An Observation About Service Companies

I have heard many times in my investing career the expression.."Sounds like a service company." The comment is meant to be somewhat derogatory reflecting an investor's preference to invest in "technology development" rather than service companies built on technology developed by others. I am thinking about this in the context of data network mngt. These companies typically manage a system made from components created by others. The person making the comment "sounds like a service company" would rather invest in the company that creates the components. There is a lot of merit to this view.

Here is another view. Service companies reflect not only a form of competency but also a culture that may be more conspicuous to the customer than that of the component manufacturer. The word "service" implies a human interaction in some sense. The persistence of the service interaction only further calls out the visibility of the corporate culture behind the service provider.

So let's say for a second that each human is different than the next and excellence among humans is less common than it is more common. It is possible then to conclude that one leader's culture machine will be different than another's and it is less common rather than more common to create one that is excellent. In fact...in a way it may be much more complicated to create excellence in the service company world than it is the product product company world.

The reason I ponder this point is that we have invested in just such a company which I believe is "winning" partly because of its positive culture which is observed by the customers and partly because of the ngeative culture of a primary competitor which the customers also observe. The service offering is not that different. BUT the attitude is different. And I think as a result of this attitude...huge financial gains are being made by this portfolio company.

Now I can't really develop and rely upon an investment thesis centered purely on culture...I can only observe (and to a degree speculate)...that one can create huge competitive advance in this area for a company that is selling something not far from "plain vanilla."