’t have a problem seeing how lots of companies would want to pay  him a ton of money and get his time and energy, but once he’s trying  to hire other people, it is going to be incredibly hard if not almost impossible  to find people that are as good as he is. It’s going to be really  hard to get, keep the quality and expectations at a certain level with clients. And  also, a client in a servicing business in the first month when they come with  all their hopes and dreams and their problems, that’s a much more exciting conversation than  three, six, nine months down the line as the messiness of reality shows up, right?  As you’ve done a bunch of experiments and nothing has really worked yet. Or you’ve  gathered a bunch of data but the data’s not really conclusive in one way or  another. Or as they have all these pressures from investors or other sources that make them want you to do shortcut things that might not make sense or you know  all these problems that come up and so scaling a services business by hiring more  and more and more people and scaling a services business by retaining your clients over  a really long periods of time and keeping them happy seems to be one of  those things that is very hard to do. I was telling him about that, he  was ignoring me on that, and a few months ago, two months ago, so he  shut down the business because, as amazing as the beginning was and he was hiring tons of people and getting tons of clients, ya know, as messy it became a  year into running that business and eventually it was like “this sucks I hate my  life, I hate running this company, so I’m just gonna shut it down.” And I was just talking to a founder yesterday in person that was thinking about starting a  services business, again because he’s amazing at what he does, he has lots of clients  and is a consultant himself, so he’s now thinking about hiring a bunch of people  and scaling this up and I was telling him about this challenge of scaling the services business and I had an email this morning I just remembered as I’m rambling  on with you of a founder that we both know. I’m not going to name  his name, but he’s been running a business and his main challenge has been that  he gets these new clients and they do this job for them for six to  nine months and they do really well and then the client hires internal people and  builds a team and doesn’t want to work with the outside person anymore. So he’s  like running into this retention issue. So, lots of challenges, none of this I’m sure  you’ve ever heard before, but let’s dive into it and talk a little bit about  like, ya know, how to avoid these or how to address these challenges, because there  are service businesses that have become really, really fucking big. So, there is way to  deal with it. But, I’m curious to hear your thoughts on that stuff.

Hiten Shah:

Yeah. I think it’s like any other business. Which is, you need to create  repeatable processes across everything in the business, from sales to delivery of whatever your product  is, whatever your service is, all the way to retaining clients. So-

Steli Efti:

Let me stop you right there real quick.

Hiten Shah:

Yeah.

Steli Efti:

What color is your shirt today?

Hiten Shah:

Gray.

Steli Efti:

Gray. I’m sure it’s a dope shirt and you look really, I like the new  shirts that Eaton is rocking. He looks dope, we need to make new pictures. But,  you’re scritchy scratchy on the-

Hiten Shah:

Okay, let me work on this. I’m gonna fix this, I’m gonna fix this for  you so I don’t have to hear this shit again. Okay.

Steli Efti:

Alright.

Hiten Shah:

If it keeps doing that, please let me know. I have made some changes.

Steli Efti:

Alright. You’ve made adjustments. I like it. Thank you.

Hiten Shah:

Yeah. Absolutely. I haven’t been able to find great headphones, with good mic. So,  I think Apple needs to do some upgrades. So, to me, when you’re running a  consulting business, you tend to come up with these common problems and most people, instead  of like solving them by looking at the problem and thinking through how to solve  them and either running some experiments or making some changes, they tend to give up.  Because its much easier to just give up or much easier to go do something  else. What I found is that when you push through, you actually discover how to  build a very successful, very large, highly profitable cash flow business. And, there’s some natural  tips that I’d give somebody. So, I think you mentioned a bunch of objections. Number  one objection you mentioned, which I call it number one because it’s probably the most  common and people don’t know how to deal with this. When a client wants to  bring it in-house. So, what I would say is, up front, the biggest, best, baddest-ass  thing you could do if you’re a services business and you’ve heard that clients bring  it upfront or you experience that, is in the first conversation with them, you set  expectations that say “Look, I would need to know before we start, if you want  to bring it in-house.” I would want to know what your timeline looks like. And  then, I would also want to create a roadmap and a plan where you’d pay  us, we do it, and then we help you bring it in-house. Otherwise, I am  not interested in this business. And the reason is you’re not a good customer to  me if you show up six months from now and tell me you’re going to  bring it in-house. That means a lot of different things. It could be we’re doing  a poor job or it could be like you realize that like it’s cheaper if  you bring it in-house. So we’d rather align with you now and determine what that  path might look like and build that into our contract. The reason I say that  is, there’s missed opportunity in services businesses, where you could be also a recruiter-

