Scale Enablers

In my last post I wrote about how reach-enabling Intellectual Capital is helping businesses overcome the scarce availability of talented human capital, such as teachers and doctors. This time I will extend the analogy to include the average line worker and in the process reveal yet another paradigm in the successful deployment of Intellectual Capital, something I call ‘Scale Enablers’.

Let me start by asking you to recollect the last time when you had to personally visit your bank. No, not a drive-through ATM, but your actual bank premise in order to conduct a banking transaction with the personal guided help of your bank teller. Do you remember the approximate time frame, even within the ballpark of a month or two, when you had to this? I bet you can’t. Because neither can I. You can put the blame on the lack of your personal bank visits solely on the ubiquitous ATM or Automatic Teller Machine, which have mushroomed by the hundreds in every possible heavily frequented nook and corner of your city and which have made available your bank to you 24x7. These ATMs enable banking functions such as cash withdrawals, check deposits, money transfers, balance information, account queries and many other common banking transactions, eliminating the need for you to ever visit your bank again. As surely as these ATMs have made your life easier, they have also incurred huge capital expenditures on your bank. Why then, you ask, are banks incurring such huge costs? Well for one, they have figured out that deploying ATMs not only reduce the requirement for hiring bank tellers (saving monthly salaries, office space, pensions, etc.) but also the need for having full fledged branches itself, thus shaving off huge amounts costs of their lease and rental expenses. But more importantly, the bank is able to serve more customers using ATMs which directly enhances the scale of operations of the bank at no marginal cost. This is because an ATM, once installed, can easily serve 100 customers or even twice or thrice that number each day without any additional cost. ATMs therefore are the scale enablers of the bank. A business that can scale its operations without significant requirements of either talent or variable cost is a business worth investing into because such a business can target unlimited growth. ATMs cause banks to fall into just such a category. But ATMs after all are a part of the structural capital of the bank, aren’t they? Perhaps you are beginning to realize now how powerful the impact of Intellectual Capital can be, when it is deployed as a scale enabler.

Once you have understood the value of ATMs for banks, you can easily understand the value of all other types of automatic vending machines (AVMs). They follow the same principle as ATMs except that they dispense various items of consumer interest such as cola, coffee, fruit beverages, snacks, newspapers, magazines and even condoms, instead of cash. Although the dispensed item varies, in each case AVMs extend the scale of operations of the corresponding business, enabling it to operate from remote locations such as highway rest areas, airport lounges and rail stations, office cafeterias, mall entrances and sidewalks and even from public restrooms! Next time you spot a humble ATM or an AVM therefore, try to look at it more respectfully. These humble machines have eliminated the need for human labor in the same way that industrialization era machines replaced farm hands. They have contributed to the smooth scaling of the businesses that own them, contributing to cost effective growth of the business which in turn has generated more wealth for the owners of those businesses.

One of the best examples that I have encountered of a business that has used the Scale Enabling Intellectual paradigm not only to grow its business by leaps and bounds but in fact to create an overpowering dominance so as to block out all competition, is our very own friendly search engine company aka Google. Such is the overwhelming influence of Google in the Internet search world that most Internet users are not aware that other search engines even exist. Google is not only the undisputed king of search but it has also very cleverly extended its reign into the world of online advertising. Online ad revenue is the single largest source of income for Google. Hence you would be forgiven for thinking that Google has armies of sales personnel interacting with its customers every day for generating those online ad revenues every day. Nothing could be further from the truth. I have been a customer of Google for more than three years now and to this day I have not yet interacted with any Google personnel. Most of my interactions so far have been through the Google web site and on the rare occasion I have also used e-mail. Yet I cannot think of any other business which has served me for over three years without the need of human intervention for a single business process, including account opening, which is typically the most human intensive of all customer facing processes. Can you? In business parlance, this means that for every additional revenue dollar that Google pulls in, it Cost of Goods Sold (COGS) is negligible or perhaps even zero, which means that its Operating Margin is very high. All Google has to do then is to manage its staff salaries and Administrative expenses to ensure that its Net Profit Margin remains high (27.57% for Year ending Dec 2009). Are you surprised then that Google is so highly valued by the Capital Markets? In a short span of just 12 years (it was founded on 7 Sep 1998), Google has come out of nowhere to occupy the 12th slot in the list of top companies in the US by market capitalization. Its market cap as on 31 Aug 2010 was a whopping $143.7bn, just behind well established behemoths such as General Electric, AT&T and IBM. That is the power of the Scale enabling Intellectual Capital model.

