Theory of Constraints Handbook - James Cox Iii [573]
If a PSTS enterprise is process-based, it likewise has to execute individual processes, as well as manage a portfolio of processes for multiple clients. Moreover, those processes compete for resources, not just with other processes, but also with projects. For instance, if the service is employee benefits processing for multiple clients and the service provider is simultaneously building an asset to automate employee benefits processing, then the benefits experts are likely pulled in several directions at once.
Clients engage service providers to perform processes on their behalf for various reasons. Expertise is an obvious one. So is reduced cost from economies of scale. Perhaps less obvious is the expectation that the service provider has global reach, can handle higher processing volumes, or will be able to react to a wider range of demands. The latter point is notable because it requires the service provider to be nimble. The ability to dial processing capacity up and down with demand differentiates services on demand from services as available. Capacity management requires measurements to drive it.
Measurement
Every enterprise in the PSTS sector requires measurement. Of course, the finance and accounting functions are major sources of measurements.
The prevailing measurement method in PSTS, cost accounting, is the same method used in the vast majority of enterprises, regardless of whether they produce goods or deliver services. Despite its widespread use, however, cost accounting is controversial. Many accountants are well aware of its shortcomings, but they are trapped in a professional conflict that obligates them to use it anyway.
When direct labor costs dominated product costs, allocating overhead was straightforward. However, now that direct labor no longer dominates product costs, allocation creates distortions that mask the true profit contribution of each product. Some products may appear profitable, when actually they are not. Consequently, manufacturers relying on cost accounting make product mix decisions that are far from optimal.
The same dilemma afflicts service providers who rely on cost accounting. Even in labor-based services, cost allocation masks the true profit contribution of service offerings. Some may appear profitable, when they are not. Consequently, service providers relying on cost accounting make service mix decisions that are far from optimal. Moreover, service providers who bid on jobs with cost-plus pricing are more prone to over- or under-price their bids relative to what the work is actually worth to clients.
Another insidious effect of cost accounting is Cost-World Thinking, which is the TOC name for making cost reduction the top management priority. Relentlessly driving costs down can have the unintended consequence of driving down revenue, customer satisfaction, and employee morale as well. This is just as true in PSTS as in manufacturing.
Marketing and Sales
Every enterprise in the PSTS sector has to pursue marketing and sales, even if its practitioners are on retainer. Moreover, marketing and sales depends on expertise and intellectual capital that clients value. Here are typical marketing pitches for PSTS.
We should do it for you because you don’t have the necessary expertise in-house (for example, independent auditing, architecture, or intellectual property law).
We can do it for you because it’s not your core competency and we can do it better, faster, cheaper (for example, technical support, procurement, or market research).
We can do it with you because you have insufficient capacity,