There’s No Such Thing as a Pure Service Business

What makes service businesses different from manufacturing or software businesses? And how are successful service businesses managed differently than other types of companies? These questions captivated me as I embarked on a decade-long journey scaling a service business.

Diving into the intricacies of successful service businesses, I encountered something surprising: pure service businesses are a myth. In reality, the most successful service businesses integrate product-like elements on their way to building great companies.

My journey led to two transformative ideas that reshaped my approach to business strategy.

• The Service-Product Continuum
• The Service Imperative Principle

These concepts aren’t just theoretical; they’re practical tools that drove financial growth and enriched team dynamics.

I will unravel both of them and demonstrate their influence on the hybrid nature of successful service businesses. More than that, I’ll guide you through three transformative approaches that can help your service business unlock incredible value.

The Service-Product Continuum

There exists no authoritative consensus on either the boundaries or the classification of the service industries.

– George J. Stigler

During the 1960s and 70s, as services became a more significant portion of economic activity in developed countries, researchers attempted to define the characteristics of services. Over subsequent decades, several contributors built upon each other to create the prevailing view that services exhibit four characteristics, commonly called IHIP.

• Intangibility: Services are not physical products.
• Heterogeneity: Even if the same person performs the service repeatedly, the service output tends to differ for each client or customer.
• Inseparability: Services cannot be separated from the source, so the role of the service provider is crucial in service delivery, reducing the prevalence of intermediaries and distributors.
• Perishability: Services are usually produced and consumed simultaneously, creating different supply-demand dynamics because they can’t be stored.

The Services-Goods Continuum plots business offerings along a spectrum. On the Service side of the spectrum, offerings have high amounts of IHIP, and on the Goods Side, they have low amounts.

All businesses lie somewhere on this spectrum, combining product-like and service-like characteristics. Even management consulting firms – considered among the most service-oriented companies – generate lots of revenue from product-like offerings. While exact numbers aren’t widely available, McKinsey & Company probably generates over a fifth of its revenue (and a larger percentage of its profits) from its asset-based consulting division, McKinsey Solutions. (I discuss asset-based consulting more in the last section).

The Service-of-Necessity Principle

The Service-of-Necessity Principle emphasizes how and when businesses should use services. Specifically:

Businesses should use services to resolve client and customer problems only when a product-like solution would be insufficient.

This principle is rooted in the understanding that the IHIP characteristics of intangibility, heterogeneity, inseparability, and perishability lead to inefficiencies:

1. Intangibility leads to higher perceived risk from customers and clients, requiring more time and resources to establish trust and credibility.
2. Heterogeneity makes consistency and quality control challenging, sometimes leading to dissatisfaction and increased business training and monitoring costs.
3. Inseparability makes scaling difficult and can lead to scheduling, capacity utilization, and customer service inefficiencies.
4. Perishability leads to inefficiencies in supply and demand, making it hard to price services.

As a result of these inefficiencies, service business leaders should be on the lookout for parts of the business where they can introduce more product-like offerings without compromising the client or customer experience.

By reserving pure services for situations where they’re necessary, you can increase the value you create through and for your business.

A word of caution: please don’t misuse this principle by overlooking your clients’ or customers’ preferences. Some things really do need services! Moreover, when resolving a customer or client problem, what matters is their perspective, not yours. The principle should never promote efficiency at the expense of ensuring clients or customers get (and believe they’re getting) compelling value.

Introducing product-like solutions as a service business requires a thoughtful approach. As I’ll share in the next section, there are areas in your business where you can use more product-like solutions while maintaining your identity as a service-first business.

3 Approaches of Hybrid Service Businesses

In the landscape of service businesses, the evolution toward a hybrid model is not just a trend; it’s a strategic position. I call these businesses “Hybrids” because they intentionally and skillfully incorporate product-like characteristics into their service offerings while maintaining a service-first ethos. This integration addresses the inherent challenges of traditional service models by introducing scalability, consistency, and efficiency.

