Customer-centric Cost Reduction and ‘Hygiene Factors’
Today’s post is a follow-on to my introduction to the concept of customer-centric cost reduction, back in January. You may recall that it is about how you achieve necessary cost reductions without screwing things up for your customers. It is not easy.
Various theories about human motivation include the concept of ‘hygiene factors’. Read up on Herzberg’s theory in particular if you want to know more. A link to the Wikipedia article on the subject is here. Hygiene factors can be compared to taking a shower, where doing more than a certain amount brings no additional benefit. Some hygiene factors are as basic as air. If you can breathe, you don’t notice it. Giving you more air than you need to breath normally adds no value.
Hygiene factors and delighting customers
A common customer experience slogan is “We must delight customers at every possible interaction.” While it sounds nice, it is nonsensical. Not many interactions matter. Basic service center interactions are a good example. If you have resolved the customer’s issue, that is good enough. Doing more does not add anything and wastes money.
Hygiene factors and customer-centric cost reduction
The heart of customer-centric cost reduction is understanding which of your activities just have to be “good enough”. Once they are good enough, they are not worthy of further investment. If such “above and beyond” investments have already been made, they should be cut back. They serve no purpose. There is a challenge, and that is how to determine whether the work areas in question are indeed good enough. Here are some indicators:
Common sense applies. You probably have costs that are totally invisible to customers, and which have no conceivable impact on them. For example, your customers really don’t care how much you pay for office supplies. They probably don’t care about the cost of some building they never visit. Assuming the basics function, they don’t care about your telecommunications costs. These sorts of costs can be reduced without affecting customer loyalty and growth.
Use your existing customer survey data to find out what customers care about. If you have a complaints department, you have a good source of information about things that may not be good enough, even if they should be hygiene factors. If you believe your service center hold times are fine, but your customers are irritated by them and say your competitors do a better job, then you should probably not cut costs in a way that makes the hold times worse. Note that it would also be a waste of energy to identify and communicate fifty hygiene factors. I suggest keeping your list to three to five things that are easy for everyone to remember.
While customer surveys are a great source for data on what customers care about and how you compare to competitors, not all survey types are useful for this purpose. The useful ones include open questions that ask customers what they would like to see improved, or for their reasons for giving an overall satisfaction rating of some type. If you do not have this type of question in your research, you risk cutting expenses where it is not appropriate. Many survey types require customers to choose between a set of options that you have dreamed up, but which may not reflect their reality. Think about this as the only question a waiter might ask in a restaurant: “Would you like your steak rare, medium-rare, medium or well-done?” Note that you do not get the choice of having something other than steak or being a vegetarian. If you are the restaurant owner, ask the open question “What would you like to eat today?” If nobody ever asks for a vegetarian option, you can safely remove it from your menu.
More common sense applies, in the absence of survey data. It should be obvious that a number of transactional process just have to work. If you accept credit cards, the credit card approval/denial process has to be almost instantaneous. No normal customer could be “delighted” by their credit card being approved, and nobody would recommend your company on the basis of the approval. Similarly, if your service center solves a customer issue, most customers will consider that to be acceptable, but could not be “delighted” about it. After all, they did not expect or want to have an issue to resolve in the first place. Once you believe your issue resolution is as good as that of your competitors, you should do it as inexpensively as possible. The same applies to processes associated with renewing existing service contracts, for example.
Implications for cost-reduction goals
For the sake of simplicity, lets’ suppose half your people costs are for work on hygiene factors, and half on things that genuinely make customers happy, generate recommendations and drive loyalty. Customer-centric cost-reduction means that your savings should come entirely from the hygiene factor work, with one major condition. That work has to already be “good enough”. In the absence of a a precise definition of good enough, it needs to be as good as your main competitors.
Implications for your organization
If you do indeed respect these guidelines, it will become clear to your employees that there are areas that are good for career development and others that will be relatively depressing places to work, under constant cost pressure. Your hygiene factors will not be the same as those of companies specialized in that type of work. You should consider achieving the cost-savings by using Business Process Outsourcing (BPO) services. Your hygiene factors are their core business. Your people may be happier being transferred to the outsourcing company.
Negotiating a good BPO contract
Business Process Outsourcing contracts tend to be long-term in nature. Five to seven year terms are common, and I have even seen a twenty-year contract agreement with a Swiss bank. A typical contract is for a 20% cost-reduction, usually measured in cost per transaction. For example, if you outsource the processing of expense claims, the contract will be for a 20% cost reduction per claim within a defined period of time. Standard contracts include renegotiation clauses. Save yourself the hassle by negotiating further ongoing price reductions, for example 1% per year, directly into the contract when you sign it.
Keeping your customers with you as you reduce cost can be challenging. I doubt you can do it by consensus. It is easier for a CEO to say “We have made some bad decisions and now need to reduce our costs by 20%. I want each and every one of you to reduce your costs by 20%. Tell me when you have completed the task.” That is all too common, and leads to loss of customers, and a corporate death spiral, as the CEO is surprised that revenue continues to decline. The guidelines I have provided can help CEOs to be more constructive: “We have to reduce our costs by 20%. Here are the top things that customers care about, and where we may have to spend more. Here are the top five cost areas that are invisible to customers and where I want to target a 50% reduction. Tell me what is possible.”