How eliminating complexity can help you increase service process productivity by 10-15% in 90 days

Why are apparently simple problems so difficult to solve?

A Rubik’s cube appears an impossible puzzle for the uninitiated. If you don’t know how to do it, it could take days and weeks of ‘trial and error’ to solve the puzzle. And yet the current world record was set by Erik Akkersdijk in 2008, with a best time of 7.08 seconds at the Czech Open 2008 competition. Similarly, the puzzle of improving service process productivity has appeared to be frustratingly difficult for many organisations. Dedicated teams are formed, apply huge amounts of effort over 6 months and yet end up with service productivity improvements below 10%. The secret to transforming your performance in both cases is knowing the most effective strategies to deploy to be successful. So let’s explore in more detail what makes service productivity improvement so difficult using conventional approaches and alternatives you can apply to achieve rapid breakthrough productivity improvements.

What are service processes?
Our lives depend on service processes and they are critical to the success of business and society. They range from ordinary activities such as withdrawing cash from an ATM and changing the calling plan for your mobile phone through to arranging for an operation in the Health Service. In business terms they cover the back office processing in a financial institution through to the restocking processes that ensure your supermarket is replenished each day. Without these ‘invisible’ service processes our shops would stand empty and life would soon grind to a halt.

What are the elements of a service process?
In general, services are defined through a combination of three key elements:
i) The features of the service
ii) A delivery mechanism that defines the where are how for the service and
iii) The supporting processes to make them work.
For example for a cash withdrawal service through an ATM from your bank, the features could include withdrawals up to $500, 24 hours per day, 7 days per week. The delivery mechanism is through any ATM displaying the Visa symbol in 170 countries using your bank card. The service process from a customer perspective starts by inserting your card and entering PIN, then making a withdrawal request for any amount up to $500 and finally receiving the cash (if you have the money in your bank account) and having your account debited for the transaction.

Why do service processes get so complex?
There are a number of factors that combine in my experience to lead to process complexity. The first is that while the features and delivery mechanisms are tangible whose performance can be easily defined in engineering terms with hard metrics, the service processes being ‘invisible’ are much harder to engineer systematically and so often get overlooked. If you consider your doctor making an outpatient referral for you for a consultation with a specialist consultant; you’ll find that nearly every hospital and health authority will have a different service process with huge variations in terms of how quickly you are treated, the cost per treatment and medical outcomes.

In my experience, new service processes are typically launched with poor productivity; complexity is then added with new rules and decision points to be applied continually with constant further workarounds and hand-offs being created. Each time complexity increases; the amount of work per case goes up undermining your productivity and driving up costs. You could think of the eventual impact as a process version of the movie ‘Super Size Me’. You don’t notice the impact of the first few super-sized burgers, however the cholesterol from each additional super size burger clots up your arteries until eventually a heart attack occurs. Similarly as the added complexity builds up over time and volumes grow day-by-day, the process cholesterol builds up until you suffer an eventual ‘process heart attack’ as either processing costs explode or your service delivery functions collapse from being overwhelmed by too much work.

Why does productivity get compromised in new service processes?
In a new service process, even though it shouldn’t happen in theory, in practice the requirements set for new processes end up being far too complicated. Far too many requirements are included from all parts of the organisation (marketing, finance, audit and compliance). All too frequently, this is combined with a ‘hard date’ for when the new process must be implemented, so as the target date nears the project team (and the operational departments) are forced to come up with a working process no matter how complex to ensure the target implementation is seen by to be met (or face the wrath of the senior executives who are paying for the project). Worst-case scenario is a Heathrow Terminal-5 disaster on Day 1 but to be frank these disaster scenarios are the exceptions.
In most cases a more insidious problem is building up unnoticed. The initial volumes for the new process are relatively small, so the operational departments can cope. The project team is then stood down and moves onto another process leaving their operational colleagues to run the new process. As long as the volumes remain low, nobody notices the problem. You can think of it as an unexploded bomb just waiting to be set off on the operational folks once volumes reach a critical mass.

