Strategic initiatives

Situation analysis customers

Strategy: Ask new questions to get new answers – Part 1: Customers

/ , , / , , , /

Way back in 2005 I had the privilege of attending an executive education program at Columbia called Creating Breakthrough Strategy. The course was far more practical than the other attendees and I expected. The reason was simple: the main content and structure were provided by Willie Pietersen, a South African who has been CEO of a number of multi-billion-dollar companies including Lever foods, Seagram USA, Tropicana, and Sterling Winthrop’s Consumer Health Group. Over a ten-year period at HP, I took what he and Rita Gunther McGrath taught me and applied it to build strategies for individual HP countries (including Russia, Germany, Ireland, and about ten others) and for HP businesses. I also used it to build customer experience strategies for HP in EMEA and in my final job as VP of customer experience for HP’s $4B software business.

What I would like to do in this series of articles is to share what I consider to be the most important aspect of strategy development: an accurate analysis of the current situation and what should be done to improve it. If there is a single message here, it is a simple one: To get new answers, you have to ask new questions. I wish I claim I said this first, but I have to give credit to Willie Pietersen.

I adapted the method over time

I followed the methodology exactly as I had been taught, at least initially. After the first couple of strategy projects, I determined that a major element was missing for HP, and I believe that element matters to all B2B businesses, and to many others. The element I added to the structure you see at the top of this article is ‘Partners’. These are other companies with whom you work to make your business function. More about partners next time.

Getting started

Strategy should be developed by cross-functional teams that cover all areas of your business. What I suggest is that you set up six teams, one for each area of this situation analysis. If yours is a small company, one person may be enough for each. In a large company, it takes six weeks to do the situation analysis well. You should have a short progress check with your team members each week. The first session takes a little longer in that each team needs to agree the questions that should be asked and answered. What follows below is a suggested set of questions that concern customers. Please be clear that the list is just there to get you started. I find that people are better at editing a list than creating it from scratch. This list was developed for the creation of a customer experience strategy and most questions will apply to any type of strategy. Some will of course not be relevant to your business. And you will certainly be able to come up with others.

Remember: ask new questions to get new answers. The purpose of the whole strategy exercise is to develop a set of ideas that will allow you to crush your competitors and win in your market. The overall approach is ‘outside-in’, meaning it is primarily focused on trends outside your company.

The questions

  • What experiences do your traditional end-customers want at the most important customer journey points? How reliable is your evidence for this?
  • How and why are the expectations of your traditional customers changing over time?
  • Are there useful ways you could segment customers and provide differentiated experiences to each segment? Should all customers of all sizes and from all industries be treated exactly the same or should you tailor a specific experience for each?
  • Should new customers be treated differently from existing customers? If so, how?
  • If you provide both face-to-face and web-based purchase and post-sales experiences, is the intent that one should complement and build on the other, or are they set up to effectively compete for customer attention? If they compete with each other, is that your intention, or just the result of the way you have set up the work of two independent teams? Are the prices the same, no matter what the purchase channel?
  • Do you have any information on how your traditional customers consider their experiences with you compared to what they experience with competitors?
  • What do your formal feedback mechanisms tell you about customer experience expectations?
  • Do you currently communicate back to customers, telling them what you are doing with input they have provided?
  • Which are the areas where you just have to be ‘good enough’ and investing more does not provide much return?
  • Are new types of customers emerging with different expectations?
  • What experiences are you providing customers that give you no competitive advantage and could be stopped to provide resources for new work?
  • Do some of your customers have supplier assessment processes in place? If so, how are you doing in their ratings?
  • If customers have left you, or you unexpectedly lost a deal you expected to win, do you understand why?
  • If you have an executive sponsor program and / or a Customer Advisory Board in place for your largest customers, do you have any way of getting consensus from the sponsors and the board on the most important improvement opportunities?

At least half the day-to-day work of most customer experience teams is about listening to customers and partners, then summarizing what they want you to improve. This means that much of the necessary situation analysis information is directly expected from and controlled by the customer experience leader. Naturally, in small companies, there is no single central reference point, except perhaps the owner or CEO.

The answers lead to insights

If you have asked new questions, the result will be new answers. Just a small subset of these will lead to true insights about the trends in the experience you are providing customers. The concept of new or emerging customers is an important one and deserves special attention.

Conclusion

We have now covered one of the six dimensions of a situation analysis. The customer dimension is probably the most obvious. My next blog post will cover partners. I hope you will gain some new insights and a new strategy development methodology.

 

As is often the case, the above is a substantial rewrite of a chapter in one of our books; in this case Customer Experience Strategy – Design and Implementation. All of our books are available in paperback and Kindle formats from Amazon stores worldwide.

 

 

Scream

Tips for communicating the purpose of cost reduction (7-minute read)

/ , , , , / , , , , , /

I was talking to a former colleague yesterday. He described a recent meeting where he learned that major cost cutting still continues where we used to work. The discussion made me want to share what follows. I have seen cost cuts communicated well (which is rare) and poorly (which is the rule, rather than the exception). I hope the points below can help you to communicate the purpose and consequences of cost reductions more effectively. All but the smallest startup companies reduce costs, even those that have spectacular growth. Cost reductions are a necessary part of securing the cash you need to invest. Of course they are sometimes necessary for a company to survive too.

What I would like to accomplish here is to help you avoid major disconnects shown in the drawing at the top of the article. I believe the rational, emotional and verbal parts of your communication need to respect these guidelines to avoid project and company failure.

