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Luis Miranda

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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Hi Luis, Quite an interesting piece. Scalability in a business model is often a desired but elusive component. It does show up impressively in the spreadsheet projections but extremely difficult to execute on the ground. Often a times, I come across investment thesis highlighting the low per capital consumption of a product or service in India compared to other economies. Hence, it is a great opportunity!!! Investors must be astute enough to understand the dynamics of the model before extrapolating consumption trends. As an example, in the last 30 years of the Indian IT revolution, we have had just 4 companies who organically crossed the $4 bn mark in sales. Furthermore, we have hundreds of companies who find it difficult to break through $100 mn marks. Some of these entrepreneurs have brilliant products and an addressable market and yet fail to execute the script. They get saddled with high customer acquisition costs, high receivables, and IP that never gets monetised. On top of this, the inability of theoretical finance to find an iconoclastic measure of quantifying risk often leads to concept companies command premium valuations before even selling a single product or acquiring a single customer. But that's the nature of the game!! "Constants Won't, Variables Aren't"
This is an excellent piece. I remember about eight to nine years ago, during an interview Nandan Nilekani said Infosys did not want to get into Education/training business because it was not a scalable business. Particularly for education, quality of the staff (teachers/doctors) and students are important. That's one of the reason many of the famous inistitutions are grappling around whether to start branches outside of their countries though few have already tried (INSEAD and Yale and schools like Harrow with their branch in China).
Nilesh Trivedi
The retail example you point out is interesting because, even the online generation is finding it hard to scale without excess pressure of #d i.e whether there is enough financial banking to allow you of this opportunity (case in mind: Flipkart burning through cash quickly). I think, to scale, replicability plays a huge role. Whether it's replicating processes, business model or customer acquisition techniques, the key is have you found that common ingredient that allows you to not have to repeat the same thing over again when you open up in a new market say for example. I look for those value drivers when looking for opportunities to invest as a early-stage guy.
Pratap Vijay Padode
Luis: Your example of NIIT and how every fourth Indian wanted to be in IT itself explains that we need a "momentum generator" to scale up the business. I read that in Indonesia, there is an acute shortage of farmers as no young aspirant wants to be a farmer. This has begun to be mirrored in India as well. So if there is an obstacle blocking the road to scale, we need to locate the "momemtum generators" to help leap the obstacle. Maybe Aamir Khan's portrayal of a farmer in "Lagaan" helped farmers gain some self esteem and convinced the next gen to stay aboard their legacy. Image projection and perception play a great role in ability to building scale in niche areas.
Luis: Why should size be considered a key success factor? We have a wealth of unexplored knowledge and skill sets that touches our lives every day: entrepreneurs who understand their limitations and are content to deliver a boutique service. Have you thought of doing a case study on our local istrewalas? Akin to the famed Mumbai dhabbawalas, these enterprising dhobis all over India, offer door to door service on a daily basis, ensuring their customers get their well ironed clothes on time, with minimum errors handling several bundles of clothes, and ensuring 12 months uninterrupted services by offering replacements when they go back to the village. Like the dhobi I have used for the past ten years, these are entrepreneurs who are content to manage the scale of their business with grounded reality (vision) and execute it with a tried and tested process that delivers perfection and customer satisfaction.
Insightful article.The challenge of building scale may also require a contrarian approach. My team built the finest direct mail driven business of Personal Loans in Spain- a market that has the highest density of bank branches in the world. The consumer would typically go to the branch to sign up for a loan until we got them to apply for the loan in the comfort of their homes. A multi-channel connection with prospects further accelerated volumes and lowered acquisition costs. And yes, building scale was very tough work.
sir, in my view nsdc is doing its bit in developing skills industry in india, but in india we are not able to carry on the momentum that these institutes provide young entrepreneurs, so most of the the ventures get shelved and then we are not able to produce anything worthwhile
Sushrut Munje
Loved this. At Hammer & Mop (my startup), we specialize in cleaning up residences and commercial property. The act of 'cleaning' is something that is often looked down upon and managing workforce is a key challenge. We want to structure the job market in this sector, give prestige to the job of the housekeeper/cleaning attendant and uplift the mindset of the employees. We believe this will benefit the entire sector, along with Hammer & Mop. Am I right in believing that efforts in these directions would improve the retention charts and help build an organized workforce, thus aiding scale? "How" is the question. We're attempting to imbibe empathy and accountability in the training sessions- focusing on making them better humans in addition to better employees. Results have been encouraging. Would like to understand whether it can be replicated on a larger scale, with the same results. Would that help a Facility Management organization deliver the same quality over an enviable geographical spread, while adding genuine value to employee lives?
thats very nice concept,being a student of iit, we have already started implementing these type of concepts such as providing door to door laundry service, etc but the main hurdle that we face is managing the workforce, sometimes the workforce is not able to deliver clothes on time, clothes are not properly washed etc etc. therefore i would like to ask u how u r managing all types of problems??
Sushrut Munje
Thank you, Vishal. We're simply attempting to communicate the importance of their work to them. :)
Nice one. But i would like to relate it to the way the operations are done with the Dabbawallas in mumbai. A uniform system and practices with an standard operating procedure can help execute scaling facility management services in a consistent manner.
Priyadeep Sinha
Great article at a great time, Luis. Being an entrepreneur who is looking to scale up, the article really connects to my thoughts and compliments it. Thank you. I hope we do scale up in the right manner and right time-frame with the most innovative strategies and paths that could be taken in the school education sector - and its great to have your mentorship.
 
 
Luis Miranda
Luis Miranda started investing in India's infrastructure before it became fashionable. He started IDFC Private Equity and was earlier a part of the start-up team of HDFC Bank.
Luis has invested in and has been on the boards of companies like GMR Infrastructure, Delhi International Airport, Gujarat Pipavav Port, Gujarat State Petronet, L&T Infrastructure and Manipal Global Education.
Today he is involved with various non-profits like Centre for Civil Society, SNEHA, Human Rights Watch, Gateway House and Samhita Social Ventures. Luis graduated with an MBA from Chicago Booth.
 
 
 
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January 10, 2013 17:13 pm by Shivam Gupta
Hi Luis, Quite an interesting piece. Scalability in a business model is often a desired but elusive component. It does show up impressively in the spreadsheet projections but extremely difficult to execute on the ground. Often a times, I come across investment thesis highlighting the low per c...
October 09, 2012 22:13 pm by Alagu
Nice one. But i would like to relate it to the way the operations are done with the Dabbawallas in mumbai. A uniform system and practices with an standard operating procedure can help execute scaling facility management services in a consistent manner.
July 21, 2012 20:59 pm by Sreeni Gali
This is an excellent piece. I remember about eight to nine years ago, during an interview Nandan Nilekani said Infosys did not want to get into Education/training business because it was not a scalable business. Particularly for education, quality of the staff (teachers/doctors) and students are imp...
July 21, 2012 12:52 pm by Nilesh Trivedi
The retail example you point out is interesting because, even the online generation is finding it hard to scale without excess pressure of #d i.e whether there is enough financial banking to allow you of this opportunity (case in mind: Flipkart burning through cash quickly). I think, to scale, repli...
July 15, 2012 11:51 am by Pratap Vijay Padode
Luis: Your example of NIIT and how every fourth Indian wanted to be in IT itself explains that we need a "momentum generator" to scale up the business. I read that in Indonesia, there is an acute shortage of farmers as no young aspirant wants to be a farmer. This has begun to be mirrored in India as...