Dashboard: Why Business-Book Advice Doesn’t Work for You

[Music] welcome to another 21 hats dashboard brought to you by our sponsor the great game of business I'm Lauren Feldman and I'm here with Shan busy who is CEO and founder of Kinesis which is based in Portland Oregon and works with small businesses on marketing culture and strategy welcome back to dashboard Sean hey good to be here Lauren thanks for inviting me my pleasure Sean you recently wrote a piece uh you called rethinking your value model that kind of slots businesses into three categories stories based on how they deliver value to their customers um and and in the piece you you then go on to explain why this is important why it matters you you've talked about this some on the podcast but I got to admit I I didn't fully get it until I read your piece uh just recently um I and I thought it was really interesting can can you I'd love to dig into it a little bit deeper can you start by identifying those three categories and tell us a little bit about what you're thinking yeah sure um and and you know just to kind of give some context here you know I've been in business for this will be 25 years this January this coming January and when I came across this idea of a value model I had never heard of it in my entire career you know I was G to ask I I had not heard of it either I'm glad to hear that yeah I mean you've you've been at this a lot longer than me too in terms of of uh you know the business press so so you know what the idea is is that um you know lots of companies know what their business model is which you know I like to say Loosely is sort of a combination of customer profile your financial model the marketting industry you're in it's it's an amalgam almost like a canvas there's a great book called business model canvas that I like you use as a framework for business model but underneath a business model is is a layer that's really not discussed and is almost as important maybe even more so and it's called the value model and the value model is is exactly that how you deliver value to your customer and the three types of value model are um chains networks and shops so um do you want me to describe what they are or do you want to just yeah please take us through give us an example for each of those what are they yeah so so start with the easy one chain we've all heard the expression the value chain it's such a common term that comes out of the world of manufacturing so um any business that assembles things or combines things um from various components uh into some sort of like a finished good is a value chain and value chains behave um in a very linear fashion and they're really concerned with efficiency predictability and risk mitigation um our country was built on manufacturing so you can understand why the value chain is actually the dominant ideology that's out there um and then the second one the value Network we've we've all become more aware of value networks uh in the last say 20 years um a value network is one in which you connect a high number of buyers to a high number of Sellers and the value network is usually the intermediary so a good example of that would be like Google Google sells ads to businesses Google has users who do searches large numbers of buyers large numbers of Sellers and Google connects those to each other uh the the idea with a network is scale you got to have scale to be a value Network generally and then the last one is what's called a value shop and Kinesis is a value shop um value shops solve usually hard problems for customers that they they can struggle with to DIY um lots of businesses are value shops and they don't actually know it um an example a value shop would be a law firm or a medical practice um an auto body mechanic where the problems that are brought in the door are different from client to client to client and the value of a value shop is that they have enough experience over time to where they can see patterns and problems and they can combine solutions from past customers and assemble them into an answer that has usually a a disproportionate value to the amount of time that they can put into it so that's the third type it's a value shop and I could go on and on about that well let me ask you about that uh because it it feels to me like there there probably some distinctions between companies that you would that you just categorize at Value shops so you know it's clear to me how you a Kinesis would be a value shop you're doing custom work you're you're dealing with problems that are different with every client um but is that also true of a of a law firm or an auto mechanic I mean yes every car is different but the challenges are going to be similar everybody who comes in and needs a will uh at a law firm tell tell me how you draw the the distinctions there yeah yeah I mean I can imagine where um in some Industries uh you have wide disparity of how shop oriented the business is so if I was a law firm and I was doing you know say wills and probate that that's not necessarily the highest level of complexity although it does require a fair degree of expertise um and so that that information asymmetry where the solution provider knows a lot more than you the buyer it does exist there but if you get into the realm of like say business law uh as a law firm that is really highly Divergent and complex Arena enena you know you could be dealing with contracts you could be dealing with negotiations you could be dealing with disputes and you know your knowledge of these diverse Arenas when a client comes to you and your ability to solve their problem is usually experience related and usually there's there's a there's a big Gulf of difference between their