Most managers behave rationally. We believe that if we simply provide a clear and positive vision for the future and explain how cost reductions are on that path, everyone will understand. We set out the vision, and the practical steps required to get there. We then cover the positive and negative consequences individually. Seems rational. Unfortunately, the rational approach is not sufficient if human beings are involved. Our initial reactions to absolutely every new situation are intuitive, and based on emotion. It is a fundamental part of our human nature. It affects your employees and your customers too. What follows are some suggestions about why this happens and how to take it into account in your planning and execution.

Your customers believe they will lose out

As soon as your customers hear that you are going to cut costs and reduce people, they start to believe that they will be the losers. Your competitors will be quick to help this thought process along. It is absolutely critical that your formal external and internal communication covers the impact on customers, and not just as an afterthought. Customers need to be at the center of your message, assuming you are actually going to use the savings to invest in something for them. (If you are reducing cost just to survive, you must accept that some of your customers will jump ship.) News media will not help, as they will focus on the negative. There is some science around the way you need to communicate with your customers, and it is not at all intuitive.

If you only remember one thing

In the HP EMEA leadership team, all but one of the direct reports to the Managing Director were engineers. The one exception was our leader for Iberia (Spain and Portugal), Santiago Cortes, who graduated in mass media communications. The most important thing he taught the rest of us is “Communication is something that happens at the receiving end.” You must be able to put yourself inside the minds of the various types of people who will read what you write or listen to you. The difference between what you are trying to say and what they hear can be radical. At its most basic, avoid saying, or even thinking “I communicated it all to you. Didn’t you read my email?”

A lesson from Mark Hurd

Mark was and still is one of the world’s greatest experts in cost reduction. I was present when he once explained the principal difficulty he faced to the HP EMEA leadership team. (Mark is now CEO of Oracle.)

“When I started to talk about where we would get the money to invest in doubling the size of the sales force, I did my best to spend half my time talking about growth and the other half about cost. Whenever I would speak to a group of employees, I got into the habit of asking people around me what I had just spoken about. With the 50:50 time distribution, everyone told me I had only spoken about cost reduction. I found that I had to spend over 80% of the time on growth before the audiences would accept that I said anything at all about growth.”

A lesson for managers from a Nobel winner

In Thinking, Fast and Slow, Nobel-winner Daniel Kahneman covers loss aversion, part of his work on Prospect Theory. In short, humans care far more about what they could lose in any given situation than what they could gain. This is not at all what classical economic theory predicts. Classical economic theory is simply wrong; humans and Econs behave differently. Kahneman provides many examples of experiments. One of my favorites is about a potential new chemotherapy treatment for cancer. Half the oncologists were told “The first year survival rate is 90%” and close to 80% said they would prescribe the new medicine. The other half were told “The first year mortality rate is 10%.” In this group, only 50% of doctors were willing to use the treatment. The two proposals are identical, but one is phrased in terms of the potential loss.

If your company is obviously in financial difficulty, loss-aversion communication is relatively simple: “We need to save $85 million this year or we will not be in business next year.” If corporate results are fine, the message has to be more externally-focused, ideally on your competition. “Betacorp is out-investing us in sales, marketing and sales support. We need to find an additional $85 million to invest in sales or Betacorp will continue to steal our customers.” What this does is position the enemy as outside the company. The enemy always needs to be outside. If your leaders believe the enemy is inside the company, you will not survive.

Taking responsibility

Taking responsibility for your actions is the key to avoiding revenge, as Dan Ariely and other behavioral economists have discovered. Let’s use a parallel example to illustrate this point. When you ask sales people why they just won a big deal, they will almost always attribute the win to something in their control, such as the great relationship they have with the customer. When you ask them why they just lost a bid, they will attribute it primarily to something outside their direct control, such as price. When it comes to the ups and downs of corporate results, the same tendencies apply. CEOs attribute positive achievements to their creativity, great strategy and wonderful execution. When things go badly, they attribute it primarily to things outside their control, such as a financial crisis, or some change in the market that they say nobody could conceivably have anticipated.

Avoiding revenge

In his book The Upside of Irrationality, Ariely describes studies of litigation when doctors apologize to patients for errors they have made, rather than hiding from the truth. Where they apologize, they are far less likely to face malpractice suits. Where they simply say “I am sorry. I made a mistake. I understand how it happened and I have learned from it,” patients are more likely to forgive them, and give them another chance. In corporate life, employees can find all sorts of big and small ways of taking revenge for leadership errors. To avoid revenge, and to encourage general employee empathy for the situation in which the corporation finds itself, try apologizing. “On behalf of the leadership team, I want to apologize to all our employees, customers and partners for the unpleasant times we are now facing. My team and I made some poor strategic decisions, and let our competitors beat us in the market. We now need to find the money to invest in the following three growth initiatives, to recover our rightful place…” Try it. On top of being truthful, it would be so unusual that it would attract a lot of positive press.

What you have and what you don’t have

In my own words, cost reduction is about what you have, and growth is about what you don’t have, by definition. This means that loss aversion theory applies to cost reduction. Once you talk to the general population of your company about cost reduction, you are talking about potential loss and that will erase all memory of anything you may say about potential gains. In the Mark Hurd example, the customer-facing sales people felt safe, as they had been told their numbers would double. Everyone else felt paranoid, including the pre-sales and sales operations people. In short, nobody except the sales people heard the growth message at all. Most people felt they were walking around with a big target on their backs.

Problem: cost reduction comes before the investments

Communication is further compromised by the fact that you usually need to achieve cost reductions before you can make the additional investments they allow. This means that the only short-term communications and actions tend to be on cost. Again, people understand these discussions really well, because they are all about the people, buildings and supplier contracts they already have. The possible discussions about making growth happen are far more vague. The market and other factors can change too. In one HP case, cost savings were designed to allow an investment of over $100 million in automation of a labor-intensive business. It took so long to achieve the savings that other things had change and almost none of the automation investment was made as planned. Unfortunately, that in turn drove a need for further cost reductions, as competitors made the investments.

