#49 – Cost predictability, events customers, employees, partners and communities should worry about

Welcome to the 49th edition of my customer strategy newsletter. The five topics this week are:

1. Predictability of costs can me more important to customer than how high they are
2. Two types of events that should cause customers, employees, partners and communities to worry
3. Latest blog posts
4. Notable items from other sites – CX assessments
5. Looking forward

My car is coming up to five years old, and it came with a five-year warranty that included all the regular services, free of charge. The garage approached me with a proposal for an extended service contract that has almost the same attributes as the OEM warranty. I plan to sign it, as soon as the contract arrives in the mail. Yet, my car has been totally reliable, and not one single thing has gone wrong since it was new. So, why do I think it is worth quite a lot of money to me to sign a 24-month contract?

A bit of personal automotive background may be relevant. Every car I have owned before my present one has had some sort of breakdown. My first few cars were extremely unreliable. (A Lancia Fulvia, a Citroen GS, a Matra Bagheera, if you must know.) I have been through Ford and Mercury models in the UK, and a variety of German and Japanese cars, including a Lexus. Perfection has eluded me up to now, but now I seem to have it, at least from a reliability perspective.

I have been accustomed to having substantial unpredictable automotive costs. The part that upsets me is not so much the expense as its unpredictability. With my new contract, my expense will be quite high (about $2800 for two years), but totally predictable.

I believe this rationale applies to a lot of businesses too, and to a much greater extent. Budgets are prepared annually. Unpredictable expenses have to be minimal. This means you can charge customers far more for an annual contract than their average costs would have been without the contract. Sure, you may lose money on one or two contracts that have bad luck and high expenses, but you will win out overall. Predictable costs, even if they are relatively high, are much better than the alternative for both customers and companies.

Here are two nasty events customers, employees, resellers and communities should probably worry about

I live not very far from the corporate headquarters of the Nestlé company. They are going through a period where they have the ‘pleasure’ of a substantial activist investor. The consequences for everyone except shareholders seem pretty negative, and feature frequently in local newspapers and the TV news. This got me thinking…

Companies that do good things for customers, employees, suppliers, partners such as resellers, and for local communities tend to have CEOs that have come from the inside and a business strategy that is quite consistent over time. Consistent can mean constant evolution and adoption of new technologies too, for example. They tend not to have sudden, major change. Sometimes major change happens when a new CEO is appointed from the outside, and sometimes there are other reasons. (In a recent Freakonomics podcast about CEOs, they discussed new research that confirms older research: CEOs from outside, on average, perform significantly worse than insiders, and cost an average of $3 million more annually.) Anyway, CEO changes may cause some major events to occur, and there may be other causes.

I believe there are two types of events that should make alarm bells go off for employees and customers. And I suppose suppliers and the local communities should be worried too. These events are:

1. The arrival of a substantial activst investor. The underlying message of such investors is simple: ‘You are giving too much to employees, customers, suppliers and the community, and investors should be getting a much greater share.’ Company boards often react to such new investors by saying ‘By amazing coincidence, we were just thinking the same thing. Here are the major initiatives we have to double the share price.’ In the case of Nestlé, the result is a $2 billion savings plan that includes closing two-thirds of their sites here in Switzerland, and cancelling local cultural investments in Vevey, their HQ city. It also includes a number of business disinvestments that I would worry about if I were a customer of those businesses.
2. Major merger and acquisition activity. Tiny acquisitions don’t matter much. Large ones do. When a company wants to acquire another company, the seller always believes their company is worth more than the buyer wants to pay. This disconnect is resolved by a nasty concept called ‘synergies’. The words used are often about eliminating duplication. The elimination is always one of three things: people, buildings, or payments to suppliers. Each of these has an impact on customers, and of course employees.

I have worked full-time on M&A for a number of years, and have formal training in the area. I am not making this up. Elimination of duplication seems to pass the laugh test, but in practice, I have never seen a deep discussion about the work the people have been doing, and where that work will now happen. The absence of such discussion is partly due to regulatory requirements to discuss layoffs with workers councils in some countries before details can be discussed with employees.

I say the duplication argument seems to pass the ‘laugh test’, but I don’t generally believe it, because of what I have seen when there are substantial divestments. Logically, when two companies are split up, the opposite of what happened when they were joined together should now take place. It never does. When two companies are joined together, the story includes lines like ‘We have two HQ staffs and need only one.’ Seems logical. When companies are split up, you would think the plan would including hiring a lot of people, since work now needs to be duplicated. However, such plans generally have the opposite, meaning major layoffs. ‘We have split our business up into two independent businesses, which will each be run by their current business unit staff. We will lay off all of the HQ staff.’ The laughing stops then.

While activists are active, and while major M&A work is happening, very little that is good for employees, customers, suppliers, resellers and communities is happening. Employees who are not in charge of the change projects should be preparing their CVs /resumes. Customers, suppliers and other stakeholders should be hedging their best. Shareholders can plan on making nice returns, in the short term.

 As always, feel free to disagree…

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