knowledge and your knowledge and so your ability to add value is very very high in that case um I I would say an easier one to be like that's not a real value shot would be like a CPA firm in theory a CPA firm should talk to you about you know your goals and objectives around finance and your earning potential and tax and so forth but the vast majority of CPA firms actually they sort of behave like chains processing tax returns in a very almost automated way and I think those businesses are actually the ones that need to fear AI the most so yeah do that does that help kind of that makes sense yeah that does help so I yeah I think I got it um you know just to recap chains are kind of our manufacturing uh networks are kind of marketplaces and value shops are doing more custom work right I guess my next question for you then is why does this matter because a lot of people listening to this may not have heard this terminology before but they probably know what their basic business model was so how does this help yeah yeah so and why this is so eye openening to me was that I realized that the vast majority of Consulting and advice especially business literature was founded on studies and uh the sort of philosophy of the value chain you know so if you look at you know let's take the emyth as a good example right very popular book you know one point in everybody's you know entrepreneurial career they fall in love with the em I got to work on the business not in the business right yeah yeah yeah yeah on and on and on everything should be a system you should make people infinitely replaceable by having a user guide for every process in your business well what does that sound like Lauren right he's telling you how to set up a factory that repeats the same thing over and over again he's sort of saying build your business to be like McDonald's in fact he talks about McDonald's is like the ultimate business if I were to run my business like that it would fall apart right we have diverse problems that come in the door we have a diverse crew of people with different skills there's no cogs in the machine so that's just one example of a book that's really written from a chain-based ideology it's written to you know systematize and standardize things and there are plenty of businesses that would benefit from that idea and it's not to say that Kinesis doesn't have systems but also our value is is through the diversity of what we do it's through a problem we see today that we've never seen before and by solving it we might add a million dollars1 million $50 million of value to the customer I I mean I literally I can point to customers where we have delivered tens probably hundreds of millions of dollars of value over time by solving pretty hard problems and there's no users manual that's going to tell me how to solve that problem and so when I realized that most books are actually written for chains I it started to make me reexamine all the things that I took for granted in terms of how I was quote unquote supposed to run the business interesting all right so that's a that's a great example a lot of of of why this matters a lot of the advice you're getting may be aimed at a a slightly different kind of business uh a radically different business Lauren I'm not saying slightly here you know like like you're talking you know a chain cares about risk mitigation predictability um uh controlling inputs and outputs I don't I I care about exponential returns for my clients I care about solving unique problems that never existed before I care about hiring people that have unique skills and are very different so that's really really different ideologically than a business that's thinks of like people as cogs in a machine and and I I know that you know culture has changed a lot in terms of of corporate America but if you look at a lot of Corporations uh you know Mega corporations especially they really are treating humans as cogs in the machine and I think that's a huge opportunity for small businesses to begin with but looking at where does that come from in the first place it's coming from a factory mindset uh so there's a there's there's so many good answers for how you can behave differently um to create a better C I mean you know the kind of culture we have at Kinesis the kind of culture we help our clients build where really low turnover super high levels of Engagement let me ask you about that in your experience at Kinesis did you anybody who's listened to this podcast knows that you had a shift in your business model some time back and you've definitely now that we know the term value shop it's it's clear you've moved in that direction my question for you is did you were you running the business previously and then you heard oh there's this thing called a value shop that's what I want to be and shift your business then or did you shift and move in that direction because that's what made sense for your business and then later learned oh I just created a value shop I mean I think I'm a lot like a lot of entrepreneurs where we operate intuitively first and then we write the narrative later so like I I you know I started my career in an advertising agency and in hindsight they were set up like a chain they were trying to sell as many ads as possible um consistently and predictably as possible they treated their employees like they were cogs in the machine and the goal was to sell more ads the goal wasn't actually to solve the client's problem the goal was to sell ads to make margin and markup on the ads and so when I built Kinesis I was like that seems really stupid why don't we solve problems and so I was like that's when I got into branding and I got into positioning and messaging and then