Accelerate communication to those who are going to lose out

To limit paralysis, it is critical to communicate as quickly as possible to groups who are going to lose out. Don’t spend much time with teams who can see they are going to gain. In the absence of communication, groups that might lose out will form their own mental images of a reality that is far worse than the worst situation you have in mind for them. Understand that everyone who has not explicitly been told they will gain will believe they lose out. Unfortunately, there are countries, mainly in Europe, where the communication processes are regulated and you will not be allowed to communicate the bad news quickly. You need to build this into your plan, and also to plan on having worse than average business results in those countries until communication is allowed.

Customers too

In the absence of clear positive messages from you, your customers will believe they are losers too. Your brand image will suffer. Local websites will skip any positive messages in your press release and lead with “Acme to cut 50 jobs in Smalltown. Community devastated.” Your CEO needs to speak to the leaders of your larger customers directly. Your website and general messaging needs to talk almost exclusively about where you are investing. Don’t forget to mention complexity reduction, especially if you are shutting down an entire business. The unfortunate source of the investment funding needs to be less than 10% of your content. Even at that level, it will still be the majority of what people at the receiving end remember. Ensure all of your sales people understand and can communicate the messages concisely. They will be at the front line when competitors spread fear, uncertainty and doubt to your customers.

Some behavioral economics tips for your communication

In Thinking, Fast and Slow, Daniel Kahneman provides some research-based tips for credible written communication. These are not at all intuitive:

  • Take the following two statements:
    • Mahatma Ghandi was born in 1865
    • Mahatma Ghandi was born in 1868

The one in bold text is far more likely to be believed. Both statements are in fact false as Ghandi was born in 1869.

  • If you use color, your message is more likely to be believed if you write in bright blue or red, rather than in medium shades of green, yellowor pale blue. (And I think you can tell that yellow is hard to see against a white background on a computer screen.)
  • Kahneman’s colleague Danny Oppenheimer showed something counter-intuitive in his study titled ‘Consequences of Erudite Vernacular Utilized Irrespective of Necessity: Problems with using long words needlessly’. Surprisingly, using complex vocabulary where simpler words could be used turns out to be perceived as a sign of poor intelligence and low credibility. This is, of course on top of the more general consideration that you should write at about an 8th grade level when addressing a multinational audience.
  • If you have to quote or reference someone else to make a point, make sure their name is easy to pronounce. References from people with difficult names are considered to be less credible. This is a tough message for many people.
  • Finally, and more intuitively, if you want your most important short points to be remembered, make them rhyme. People will remember “Woes unite foes” far more easily than “Woes unite enemies.”

Reward systems are quite different for working on cost compared to growth

Now to cover communication to people driving the cost-reduction work. I spent many years working hard on cost reduction. I felt that I was being paid quite well, and was regularly promoted. I must say that I lived a sheltered existence. For the first years of my career, I worked in manufacturing, distribution and logistics locations where cost mattered a lot. They were also locations where I did not come into regular contact with people who worked on growth. Once I moved to Geneva, I found myself surrounded by them. I quickly discovered that people who bring growth are paid far more, and receive higher bonuses than those who work on cost.

I remember an annual salary review discussion with one of my managers. I had a formal cost reduction goal for a European program I was managing. My team had over-achieved by about 20%. I was given a perfectly average salary increase and a small bonus. I was disappointed and asked why. My boss told me “You were just doing your job.” This is all connected to the ‘What you have and what you don’t have’ discussion we have already covered. I was just doing my job. Anyone who brought in a small amount of growth was a genius, and received maximum rewards. This also matched the formal corporate goals of DEC. Growth was listed as the top priority. In Europe, we were a $5 billion company and had a formal plan to get to $10 billion. Cost reduction did not make the priority list.

If you are going to work on cost reduction…

So, if you are going to spend a lot of your career on cost reduction, be sure it is actually in the formal top priorities of your company. If it is not, it is really not worth the pain. If it is not a formal priority, you will be causing pain all around you, without the necessary support from the top. I suppose timing is everything. All companies go through tough times at some point. If you can lead through dark times with support from the top, celebrate the resulting financial performance by working on something more positive for a while.

 

As is usually the case, this is a slightly-edited version of a chapter in one of our books; in this case Customer-Centric Cost Reduction. All of our books are available in paperback and Kindle formats from Amazon stores worldwide.

 

 

Survey dramatic interpretation

When should you ask for customer feedback? And should you survey customers at all? (5-minute read)

/ , , , / , , , , , , /

I have a sort of hobby: answering companies’ requests for my feedback and seeing whether they will write back to tell me what they have learned and what they are going to do. I suppose I have responded to about 20 such requests over the last two months, and then heard nothing at all back, except perhaps an auto-reply with a thank-you. So… let me offer my thoughts on whether and when you should ask for customer feedback.

The first step in designing surveys is being selective about what research you are going to do. Make sure you are going to provide customers with more value than you will extract from them.

Sanity check on whether you should gather feedback at all

Here are some considerations that should help you decide where to start:

  1. Are you going to use any new input you get? If you have already established your top five improvement priorities, have staffed them, are implementing, and can’t add a new project in the next six months, don’t do any surveys other than those that provide progress feedback on your improvement work.
  2. Taking a software example, if you are planning a new major release and want user input on what should be in it, ask them in a formal way. After 30 years in and out of the software business, as a leader and as a user, I have never once been asked for formal input about what should be in the next version. Product managers generally feel they know what users want, based on informal and anecdotal conversations, rather than research. This of course applies beyond software.
  3. Not every customer touchpoint is important. Use your overall brand or benchmark surveys to establish which touchpoints customers mention as competitive advantages or disadvantages, and don’t survey anyone about any of the others. To pick a B2B example, surveying people about the friendliness, competence and efficiency of the person who handles a query about the accuracy of an invoice is certain to be a waste of resources that could better be spent elsewhere.

