Sources Of Economies Of Scope

Yesterday, I shared the definition of economies of scope and why it's a much more relevant concept for boutique consulting firms than the famously known economies of scale.

It's about reducing your marginal costs by increasing the variety of your offerings instead of the number of your clients. But why is this idea true? What are the sources of those economies?

Economies of scope can occur because the products or services are co-produced, they share the same processes, or they share the same resources.

Offerings Are Co-Produced

This happens when delivering one offering will automatically produce another product or service as a byproduct. For example, cream is a "side-effect" in the production of skim milk in a diary. To produce skim milk, you need to get separate it from the cream. And it turns out a lot of people enjoy and are willing to buy cream by itself.

It's easy to spot examples of this in the consulting industry. If you need to diagnose your clients before delivering larger engagements, you can start selling your assessments separately. If you use a framework or documented process to solve a specific problem, you can productize your IP and sell it as an asset.

All of these examples would create an economy of scope since when you productize or package your projects into smaller engagements you also decrease the cost of delivering them.

Offerings Share Business Processes

Economies of scope also come from sharing production processes. For boutique consulting businesses, the most important ones are business development (which includes marketing and sales) and operations or client delivery.

Marketing and advertising costs can be shared across services - for example, you can hire a designer to create brochures for different offerings at once. Selling also becomes much more effective when you provide prospects with a range of options, rather than one unique solution. Finally, a variety of offerings allows you to cut down client acquisition costs - instead of looking for new clients, you can retain your current ones by continually serving them in different ways.

From a delivery perspective, it's easy to see how delivering a sequence of services for the same client can increase results or improve client experience. But it also creates economies of scope since you and your team will likely need to invest less time to diagnose, earn trust, and deliver on your marketing promises.

Offerings Share Business Resources

Since business inputs (people and assets) usually have more than one use, economies of scope can often come from common inputs to the production of two or more different offerings.

People are a natural example in consulting. You can reduce costs by allocating your time and/or your staff's time to deliver more than one service, instead of hiring different people for different projects. That's why large firms obsess with maximizing their consultants' utilization rates - time is money.

Sharing assets and overhead costs are also a source of economies of scope for boutique consultancies. If you own specialized software or equipment that adds to fixed costs, developing more services where you can put them into use will decrease your marginal costs. Your cost structure matters.

You might be thinking: "Got it, but why should I worry about decreasing my marginal costs when I take in just a dozen of clients every year?"

Tomorrow I'll list the biggest benefits economies of scope can provide to your boutique consulting practice.