How does complexity impact service processes?
The more rules, the more hand-offs, and the more decision points within a service process the more complicated it gets. It seems obvious but is so often overlooked – the more complex the process the greater the costs and the more opportunities exist to disappoint the customer. Typically, 40-60% of activities and costs within a service process are non-value added from a customer perspective. Some of this cost may be justified from an audit and compliance perspective but this should be contained to below 5%. If service processes are a major proportion of your operating costs or service quality is critical to your business proposition and operations then this level of waste is both a significant burden and a major opportunity for you to improve performance.

What are the best measures of service productivity?
The most powerful measures of service productivity are based on focusing on the customer and business performance. The top-three performance measures, I would recommend that you implement are: are a measure of your ‘customer experience’ (such as the ‘Net Promoter Score’ (NPS) or equivalent), cost per activity and a measure of the effectiveness of your process outcome (depending on your business this could be customer lifetime value, asset utilisation, sales per square foot, patient outcome etc).

What's the easiest approach to eliminate complexity?
The simplest and most powerful approach in my experience is to attack the complexity head on. There are straightforward tools that help you to identify the principal components of service process complexity. You simply need to apply a ‘triage approach’ to generate an action plan that removes those elements of complexity that generate the greatest cost and customer dissatisfaction in the fastest time. It sounds simple because it is and it’s an approach that works.

Why do so many IT based productivity implementations disappoint?
My background is in IT and I’ve worked with a number of the largest IT firms and users in the world such as AOL, Citicorp and EDS. I love IT and spent many happy years as a programmer, business analyst and systems designer. Clearly some IT initiatives, such as increased ‘straight-through-processing’ in transaction processing, environments are ‘no-brainers’ as they eliminate work. Well yes they are, but these often make up a minority of the initiatives within the typical IT portfolio. So what’s the fatal flaw that causes so many of the IT investment projects to deliver minimal productivity impact? My observation is that these projects start off by mapping the data, document and process flows within the existing process. By and large, the process is then engineered into an IT process that preserves most of the complexity in the original process. Indeed in some cases it’s made worse because the new IT system can now administer far more rules and complexity than was possible before. So the new (IT system enabled) process starts off with even more complexity than ever. Ultimately the new IT system, even with the latest workflow, image, SOA and web-enabled functionality fails to deliver the goods in terms of meaningful improvements to your productivity, customer experience or operating costs.

Who needs to be involved in removing complexity?
To achieve the best results, ideally you should get 2 to 5 people (from the function that operates the service process day-to-day) that can describe the process end-to-end. A smart front-line person and a team leader/ supervisor are often enough. Typically, just these two individuals can identify 20-40% of the performance improvement opportunities available. In an ideal world, if they could be joined by 1-2 people involved in the process upstream and downstream then you can identify 80%+ of the opportunities.
For the icing on the cake, if you had someone from finance who really knew the numbers and someone from marketing who defined the service offering then you would have the perfect team. All told, you will get great results from getting these 2-10 people in the same room to optimise the process.

What's the impact of removing complexity?
So what’s the bottom-line? I’ve done projects across Europe and the USA across banks, insurance, technology, retail and outsourcing sectors where we’ve achieved 25-30% cost reductions delivered within 90 days – in some cases much higher. These may of course been special cases of high complexity, so to set a more realistic expectation (certainly when speaking to your boss) you should set yourself a target to increase productivity by 10-15% within 90 days. For more in depth case studies of applying these techniques across the whole of a business go to: http://www.closequarter.co.uk/cq-thought-leadership.html

Does this all sound too good to be true?
If you’ve been working for years and have now hit-the-wall on delivering further productivity improvements then no doubt this discussion of rapid productivity gains no doubt sounds ‘too good to be true’. If you’ve used techniques derived from manufacturing such as Lean and Six Sigma, you may be wondering what these alternative approaches designed for service processes have to offer you? If you are working on manufacturing processes in an automotive company, than Lean techniques represent global best practice and many of the planning and analysis tools can be used in any environment. However even a world-class manufacturer such as Nissan realised there was much it could do to improve its service processes when Carlos Ghosn joined from Renault. One year after he arrived, Nissan's net profit climbed to $2.7 billion from a loss of $6.1 billion in the previous year. Nissan's operating profit (EBIT, or earnings before interest and taxes) margin increased from 1.38% in FY 2000 to 9.25% in FY 2006. The application of Renault’s expertise to critical service processes within Nissan enabled it to transform its profitability.