Timing is everything

Survey timing is an important part of research reliability. Seeking feedback about things that are in the distant past is unlikely to be of much value for example. Here are some appropriate times to consider collecting customer input, by type of survey. What follows presupposes that you are going to use the feedback to make improvements for your customers. If not, there is no good timing.

Product surveys part 1 – Unboxing and installing your product

Here we are talking about an individual product, not a generic purchase or other touchpoint experience that applies to all your products. Some products are sophisticated (the marketing word for complex) to install. Others are not. If your product takes time and effort to unbox or download, install and use for the first time, it is worthwhile understanding what your customers think of the experience and how it can be improved. The research needs to be done immediately after the experience. Waiting a week or more will mean losing the positive and negative emotional impact.

If yours is a technology product, I suggest sending the survey request or phoning the customer within 48 hours of delivery. While this will be easy to do in a direct business that sells to consumers, it is more difficult in other circumstances. You want to survey the end user of the product, and they may not be the buyer in a B2B situation, so you might not know who to contact. If you use resellers, they may not want to provide the customer data, and you should offer to run the survey on their behalf, providing them the data for initial screening. If yours is a software product, the installation routine itself should generate the survey request 24 hours after the installation takes place. Requiring or at least suggesting product registration on a website will give you additional sources of end-user contact details.

Product surveys part 2 – Usage

In most situations, you won’t hear anything from a customer who does not have any problems. Unfortunately, the reason for not having problems could be that the customer no longer uses your product. Perhaps they never started using it in the first place. You need to understand the views of customers who have been using your product for some time, and I suggest six months after purchase as a reasonable target for your research. The purpose, as explained to the customer, should be to get feedback for improving the product itself, as well as future products. In my own experience of software product usage surveys, it is common to get suggestions for additional features that the product already has, but the customer has not been able to find. Usage surveys have the same challenge as installation surveys, meaning you may not know whom to contact.

SaaS (Cloud) software is a completely different in that you do know who is using your software and indeed how much they use it. If a customer who has been using your software suddenly stops, contact them immediately. SaaS software usually allows you to see what functions a customer uses. If you can see that they are not using something they really should be using, you can send them a link to a training video, or send over someone who can talk them through it.

Service contracts

The ideal time to get feedback on a service contract is a little before the customer is considering renewing it. This is a bit more subtle than it might seem. If you have a large multi-year contract (for example to provide security services to a company) your competitors will probably know about it, and will start to contact your customer well before the contract renewal data. Since your competitors will be saying how wonderful they are, and how awful you are, you need to have acted well before this point. I suggest an annual survey as a minimum for multi-year contracts, taking place half way through each year. If you have a single-year contract, I suggest doing the research about three months in, so that all improvement suggestions can be implemented before the contract comes up for renewal consideration, probably about nine months in.

Hybrid product / services

An airline flight is a hybrid product & service. This sort of offer should be researched within 24 hours of completion. Most airlines seem to miss the point. Some give you the survey while you are still in the air, not knowing essential things like whether your luggage will show up on the carousel. Others send you the survey after a week or two. Frequent fliers will have completely forgotten about the experience by then, or will confuse it with another flight. This happened to me regularly, as I have been taking over 100 flights per year for nearly as long as I can remember. What did I think of my flight from Atlanta to Paris two weeks ago? Who knows? Since product and service surveys are not mentioned in The Ultimate Question 2.0, this may be a good time to reinforce the definition. An entire flight experience, from awareness, to reservation, to the actual trip itself, involves a sequence of touchpoints. Each touchpoint could be studied by a transactional survey. The airline offers many different products and services, the sum of which might be studied in their brand survey.

Relationship surveys and Brand surveys

Twice a year is a good frequency for your most important customer relationships and may work best for your brand surveys. You may like to run them both on a continuous basis so you can see the effects of things like changes in the economy and your financial and product announcements. This would mean, for example, sampling one sixth of your customers every month. Remember that you need to report results and improvement projects to customers as well as to your own team.

Transactional and episode  surveys

While it might seem obvious that they should happen shortly after the transaction takes place, it is surprising how rarely this happens. All too often, I get pop-up windows when I have just started an online transaction. I dismiss the window, and then don’t think about it anymore. For the simplest transactions, surveying just after they are complete seems appropriate. For more complex things, like telephone support for a technology product, it seems appropriate to wait for 24 hours, as it may take a little time for the customer to know whether the issue has been completely resolved.

 

Your feedback is most welcome.

 

As is usually the case, this is a slightly-edited version of a chapter in one of our books; in this case Net Promoter – Implement the System. All of our books are available in paperback and Kindle formats from Amazon stores worldwide.

 

 

piles of money

Contra Revenue: Could it be your easiest way to improve profit margins? (5-minute read)

/ , , , , / , , , , /

On the general subject of ‘customer-centric cost reduction’ I would like to discuss an area that many medium to large companies do not examine at all, and the rest do not cover deeply enough. Contra revenue is not in your P&L or in your Balance Sheet. It therefore receives little attention in most companies. After all, if it is not in your P&L, Balance Sheet or cash flow statements, how can it possibly matter?

What is it?