later on culture and employee engagement because what I was trying to solve for was like how do you build a resilient powerful you know owner-run business like that's the problem I was obsessed with partly because that's what I was doing but also it's like my my family did that you know like like I care about this really intimately and so I was trying to solve that problem I was setting up a value shop I just didn't know what to call it the problem was is I was operating on a lot of Legacy ideas like emyth and elsewhere where I was using chain-based stuff like you know um hourly billing rates that's a great example of a factory mindset you know we were using hourly billing rates we don't do that anymore because the value you deliver is not tied to the amount of time you work on something um it's usually tied to your experience and so there's a lot of tension in arenas like say in marketing where there's they're charging by hourly rates or they're paying their employees on hourly rates when you know who knows they might be solving problems very quickly so so these are these are examples that if you go into any Professional Services business that tracks their time and you ask any employee how much do you like tracking your time you will get almost universally I hate it and I think part of the reason for that is like well we want to do the work we don't want to track our time but the other part of it is is like really creative people they don't work in a linear time-based fashion really creative people solve problems you know while they're Dreaming or while they're walking or suddenly out of the blue and so that's where the time based tracking just it falls apart it doesn't doesn't work so the alternative is you want to be paid for your expert piece how have you found your customers respond to that are they okay if it it they bring you a problem that you have the expertise to solve quickly but want to be paid well for it depends on the buyer you know what I've discovered is that I do really well selling to other value shops like like other like engineering firms for example and certain types of engineering firms so like automation engineering or robotics engineering or um some Building Systems Engineers these are all value shops and they're solving really hard problems for their customers and so when I talk talk to them in a language that they understand that value is asymmetric they tend to they tend to Vibe with that and so I'll you know we'll put fixed fixed Bas priceing to things and they're okay with it um on the other hand when I run into highly commoditized chain-based businesses they do not like us they want to like ask us what our hourly rate is and they want to you you know line item invoices and all this kind of nonsense that doesn't actually make sense for our business but it's how they operate and it's often how they're bought too and so I've kind of come to learn that certain types of buyers make better customers partly because they empathize and they get what you're doing so the more problem solving oriented a a business is doesn't have to be a value shop but the more they think through the lens of like how do I creatively solve problems the easier it is to have those discussions and I mean we've had it's been very liberating for us to to shift to these value based fixed fee models because clients know exactly what they're going to pay for they know what the results are going to be um and they can plan accordingly uh it's it's a lot like hiring an employee right when you hire an employee you expect them to do certain things but you know a lot of it is an investment in potential and you never know like a really good employee can transform your business in powerful amazing ways and so I I talk I talk about that a lot with clients it does seem like the kind of thing where if you're dealing with the right client both parties to this um negotiation could be much happier uh with a non-hourly fee uh yeah I'm thinking of dealing with a law firm I you know a lot of businesses are scared to death of how those fees can mount if you're being charged by the hour a lot of people would be prefer to be told this is what I'm going to do this is what it's going to cost is that what you find yeah I I think the the the legal firm is sorry the legal industry is is undergoing a pretty big transformation it's got a lot of problems with it and and it's an unsustainable model because of costs and aging partners and I think what you put your finger on it like I don't want to pick up the phone and and talk to my attorney for like 15 minutes and get a $500 bill so then I don't make that call and then it ends up costing me you know $50,000 because of a lawsuit so so I think there's a real problem with the incentives you create when you when you're saying to a client effectively be careful if you touch that phone it's like lava you know like you're really regret it um so I think you got to start to align those in incentives um with how you charge and what you're going to produce um for those results and I I try to find a ter as an example I try to find attorneys who will do a fixed fee for the type of activity they're doing and I realize you can't do that for every type of law practice you know especially litigation can be a lot of unknowns but the more you do something that is within a certain realm of expertise the more opportunity you have to kind of get tighter on what the pricing is and to be clear with the customer so that there are no surprises um that's it's part of our secret to having these long-term relationships is you know the clients they think of us like an like a valuable employee and and the the way they pay us is very similar to an employee and just like an