Steli Efti:

Yeah!-

Hiten Shah:

And actually get a recruiting fee. Right?

Steli Efti:

Yep-

Hiten Shah:

So for me, services businesses are all about finding more and more ways to make,  to add value for your customer and make more money. And so, and you bake  it in. I think what happens is people are like “Oh, I’m getting paid ten  grand a month” or 20 grand a month or 5 grand a month or 50  grand a month and they think it’s gonna last forever and they design, they don’t  even design a PNL or anything like this, ’cause they’re not that crazy, go back  to our episode about math and PNLs and finance, but like, ya know, they don’t  even think of it like that they’re just like “oh I’m making 50 grand. If  I get ten customers, I make 500 grand a month,” ya know, and I know  I’m talking about extreme numbers, but you can say it’s five grand, if I get  ten customers I’m making 50, whatever, but then they don’t have any churn built into  it. They don’t think about, like when is this customer gonna leave me? When is,  when are they gonna do some math and realize that they can do this in-house cheaper and they, and we’ve built up their skill set internally to do that. So  for me it’s all about alignment and having that alignment in the first convo. I  actually had one of these conversations because I was helping a friend with a deal  and it came up right away and I told him straight up, “Yo, find out  if they want to bring it in-house.” He’s like, “Yeah, they do.” I’m like “When?”  “One year.” I’m like “Cool, can you come up with a plan on how that fits into budgeting and everything for you?” He’s like “Absolutely.” Can you come up with  a plan where you help them do that and you transition from month nine to  twelve? He’s like “Absolutely.” “And they keep paying you right?” He’s like “Yeah.” And the  other thing is like there’s no reason, you shouldn’t be willing to reduce the engagement  at that point. You don’t have to get rid of it, you can reduce it.  And if you’re doing key things for them, right, you reduce it so you’re almost  equivalent of one or one and a half head count, but you’re still doing some  key critical things for them because you built the trust and the processes with them.  So, I think that, like companies get really used to, services businesses really get used  to the total revenue that they’re getting from a customer every month and don’t think  about how does that evolve over time?

Steli Efti:

Yep. I love that. I love especially the idea that if you look at some  of the, kind of the biggest, most recent examples of services businesses that scaled, a  lot of them adopted this model where eventually to be, like part of their final  end transition is to hire this talent, build these teams for you and then act  as a recruiter where you can hire these people, you know as full time internal  resources. And that becomes part of their pitch in terms of hiring great talent, is  like you come here, you work some top brands and companies, and then you can  get hired into great positions after all the experience that you’ve got. So, thinking about  the entire life cycle of what you can provide as a service business versus just  the, you know the beginning of it and then losing all these customers and being  frustrated about that I think is a massive missed opportunity that I see many, many  companies do. How about the challenge of kind of quality consistency? Right? You know, knowing  how to, hiring the type of talent that can do the work really well, but  then also ensuring that quality is done at a certain level that you don’t run  into these big differences where, you know one … One of your consultants, let’s say  you know is generating a lot more revenue and making people a lot happier than  the other, or you’re pitching a certain value proposition, but you know that there’s a  range of talent that you have internally, in terms of how that value is going  to be delivered. What do you think about how do services businesses deal with the  challenge of hiring and delivering quality work that is consistent? Which is what I think  the toughest thing for most of them.

Hiten Shah:

it’s easy when you have less clients ’cause, you know I’ll, okay how bout  this? The number one reason services businesses don’t have consistent quality is because the people  who are running the show earlier on, per customer, are not the ones running it  anymore. Which goes back to the repetition scale problem. So the number one reason is  the founder or the founders of the business are no longer the ones managing the  clients, running with the clients, and what not. Right? And managing the processes, managing what’s  going on and they take their eye off, what I call, the ball. Right?