Perhaps the most powerful argument is that if you’re finding your existing tools and approaches are not delivering the results that you need, perhaps it’s time to consider an alternative approach, an approach that you could learn in a day and start seeing immediate productivity improvements this week.

What are the most powerful ‘takeaway points’ for you to consider?
In summary, the three most powerful ‘takeaway points’ are:

• Typically 40-60% of cost in service processes is non-value added from a customer perspective
• The key driver of costs in service processes is complexity
• By using tools focused on helping you eliminate complexity, you can deliver 10-15% productivity improvements in service processes within 90 days

When you know how, the seemingly impossible becomes easy
So if you want to learn how to solve a Rubik’s cube puzzle, just key ‘Rubik’s cube solutions’ into Google and you’ll know how to do it in the next hour. If you are interested in learning more about how to increase service productivity by 10-15% in the next 90 days just apply the principles you’ve just discovered.

Regards John.

CLICK HERE to download a pdf format version of this article to read at your leisure

John Corr (Managing Partner)
Tel: +44 (0) 20 7748 2225.

PS If you would like to discuss these principles in more detail or for a confidential conversation on how they apply to your specific situation, challenges and objectives - just drop me an email or call. I’d be delighted to help you be more successful.

Additional resources – suggested reading
‘Zero Defections: Quality Comes to Services’ by Frederick Reichheld and W. Earl, Jr. Sasser (digital download from www.hbr.org)
‘Moments of Truth’ by Jan Carlzon
‘The Service Profit Chain’ by James L. Heskett
‘Managing the Customer Experience: Turning customers’ by Shaun Smith
‘The Loyalty Effect: The Hidden Force Behind Growth, Profits, and Lasting Value’ by Frederick F. Reichheld
'Customer Expectation Management' by Steve Towers

How reducing 'frustration churn' could increase your business value by 15% or more

How to reduce operating costs and improve long-term profitability by eliminating the root causes of ‘frustration churn’

If you lost 1-2 pints of blood your doctor would be worried and so would you. And yet most businesses still lose around 15-20% of their customers each year. While many organisations put this down to competitor activity (mainly price and sales promotions), in our experience around 40-60% of customer churn is due to internal factors under your direct control that relate to the experience customers have of consuming your products and services and the experience they have interacting with your organisation (that is your people, processes and systems).

Losing customers is painful, but worst of all is losing your most valuable customers. Depending on your industry sector, the top 10-20% of customers contribute from 50-90% of the total value of your entire customer base. So if you lose these customers, this can be a significant threat to your profitability and cash flow. For those readers who’s main interest is in determining the potential shareholder value impact of strategies, and are wondering how a concerted ‘Frustration Churn Elimination’ programme could possibly increase their enterprise value by over 15% then they should skip down to the Shareholder Value calculation (near the bottom of this article in the penultimate section) – and don’t forget to come back to read the rest of the article on how they can do it.

What is ‘frustration churn’?
We describe the phenomenon of customers who have chosen to leave you for your competitors as a result of their disappointment with your products and services (and their experience of how you provide them to them) as ‘frustration churn’. Examples of ‘frustration churn’ include billing errors, the product or service doesn’t work reliably, the customer delivery didn’t arrive or the customer had a poor experience when interacting with your business (people or systems).

