The Profitability of a Process Owner
April 3, 2008 – 4:15 pm
A business concept I’ve been ruminating on recently is the idea of how to make the most efficient and profitable service based business. The more I think about the idea the more I become convinced that there is a fundamental difference between being a process owner vs. a service provider. I think it comes down to the idea that when you own a business process you own the consumer rather than if you were delivering a service that acts as an input to assist with the process.
Don’t get me wrong, it’s not that I’m arguing that there’s no money in providing services but it’s my belief that service providers have little to no leverage in the transaction. It’ll probably help me illustrate my point if I provide some examples:
Process Owner = Delta,
Service Provider = Travel Agent
Process Owner = Google
Service Provider = SEM (pick any company)
Process Owner = ReMax
Service Provider = Zillow
Process Owner = Fidelity
Service Provider = Morningstar
If you think about these examples, or find others, you’ll likely notice that the companies that generate the most money are the process owners. Even though all of the companies listed above provide a service of some kind, its the ones that control the function that’s being performed that earn most of the money. I’m not arguing that service providers aren’t successful businesses just that when you control a business process your business will scale much faster.
The idea of creating a service based software business is one of the hottest topics on the web today. The idea of building content based web pages has taken a back seat to the Software as a Service (SaaS) concept. What I think makes the idea of SaaS so interesting is its low cost of entry (readily available web dev tools), and (based on my theory above) its practical application as a business process. Some great examples of SaaS companies include Salesforce.com, 37 Signals, Google Apps, and most recently Adobe has jumped into the fray with Photoshop Express.
I recently read a great post on building a SaaS business on the Will Price blog. Guest author Lars Leckie summarized an interesting approach to building and monitoring performance of a SaaS company from the perspective of Josh James the CEO of Omniture. One of the most interesting points made in the post was in regard to creating efficiencies in the business:
“…it is not until later that investments in efficient infrastructure and operations hit their ToDo lists. This outline displays a strong focus on finding a product market fit and then adding gas to the fire as the market opened up.”
In essence Josh was advocating that you need to build a good product that has market demand, sell the crap out of it, and when it gains traction take it to the next level through investment in infrastructure and operations.
Some of you may take issue with the fact that I included ReMax/Zillow in the example above considering Zillow’s baby steps into the real estate market. I included it on purpose as I’m trying to illustrate a point. One reason the realtor market is in upheaval is precisely because companies like Zillow, who started by providing business intelligence, are now trying to own the process. Realtors are facing the same challenge that travel agents faced 10 years ago when Expedia hit the scene. The travel agent community had all the leverage as they owned the process for booking travel and with the advent of Expedia, a market shift occurred and now we find ourselves in a world where we rarely use an agent. The same is happening in the real estate space. Zillow is in the midst of migrating its business from being an information portal to being a SaaS model for prospective buyers. Like Seattle based Redfin it’s only a matter of time before Zillow pours on the gas and leverages their built in community to become the Expedia of the real estate world.
I’m all for the idea of owning the business process. In my daily life looking at online products and thinking up new ones, I’ve added a new question to my list: “Can my client do his/her job without my product?” If the answer is even close to yes I go back to the drawing board.
Photo Courtesy of AMagill via Flickr
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Tags: Adobe, business intelligence, business theory, content based web, Delta, Google Apps, Josh James, Lars Leckie, Omniture, online products, process owner, real estate market, real estate space, real estate world, saas, Salesforce.com, Seattle, service provider, software, then adding gas, web dev tools