Contra revenue is the difference between your list price and what you actually charge your customers. It is a cost, and most managers never think about it. Here are some examples:

  • Corporate discount agreements: standardized price reductions you give your largest customers. They are often subject to negotiation, and there are wide cultural differences in how they are positioned. Some countries, such as China, are ‘high list price, high discount’ countries, meaning corporate customers expect to see discount levels of 80% or more, so companies bump up their list prices to facilitate them.
  • Negotiated discounts: most corporate procurement people consider the corporate discount agreement to be a starting point for a further downwards negotiation.
  • Reseller rebates: these are the standard discounts you give to third parties who sell your products. There can be sub-types like ‘deal leader’, ‘deal supporter’ and ‘lead payment’, where a partner brings you business but plays no further part in it.
  • At retail, price reductions during sale periods are contra revenue.
  • Customer returns are also contra revenue, though they tend to attract more scrutiny than other categories.

Contrasting control mechanisms

Taking the retail example, a decision to repaint the walls of a store can take weeks, involve multiple bids from contractors, intense negotiations and have a budget of $20,000. Meanwhile, a department manager can spontaneously decide “We tried 30% off in our sale last summer. Let’s try 40% off this time”, and that difference can be worth far more to you than the paint decision. Yet it undergoes less scrutiny.

Change can be difficult

Once customers have become used to receiving a certain level of discount, it can be really difficult to change it. The least flexibility comes with volume discount structures, where you publish a table that says that purchases of above a particular amount attract a specific price reduction. Such formal structures are particularly problematic in two situations:

  1. When your company merges with another company of approximately similar size, customers will try and often succeed in negotiating the lower of the two discount structures for all of the combined business. Procurement managers love supplier mergers!
  2. When you decide to launch a new product line with lower gross margins, it can be challenging to communicate to both customers and sales people that the discounts they are used to are no longer available. You may even have corporate master discount agreements that mean your new product line will be structurally unprofitable when sold to your largest customers.

Managing contra downward

No matter what forms of contra revenue exist in your company, driving it downward will always be possible if you have never worked on the subject before. Here are some ways to go about it, without excessive pain:

  • Review negotiated discount levels with sales managers as part of your standard sales reviews. Simply inspecting them will have a reduction effect.
  • Compare the discounts given to similar types of customers by different sales teams and approval processes. You will quickly find that some managers give high discounts quite easily, compared to others who are in identical management situations.
  • While it is worth including downward management of average discount levels into sales managers’ goals, it is quite tricky to get right. You can’t punish those who already have the lowest discounts. They should probably be asked to maintain discount levels while others are asked to reduce.
  • There is often a subjective element in partner discounts. Did the partner simply refer the customer to you, which might be worth 5%, rather than assisting you with the sale, which might be worth 15%? Did they simply assist the sale (worth 15%) or actually lead the sale, which might be worth 30%? Ensure the decision criteria do not contain any element of subjectivity. If you have an automated sales system like Salesforce.com, you should be able to tell when you are paying partners and your own sales people for doing exactly the same work. Inspect it.
  • More generally in high-tech, customers try to get higher discounts on software licenses than for hardware, at least for on-premise software. This is because they perceive the incremental cost of a software license as zero. If your sales people sell both hardware and software, you may become a victim of the same mentality. Ensure sales people are trained to understand the R&D and other costs associated with developing and maintaining software. If you sell both hardware and software, and your software discounts are higher, you should consider it an attractive contra improvement opportunity.

Culture

Watch out for cultural differences in contra revenue. There is no universal standard discount rate, and your results will vary. There are countries where customers expect relatively high discounts during the negotiation process. Your own experience is your best guide. The most extreme expectations I have seen have been in China and some Middle-Eastern countries. You will probably need to make your list prices higher in these countries to allow the customer to feel they have had a successful negotiation. While the Dutch and Danish have aggressive negotiation styles, they tend to have realistic expectations of what is possible, and reasonable knowledge of the prices you offer locally and in adjacent countries.

Prices and brand perception

Taking contra revenue to the extreme, where exactly do your prices come from? If yours is mainly a product business, there is at least one way of checking whether your prices are based on sound logic, or whether a single individual has decided what is acceptable based on personal intuition. That way is to look at the last numbers in your list prices. $1,299, and $8,999 are almost certainly examples of prices that have been decided without any testing. Intuition can involve thinking like “Our main competitor has a similar product at $699, so we need to match that.” Well, why do you need to match that? It is not possible that the perception of your brand is exactly the same as that of your competition.

Differences in brand perception mean that you can sell exactly the same product at a different price. This is easy to prove. More than 95% of the bananas sold in the USA are a single cultivar, the Cavendish. Go to Aldi, Safeway, Walmart and Whole Foods, to find four different prices for Cavendish bananas. The reason we are willing to pay more at Safeway than at Aldi or Walmart is all about brand perception. Your corner store in Manhattan can charge still more for the convenience it offers. ‘Pink Lady’ apples are another example. Most people think they are a specific type of apple, but ‘Pink Lady’ is a trademark, and is simply used for some ‘Cripps Pink[1]’ cultivar apples. You can buy identical apples more cheaply, with different branding.

Testing

I don’t pretend to be a pricing expert. I do claim to be a testing expert. If you cannot find sound logical reasoning for your current prices, run small tests of higher prices in some markets. Yes, almost all prices are elastic in some way, meaning higher prices may reduce sales. However, every cent you add to your price is an additional cent of operating profit. If your corporate operating profit is 6%, increasing your average selling prices by 2% means your profits rise by a third at a constant sales volume. Will a 2% price rise cause your sales to drop by 2%? Why not test it, and a variety of other increases? Would moving that $829 price to $845 really cause a sales drop, or just a profit increase? Test it and find out.


[1] See this link for the explanation of Cripps Pink and Pink Lady: https://www.orangepippin.com/apples/pinklady

 

As is usually the case, this is a slightly-edited version of a chapter in one of our books; in this case Customer-Centric Cost Reduction. All of our books are available in paperback and Kindle formats from Amazon stores worldwide.