What’s the profit impact of neglecting ‘frustration churn’?
There are a number of areas where neglecting ‘frustration’ churn can impact your P&L severely. These include:

i) First and most obviously is the loss of customer lifetime value of the customers that have left your business. Many businesses just take this loss as a fact of nature, executives say let’s just do more acquisition marketing in order to keep the customer numbers steady. A financial analysis by Fredrich Reichheld (see Zero Defections Comes To Services – by Frederick F. Reichheld and W. Earl Sasser, Jr. HBR September 1990) calculated that a 5% reduction in overall churn rates would increase the your customers’ lifetime value by up to 100% (see the article for the full arithmetic and examples from different industries).

ii) Secondly, there is the cost of the additional acquisition marketing to keep the customer numbers from falling. Financial markets seem to hate to see your revenue numbers fall. Acquisition marketing spending (covering sales, marketing, advertising, distribution channels) can consume 10-25% of many businesses cost structure. Much of this spending is to acquire new customers to make up for customers that are choosing not to do business with you. In a B2B context, it can take years of effort and hundreds of thousands of dollars to acquire and develop your most valuable customers, it’s a damned shame to lose these customers because it’s going to take you a lot of time and effort to replace them.

iii) And finally, perhaps this is the secret you should share with your CFO. I’ve seen clients struggle for years with process improvement and cost reduction programmes that ultimately yield little or no benefit to customers or the P&L. Focusing on eliminating the root causes of the principal reasons why customers defect is one of the very fastest and most effective techniques that I’ve seen in business. Typically, I’ve seen businesses taking this approach are able to eliminate 10-30% of cost within 30-90 days within a specific business unit (clearly rollout across the whole business takes somewhat longer). I’m not saying it’s easy, in the sense that this level of performance improvement requires cross-functional teams and co-operating which gets more difficult as the size and complexity of your organisation grows. Nonetheless, if you can form such teams then 10-30% cost reduction in the specific processes that you set out to improve is readily attainable.

Example: We worked with a technology company to help reduce churn and reduce operating costs in one of their service operations functions. They focused on identifying the root causes of churn and poor customer experiences that could be readily fixed and then eliminating them. The result: They improved their customer experience substantially by eliminating process defects reducing customer churn while reducing operating costs by 28.5% (€5.6 million annual saving) in the operating unit involved.

Why does ‘frustration churn’ build up over time?
I don’t know what it is about growing older, but somehow it’s all too easy for all those delicious meals to cause your waistline to keep widening and more worryingly layers of cholesterol to build up in your arteries. Left unchecked, it’s not a great outcome on a personal level as you are likely to end up with a heart attack. In a similar manner slowly but surely, over time most of your business processes get ever more complicated. As they grow more complex, your operating costs on key processes continue to creep up continuously putting your operating budgets in ever more pressure (ask your CIO or VP Operations to comment on how this feels). That’s bad for budgets and your margins, but even worse this complexity becomes the source of ever more opportunities for failures to occur in the ‘customer experience’ ultimately causing your customers to defect due to ‘frustration churn’.

What’s worse than ‘frustration churn’?
Now if you are in financial services or retail, customer cancellations and defections may be invisible to you. In a retail environment, it may mean customers start shopping less with you and reduce their basket sizes. Unless you are running a sophisticated customer management system like Tesco’s Clubcard this level of defection may be invisible to you (a good reason if you are a retailer to introduce something similar to manage your customer assets more effectively). Even worse, is the situation in financial services where instead of just cancelling or closing their accounts, customers instead reduce the balances on their accounts. In these situations, you don’t see a cancellation directly, but you do get to see a negative profit impact as once profitable customers become unprofitable customers that you then have to carry within your business. Overall, the value destruction impact of those who reduce balances can be 5-20 fold that of those that just close their accounts completely.

How can you measure ‘frustration churn’?
The most obvious method of measuring ‘frustration churn’ is to collect the cancellation reasons of customers when they come to cancel or significantly reduce their business with you. The Telecoms industry is more active than most in measuring this factor than most (particularly for mobile phone contracts and Internet contracts). The data is somewhat inaccurate, sometimes the customer doesn’t give a completely truthful reason (particularly when faced with a stubborn customer service representative who seems very reluctant to process the cancellation) and other times limitations in the call centre systems (or web based systems) lead to an inaccurate reason code being taken. However, the greatest danger I’ve seen is that inaccuracies in the data capture process end up as being used as reasons (or perhaps more accurately rationalisations) as to why the organisation should not take action on the cancellation data. I’ve often heard the phrases ‘facts are friends’ and ‘you should never put lipstick on a pig’ in organisations that then decide to completely ignore the invaluable feedback and insight that comes from understanding their customer cancellation data.