Steli Efti:

Yeah.

Hiten Shah:

Or they don’t make it so that information is transmitted to whoever is doing account  management and the services and what not and running that team. So, I see that  as like a very common problem. And honestly Steli, like you might have noticed  this, but the people who start these businesses are not conscious of that problem. They  don’t even realize that’s what’s happening.

Steli Efti:

Yeah. Yeah and I had the, on the receiving end, I had like a business  recently that was trying to do kind of a contract with us and being a  service provider and one of the people that were talking to us was one of  the, you know, founders and he was laying out the project plan and this, that  and the other, and he was amazing to talk to, but very early in the  conversation I was like “Buddy, like working with you will work really well for us.  I can already tell that working with you would be a pleasure and we’ll be  successful, but you’ve never mentioned, so far in all this communication, you’ve never mentioned who’s  actually gonna be servicing us? Who’s gonna be our account manager? And I assume that’s  not you and I’m telling you if it’s not you, I’m not interested.” Right?

Hiten Shah:

Mm-hmm (affirmative).

Steli Efti:

And that person was like, you could tell literally how he had like an “Oh  shit” moment, where he’s like “Oh, hm.” And then he mumbled on saying “Well, you  know with you guys, we could probably make an exception and I could be your  account manager.” Like yeah buddy, but are you gonna do a good job? Because my  sense is that you’re out there, like, bringing in business, which you’re doing an amazing  job at, but are you gonna be able to spend enough time with, like, servicing  us if you’re main job is bringing new business, doing sales and business development? And  he just was not prepared for that question. Now, to be fair, I would assume  that 90% of the people he talks to would never bring this up, but I  think that’s a problem. Because a lot of times the person that is selling the  services business and is doing the business development and is like buttering up the clients  and making them fall in love, builds a relationship, the client is gets accustomed to  certain style and person in quality communication and they think “This is gonna be our  guy” and then, boom, the moment you sign the contract, you wire the money, boom  there’s this new person you’ve never heard of, there’s some kind of introduction call with, ya know person XYZ and now, ya know, good luck, hopefully you like that person,  and hopefully that person’s awesome and hopefully the person is somebody you wanna work with.  Like services businesses do a terrible job sometimes communicating their transition, having, setting realistic expectations,  but also thinking internally, how can we make sure that there’s no big disconnect between  how we bring in customers and then how we treat them along the journey and  how do we make sure we’re the founders, that once we have done all the  account management ourselves, that we don’t just go “Let’s hire a bunch of people, have  them deal with everything.” As you said, losing touch with what’s really going on.

Hiten Shah:

yeah. If you are running a services business right now and you’re listening to  this, like I think we just gave you the biggest thing you can think of  right there. Which is like go pay attention to what’s going on in a way  that you used too. Especially if you were wondering why your business isn’t working anymore  and it used to.

Steli Efti:

And the other thing, which I love, which is such a fundamental truth, but I  want to highlight it to wrap up this episode, as you start your business, you’re  going to run into problems. Doesn’t matter what kind of businesses, services or not services.  Once you run into these problems, you can decide that these problems make it no  fun and these problems are bad and, so you don’t wanna do it anymore, or  you can accept that you’re reason for existence is solving problems and the harder the  problem is, the more valuable it is to solve. So if you are running a  services business that’s going well, and now you are hitting some scaling challenges, solving these might be very difficult, but if you do solve them, there’s a big price that’s  waiting. There’s, scaling a services business to something really large is incredible. As Eaton said,  it’s the type of business that has great margins and massive cash flow and it  can be, and all your competition is gonna be failing at scaling the way that  you did. They all stop at some point. So, there’s big opportunity at the end  of it. But, the price you have to pay to get to that size, to  get to that type of awesome business, is solving some challenging problems and not running  away from them. I think that’s it for this episode from us.

Hiten Shah:

See ya.

Steli Efti:

See ya.