Small and Medium Business

What does it cost you to provide the revenue generating service or product upon which you and your employees depend for a living and your customers depend for value?  Can you break down that cost into individual parts and determine if, in fact, you are getting the best value for your investment?

While it is likely these questions are of interest to you they are rarely easy questions to answer.  There are some industries though, where if you answer them correctly you can devastate the competition.  These are likely industries where one or more of your raw materials are in short supply and variable in quality and therefore value.  If you can capture the highest value product by paying a little more, then create the finished product for the same or less than your competition then your product can be higher quality at the same or lower cost.  Your competitive edge then is being the preferred customer of the raw material because you can pay more AND the preferred vendor of the finished product because you are the higher quality at the same or lower cost.  How can you achieve this?  By tackling that difficult problem of knowing your input costs through the entire product or service creation better than anyone you compete against. Once you know your costs and how to minimize them, it is also critical that the behaviors that minimize cost through the organization be easily and reliably replicated.

This is where a custom application can provide a big advantage over standard software.  If you use the same software that your competitor does then your competitor has the same opportunities to achieve the cost reductions.  You are limited in your tactics to methods that the standard software will support.  Your advantage is limited to being able to use the standard software better than your competitor.  The barrier to entry, should you succeed, is much lower because once your competitor sees your success they have the tools in hand to replicate that success, they just have to use it.

Custom software, on the other hand, is tailored exactly to your knowledge of your business.  The more information you can input into your software and manipulate the better and more granular your cost knowledge becomes.  When it is clear that doing something differently will make your costs go down or your quality or yield go up then changing the software to behave in that new way should be easier.  More importantly if you find a method that would not be supportable with the standard piece of software you are increasing the barrier to entry for your competition.

A company I worked with several years ago made their living buying a manufactured product that had seen better days (used) and selling pieces of that product in order to make a profit.  There were dozens of ways the product could be resold, whole for salvage, partial for salvage, pieces for reuse, pieces for specific salvage, and many others.  Each type of disposition had it’s own costs.  As a quick example:

• Sale as a whole salvage item
• - $100 = Whole Item Cost
• - $  25 = Labor to process from intake to sale as salvage
• +$150 = Whole Item Value Salvage
• =$  25 Profit
• Single part separation
• +$  75 Single part value separated from the whole
• - $  50 Labor to separate single part
• - $  10 Salvage value decrease of remaining whole
• - $  15 Inventory holding costs (space, time value of money, etc.) for single high value part

Separating the part from the whole becomes at best a break even. But, if you know your costs this accurately, and you can shave $20 off the three costs of breaking out the single part, now you can pay an extra $10 for the supply. Your competitor can not pay that much, or if they do they are paying too much. With overhead they could begin to loose money on every purchase. You either corner the market and make better profit on each of this particular item or you force your competitor to loose money which, over time, will kill them. Multiply this over hundreds of items which all could be separated in multiple ways and you can see that the modeling and management could be come extreme unless you had the proper tools.

While it is still a daunting task to get all the costs itemized, the potential value, especially if you can tightly control this information as a trade secret, is large. By creating a custom application and allowing only a few trusted employees to enter the key values under the proper protection agreements you can create a system that gives you a large competitive advantage AND a huge barrier to entry. The rules of the system are “under the covers” so even the employees who are working closely with the inputs and outputs and modifying the systems values still only see a “black box” when it comes to the rules. These employees might be able to do the same things in spreadsheets at a much lower cost but this makes it much harder to maintain the trade secrecy value of the information and the business far more dependent on that particular individual.

