#26 – Loyalty Cards, Outsourcing, and more

I have difficulty making up my mind about loyalty cards and similar schemes. I still have not been able to decide whether they are worthwhile, but at least I am able to articulate a few thoughts. Two things stimulated my thought process recently. One was a request from a company that offers a multi-brand loyalty scheme. Another was a report on Swiss radio about the loyalty schemes the two largest supermarket chains run here.

Starting with the supermarkets, the tone of the report was that it was almost scandalous that the cards give just a 1% discount, and that the supermarkets get so much data about us in return. Reducing my attitude to this to personal anecdote, the existence of these schemes has had no effect whatsoever on my grocery shopping. I continue to do it all in the supermarket that is closest to where I live. The other major chain would be a further five minute drive away, so I don’t bother. Similarly, I when I travelled a lot for HP, I reached the highest tier on all three major airline alliances’ frequent flyer schemes. However, the existence of the schemes had no effect whatsoever on my purchases. Company policy required me to take the lowest-cost flight to any destination. I suspect many other companies have similar policies. All this makes me think such single-brand cards are nice to have, and bring no particular benefit to the companies offering them. Of course the consequences of stopping such a system would be major.

There are a number of companies that offer multi-brand loyalty cards. I have to say that I don’t see many advantages for the participating companies. Since the cards are not proprietary, participating companies do not get customers’ purchase data that way. Yes, they can say they offer a loyalty card, but the loyalty card also potentially works at their competitors’ stores.  I play golf, and have received offers for three different loyalty cards, each of which gives substantial discounts at a large number of clubs. I can get out a calculator and work out whether they make financial sense for me. In the case of golf, one of the loyalty schemes comes from a company that owns a number of the golf clubs covered. For more general purchases covering lots of different retail stores, I just don’t see what it is in it for the stores. What am I missing? Your views are welcome.

Cost reduction and its effect on customers – maybe – British Airways

Rowan Jackson posted an article on LinkedIn on July 19th. Eight days later, it has had over 10,000 likes and 1200 comments. I have not seen this volume on LinkedIn before. The title is British Airways: a brilliant example of how cost-cutting increases costs. It attributes the recent major computer system failure at BA entirely to a supposedly-misguided decision to outsource its IT operations. Rowan suggests that one of BA’s historic CEOs, Sir Colin Marshall, would never have outsourced IT, quoting him as saying “Our IT is so important we would never outsource it.” He goes on to say that Sir Colin’s successors did not have the same IQ as Marshall and outsourced anyway.

Let’s remember what the nature of IT outsourcing was at the time. A company simply transferred its people and equipment to the outsourcing company. That company in turn drove efficiencies that typically resulted in a 20% cost reduction. EDS and HP merged in 2008 and EDS arrived with the BA outsourcing contract. I don’t know when it was signed. Sir Colin left in 2000. EDS/HP do not have the BA outsourcing contract anymore, by the way. But the unfortunate single employee whose mistake caused the downtime could have been working for anyone, including BA..

Moving from the specific to the generic. A good business strategy is one that allows you to concentrate your scarce resources on the few things that will help you to destroy your competitors. Everything else should be cut to the bone to provide you the cash you need to invest in the few things that will let you win. Unless you have decided that superior IT operations are one of the few things that will let you win, you should therefore give it all to someone else to operate. I have no idea what was on the list of BA’s top three strategic investments in the late 90s. If IT operations were on the list, they should have kept it in house. If not, goodbye, and use the resulting savings for the things on the top three list.