employee we'll hit a home run you know in the second quarter and then the third quarter not much is like working you know and then the fourth quarter we do something amaz amazing so it's it's asymmetric in terms of the return but you when you start to look at the average of those returns it's much much higher than other models like hourly rates where a lot of perverse incentives um with that I I I see all the advantages to being a value shop but do you feel as though you've also paid something of a price for being a value shop U by definition you're doing custom work it limits the number of clients you can have um in a perfect world would you would you want to create an AI software program that could lead customers through the same process that you do individually for each of them and then be able to serve a lot more people I mean there are trade-offs um you'll notice that private Equity isn't buying value shops right and left you know you know it it doesn't scale very well it's a hard business to scale um people in a value shop business people are incredibly important they're not easy IL replaced with AI if they're doing True Value shop work right you know you're combining years and years of expertise and then sometimes you're creating new solutions that have never existed before and that's a lot of our secret sauce is that most clients are getting new Solutions so it's not it's not like we're you know replicating what has worked before as a best practices model that's one way that's one way to work but we're like creating new things like in the realm of innovation because that's where the most exponential return exists you can't really aiy that um you can aifi you can aifi best practices you can totally do that like you can ask AI hey what's the good SEO strategy for you know somebody in the you know uh Plumbing industry um but uh it you couldn't ask AI hey uh I mean I guess you could but it's not going to give you a good answer what's a what's a new new Revenue stream that has not existed before for this Plumbing business it's going to give you it's only going to know what's been known right so those are the advantages and disadvantages and and and the customer base for me quite frankly is pretty small you know like I I'm going to work with clients who really care about the long term you know value shops you know often our solutions they take why a while to manifest but when they do they they kind of hit it out of the park so you have to have a high level of trust with a client and a client has to have a strong vision and I promise you not every business owner has a strong vision and not every business owner has a high level of trust so it it limits who I can work with but I'm okay with that it's you know my people are out there and and they're really fun to work with do you have any advice for someone listening to this who is realizing for the first time hey I'm a value shop I didn't know that yeah I mean it's really exciting when you start to learn this because it's a little bit like taking a personality test for the first time you're like oh this is who I am you know and then you can actually start to think about how you would change your business and and I think that uh you know in the paper we wrote we talk about kind of the key areas that value shops really need to pay attention to those are really areas like branded marketing um people in culture Innovation you know how you work in these areas and then I would start to really self-examine and say say what am I doing it feels like it was designed to work with a in a factory you know to work in the walls of a predictable system um and and that's I think where the opportunity is is to kind of start to re-examine those choices I want my accounting to be run like a factory that's okay you know like I want best practices in my finances but how we charged our clients we've absolutely re invented that you know several times over and it's gotten better and better it's um it's very very different than how a lot of other service companies charge um How We Do the Work how we plan for the work how we communicate with clients we've we've really had to kind of build a lot of these things from scratch because all the advice is just bad you know it's it's not bad it's not for us right so that's that's what I would say to folks is like look really carefully because um like said this this idea uh it it came about in the 80s through a Norwegian business school and I hate to say it but the Norwegian business school doesn't have have a lot of brand cache like you know Harvard you know so or Wharton so like the idea I never made its way into the mainstream and so as a consequence we've just been operating under these sort of like unspoken agreements that all businesses act like a factory when there are businesses that a They Don't Really behave like a factory nor should they operate like one right yeah yeah well I'm really glad you wrote the piece you wrote uh again it's called rethinking your value model I'm going to include a a link in it this is Monday I'm going to have a link to the piece in today's Morning Report uh anybody who doesn't get that can just email me and I'll be happy to send you the link um but I'm really glad we had a chance to dig a little bit deeper into this uh Sean busy is CEO of Kinesis which is based in Portland Oregon and works with small businesses on marketing culture and strategy this episode was brought to you by the great game of business which helps businesses use an open book management system to help build healthier companies you can learn more at Great game.com thank you Sean thanks Lauren that was fun appreciate it have a good week everybody 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