CWS has a sister company that focuses on corporate housing. They provide temporary housing for business people, interns, long-term, special projects for companies, etc. I am one of the advisory board members and it’s been such a treat to see how the company has grown and prospered over its 25 years in business. We recently had an advisory board meeting and one of the participants made the observation that when studying the financials, he noticed that roughly two-thirds of the profitability came from one type of business line, whereas the rest, the main revenue source of the business, represented only one third. The question we discussed was whether the management team focuses on tweaking the main business line to improve its profitability or is there something special about this other business line that should result in more of a focus for the company? While of course, both could be correct, I was much more intrigued by the success of the secondary business line.
I was reading an article in the Harvard Business Review about Tesla and its innovation strategy. It was a very interesting article, but the point that really caught my attention and how it relates to the corporate housing company is when the authors pointed out that profits flow to the bottlenecks. That line really captured my imagination because I’m always thinking about where at CWS our pain points are and what we can do to alleviate them or lessen them so that people can be more effective at doing their jobs. I have found it immensely satisfying to have deep dives done on key processes in our company to uncover those catalytic changes that can dramatically improve productivity. It doesn’t always have to be a fancy technological solution, although those can definitely be extremely impactful at times.
I can see why those companies that can focus on the bottlenecks and help alleviate them can be immensely profitable and successful. Salesforce is a company that comes to mind in this regard. The following chart shows how the stock has exploded over the last 10+ years with the company now having a market capitalization in excess of $168 billion. Profitability flows to the bottlenecks and they have broken many of them when it comes to customer relationship management and increasing the effectiveness of salespeople.
In analyzing the two components of the corporate housing business, one is more transactional in nature and more of a commodity while the other is a solution for companies that have big pain points. For example, we all know that it is increasingly more competitive to acquire and retain talent, particularly in the world of technology. As a result, Internship programs are very important to introduce talent to companies and allow them to experience what it’s like to work in these firms and hopefully have a good experience, such that if they do a good job, they will receive and accept an offer.
The corporate housing company manages the housing for internship programs for a number of companies and these programs are immensely important with many different pain point potentials. Moving into a new place in a new city with new roommates can be fraught with peril. The H.R. departments are paying firms like our corporate housing group to execute smoothly and handle all of the housing-related issues. They are paying for peace of mind and they are not nearly as price-sensitive in this arena as they are in the more commodity business of housing employees who are doing projects out of town for a period of time. As a result, this division of corporate housing has to be outstanding at finding inventory with access to the businesses via walking, public transportation, or carpooling, negotiating with the apartment owners, doing roommate matching, providing documentation to give interns the A through Z about what to expect and what is required, as well as many other logistical requirements. This situation for interns can be very impactful on their experience and whether they have a positive or negative association with the firm. It’s important that they have a good living situation and it is friction-free because, if not, then they can lose very high-quality talent. As a result, they can’t really take a risk with unproven firms. Our sister company is really adept at this and this core competency results in this part of the business having higher margins than its more bread and butter business.
The reason I bring this up is that I think there are some instructive lessons for investors as well as for us personally. If you can understand what a business does and whether its solutions can help break down powerful bottlenecks, then they might be a good potential long-term investment. Now, of course, valuing those businesses and whether it’s the right entry point to invest is a different story, but in terms of whether they have a service or product that has great demand, and acceptance in the marketplace with great growth potential, then evaluating how these firms offer solutions to bottlenecks may be one compelling way of evaluating businesses.
Although apartments are somewhat of a commodity in that there are numerous comparable choices with only modest barriers to entry, we believe that the business itself is highly valuable because it offers flexible housing choices for people and eliminates a costly bottleneck that comes with being a homeowner. Homeowners have an illiquid investment with high transaction costs such that if they want to move or need to move, doing so may be a financial burden. With apartments, however, much of this friction is alleviated by the ability to sign leases of 12 months or less. And this doesn’t even take into consideration not having maintenance responsibility that homeowners do.
This bottleneck solution thinking can be valuable from a personal perspective as well. Think about where you may be stuck in life and whether there are ways for you to alleviate those bottlenecks either through mentors, education, professional resources, or whatever you might think would be valuable. Effective coaches and therapists are highly valuable for certain people because they help them get unstuck and alleviate bottlenecks.
I will conclude by saying that it can be highly valuable to take a look at your life and analyze whether you are experiencing some level of frustration from either treading water or not making certain breakthroughs and ask yourself why that may be the case and if there are constructive actions that you can take to break the bottleneck.
The opportunity from doing this is that you may find that it will generate great psychological, emotional, and potentially financial rewards in your life