Now not all organisations do have the luxury of having useful cancellation data. In these circumstances, you can fall back to using ‘customer experience’ data that’s collected on key ‘moments of truth’ with customers. And worse case, if this is unavailable customer complaint data is a great fallback. If the complaint data is not in a database, just collect as many complaints as you can and sit down and do a simple 1 day complaint analysis exercise (it’s always worth phoning a sample of these complainants personally to get some qualitative colour and depth on what’s actually going on from a real live customer basis).

So why does ‘frustration churn’ arise in the first place?
I guess at a human level, nobody’s perfect. Though for air traffic controllers thankfully their systems are a great deal safer and more reliable than ‘Six Sigma’ perfection would require (thankfully less than 3 in a million flights end in a crash). So its down to us to make our processes more reliable. The most frequent reason I see ‘frustration churn’ being baked into business processes from Day 1 is the rush to hit delivery dates. If you are running a high profile product launch or ‘big ticket’ IT project, the most obvious failure is to be late. So sadly, in too many occasions that means at the end of the project in the rush to hit the implementation dates, it’s an all too frequent issue for Operations folks to find the product/ process/ system is thrown over the fence on implementation day for them to manage the ‘teething problems’ (in future this may become known as the ‘Terminal 5’ syndrome (after the fiasco at Heathrow Airport where the new terminal was opened before the baggage systems were ready ending up with over 10,000 passengers loosing their bags on the day of opening), Now typically (Terminal 5 excepted) you can expect the showstoppers to get fixed, however it’s a rare organisation in my experience that gets around to enhancing the new business process to take out 30-50% of the costs and causes of customer frustration and poor experiences). More typically, a sub-optimal process that works somehow is in place for Day 1, and then in the coming months and years the business process slowly deteriorates in growing complexity.

Frustration churn – easy to eliminate in theory but is it much harder in practice?
There’s an old song that goes “everyone wants to go to heaven but nobody wants to die.” Eliminating frustration churn is simple in concept but to be most effective it does depend on cross-functional working and co-operation. Typically in our experience of large complex organisations, the root causes of perhaps 80-90% of frustration churn arises either upstream of the customer facing functions that are held accountable for service delivery or from the business rules that define the process concerned (and it’s unclear to most people who originated or controls these business rules anymore).

Now cross-functional working may be completely impossible, or just extremely difficult, within your organisation. In these circumstances, I’d say that why don’t you just spend a little effort improving what you can. This could still give you an operational productivity improvement of 1-3% that is within your reach. As you start to gain traction, others may rally to your cause.

Why not set yourself a target to see if you can get one or two of your senior colleagues and a small team of folks from across sister departments or functions involved, then you can make some serious headway. A small team, with a little bit of data analysis, thinking and planning can achieve some remarkable results. I’ve seen a roomful of ambitious folks at mid-levels in their organisation (without having to get CEO sponsorship) develop and implement process improvements that saved their organisation over $10 million within 90 days.

Example: Andy Homer (Group Chief Executive - Towergate) has grown Towergate to be worth over £3 billion ($6 billion USD) in 5 years by applying these techniques. It's now Europe's most valuable privately owned insurance company. Hear what Andy has to say on the impact of these approaches by CLICKING HERE

It’s easy for your attention on be focused solely on the competition
When I ask senior executives why they are losing revenues and their most valuable clients, they usually focus on comparisons of their business with competitors and give explanations of competitor activity at best undermining their margins and their revenues and at worst ‘stealing their customers’. In a future article, I’ll discuss loosing customers to competitors because of their perceived stronger offers that we describe as ‘comparison churn’. The downside of focusing overwhelmingly on competitors, whose actions are not directly under your control, is that you end up ignoring the 40-60% (in our experience) of customer defections that are caused by things your business does (or fails to do) that are under your control that lead inadvertently to you ruining the ‘customer experience’ of your products and services.

