David Kellam

Just read Christopher Hawkins’ post on One-Stop tech shops and had to comment. I think he’s mainly right – there’s a serious argument (backed by economic theory and history) for specialisation. There’s also serious contemporary practice for it as companies are divesting their non-core assets and concentrating on what they do best. In a society increasingly intolerant of bullshit (e.g. conventional advertising), excellence in your area is mandatory. Specialisation and focus are the methods.

That said, at the smaller end of town search and transaction costs are significant and change the game.
Waterfront IT touts itself as an IT Consulting company. This is not an accident, nor is it misleading given most of our work is in the ’support’ department. We are aiming to act as a one-stop IT shop for small companies, just as Christopher claims is inefficient. But, if you look at it another way, we are a specialist IT Consulting company for small non-IT-savvy businesses. We just happen to in-source (the make component of the make-or-buy decision) certain functions as a convenience for our clients. I’m sure our web hosting service isn’t (technically) as good as ICO’s, but that doesn’t mean we shouldn’t do it. In fact, there is no tangible difference between a $30 Waterfront IT plan and a $500 ICO plan for someone who just wants a basic “contact me” website and e-mail hosting. In fact, when operating as Consultants (and billing by the hour), the search costs associated with finding another appropriate vendor, negotiating with them, setting it up, liaising with the clients, etc. are significant. We do it, but only after we’ve made an assessment that it’s worth it (to the client).

I started Waterfront IT with the goal of having no inventory, billing close to 100% of my time (it’s a part-time business, so this is more attainable) to clients and not expanding beyond about $50,000/yr in income. There are plenty of good reasons for this: efficiency of billing keeps rates down for clients & profit per hour up for the business; no inventory reduces costs; artificially low capacity allows you to be more selective about clients &/or increase your rate when your capacity is being reached; not focussing (and hence incurring opportunity cost) on internal systems development and business expansion, thus leaving more time for my other businesses and not diluting my focus. I do the work for the client, go home and don’t have to think about it. Not so.

I/Waterfront IT now:

• Has its own testing, internal & production hosting servers
• Is accumulating inventory (networking equipment, optical & magnetic drives, anti-virus software (Trend Micro PC-Cillin), etc.
• Has its own Accusys 76510 backup unit stuffed with 3 x 320GB SATA II hard drives for testing (for a push into small business backup solutions)
• Is a company, with MYOB Accounting Plus and MYOB PocketAccounts for billing (increasing complexity/time but improving financial reporting and accuracy)
• Spends considerable time on quotations (even though we have a no free quotes philosophy
• Involved in business negotiations with several entities for part/deferred payment deals (thus increasing up-front costs/decreasing up-front revenues for the possibility of future risk-adjusted income
• Spends considerable time in the car. Now with operating closer to the production possibilities frontier this represents a problem – time spent in the car is compensated at somewhere between $0 and $40 (minus car costs, which economically eat up almost all of that), whereas on-site time is compensated closer to $100.
• Investing in marketing systems
• About to invest in additional casual staff to cover booking timetabling inefficiences (multiple appointments at once), risk reduction (multiple appointments of variable duration close to each other), service enhancement (holidays, unavailability, busy-ness), timeliness (quicker turnaround time due to task decentralisation)

And more.

These efforts can be broken into two goals: service enhancement and business improvement. My initial goal of an asset-poor consulting approach turned out not to be very realistic for smaller clients. It’s easier for me and cheaper for clients to set up a hosting server and offer people e-mail for $100/year than to set up a separate (and possibly different) hosting account for each client. By doing it myself, I also have full control over what goes on, so when a client is on BigPond ADSL and suddenly finds outgoing port 25 connections blocked on the border network, I simply set up my server to also work on port 1025 (which isn’t blocked). This flexibility allows me to deliver better service at a better cost, even though it’s not my primary business nor an area I’m actively pursuing. In economic terms, hosting is a saturated market, where the expected (market-based) economic profit hovers around 0. Not so in this instance, where the economic microsystem of client–>consultant–>service provider is so inefficient that backwards integrating many of their functions makes sense.

For instance, I now stock Anti-Virus software. Partly because I get volume discounts (but I’d rather not, as cashflow is more important to me: not having my cash tied up in inventory) but mainly because it’s more convenient for the client. I can be on-site and know that if I need it, I can install anti-virus without having to:

• use a trial or NFR serial number (which needs to be changed later, assuming that is even possible)
• ringing my supplier and ordering a serial number (which admittedly is a great service, but there’s still a 15-minute wait period assuming they’re contactable
• go to a store and purchase a physical boxed copy
• download the software and deal with credit cards on a potentially dangerously infected PC

There are issues with stocking it:

• I have to carry it around (or open up each container and note down the serial number and keep that up-to-date
• I am incentivised to sell Trend Micro, rather than any other solution (by virtue of the above efficiencies and the desire to turnover stock)

The second is my main concern. I happen to be satisfied with Trend Micro, above and beyond NOD32, MacAfee, VET, Avast/Antivir and particular Norton. It has excellent anti-virus, OK spyware (I use Spybot anyway) and a customer-friendly firewall. So in 90% of situations, I’ll recommend it. That makes it worth stocking and also unbiased and good value to the client, but the product analysis is not necessarily correct for other products (e.g. wireless routers).

Some equipment, such as the Accusys backup unit, has been purchased to improve knowledge on how things work and to be able to adequately test it in a non-live environment. So I have to wear the cost for that, but it should be paid back pretty quickly on the next backup job. It could be argued this creates an incentive to sell that product. True, but there’s more to it than that. It enhances my knowledge of a particular product, thus decreasing the cost (search costs) of implementing that product in the future. I can and do still recommend different solutions, but these require the consulting approach (requirements –> analysis –> design/implementation/testing/maintenance, etc.) which costs relatively more. So, if I follow my approach of only internalising products & services I would recommend anyway and ensuring I still provide impartial advice, there is no harm done and in fact the client receives better service at a lower cost.

Yes, there are apparent inefficiencies in the above approach. The time and $ I spend on internal systems/testing these products should be captured in future jobs either through charging the same as if I had to investigate from scratch every time or increasing my hourly rate. I tend to go for the latter, but this is difficult to achieve in the early stages. My rate has increased from $50/hr when I was still working casually for $10/hr in the computer shop, to $100/hr when the opportunity cost on my time is probably $40-50/hr for doing something similar. So relatively I’m not doing as well (%age-wise), but I’ve also hit the price points of the competition. So how do I stand out from them? Word of mouth. So far, my rates are lower than I would like (particularly for consulting/architectural design), but the goodwill and word-of-mouth is necessary to create both the demand and reputation to enable me to charge more. I also need to differentiate my services along more economic grounds – market rates for support (e.g. removing viruses) just don’t leave that much room for leeway or leverage. Economic value is higher for networking, Infrastructure setup, data recovery, systems integration, custom development, etc. so rates can be higher. The trouble is convincing people of that. I see three ways:

1. Switch to providing fixed price quotes (where efficiency results in higher effective hourly rates)
2. Wait for word-of-mouth referral and demand to catch up
3. Using viral marketing, blogs, etc.

I guess this post is an instance of the third

Feel free to comment with further suggestions for improvement of the above!

This entry was posted on Friday, August 18th, 2006 at 11:18 am and is filed under Business, Personal. You can follow any responses to this entry through the RSS 2.0 feed. You can leave a response, or trackback from your own site.