Building Scale is Tough

First of all, thank you for your comments on my first blog, where I suggested that PE investors and entrepreneurs should visit their local market to learn how to close out deals. The guys at Forbes India actually called to remind me that the next blog was due! Thanks.

A few weeks back I was at a seminar organised by Monitor, the international consulting group. Ashish Karamchandani and his team have been looking for a long time at market based solutions for the bottom of the pyramid. He had a colleague down from South Africa to share their experiences in Africa. One of her success stories was in vocational education. That got me interested because a lot of people had tried to build large vocational training businesses in India, and other than NIIT and its clones, no one has really succeeded. So I asked her for data on the size of the larger players (after all, I studied at the University of Chicago). I forget the exact numbers, but the larger players trained about 3,000 students only. She quickly added that the industry size was well over a million students.

And therein lies the problem – a large market with huge growth opportunity but operated by small, fragmented players. After her session we talked more about this and her view tied in with what was brewing in whatever is left of my brain – in some industries building scale may be tough or not possible at all.

Take the vocational training industry in India. The need to make millions of young Indians employable has been talked about ad nauseum. At Manipal (full disclosure: I still remain connected to the Group) we started building a business in it way before it became fashionable and before others jumped into the fray. The National Skills Development Corporation has funded many players to build large training companies. But the skilling industry has slipped further back in being able to tap this demographic dividend with a lot of rhetoric, bleeding balance sheets and pathetic enrolment in skilling programmes. At the same time small mom-and-pop training shops continue to do well. Maybe the government should just fund students and not schools.

Hence, my proposition that building scale may not be possible in all industries. This has implications on PE investors who are looking at build-up or consolidation opportunities in sectors with huge growth prospects – in some of these cases it may not be possible to build scale. Investors need to spend time analysing whether anyone anywhere has built a scalable model and understand why or why not scale has been built. Don’t just look at a graph that shows infinite growth. Don’t believe consultant reports. Talk to industry ‘experts’. And finally, sit down with a host of conflicting data and decide whether (a) the entrepreneur has the vision to execute the plan, (b) whether a team can be built to execute this growth, (c) whether there is a plan to support this growth with a superior technology platform and process flows and (d) is there enough money in the bank to support this plan (provide for the unexpected when treading a new path). The BPO industry is another example of a human-intensive industry that jumped across borders, accents, education levels and poor infrastructure; early players like GE and Spectramind led the way.

Sometimes it may not be easy to build scale as an operator, but one can build scale as a specialised financier or as a standardised content provider or as a franchiser (though this hasn’t worked well so far if one looks, for example, at the hair and beauty care industry; maybe it is still early days). And of course, one has to look at how technology can be used to build alternate delivery channels that will help build scale. Traditional operating models may not work if one wants to be a dominant player in a fragmented market.

I am not saying that building scale is impossible – all I am saying is that it is not easy. The Aravind Eyecare System is one example of a success story (read their fascinating story in the recently released book “Infinite Vision”, written by Pavithra Mehta and Suchitra Shenoy). But Aravind is an exception and it requires superior vision (no pun intended) to execute scale.  So what is needed to make such businesses scalable? Let’s look at why NIIT succeeded? Three quick reasons – (a) it facilitated getting a job that was aspirational – every fourth Indian wanted to be in the IT sector; (b) it was priced appropriately when related to future expected income and (c) it developed a curriculum that could be delivered through a large network, including franchisees.

My initial thoughts on the challenges to building scale related to the social sector – mainly health and education. But a few days back I was chatting with a friend on this challenge of scalability. Nimit Tanna, of the Trust Group, said that this applied to India’s retail industry also. We have nearly 10 million neighbourhood mom-and-pop food and grocery stores in India and only a few large format stores.  Maybe India will skip a generation in the retail industry and move straight from these kirana stores to online stores, side-stepping the large format stores. India did the same in the telecom sector, where we leapfrogged a generation of technology. Maybe the large format stores will not be able to build scale due to land acquisition and pricing issues, customer transportation/access issues, supply chain/logistic issues and petty politics.

All this means that private equity investors and entrepreneurs have to spend more time figuring out how to build scale and not just get seduced by the huge opportunity that a sector throws up. This is one reason why so many businesses have fallen way behind schedule. One needs to create new paths (like Aravind Eyecare System and Spectramind did), and not just follow the herd. Building scale requires vision, focus on processes and impeccable execution.

P.S I look forward to having an online discussion on these issues – so please continue to write in with your comments (the guys at Forbes India still need to be fully convinced).  I spent over a decade in the private equity industry and enjoyed the excitement of working with great colleagues and partnering exceptionally brilliant entrepreneurs to build India’s infrastructure. We had a great ride, but sometimes we got it wrong! I am now experimenting to see how we can transfer the lessons I learnt, and did not learn, in the for-profit world to the incredibly passionate and brilliant social entrepreneurs I now hang out with; the aim is to build sustainable organisations without destroying the soul of their NGOs.

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