What are 5 quick tips that you can use now to reduce ‘frustration churn’?
i) You can’t keep all of your customers forever, however you can actively manage and reduce your loss of valuable customers. You should put in place systems and processes that allow you to understand why customers are leaving you, what they think about the customer experience that you are delivering to them. With this insight, you’ll then know what it is that you are doing and need to do that will increase customer loyalty and minimise customers going to your competitors.

ii) Keep your monitoring systems simple and make sure they provide feedback on the customer experience rapidly so that people can take action. Many organisations track their customer experience on a quarterly basis and feed that information back to their operating units. However this is somewhat like having a weighing scales that told you your weight 3 months ago – that’s not going to tell you whether your diet and exercise programme is working or not. Best practice is to have systems that give feedback on the customer experience and customer defection reasons within 24 hours to operating units.

I would recommend that you get hold of the best customer experience data that you have readily available that can give you insights into customer perceptions of your key ‘moments of truth’ (whenever your organisation interacts with the customer). If you are interested in perhaps the industry leading approaches for tracking and analysing your customer experience and causes of customer churn then some of the best implementations I’ve seen (no commission involved here!) are from SatMetrix for ‘b2c’ consumer environments (see http://www.Satmetrix.com) and Active Retention for a ‘b2b’ environment (see http://www.activeretention.com). Whether you use these systems or something similar, I would look for those processes and ‘moments of truth’ that were the root causes of the worst customer experiences for the largest number of customers.

iii) You can identify the most promising opportunities by applying a simple strategic ‘triage’ framework. I would use one of the following frameworks to ‘triage’ the identify most promising opportunities from the rest. If you have an accurate breakdown of the churn reasons then I would map the scale of the cancellation volumes against the business resources tied up with each cause (measures of value could be revenues, aggregate customer lifetime value, costs or even staffing levels). If your business doesn’t have reliable churn data then I would plot customer experience score (or complaints volumes) against the value tied up in the process concerned.

If none of this customer data is available, I would simply look out for departments or functions under severe budget pressure, cost reduction initiatives that haven’t worked out or failing projects that need to be turned around.

iv) You can rapidly create ‘Kaikaku’ or ‘breakthrough Kaizen’ teams tasked with eliminating at least 10% of costs and ‘frustration’ churn within 90 days within a specific business function or process. The team is ideally a cross-functional team, the good news is that if you lock them away for a week they should be able to carry out the data analysis, identify root causes and fixes, triage opportunities, develop recommendations and implementation in under a week (especially if left undisturbed and you take their Blackberries off them during the day). As a simple framework to organise their work, you can use DMAIC as an overall structure (from Six Sigma) and apply simple and powerful methodologies such as the CPP Level 1 tools (from Bennu Group see http://www.bennugroup.net).

v) Finally, in a ‘b2b’ environment, focus your immediate improvement on those clients and contracts with the highest value and the worst ‘customer experience’ scores. It takes a long time to acquire and develop these clients, however it’s all too easy for organisations to stop active monitoring of their relationships with these clients after the contracts have been won and signed.

Example: At one ‘B2B’ client I worked at, their most valuable client was showing REDS across the board amongst their key client stakeholders. Not unsurprisingly, this client cancelled within the quarter that came as somewhat of a surprise to the organisation concerned. On the plus side, they had a great monitoring system, on the downside nobody outside of IT seemed to be interested in using it. In a better world, as soon as you see these RED warnings arising amongst your key stakeholders in your most valuable clients, it’s time to step in and take urgent remedial action before it’s too late.

vi) The simplest, fastest and most powerful techniques I’ve come across for service businesses focus on removing time and complexity from service processes. A combination of the time compression and error elimination techniques from Lean Thinking (particularly in complex Technology environments) and the complexity elimination and ‘Customer Experience’ management techniques (that work particularly well in Service businesses and service processes) that can be learned in hours and applied immediately by your own people (see http://www.bennugroup.net).

