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When scale can destroy quality

I have written in past about how a services business is hard to scale. While one would lament at the non-scalable nature of the consulting business, at the same time these businesses can claim a very high premium in their services. Conversely, when a product or a service becomes 'commoditized' - it stops commanding a premium.

The less 'scalable' something, the more valuable it becomes.

If one could produce a million copies of Picaso's work, or every dining hall could have the Monalisa - the value of great artists or great works of art would diminish. Even if this example sounds extreme - it explains an important principle which can then explain certain other phenomena of the business world. 

For example, take the culinary business - it is possible to standardise not just the process of making food but even the ingredients used in food, to build a super scalable restaurant business like McDonalds - yet the price point which a McDonalds can claim will never ever touch even the cheapest of a local fine dining restaurant.

Another manifestation of the value limiting function of a 'commoditized' service is the inability of providers to be able to 'notch up' quality. As an example, when you go to the farmer's market to buy vegetables, you usually choose the best quality available. If everyone in your neighbourhood does that - the quality of produce sold in the market is generally higher quality. Sensing that lower quality does not sell, farmers themselves often do the sorting of higher quality vegetables in their own farms to save the trouble of transporting produce which will anyway get rejected. This however limits the 'scale' which a farmer can achieve in maximising produce or 'scale' a market can achieve.

On the other hand, if vegetables are sorted, transported and repackaged for consumption from supermarkets in towns - we often discover that there is larger wastage / rejection observed at the point of sale. Either the overall quality of the 'full pack' of tomatoes would be bad - you'd find one bad tomato in a pack on an average or one of a dozen packs would be bad. By achieving scale, the market here often loses quality.

Those who operate e-commerce related business can relate to this pretty well. The larger your scale, the more your systems need to tolerate some 'rotten apples'. In travel for example [the industry I operate in], the more the number of bookings on a portal, the more the chances of a bad traveller experience statistically. Online platforms have to provision some part of their expenses purely on doling out freebies or favours to inconvenienced/disgruntled customers. Amazon doles out millions to keep such customers happy who might have been inconvenienced or 'cheated' due to scale - even if this is done under the garb of 'customer-centricity'.

In essence, while we can deploy technology to improve the fidelity of systems or processes or measure and thence improve quality of produce - scalability introduces a hurdle rate above which quality takes a hit and must be compensated for through other means.

When interpreted in form of the financial term 'hurdle rate', it becomes easier to define businesses which are unsuitable to scale. If the hurdle rate is so high that higher input in investment to increase the 'throughput' of the process will not result into higher returns - then the business is non-scalable. And therein lies the opportunity that these businesses are the one's which claim higher premiums.

If you operate in an industry which affords a very high hurdle rate, you should be charging a premium for your services. But if you find that no one is ready to pay the premium - most likely your industry is undergoing a transformation towards becoming a commodity.

The Cyber-Security / Information Security industry has seen such a transformation in the last few years. There was a time when consultants ran scripts and manualy verified the ouput to identify vulnerabilities once in an year. Today automated tools do the same within minutes several times a month - the number of attacks, malware and exploits have also gone up systematically. But as a result, the premium claimed by the 'Pen-Tester' has slowly perished.

The graphic design industry is currently undergoing this metamorphosis along with the photography industry which has already transformed. When each one of us carries not only a high resolution camera in our pockets but it also comes loaded with software which can achieve all those effects which, at a time, took an experienced photographer followed by a photoshopper to get right; as the film got replaced by a few bytes of ever-falling-price memory - the phoshopper's art also got transformed first into a widely available skill, and then, with Instagram - a commodity where readymade 'effects' are available with a few swipes right or left.

AI and Machine learning are attacking industry after industry in similar ways and soon many skills which at one point of time were premium may start going the commodity way. Which industry will be the next one on the block? And which one continues to remain a non-scalable but premium claimable one?

Views are welcome. You can tweet to me on @kulkarninikhil

*Photo Credit: Thanks to @MacAulayCalum for making this photo available freely on @unsplash 🎁


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