Here are three common approaches of hybrid service businesses:

1. Productized Services: This approach involves packaging services with defined scopes, deliverables, and pricing, much like products. Businesses can achieve greater consistency and scalability by reducing variability and setting clear expectations. Productized services allow for easier marketing, selling, and delivery, eliminating much of the custom work that makes traditional services inefficient.
2. Asset-Based Consulting: In asset-based consulting, firms develop and utilize proprietary tools or software to deliver part of their service. This approach transforms the knowledge and experience traditionally offered through person-to-person interaction into scalable internal products. The assets provide consistent, high-quality advice or solutions, often enabling businesses to serve a broader client or customer base more efficiently.
3. Targeted Digitization: Leveraging technology to automate or enhance certain aspects of service delivery can significantly improve efficiency and customer experience. This might include client or customer portals, knowledge bases, digitized intake, automated scheduling, or other digital platforms for service delivery. By identifying areas where technology can replace or augment human efforts, service businesses can free up valuable time for their team to focus on more strategic, high-value activities.

By embracing productized services, asset-based consulting, and targeted digitization, hybrid service businesses skillfully integrate product-like efficiencies while maintaining their core service essence. This strategic evolution positions them for enhanced scalability, quality, and satisfaction.

Hybrid Service Businesses in Action

In the service business sector, the shift towards hybrid models is undeniable. Traditional service businesses are progressively integrating productized services, asset-based consulting, and targeted digitization to enhance their value proposition, streamline operations, and extend their market reach.

Here are prominent examples of service businesses that have successfully embraced these transformative strategies:

• Kroll Inc.: Specializing in risk, financial, and business advisory services, Kroll demonstrates the power of productized services. They offer specialized, standardized solutions for complex issues like cyber risk and compliance. This approach ensures its clients receive consistent, scalable, and efficient advice tailored to their needs.
• Accenture: A giant in consulting and outsourcing, Accenture showcases asset-based consulting through a variety of proprietary tools and platforms. These innovations significantly enhance their consulting capabilities, making their services more impactful and results-driven.
• Waste Management Inc.: A leader in environmental solutions, Waste Management has adopted targeted digitization to transform waste collection and recycling services. Using route optimization software and automated vehicles, they’ve significantly enhanced their operational efficiency and customer service.
• Albourne Partners: As an independent advisory firm focusing on alternative investment strategies, Albourne has adeptly employed productized services. They offer standardized advisory packages that provide clear, comprehensive solutions for hedge fund, private equity, and real asset portfolio management.
• McKinsey & Company: At the forefront of strategic consulting, McKinsey’s asset-based consulting is epitomized by McKinsey Solutions. This suite of tools and software provides scalable, data-driven products that address a range of business challenges, augmenting their traditional consulting services.
• ADP: Known for HR and payroll services, ADP employs targeted digitization with its automated and cloud-based solutions. These innovations offer businesses streamlined, efficient, and flexible services.
• Xerox: Transitioning from its roots in manufacturing, Xerox now provides document and business process services, incorporating targeted digitization to deliver effective managed print services and business process outsourcing.
• KPMG: KPMG has transformed the audit process with Clara, an integrated audit platform that exemplifies asset-based consulting. Clara incorporates technology to deliver more efficient, accurate, and transparent audits.
• CGI Inc: As a consulting and IT services firm, CGI Inc demonstrates asset-based consulting with its proprietary software and tools. These resources enhance the efficiency and effectiveness of their consulting services, offering clients innovative solutions to complex problems.

These companies exemplify the hybrid service business model, each leveraging productized services, asset-based consulting, or targeted digitization to build great companies. They stand as testaments to the value and effectiveness of embracing hybrid strategies in service businesses.

Conclusion: Embrace a Hybrid Service Approach

In conclusion, recognizing and embracing the hybrid nature of service businesses opens new avenues for innovation, efficiency, and growth.

Here’s what that looks like in practice:

• Understand the Service-Product Continuum and adhere to the Service Imperative Principle.
• Position your businesses to capitalize on the strengths of both services and products.
• Implement approaches like productized services, asset-based consulting, and targeted digitization.

If done thoughtfully, this approach can help you be more scalable, consistent, and operationally efficient while maintaining the high-quality, personalized service that clients and customers value.