Managing the Tail

Technologies come and go, but some linger. And there’s a reason they linger. They keep making money.

Take the conventional phone network. It lingers because cellphones don’t answer all needs (which is why firms have receptionists and PBXs), and because some people don’t want to give up their conventional phones and don’t care enough about fast internet access for carriers to lay cable or fiber. It lingers because public utility commissions are somewhat responsive to their constituents. But most of all, it lingers because it generates cash.

A really good example is the Meridian Business Set, known in the trade as the “p-phone”. The basic MBS is self-powered, economical, and as feature-rich as the Nortel switch that drives it. Users are generally very attached to them. Carriers are as well, or they should be, because this kind of service is inherently “sticky”, i.e. inconvenient and costly for users to replace with competing offerings.

A business that generates cash is a valuable thing, even when it’s not growing. But if it’s shrinking over time, it takes a different kind of management to extract as much value as possible and keep the cash flow positive. I call it Managing the Tail, because that’s more upbeat than “end of life”.

A key aspect of Managing the Tail is cost control. Revenues are shrinking, so costs have to shrink, too. Sometimes relatively small investments are called for, but break-even usually has to be on the order of one to three years, depending on the business. Anything longer is too risky.

In many cases, the biggest fixed costs that can be reasonably trimmed are labor costs, although rather than layoffs this can mean freeing up personnel to move into other areas of the firm, where their salaries can be applied toward future revenue growth.

But strategies for managing costs are firm-specific and business-specific, and sometimes region-specific. The temptation is to do nothing, because doing anything costs money. But a strategy of creative adjustment will often yield better returns than inaction. And when the days of a business are numbered, it just makes sense to get all you can from it, before it’s gone.

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