What straightforward thing can you do right now?
I would find someone who is in budget pressure right now and is in urgent need of getting some rapid productivity improvements in place right now. I’d form a small cross-functional team (as cross-functional as you can manage that’s easy to put together at short notice). If you had a little help from your friends from Marketing to help with the data analysis of customer experience data you could save a lot of time (it’s in their interest as every customer that you save from ‘frustration churn’ means they are under less pressure on their acquisition marketing budget to replace them). I would then choose a first process to work on using simple techniques that helped you eliminate complexity and time from the process (see http://www.bennugroup.net for some useful ideas). And then I’d let them free to work on their analysis and recommendations for the next week. Come back in a week’s time and be prepared to be amazed by their recommendations and what can be achieved in the next 30 days.

Summary
The key takeaways relating to ‘frustration churn’ are:
• Eliminating the underlying root causes of ‘frustration churn’ can enable you to reduce service process operating costs by 10% or more within 90 days
• 40-60% of customer churn is down to internal factors under your organisation’s direct control
• Reducing your annual churn rate by 5 percentage points can increase your customers’ lifetime value (and ultimately your profits by up to 100%) Eliminating ‘frustration churn’ is one of the quickest, simplest and most effective methods to achieve this (just compare the financial cost against reducing your prices by 5-10% to achieve a similar impact)
• There are simple techniques that you can learn and readily apply immediately to improve the effectiveness of your key business processes. These techniques focus on reducing the complexity and the root causes of customer frustration with your business
• Measuring, analysing and acting on customer feedback on why they chose to leave your business can give you key insights on where to focus your process improvement and customer initiatives

Value impact calculation:
Take a business with an enterprise value of $1 billion (based on an EBITDA multiple of 5) with a customer churn rate of 15% per annum (retention rate 85%) where ‘frustration churn’ is responsible for 40% of customer losses (6% per annum). In this example service and customer management functions cost around $40 million per annum operating cost.
A realistic expectation for a 90-120 day churn reduction initiative results would be:
• A 10% reduction in operating costs for service and customer management
• Elimination of around 30% of ‘frustration churn’ reducing churn rates by around 2%
Value impact: Operating cost reduction of $4 million per annum creating $20 million shareholder value (based on EBITDA multiple) however this is dwarfed by the increase aggregate customer lifetime value of 15% that could be worth $150 million for this scale of business.

Total shareholder value impact: $170 million

Straightforward fixes to eliminate ‘frustration churn’ can turbo-charge profits
The fundamental underlying value of your business is driven by the aggregate value of your individual customers and the cash streams they provide. By reducing churn by around 5%, many businesses can double their customer lifetime values and ultimately profitability. Eliminating the root causes of ‘frustration churn’ is one of the simplest and most straightforward ways you can protect and extend the lifetime value of your most valuable customers.

My best wishes for your success.

John.

Further reading
The following articles and books are useful on this topic:
• Zero Defections: Quality Comes to Services by Frederick F. Reichheld, W. Earl Sasser Jr. (Harvard Business Review: September 1990)
• The One Number You Need to Grow by Frederick F. Reichheld (Harvard Business Review: December 2003)
• Managing Customers As Investments (Hardback) by Sunil Gupta
• Customer Expectation Management: Success Without Exception (Paperback) by Terry Schurter (Author), Steve Towers (Author0

Books available from Amazon, articles by download from http://www.hbr.org

Download this article in pdf format
CLICK HERE for a pdf download of this article.

How can you sometimes be worst and still come out a winner?

How can you sometimes be worst and still come out a winner?
This week, I learned at first hand a few interesting insights into what makes a really great service – and for the business behind it this has translated into incredible success and profitable growth. The business concerned came from tiny humble beginnings to overtake dominant industry giants and transformed the lives of millions of people across Europe.