Companies such as Google have proved that structural capital can be deployed successfully for achieving unlimited scale in the shortest amount of time and with maximum profitability. Can we therefore afford to write away Google’s success as a one-time fluke instead of recognizing and understanding the pattern of Intellectual Capital embedded in its business model so that we may spot other winners early on in their growth cycle? The message is clear – always be on the lookout for businesses that are working on or have already devised scale enablers. Businesses with such scale enabling assets are the ones that will generate massive value for themselves and their owners in the future. And with a little smartness and a healthy dose of diligence you could benefit from their future too!

Reach Multipliers

Teachers are a scarce lot nowadays. Teaching is a noble profession no doubt and a highly honorable one too, but like a lot of other noble professions nowadays it is losing its shin in this modern age. There is no glamor in being a teacher anymore; hence not very many of the younger generation aspire to become teachers these days. Consequently their tribe is only decreasing. Paradoxically with the increasing population, school enrollments are on the rise. With the result that the demand for teachers today is more than it was ever before. I see a shortage of teachers in primary schools, secondary schools, junior colleges, engineering colleges, medical colleges and Universities. In short, I see a shortage of teachers in the whole teaching system. Yet I also see more and more schools and colleges coming up everyday. It requires an explanation. How are these schools and colleges managing to teach their increasing number of students with lesser numbers of teachers? I was prepared to see visiting teachers from other faculties, cramped classrooms reflecting a higher student to teacher ratio and self-study student groups in those schools where teachers were missing altogether. And I did see all of these. But I also saw something else. A handful of innovative institutions had attacked this problem by multiplying the reach of their teachers. They had installed video conferencing equipment in their classrooms using which multiple students at dispersed locations could attend the lecture of a single teacher at the same time using the power of video conferencing. In effect these institutions had managed to solve the problem of scarcity of human capital by strapping structural capital in the form of video conferencing equipment to their human capital, the combined effect of which enabled them to reach out to a larger number of students in geographically dispersed locations!

I was hardly surprised this time when I saw the same solution being applied effectively in another noble profession – medicine. Like good teachers, good doctors are also becoming a rarity of late. And patients who can afford it always seek a second opinion especially when they have to make a decision based on the opinion of their doctor. Some innovative hospitals have resorted to video conferencing technology to enable their patients to seek a second opinion from doctors in other hospitals, perhaps those in their own network of hospitals. Case history of the patient is available to the remote doctor electronically which he can browse and consult with the patient simultaneously over video. This much is becoming pretty common. Meanwhile medical solution providers are working on building technology solutions that will enable doctors to remotely examine patients and even conduct surgeries remotely using remote controlled robotic arms. This may sound like science fiction right now, but we are getting there slowly but surely. This is one more instance of specialists reaching out to a larger audience beyond the confines of their own physical boundaries through the leveraged use of structural capital.

While video conferencing has been enabled in leaps and bounds by gigantic advances in telephony, the Internet has also been a great enabler in this regard. One example of this is webcasting, a medium that is being increasingly adopted by businesses nowadays to peddle their products and services. The traditional approach would have been to invite a select audience into an attractive downtown location, make the sales pitch, feed them lunch or dinner and offer them networking opportunities with their peers. This high cost approach is a rarity nowadays. Webcasts are not only cost-effective for the business itself but also time-effective for the target audience, since they do not have to commute anywhere but can attend the conference right from their desktop. Moreover, webcasts enable the business to reach out to a worldwide audience at the same time which would be physically impossible using the traditional approach.

Structural capital that enables businesses to address much larger audiences than they can do at present is a very attractive proposition to every business. It is so attractive that I have coined the term “Reach Multipliers’ to denote such capital. Reach multipliers are critical for any business to increase the reach of its human capital manifold. Those businesses that have devised reach multipliers are well on their way to achieving the next level of growth in their business lifecycle. Others will be constrained by the limits of reach of their human capital.

As attractive as Reach multipliers are they still are dependent on the presence of human capital in the back-end. The scale that can be achieved using Reach multipliers is a limited therefore by the amount of human capital in the back-end. The question that arises then is – Is there a way of achieving unlimited scale? Turns out that there is and some have already done it. Wait to read about it in my next post.