Increase small business profit and value by adopting AI

Artificial Intelligence (AI) is like a fulcrum for businesses. With the proper leverage, a large project can get moving and gain momentum with little effort.

For example, encouraging your company’s knowledge workers to adopt AI tools can help them carry out tasks more efficiently.

One study from the Harvard Business School titled “Navigating the Jagged Technological Frontier: Field Experimental Evidence of the Effects of AI on Knowledge Worker Productivity and Quality” cites that consultants using AI completed tasks 25 percent more quickly and with more than 40 percent higher quality compared to a control group.

That HBS study was conducted in 2023; since then, billions of dollars have been invested in business-to-business AI tools focusing on industry specialization and user experience. Those investments should make improvements in timeliness and quality more achievable.

Even if those numbers are overstated, even a 5 percent bump in productivity would cost you relatively little, thus flowing directly to your bottom line and improving your profit margin.

AI is as much about margin expansion as it is about revenue increases.

Earlier in 2024, as the chief investment officer for Berkshire Money Management, I wrote a column about how individuals could invest in AI. I cited specific securities, such as Nvidia, Alphabet, Microsoft, and some AI-related exchange-traded funds.

However, the more significant takeaway for investors is similar to the consideration for business owners — the current opportunity is in expanding your profit margin.

Jeff Bezos, founder of Amazon, famously said, “Your margin is my opportunity.” Bezos was referring to the lower prices he could provide consumers by reducing the expenses associated with the traditional intermediaries of the retail supply chain.

For investors, their best risk-reward opportunity in AI lies not in finding the next Nvidia, but in the profit margin of other companies. Investing in AI is as much about margin expansion as it is about increasing revenue.

Some software companies may be able to increase prices or sell more subscriptions if they use AI to improve their products. For example, Adobe is more user-friendly, Tesla is getting closer to self-driving cars, and Facebook is better at targeting advertisements.

Many other companies can use AI to improve their profit margins through dynamic pricing, targeted marketing, risk management, quality control, supply chain optimization, automation, and analyzing data to follow customer behavior; all of which increase profits. If AI can shift your company’s profit margin, it will become more valuable.

Small businesses can start small with AI, but they must start

Many companies that have experimented with Artificial Intelligence — if they have at all — have limited themselves to tinkering around with ChatGPT as a replacement for Google. What else can AI be used for? Name it — chatbots, e-mail responses, personalizing marketing campaigns based on customer data, optimizing pricing strategies, identifying trends, detecting fraudulent transactions, and social media management. The companies that help with these initiatives include Zendesk, HubSpot, Tableau, Zapier, Fathom, SaneBox, Qualtrics, Healthee and Plaud.

I first learned of Plaud at a business roundtable in Dallas. The host, Rick, and one of my peers, Julie, had a Plaud device attached to their phones. Plaud records meetings, telephone and video calls, and conferences to transcribe the conversation in time-coded text and summarizes crucial information. A business coach of mine, David, uses Fathom notetaking for video calls.

Neil, the owner of a waste management company based out of Wilbraham, struggled with selecting healthcare plans for his employees and understanding their various benefits. (That’s not his fault; large insurance companies are notorious for designing group packages that maximize their profit by providing subpar healthcare or adding unnecessary benefits at a premium.)

Neil used Healthee to quickly and easily redesign his company’s health care package to align benefits to his workers’ preferences and was able to reduce his insurance costs significantly.

How do you get employees to use AI software?

Getting employees to adopt AI software should be a familiar challenge for experienced management. Desktop computers were a new form of microcomputer that entered the market in the late 1970s; they became more popular in the 1980s.

It is inconceivable that a worker wouldn’t have a desktop or laptop computer today. In the late 1980s, managers trained in Excel and had their best employees adopt the software; it’s become a standard tool in small businesses. Using e-mail was considered cutting-edge in the mid-1990s. People adopt technology that makes their lives easier.

The closest analog to AI might be the adoption of the Internet. Like AI, the uses of the Internet were not clear to many corporate managers at the start. About 20 million people used the Internet in 1994 compared to 5.35 billion today.

The internet communicated 1 percent of information in 1993, 51 percent by 2000, and 97 percent by 2007.

ChatGPT was released on Nov. 30, 2022, followed by other large language models and a flood of business-to-business AI software companies. According to Workday, 73 percent of business decision-makers feel increased pressure to adopt AI, yet three things hold them back — concerns regarding the accuracy of output (debunked by HBS), clear use cases (see above examples), and overcoming the employee skills gap.

Will your company be one of the last to use the new Internet of our time? Will you support your employees and expand your margin now, or be forced to play catch up with your competitors later?

You don’t have to start with something that revolutionizes your business. Consider the compounding effect of small changes.

Let’s use the iPhone as an example. Apple is on its 15th generation iPhone. If you were to hold up any generation to the next, you’d barely see a difference. But 15 generations later, there is a Bionic processor (literally), exponentially better connectivity, biometric security, emergency SOS via satellite, massive storage and battery life increases, and water resistance.

Today, the iPhone is a mega-supercomputer in your pocket, and it has radically improved from when it was first released. Yet, looking back over the years, many people cannot recognize the changes from one generation of phones to the next.

In the same way, using AI in your business today to make minor improvements can radically improve your company’s cash flow and value over time.

This article first appeared in the Berkshire Eagle on August 2, 2024.