Treat a supply constraint as demand for talent

1. The other side of the box

Everything asked before this point was about getting more in at the front: more leads through the door, more pushed into the front end of the business, pictured as a black box. Sometimes that is where the work has to go. But some of the other parts of that box are constraints on the supply side.

2. Where supply constraints hit hardest

The places named here come from observing a lot of different businesses.

Where	The examples given
High-volume, low-wage roles	Staffing, social workers, people who talk to the elderly, care providers; it happens a lot in healthcare
Trades	HVAC, plumbers, electricians, some types of niche welder; a lot of trades have the business and cannot service it
High-end, white-collar services	Consulting, accounting, legal, investing: fields where very skilled people are super hard to find

The trades case offered is one owner in the machine business. He builds big machines that take over whole roles in factories and manufacturing plants, and that work calls for a super specialized skill. Over dinner he said he had been forced to decline $13 million in projects for lack of people to staff them. That figure is his, as he told it.

If you are in one of these industries, you are probably nodding along. If you are not, it is said, this constraint will still reach you; it is simply more common in the fields that have it.

3. Why you cannot do more: the volume

Asked why you cannot do more, the answer at this stage is that the volume is more than you can handle. Most of the time the cause is manpower; sometimes it is structural. What a structural cause looks like: Not established on this page.

Some of the forms a manpower constraint takes:

• Talent is really hard to find.
• You do not know how to go about finding it.
• Talent wants more than you can afford; they want more money, for instance.
• Finding it costs money or time you do not have; that one is sometimes a little bit different.
• The talent does not solve your problem.

What that last one means in practice: Not established on this page.

4. The signs

These are offered as symptoms of a manpower constraint on the supply side:

• A waitlist for your services.
• Maybe you yourself put 70 plus hours a week into the business, with no relief to be had.
• Qualified customers turned away, like the machine projects above. This one is called super big.
• Quality dropping because of volume.
• Your staff are fully utilized, and you still cannot keep up.

Quality dropping with volume. This is said to happen a ton in marketing agencies and the like. They get really good at selling, then hire bodies to do the work behind the sale, and suddenly customers are leaving out the back because quality has suffered: the people are not good enough. What looks at first like a limit on spending to win customers, and then like not making enough from each customer, is really a manpower issue. The lesson drawn: it is usually not the big, obvious problem most people identify. People kind of lose their way in the problems of the second, third and fourth order.

5. Supply-constrained means demand-constrained for employees

This is offered as a big realization. Manpower means employees, so the target becomes a different kind of customer. If supply is what holds you back, then, simply put, you are demand-constrained for employees. So a business is short of demand either for customers or for employees, and none escapes being demand-constrained, one way or the other. The whole point of the manpower question, basically, is said to be getting you to see this.

6. What a hire makes against what a hire costs

On the customer side the ratio is lifetime value to acquisition cost. Some of you already know your return on ad spend and that ratio, and you should; knowing those numbers is urged strongly.

The version for talent is called a leveled-up form of the same thing. It asks two things: what getting talent costs you, and what that talent earns you. Put as a ratio: lifetime gross profit per employee, against the cost of acquiring talent.

The customer side has its own procedures: lifetime gross profit and the ratio are worked on SOP 55 — Compute lifetime gross profit and the ratio that gates spending, and the cost of a customer on SOP 56 — Define and compute what a customer costs to acquire.

7. One owner's case: from $500 to $25,000

In one example, an older man had owned an insurance company and later sold it. For many years his business had sat at about $10 million a year, and he explained what ended it.

The company worked through agents, who sold its insurance products. It had a referral bonus: an agent could get $500 for referring another agent. Sensible enough, but it was not really driving anything.

Some of you have the same arrangement. You probably give some kind of bonus, or hopefully you do, when someone on your team refers you a person. A referral from your own team is called far more valuable than one from a customer.

Then he did the math. Each activated insurance agent brought him $250,000 of gross profit a year, yet the reward he offered for sending him an agent was five hundred bucks. So he took the $500 and made it $25,000: bring me an agent and you get $25,000. It worked. He sold the company many years later, the reason given being that he had found a way to compound his supply base. This page gives no figure for the sale price.

8. Paying for a referred hire at a milestone

The same reasoning was then applied to a team that needed more media people. The fastest and easiest move was to ask how much the business makes on one media person, and whether it would pay a tenth of that to go and get one. Looked at the way you would look at the stock market, would you take a 10x return on money? Of course. So talent is treated as a return on what you spend to get it.

The caveat: put milestones on it. The way it is put, the offer is not twenty-five grand for referring a friend. It is 25 grand at month six, once the new person is activated.

What the milestone buys: both people are now invested in the new hire succeeding. The person who made the referral cares a great deal about how the new person's onboarding goes, and gives them extra training and context, which raises their chance of success. So besides the return, the new hire is integrated and trained better.

This is called a huge source of returns that, it is thought, is wildly overlooked. If the constraint on your business is supply, this is where your capital belongs.

9. Where a service business reinvests

Running a service business, to some degree, is normal, at least in the U.S. economy.

