In today’s Startup Chat, we talk about the various challenges involved in scaling service businesses. It is common for service businesses to fold when faced with certain challenges—like maintaining consistent quality and client churn. However, if a service business is able to work through these challenges and scale up, you can achieve success and healthy profit margins. Tune-in as Hiten and Steli provide insights into how you can rise above these seemingly insurmountable challenges and take your service business to the next stage. Time Stamped Show Notes: 00:05 – Today, we are going to talk about the various challenges involved in scaling service businesses 00:51 – This topic is particularly relevant since quite a few people are either shutting down their service business or are considering starting a new one 02:20 – It is incredibly hard to find good people that meet client expectations 02:50 – Often businesses run into challenges as experiments fail, data is not conclusive and investor pressure mounts up 04:08 – Over a period of time, a client may build an internal team and choose not to work with you 04:54 – Like any other business, you need to focus on sales, delivery and repeatability 05:56 – Instead of experimenting and pushing through, most people tend to give up 06:42 – Discuss the possibility of the client migrating services in-house and build it into your contract 07:42 – Be mindful of missed revenue opportunities 09:14 – Client engagement will continue; bring value to the table by carrying out key, critical tasks for the client 09:33 – Service companies look at the total revenue and do not consider how it evolves over time 10:16 – Think about the entire lifecycle of the service business instead of just focusing on the beginning 10:32 – Achieving quality consistency 11:21 – Quality suffers as the founders are no longer the ones managing a client 12:01 – People who start a service business are not conscious of this problem 13:39 – The person who is in charge of business development is often not the one managing the account 14:52 – Pay attention in a way that you used to, especially if your service business is running poorly 15:06 – Accept the fact that your job is to solve problems; scaling a service business will yield incredible rewards 3 Key Points: Discuss the possibility of your client migrating services in-house and build it into your contract with your employees—it’s common for service companies to miss out on revenue opportunities. Quality suffers as the founders are no longer the ones managing the clients. Scaling up is one of the biggest challenges faced by service businesses today; if you can solve this problem, you will reap rich rewards. 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 acros...