 

 

What we do 800

Suggested method for choosing your strategy from a list of proposals

/ , , / , , , /

Once you have a set of insights about customers, competitors, your industry, the external environment and you ability to implement, the next step is to decide what you are going to do about it. Ideally, the choices will be a collective proposal from the entire team that did the situation analysis. There is a human-nature challenge in reaching a consensus in that people tend to believe their own area is complex and difficult and that everyone else’s area of work is simple. Let me illustrate with an example.

We tend to under-rate other people’s work

Shortly after I became the European software operations manager for Digital Equipment Corporation, we held a workshop with the manufacturing team, based in Galway, Ireland. Manufacturing reported elsewhere in the matrix. The enlightened workshop facilitator had each team separately draw a diagram of their own and the other team’s workflows. The results were equal and opposite diagrams. Each team showed their own work area as a complex flow chart with many inputs, outputs and transformations. Each showed the other team’s work as a single box, either ‘Make it’ or ‘Sell it’. Over dinner that evening, the manufacturing site manager asked me why the European business leadership in Geneva was necessary, since they (we) only seemed to prevent him going directly to market.

How to prioritize your choices

The best single method I have found for prioritizing strategic choices has two steps. The first is to vote and the second is an Ease / Impact diagram. A simple voting method starts when everyone present agrees that the definitions of the strategic choices are clear. Each person then gets three votes to allocate as they see fit. They can give all three to a single suggestion or split their votes. If there is a tie after three votes, give each person a further two votes. The result should be a draft list of five initiatives. Use an Ease / Impact diagram to validate the list. The diagram below comes from a strategy session after a survey of business school students.

Ease-impact diagram

If all your potential strategic choices are in the low-impact high-difficulty box, you need to start again. If you want a more sophisticated prioritization tool than an Ease / Impact diagram, consider a criteria rating table. This takes some planning. You should agree the decision criteria before knowing what the list of insights is. It is too easy for people to reverse-engineer the criteria if they have a personal preference for which items are the top priorities. The table below came from an evaluation of six different software solutions for automatically analyzing verbatim answers to surveys, compared to human analysis. The decision criteria are along the top, and each had a definition that was agreed at the start of the study, before any software had been evaluated.

 

Articulate your strategy

Since you understand your current situation in all important dimensions and have decided on the top priorities, now is a good time to articulate your strategy concisely. Customer experience strategy is a subset of a corporation’s overall strategy and should be positioned as such. For example, if your company explicitly has no plans to grow its business, the customer experience strategy should not be positioned as enabling growth. Here is an example of a strategy statement, with associated initiatives:

  • Our vision: customers for life.
  • Our strategy: achieve industry-leading customer loyalty and renewal rates by ensuring every customer achieves the ROI they expect from our services.
  • Strategic initiatives:
    • Implement Customer Success teams for our largest customers, dedicated to helping them achieve expected benefits.
    • Implement online and social-media user groups to involve the most passionate users and develop a sense of community.
    • Regular proactive outreach to all customers who do not contact us themselves and are not in the user groups. Ensure no customer is forgotten.
    • Catch up with our competitors in the area of free online training and how-to videos.
    • Catch up with our competitors in number of languages in our service centers, moving from the current two languages to eight, within two years.

The overall strategy statement shows a clear focus on existing customers. By implication, no new work will be done on using references to attract new customers, or on fixing defective products, for example. Outside the five initiatives, all existing improvement work is considered to be at least adequate. The five investment proposals may of course include moving people from an existing work area to do the new work.

Prepare for the investment decisions

If one or more of your top five priorities require no new investment in people or other resources, you are in luck, though that seems unlikely to happen. Preparing for the investment decisions requires hard work and good timing. For many companies, perfect timing means that the strategy development exercise is well-coordinated with the annual budget cycle. ‘Well-coordinated’ means the situation analysis and initiative proposals should be complete before the budget cycle starts, ideally several weeks before, to minimize surprises and maximize the opportunity to socialize the work.

Securing the investments involves understanding the level of sponsorship you have for your work, and how you will need to communicate it to each individual you are dependent upon for funding. These are topics for another day and another blog post.

 

(As is often the case, this blog post is a mildly-edited version of a chapter in one of our books. In this case the book is Customer Experience Strategy – Design and Implementation. All of our books are available in Kindle and print versions from Amazon.)

Concorde

The start of a long story: How I learned about ‘customer-centric cost reduction’.

/ , , , , / , , , /

Such a contrast

I was looking out my office window near Charles de Gaulle airport in 1982. The phone rang just as I was watching Concorde take off on its daily flight to New York. In hindsight, the contrast was complete. The roar of the afterburners was the symbol of no-expense-spared extravagance. The phone call was the start of the opposite: my first participation in a major corporate cost-cutting exercise.

I was a cost reduction expert

I was no stranger to cost reduction. I graduated as an Industrial Engineer in Ireland in 1977. There was amazing demand at the time, and my entire class had signed employment contracts before our final exams. High-tech did not exist in its current form. Following a student project and summer work at Imperial Chemical Industries, I had an ICI mentor; R. T. O’Kelly, an Englishman known universally simply as RTK. He advised me not to start my career at ICI, but to choose a company that was growing quickly and would let me work in other countries. Remember this was before high-tech. A few weeks later, I signed my contract with Blue Bell Apparel, the parent company of Wrangler Jeans, among other brands. A week after starting, I found myself in rural Commerce, Georgia with a stopwatch in my hand. Industrial Engineers were measured on saving at least 15 times their pay. I got good at it while I lived and worked in the USA, Ireland, France, Italy, Spain and Scotland, all in the space of seven years. I became an expert in warehouse automation, which turned out to pay very well in high-tech, but that is another story.