Every company is similar in one way, they all depend on people to get the work done at some level.  People require communication and communication is hard.  I have had the pleasure of working with and looking deeply into many companies in my career and invariably the hardest thing is getting and keeping people working the way you want and expect them too.  My favorite story is the story of the kids put in a row, you whisper a simple phrase in the ear of the child on the end and ask them to whisper it down the line from child to child being very sure they say exactly what they heard.  They will be rewarded at the end if the phrase the last child heard was near the phrase the first child remembers.  Invariably, even with only a very few children in the line, the last child states a phrase that bears little resemblance to the original.  Now think about day to day communications around your company and you will see time and time again where what you thought you said did not result in the behavior or response you intended.  Now multiply that problem among all the people in your organization and all the times that they depend on each other to answer a “how do I do this” question and you may see the problem in a new light.

One answer to this problem is procedure and policy manuals but frequently it is easier to ask the person next to you to repeat the policy than it is to look it up.  Then you repeat it to the next person that asks and guess what, you have just played the children game in real life.  The first person got the policy from another person and repeated it to you EXACTLY as it was stated in the original document correct?  Well, it is likely that it was not perfect, and so on and so on.

Computer programs are the interactive way of forcing consistent behavior. The policies are written into the program and the only way to successfully get the work done is to adhere to the policy or the program stops you, requiring that you “do it correctly”.  This is the equivalent of doing the activity with the book open checking that you did it correctly at each step.  One way to solve this problem is to buy the “standard” program or the framework…..these are the programs that were made for your industry or the SAP like general programs that are meant to be customizable to any industry.

One of the most uncanny aspects is that even if two companies look like they are direct competitors doing exactly the same thing when you look under the covers they are likely very different.  The differences are, in many cases, one of the reasons why some customers go to one company and some to another.  It may not always feel like this is the competitive edge, but the way you do business affects the way you communicate and that affects which customers you will attract.

A standard program forces you to work in a standard way.  To the extent that your niche is determined by the way you do business you put your company at risk.  For some companies the determining factor is not the data that is kept by the computer, in that case it is very clear that a packaged program is just fine.  A dental office, a doctors office, an insurance broker for a large insurance company that has software, perhaps a car dealer and others are businesses that most likely can be handled by a standard program.

But when you do things a little differently from the rest, and your adamant that this is important to you, then you are a candidate for custom application software.  One of our clients services thousands of clients in small transactions but a competitive advantage is customer intimacy.  How do you seem intimate with thousands of customers?  One of the things we built into the workflow was an easy way to remind the owner to send personal notes to clients on the schedule they were used to and other services to help the owner get that accomplished.   The program that all 100 employees work in every day embodies the rules of engagement that the owner has made a part of every transaction.  New agents coming into the business can not do it any other way.  Training requirements are eased, consistency is increased and the customers feel the close relationship without it killing the owners time.  She genuinely cares about her customers and now she can genuinely care about more of them.

Every company is similar in one way, they all depend on people to get the work done at some level.  People require communication and communication is hard.  As a mater of fact there are quite a few difficult problems in business. This is what makes it both fun and frustrating. But one thing I believe, the better you get the hard parts done especially if your solution is unique, the better value you can bring to the table for your vendors, customers and employees and ultimately for you, the business owner.

Originally this article described one scenario where custom application development was of value. I have since created another article on another very different value that application development can bring. I hope to add more to this series in the future. Till then here are the two articles each with a different value proposition to a business, both very real examples I have seen in action where custom application programming created significant benefit to the companies who chose to invest.

Work Flow
Getting your company to operate the way you want it too is an amazingly difficult task. You post policy and procedure and repeatedly you find people not understanding it the way you expected, resulting in inconsistent and sometimes negative value for your clients. Work flow applications allow you to create a structure where the process must be followed. The rules of the process are built into the program. These programs work well when, to get the job done, the user must interact with the computer for a significant percentage of the time. It is so important though that you are beginning to see computers in places where they traditionally have not been. For instance in transportation where the computer now guides the dispatcher/dispatched rather than leaving it to the whim of the personalities.

Knowing your costs
In this example a companies competitive advantage is based on knowing the exact cost of a large number of inputs and possible outputs of their value process. The better they know the costs the better then can manage supply and labor creating a win for everyone. This article also touches on the value of custom application development to create intellectual property or trade secret value in your business.