Also, I did something kind of silly that made me laugh really hard:

Story at the bottom of this tweet.

Chapter 1: The Crunch

Linda Pearson glanced at the clock: 11:30 PM.

Another late night at Pearson Accounting Services, her small firm she'd built over 15 years.

Tax season was always hectic, but this year felt different.

Despite longer hours and two new junior accountants, they were barely keeping up with demand.

The next morning, over coffee, Linda vented to her brother Mark, an econ professor. "I don't get it, Mark. We're working harder than ever, but our profits are shrinking. I've had to raise our rates just to keep the lights on."

Mark nodded. "Sounds like you're grappling with the Baumol Effect."

"The what now? Leave me alone, I’m a small business owner" Linda asked, confused.

"It's a silly econ thing," Mark explained. "In service industries like accounting, costs tend to rise faster than inflation, even when productivity doesn't increase significantly.

Think about it - how many tax returns can one accountant process in a day?"

Linda's eyes widened. "So that's why we're working harder but feeling like we're falling behind. But what can I do about it?"

Mark continued, "It's interesting to compare this to manufacturing. Take your client, Midwest Motors. They've been able to reduce the cost of producing each car over time, thanks to automation and improved processes. But in services like accounting, it's harder to achieve those kinds of productivity gains."

Linda frowned. "So manufacturers can make things less expensive over time, but we're stuck with ever-increasing costs? That hardly seems fair."

"Well," Mark said, "that's the challenge. But maybe there's a way to bring some of that manufacturing-style efficiency to your services."

Chapter 2: The Catalyst

A week later, Linda had lunch with her old college roommate, Sophia, who ran a successful tech startup. As Linda described her struggles, Sophia's eyes lit up.

"Linda, have you considered how AI, automation, and global talent could revolutionize your workflow?" Sophia asked excitedly. "It's not just for manufacturing anymore. Services can benefit too!"

Linda was skeptical. "That's for big firms with deep pockets, isn't it? We're just a small local operation."

Sophia grinned. "Not anymore. There are so many low cost & accessible tools now. Plus, with remote work, you could tap into global talent pools and service customers in high cost of living areas, with talent from low cost of living areas."

Linda left lunch intrigued. Could this be the answer to her Baumol Effect woes?

Chapter 3: The Experiment

Linda decided to start small.

She invested in an AI-powered document processing system to handle routine tasks like data entry and basic expense categorization.

The results were almost immediate.

Her team was processing basic returns 30% faster, with fewer errors. Encouraged, Linda took the next step: she hired a controller from Colombia via Sagan Passport to handle client scheduling and customer service inquiries.

As tax season ramped up, Linda noticed something remarkable.

Despite the increased workload, her team wasn't burning the midnight oil like before.

They were able to focus on more complex cases and advisory services.

Linda couldn't help but draw parallels to her manufacturing clients. "We're not quite at the point of having an assembly line for tax returns," she joked to her team, "but we're definitely moving in a more efficient direction."

Chapter 4: The Transformation

Over the next year, Pearson Accounting Services underwent a dramatic transformation:

1. AI-powered analytics helped them identify potential audit risks and tax-saving opportunities for clients.

2. No and Low Code tools took over repetitive tasks like data reconciliation and report generation.

3. Linda hired specialized global talent (who were incredibly high quality, but lived in a low cost of living location) to service her customers in California.

The change wasn't without challenges.

Some older clients were hesitant about the new technology, and Linda's team had to quickly up skill to work alongside the AI tools.

Linda kept thinking about the manufacturing sector.

She realized that while car manufacturers could use robots to assemble vehicles faster and cheaper, she was using AI to "assemble" financial reports and tax strategies more efficiently.

The parallels were becoming clearer.

Chapter 5: The New Equilibrium

Two years after that fateful lunch with Sophia, Linda stood in her office, marveling at the transformation.

There was no one in it. A couple occasionally used conference rooms to meet clients, Linda’s office, and that was it.

Everyone had gone remote, or gone global.

"You know," Linda said during their weekly coffee catch-up, "I never thought I'd say this, but I'm grateful for the Baumol Effect. It pushed us to innovate in ways I never imagined."

Mark smiled proudly. "You've essentially turned the Baumol Effect on its head. By leveraging AI, automation, and global talent, you've increased productivity & output in a way that was impossible before."

Linda nodded,

"And the best part?

We're providing more value to our clients than ever. We're not just crunching numbers faster; we're offering insights that really impact their businesses."

"It's fascinating," Mark mused. "You've managed to bring some of the efficiency gains typically seen in manufacturing into your service business. You're not mass-producing widgets, but you are 'mass-producing' high-quality financial insights."

Linda chuckled, "Exactly! We're not quite at the point where we can reduce our prices year after year (but we might start doing that soon!) like some of our manufacturing clients, but we've definitely bent the cost curve in our favor."

"So, what's next for Pearson Accounting Services?" Mark asked.

Linda's eyes twinkled. "Who knows? Maybe we'll start offering our global talent & AI-powered platform to other small accounting firms. The possibilities seem endless!"

Epilogue: Lessons for Small Business Owners

Linda's journey offers valuable insights for small business owners facing similar challenges:

1. Embrace technology: AI and automation aren't just for manufacturing or big corporations. There are accessible tools that can dramatically improve efficiency for small service businesses too.

2. Think globally: Remote work & ubiquitous high speed internet opens up access to global talent pools, allowing you to build a skilled team without geographic limitations.

3. Focus on high-value services: As routine tasks become automated, concentrate your team's efforts on complex, higher end services that clients value most. This is where service businesses can truly differentiate themselves from the "mass production" model.

4. Start small, scale smart: Begin with small experiments and scale what works. You don't need to revolutionize everything overnight.

5. Client education is important: Bring your clients along on your innovation journey. Help them understand how new technologies benefit them.

6. Learn from other sectors: While service businesses can't directly replicate manufacturing efficiency models, there are often lessons and technologies that can be adapted.

What will your business's "Baumol-busting" story be?

Yallah Habibi,

Jon

Passage of the Week, Irwin Yalom

One of the great values of obtaining intensive personal therapy is to experience for oneself the great value of positive support.

Question: What do patients recall when they look back, years later, on their experience in therapy?

Answer: Not insight, not the therapist’s interpretations.

More often than not, they remember the positive supportive statements of their therapist.

I make a point of regularly expressing my positive thoughts and feelings about my patients, along a wide range of attributes—for example, their social skills, intellectual curiosity, warmth, loyalty to their friends, articulateness, courage in facing their inner demons, dedication to change, willingness to self-disclose, loving gentleness with their children, commitment to breaking the cycle of abuse, and decision not to pass on the “hot potato” to the next generation.

Don’t be stingy—there’s no point to it; there is every reason to express these observations and your positive sentiments. And beware of empty compliments—make your support as incisive as your feedback or interpretations.

Keep in mind the therapist’s great power—power that, in part, stems from our having been privy to our patients’ most intimate life events, thoughts, and fantasies.

Acceptance and support from one who knows you so intimately is enormously affirming.