McKinsey Overhead Value Analysis

The Parisian phone call in 1982 was from my boss, asking me to attend an introduction to McKinsey’s Overhead Value Analysis of our company, for which I was to be a project lead. The work was my first and purest customer-centric cost reduction exercise. Keeping customers at the center of your cost-reduction work is challenging, at best. Employees who are worried about being able to feed their families don’t care much about customers.

Communication and perceptions of fairness

Communication of customer-centric cost reduction is also challenging. A coherent customer-centric message about priorities will be something like this: “Since we must preserve or increase spending in departments A, B and C to ensure great service to our customers, we will need to cut even more in departments X, Y and Z, which have no direct customer impact.” This is a much harder message to deliver than “In the spirit of fairness, everyone’s budget will be cut 20%.”

It took me years to understand how to keep customers loyal while cutting costs

Over the following years I learned different methods of cost reduction and how to maintain or improve customer loyalty as you design and implement the reductions. It is not easy. I have managed programs that made things much worse for customers too. I did not do it deliberately. I just had nobody around me with relevant experience and advice. It is not easy. That is why I wrote Customer-Centric Cost Reduction; to save you a lot of the pain I went through.

McKinsey Overhead Value Analysis description

Overhead Value Analysis or OVA is rather ancient and excellent McKinsey cost reduction methodology. Back in 1982, times were suddenly tough for Blue Bell Apparel, the parent company of the Wrangler brand. I have to say I don’t know whether this was due to the market, or a proposal to take the company private. In any case, the corporation wanted to reduce costs. OVA is no longer mentioned by McKinsey on their website, though it may exist under a different name.

The OVA process

Using OVA was my first and most meaningful experience with a process in which the Golden Rule was applied: “Those who execute have to do the planning.” This avoided the all-too-common issue where plans are prepared by one team, passed to another team for implementation, and the second team rejects them, protesting that the first team understands nothing about what they (the second team) do.

After deciding which overhead functions will be targeted, each team leader is given an overall objective: find ways of reducing the work by 40%. The actual objective is a 15% reduction. McKinsey’s experience at the time was that companies who target 40% wind up achieving 15% on average, either because some reductions are too extreme, or because some are really cost shifts, moving work from one department to another.

I continue to admire this design. The 40% target means teams have to think differently about their work, while the underlying 15% real-world goal means that solutions that are quick to implement can be prioritized. This is what happened for us in practice. A little more than 15% savings were achieved while the McKinsey team were engaged. There were additional ideas among the 40% list, such as moving to a smaller distribution center, that took more time, and were achieved up to two years later.

Who was overhead?

While it may seem odd, the definition we used was not what you might expect. I worked in the leadership team for France, the Benelux and Italy, based in Paris. The team leaders who led the work were explicitly told that they themselves would not be eliminated. Everyone else was overhead, with the exception of the sales people who actually called on customers.

The first step

After we were all introduced to the program, the first step was the analysis of how everyone spent their day. The methodology was quite clever. It used individual face-to-face interviews. Each person was asked what work they did, what was the output, who received the output, and what proportion of their time was spent on each activity. Everyone’s time added up to 100%, no matter how many hours a day they worked. At its simplest level, the output of an individual OVA analysis would look like this today:

OVA

The most interesting step

Personally, I found the second step to be the most interesting. We then spoke to the people who received the deliverables mentioned in the tables from the first step. The questions were easy: Do you use the deliverable? How often do you get it? How often do you need it? Who else uses it?

There was one painful example: a person in Italy spent all of her time preparing a weekly sales report. This was printed and sent to the regional sales leader in Paris. When we spoke to him, his answer was “I don’t use it. Is it sent to anyone else?” Unfortunately for the Italian lady’s job security, it was not. This had been going on for about two years.

The 40% reduction goal

The following step was to examine all the work and deliverables, looking for opportunities to reduce them by 40%. The McKinsey team placed the emphasis on trying to completely eliminate all deliverables that were not absolutely necessary, then decreasing the content or frequency of what remained. I found this a realistic approach.

Suggestions were categorized by impact and ease of implementation. Since the true objective was a 15% reduction, things that would make life easier in one department but create additional work in another were quickly eliminated. The 40 to 15 gap also meant that we did not have to pay extreme attention to avoiding different departments proposing the same reduction ideas. There was a little of that, and the targeting method meant that it did not matter.

Learnings

OVA was my first experience with a major corporate cost-reduction effort. I embraced the process and learned a lot. I also learned what happens in an organization when almost everyone (correctly) feels their job is at risk. New rumors circulated every day. Good people were proactive and got jobs elsewhere, rather than taking the risk of staying.

Only the sales teams were happy, since they were explicitly the ones to benefit from the reductions. Since they were also the people who spoke the most to customers, they were able to keep the customers on our side, and we continued to have the top market share in Europe.

I also learned about the positive power of what I can only call paternalistic management. For example, the division leader, David Hayes, tried his best to find out about the personal situations of each employee who was on the redundancy list, before it was communicated. He learned that one of the Parisian warehouse workers had difficult family circumstances and lived in a small trailer in a trailer park. We found a different person to let go; one who would have an easier time getting a new job in the area. My own personal paranoia made me suggest eliminating my own job, a proposal I accompanied by a request to move to a new green-fields distribution center project in Spain. That experience is a whole other story.

Conclusion

There are various ways of ensuring customer loyalty during a cost reduction exercise, and of ensuring the support of at least part of your workforce. We explore them in more detail in our book Customer-Centric Cost Reduction, of course. Your comments and suggestions are welcome, as always.