A service business cuts both ways. It is really easy to start and harder to scale. It needs almost no capital to start, and service businesses tend to throw off a decent amount of cash; if you follow sound economics, a service business should produce a lot of it.

So where does the money go back in? In an e-commerce or physical-products business the answer is clear: inventory and raw materials. A technology business reinvests by hiring more developers and the like. In a service business the answer offered is two things, brand and talent:

• Brand: the associations you choose to make now, and how you pair the business with aspirational outcomes your ideal customer finds meaningful. Making that pairing is SOP 94 — Pair the brand with what the ideal customer likes.
• Talent: how you spend on training the people you have and recruiting new ones, to get the highest possible return on your core asset.

Why talent is the core asset. A service business fundamentally sells people at a profit: labor, with a markup. So you want more of those people, and you want each of them to command a higher price, which comes from more skilled talent.

The arbitrage. The biggest one comes from taking low-skilled talent, training them well, going on paying them at the old rate for their level of talent, and then capturing the value the training created. That, it is said, is the way to put money back into a business that sells services.

A tax claim, carried as it was made. To the question of what to do with spare money when the year closes, the answer offered is that if you would rather not be taxed on some of it, putting it back into the business this way is an option you can take. Tax law and tax planning are not covered on this page.

The moral drawn: maybe better talent is something you cannot afford to go without. That is where to focus, and that is your demand constraint. Once manpower is in the picture, every business is demand-constrained.

10. Funnels for customers and for talent, side by side

The outside ways of getting customers are the four lead channels (warm outreach, cold outreach, posting free content, running paid ads) and the people who get leads for you (customer referrals, affiliates, employees, agencies). Each has an internal version for getting talent: the same idea under different names. In the order both lists were given in:

To get customers	To get talent
Warm outreach	Ask your network
Cold outreach	Cold outreach
Post free content	Post to your network
Run paid ads	Promote job postings
Customer referrals	Employee referrals
Affiliates	Community owners; HR professionals, SDRs or sales professionals are named alongside
Employees	An in-house recruiter
Agencies	Headhunters and staffing firms from outside the business

Setting them side by side, row by row, follows the order of both lists; that pairing is a reading.

Because you are demand-constrained either for customers or for talent, the good news offered is that advertising solves both, and the processes run literally in parallel:

For customers	For talent
Lead generation	Application generation
Nurturing leads	Nurturing applicants
Sales	Interviews
Onboarding	Onboarding
Retention and ascension: getting customers to buy again, or to move up to pricier things	Retention and ascension

The claim this ends on: if you can make one of these funnels work well, you can make the other work well too. If you are supply-constrained and already know how to get customers, the skill for finding the talent you need is one you already hold.

11. Where this sits

• The four lead channels for getting customers, as a grid: SOP 12 — Run the four-channel grid.
• The same routes for recruiting, in one paragraph beside the handover of a job: SOP 43, section 1.
• Paying above the market for someone already skilled, the other side of the build-or-buy trade: SOP 44 — Buy or build talent.
• A brokerage case with the same per-agent figure, where the payout waits until the agent is productive: SOP 152, section 8.
• Customer referral plays, for comparison with referrals from your own team: SOP 165, section 6.
• Running that same order of questions a second time, with talent as the target: SOP 201.

12. What this page does not decide for you

• What a structural constraint is. Not established on this page.
• What activated means for a new hire. Not established on this page.
• When the milestone falls. The mark given here is month six, once the new person is activated. On SOP 152 (section 8) the payout comes at an earlier mark, tied to the new hire being productive.
• Whether anything is paid for the referral itself. Here, nothing: the whole fee waits for month six. SOP 252, section 7, pays part up front and the rest at month six. This page's way pays only for a hire who is activated, and the referrer waits six months for anything; SOP 252's way rewards the referral sooner, and some of the money goes out on a hire who may never activate. This page does not settle which reading is right.
• How big a bonus should be for a role whose profit you cannot measure. This page gives no figure for it.
• Whether the tax claim (section 9) holds for you. Not established on this page.

13. The checklist

Step	What to do
Name the reason	Ask why you cannot do more; if the volume is beyond you, the cause is most of the time manpower, and sometimes it is structural
Read the signs	A waitlist, weeks of 70 plus hours, qualified customers turned away, quality dropping with volume, staff fully utilized and still behind
Look past the first answer	In the agency case, what looked like too little per customer was a manpower issue
Reframe it	Treat the constraint as demand for employees
Weigh a hire	What you make on one hire, against what it costs to get one
Price the referral	As in the team's case, ask whether you would pay a tenth of what a hire makes you: a 10x return
Pay at a milestone	In the example given, month six, once the new person is activated
Reinvest	In a service business, in brand and in talent: training who you have, recruiting more
Run both funnels	Use the customer funnel's stages for applicants

14. What this page does not cover

Employment law and pay rates for trained staff are not covered on this page. Interview methods are on SOP 268 — Gate each interview step, then sell at the close. Better job ads are on SOP 201, section 6.1.