In many sectors, SMB owners play a hands-on role in daily operations, allowing them to maintain tight control. However, as these businesses scale, they often face principal-agent problems, leading to potential moral hazards.
Some examples
In the absence of the owner, salon employees might underreport foot traffic, affecting collections.
Bar owners regularly write off a small percentage as liquor wastage because the pours often don’t match the recorded inventory. Some of these discrepancies are caused by employees, sometimes intentionally.
Owned-fleet cab operators struggle to scale due to challenges like fuel theft and reckless driving, which are difficult to control from a distance.
Employee negligence or misuse of facilities becomes even harder to track without the owner’s presence, especially in businesses lacking proper mechanisms to monitor revenue or inventory.
A common solution is to hire a supervisor, but this brings its own challenges: (a) the added cost may render the business unviable, such as adding a supervisor for each cab, and (b) the risk of supervisors colluding with employees, worsening the moral hazard.
Installing cameras is another solution, but reviewing footage to identify mistakes can be so labour-intensive that it becomes impractical, except in rare cases.
GenAI video capabilities could be a game-changer here, with the potential to monitor employee actions, detect, and report anomalies effectively. When this technology reaches the right price point, it could make consolidation in certain sectors far more feasible.
Link to next post in this series SMB #4