Sponsorship

Four rules for enduring sponsorship of your work

/ , , /

Ah… sponsorship. Do you have it? Can you get it? You may have a brilliant new idea and need people and money to move it forward. You may want to understand whether you and your team will survive the latest cost-cutting efforts. The results and answers depend on the sponsorship you have for your work from your CEO or other senior executives. We often see business, NGO and public sector projects, and even careers start with great fanfare, then grind slowly to a halt a year or so later. All too often, they disappear silently, without delivering anything. What follows are the observations about projects and work areas I have seen succeed or fail over the last thirty years at HP, Compaq and Digital Equipment Corporation. The observations are presented in the form of rules that must not be broken. I have seen the first three rules right from the start. The fourth observation came as somewhat of a surprise during Léo Apotheker’s brief reign as CEO of HP.

Rule #1 ­ Do senior leaders talk about your project or area of work?

If senior leaders who have to approve new investments do not spontaneously mention what you are working on when they list their top five priorities, it will be challenging to be successful, at the very least. This applies to all investments and indeed all jobs, not just those in customer experience or strategy development. For the purposes of this discussion, “senior leaders” start with your manager’s manager. If your manager leaves, you are totally dependent on their manager for your project or work area to continue. Your manager’s manager controls more resources than your manager does. If your work is not on his or her priority list, you will either not get the resources needed to make it successful, or you will lose the resources over time. I have not seen any exceptions to this rule. If your company has an intranet, look for senior leaders’ websites and study their priorities. See if you can find their typical meeting agendas. Is your area of work ever on the agenda? Of course, if it isn’t, you have a role to play in changing that, assuming you don’t just want to give up.

Rule #2 ­ Does the project name make sense?

This should not matter, but it turns out to be essential in large organizations. The name of your project or work area has to describe the work in a simple way. You should avoid code names and acronyms if at all possible. The following example is real, though I am leaving the description vague enough to avoid embarrassing people. One the businesses I worked in had a major global customer happiness initiative called the Diamond program. It was well-funded and well-resourced, and had recently gotten off to a good start. The company needed to split up the relevant business to prepare for a major acquisition. The belief was that any costs held at the corporate headquarters level could be eliminated…

The cost review took place in a room of finance people, none of whom had detailed content knowledge of the cost areas in question. The following discussion was reported to me by two different people who were in the room. The discussion leader said, “… The next item is the Diamond program. Does anyone know what this is?” Since nobody did, it was immediately and irreversibly de-funded. That would never have happened if it had been called, for example, “The customer happiness program.” The decision-makers would at least have tried to find out what it was.

There are times when things need to be secret temporarily. If your company is planning on acquiring another company, the project will have a code name until the deal is public. Similarly, your project may involve an organization change and use a code name before it has been approved by the leadership team. As soon as the reason for confidentiality goes away, get rid of the code name or acronym and call it what it is.

Rule #3 ­ The pregnancy test

Yes, this rule has a slight lack of political correctness… If you can’t deliver the project in nine months, don’t bother starting. There will be no baby because you are not pregnant. Let me explain. If your first major deliverable worth the investment is more than nine months away, something is certain to change in the environment that will make you fail, or at least lose sponsorship. Your manager may change. Their manager may change. The company may have a bad quarter, or a great quarter. Your company might get acquired. Your government department may have a spending cut, or a spending increase, or the balance of power may change in some way. I take this further in my work: you need to be able to deliver something every three months that is worth the funding and the effort for those three months. Otherwise you will gradually lose sponsorship. If you can shorten the time between major deliverables even further, so much the better.

For years I communicated these three rules, using something like the diagram above. Then something happened that showed a dimension was missing…

Rule #4 ­ Can you communicate it all effectively

I worked with Léo Apotheker’s head of strategy on the definition of our corporate strategic initiatives in a way that would make them easy for us to implement in Europe, the Middle East and Africa. I found both Léo and his strategy head, Martin Risau, to be brilliant thought leaders, with all of the practical sense you would naturally expect from senior German executives. Indeed, when first discussing rule #3 with Martin, he said “Three months is too long. We need to deliver something significant on each of these initiatives every two months.” We had the perfect sponsorship situation: senior leaders were talking about the initiatives. They all had names that correctly represented the work. They would each deliver something significant every two months…

Yet we still failed. Why? I believe it was because we, and our CEO in particular, were not able to communicate the work and the results so far in a simple and consistent way. The story line evolved constantly. People became confused. Teams leading the work felt the work definitions were changing, even though they were not. I believe Léo was adjusting the story he told depending on his audience, normally an admirable quality, particularly if each audience can’t easily compare the messaging with another audience. Industry analysts followed Léo’s strategy closely. That meant the messages were compared, people got confused, and the work did not advance as quickly as it should have. Meg Whitman’s experience in politics means that she has been able to avoid this pitfall. Her messaging was incredibly consistent, no matter what the audience, particularly during her first years at HP.

Conclusion

Sponsorship for your work matters. These four rules guarantee it. If all four are not in place, you need to get them in place or change your project, work area or employer. I urge you to consider the list as complete. Feel free to disagree. I would love to learn about rule #5. In the meantime, sign up for our newsletter if you would like to be informed when this blog is updated, normally weekly.

1 2 3 4 5

↑

Net Promoter™, Net Promoter System™, Net Promoter Score™, NPS™ and the NPS™-related emoticons are registered trademarks of Bain & Company, Inc., Fred Reichheld and Satmetrix Systems, Inc.
CustomerStrategy.net is owned by Maurice FitzGerald Consulting, Geneva, Switzerland • Site developed in conjunction with iCulture and iBusiness

Show Buttons
Hide Buttons