Services are difficult to scale. According to Mohan Sawhney, a clinical professor of marketing at the Kellogg School, companies looking to grow should identify how to productize their services. They will need to shift from an open-ended, opportunistic approach to a strategic approach focused on optimizing successes—and the timing of that shift is everything.

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Video 1 (1:47): Business Scaling Challenge: Shifting from Services to Products

When you are a startup company—let’s say you’re in the business-to-business market you go out to clients—I suggest start doing consulting projects for them. Engage in service projects for them. Because when you engage in consulting projects, you get to learn about the client; you get to learn about their needs. You get a very good understanding of what they want, their pain points are, what outcomes and objectives are, and so on. By the way, you’re getting paid to learn; you’re putting food on the table.

So the nice thing about services or consulting projects is that they generate revenues quickly and they are an opportunity to actually get intimate with the clients and learn. Now, as you start to see patterns in the work that you doing for clients; you start to see, “oh, the last ten people with whom I had projects, eight of them asked me to do sales forecasting. Maybe now I should build a sales forecasting product.”

So what you then do to scale is: you productize your services. Because the nice thing about products is that they scale, they need less people, and margins are better. But again, the way you manage this paradox is that you’re servicizing to learn about clients—and you’re putting food on the table—but then you’re productizing to scale your business and to improve your margins.

Now, if you build the product too early there will be two problems: one is you won’t have the resources because a product takes a lot of money before it can generate even one dollar of revenue; and secondly, you have the risk of building the wrong product because you’re not really closely in touch with customers.

So that’s what you gain at the early stage. But then if you persist for services too long, you can’t scale it. So that’s the idea of servicizing to learn and productizing to earn.

Video 2 (3:21): Business Scaling Challenge: How to Productize Services

so let me share a couple of examples of how this idea of productizing services allows you to scale.

One example is from a company that my cousin had founded some years ago in New Jersey. It was called marketRx. They were in the business of salesforce and marketing services for pharmaceutical companies. So they started out initially as a consulting firm: they would do consulting projects on marketing problems, salesforce problems; and they build up a nice little business around that.

But then they realized that as they kept doing projects with clients, there were some patterns. Several clients are asking them, “can you do salesforce structuring for us? Can you do salesforce sizing for us? Can you do new product forecasting for us? Can you help us optimize our marketing spend?”

As they started to tease out these patterns, what they did is: they put a development team in India and hired a bunch of software developers and engineers to actually build software products for performing these different salesforce and marketing automation functions. Over time, they built a suite of salesforce and marketing automation products.

What is interesting is: services enable these products to be built, but then the product enables services to be provided. So now it’s product-plus-consulting, but the product is the lead and you change the business model.

The result of this was that they were able to sell the company, which was at that time about a forty million dollar run rate in revenues, for about a hundred and seventy five million. You do not get a four-to-five X multiple for a consulting firm. You get it for a product company.

Another instance closer to home: we do custom executive programs for companies like Microsoft—marketing capability development programs. Microsoft came to us last year and said, “our problem is that the programs you do for us, while they’re very good, they’re very expensive and our reach is very limited. You can reach fifty people at a time; we have 2500 marketers around the world. How do we scale this?”

Faculty don’t scale, you know. So what we did is, my colleague and I went down to Microsoft and we actually taught in a studio environment to a set of sixty people—with mics and high-definition cameras and so on. But we taught our program like a TV show: thirty minute segments. So it was almost like taping a reality show over two full days. Subsequently, Microsoft took this content and chunked it, bite-sized it into short modules that were then post-produced professionally and became video on demand modules.

So now we have a library of modules on marketing excellence that Microsoft has licensed from us and we get paid a royalty as people consume those modules. What we’ve done effectively is productized our content. This is infinitely scalable. I don’t have to travel around the world and Microsoft is happy because they get on-demand learning.

So that’s an example of how you scale executive teaching.

Video 3 (1:02): Business Scaling Challenge: Strategy Transitions for Scaling Companies

Let’s take the opportunistic-to-strategic paradox that we talked about. It is important to time that correctly, because if you are opportunistic too long, you spread yourself too thin, or if you are strategic too early may make the mistake of betting on the wrong market. So what is the timing of the transition, and how do you figure out that that’s the right time to make that transition?

I think that the moment that you start to get differential traction in certain segments—which means that you are iterating and getting feedback from the market. Whenever the feedback becomes clear enough where you see: this segment is responding better, but not that, this vertical market and not that. The moment you think you have enough data that you can make that determination: not a day later, you should start focusing, but not a day earlier. So that’s the timing issue.

Video 4 (4:05): Business Scaling Challenge: The Paradoxes of Scaling

As I have worked with companies at various stages of their lifecycle—starting from start-up companies to mid-size companies to large enterprises—I observed an interesting phenomenon. The phenomenon I observed is that there are several aspects of strategy that are absolutely critical for you to grow a company at the early stages. If you keep persisting with those strategies they will kill you as you try to scale the company. The paradox here is that the various strategies that really work for you at the early stages really start to hurt you in the long run.

So you almost have to reverse your strategic thinking as you want to scale the company.

Let me share a couple of examples with you: choice of customers and markets. In choice of customers and markets, when you start off you have to be opportunistic. You have to probe all different segments, different markets, different customers, different opportunities. Its ok to be broad in your search. In fact, you want to do probes in many different directions. Early on in a startup company’s life—in the growth stage—they tend to be opportunistic. The choice of customers and markets is somewhat haphazard, and it needs to be because you’re doing exploration.

However if you persistent in being opportunistic too long you can spread yourself too thin. So you need to narrow your focus and become strategic. Then you need to say, ‘Wait a minute, I’m getting more traction from the financial services vertical, so maybe I should focus on them.’ Or maybe the consumer market versus the business market is more attractive. Then I need to start to winnow down my choices. So you flip the switch and become strategic.

That’s an example of a paradox. Now, interestingly the reverse is also true: if you start out being too strategic and bet too early on a very specific area, you may be wrong. What the opportunistic approach gives you is the option value; and then the strategic approach allows you to focus. That’s one switch.

Take another example: how you drive sales and generate demand. Early on, it is all about relationships. Let’s say you are a business-to-business company in the growth stage. Early on, what you’re going to do is, the founders of the company, the key personnel in the company, they’re going to want to go out and sell to the Rolex. It’s really about: people buy from you because they know you; people buy from because they have a relationship with you. That is critical because you can’t sell without having that personal connection.

But at certain points when you want to scale the company, that doesn’t scale. How many people can you have in your Rolodex? How many personal relationships can you have? That’s when you need to invest in building a brand.

What is a brand? A brand becomes a proxy for a personal relationship. Somebody has never met you; Somebody who’s never known you as a person knows the company, knows the brand. So that when your salesperson does walk in the door, they say. ‘Oh, we’ve heard of you guys,’ because that’s what the brand has done for you. That’s another strategic reversal: moving from relationship as the repository of how you drive sales, to brands, and the brands become the proxy for the relationship.

Those are some of the paradoxes in scaling. I talked about some others, like a shift from projects to products—productizing what you do—and a shift really from people to process. Smaller companies don’t tend to have these processes because it’s really one person in a department. Well, as you grow, you can’t rely on individuals and you can’t rely on personalities. You really need to institutionalize the expertise, so you need to shift from people to process.

Those are some of the paradoxes of scaling a company. As a business leader, you need to understand when you need to start making that switch as you seek to scale.