Is the best always the best?
So before I get started on my tale, maybe you might reflect on what counts as a great customer experience for you? Perhaps you dream of sipping champagne in the pool of a luxurious 5 star hotel? (For anyone who is addicted to luxury the hotels of Dubai set a hard standard to beat).

I guess for most of us, and for many businesses, we assume that it must entail the very best possible of each and every element of the service we’re consuming. But unless we’re willing to pay the ultimate 5 star price – then the businesses supplying the service are likely to lose a great deal of money.

When you absolutely, positively have to be there on time
Perhaps its time now to share my story. I received an invite on Tuesday to meet a potential client in Dublin the following morning. I was going out with a colleague over from Melbourne but due to fly back home to Australia on Wednesday evening.
There are a lot of airlines to choose from with an enormous difference in pricing. But who should one choose? In the past I’ve enjoyed flying with Aer Lingus who do a delicious Irish breakfast which you can even enjoy with champagne – mind you for the price you could buy a few bottles of champagne and an awful lot of sausages ;-)

It’s a long way to Australia if you miss your flight
We didn’t want to be late for the meeting and Ian didn’t want to miss his flight back home to Australia. So the choice of airline came down to who offered the most reliable on time service. This turned out to be RyanAir, my very first flight on Europe’s leading low-cost airline (sorry Stelios). In terms of price, they were less than half the cost of the normal airlines (despite the majority of the ticket price being taxes). The seats (for those who have never travelled Ryan Air) are basic – they make a London bus seem luxurious. They don’t even have seat backs so they don’t have to empty them when turning around the flight for the next group of passengers.

Let the folks know you’re a winner
Still, most important of all the flights there and back were spot on time. Just to emphasise this, as we landed a bugle sounded to announce another on time arrival each time. We met our hosts and returned home just when we needed to safe and sound – all in all a great day out. Of course, being a management consultant, I took out my note book to put down my thoughts and insights from my experience.

To win: FOCUS, FOCUS, FOCUS
RyanAir have focused on just 3 things in their business:
They keep everything incredibly simple so they can offer the lowest prices
They are number 1 on being on time (and they let you know it)
The planes are safe

In business terms, they have focused on leadership on the 2 decision factors that matter most and then made minimal investment in all the other factors. Investing in the other factors mean their competitors prices are 2 to 3 times higher. This has allowed them to grow from a tiny airline that flew only one route in 1985, flying a 14 seat Embraer turbo-prop, from Waterford to London Gatwick to carrying 42.5 million passengers in FY 2006/07.

And the so what from this tale for you in business and personally?
As a business, what is the most important factor for customers in your market? Are you the best? What would it take for you to be the best?

As an individual, if you want to succeed then you need to have an edge that is specific to you. The edge can mean winning a promotion or payrise, or winning the hearts of those that matter most to you. So on a personal level, what do you want to be known for? How good are you? What would it take for you to be even better?

Get an incredible bargain before anyone else does
Just to finish off on a personal note, we’ve always wanted to visit the beautiful Hanseatic cities in the Baltics. I thought I’d research the fares on RyanAir for a trip later this month – the flight costs were 1 Euro penny each way plus taxes. Log on now before all the seats are taken :-)

Regards John.

Building Great Customer Experiences - Or beware consultants with no clothes!

It must be one my personal business nightmares, if you can imagine having just flown to New York to meet a new client and the airline has lost all your clothes! So what can one learn from such events about delivering great customer service experiences?

The best laid plans of mice and men often go awry
To give you the background, I’d just been to California and had arranged to meet the COO of a potential great new client in New York on my way back home to England. I’d visited them a few weeks before and I’d felt as though I’d wandered onto the set of “The Devil Wears Prada” (or should that be “Ugly Betty”?). So not wanting to be left too far behind the “New York Chic look” of my hosts, I’d gone out and purchased the very best of shirts & ties that London has to offer (OK anyone from Milan is allowed a note of scepticism at this point) combined with my new Italian suit & cuff links, I knew I’d look the part ;-)

My plane was several hours late into New York due to “unexpected delays” – I was little nervous as I’d arranged to go out to dinner that evening. Still with my Platinum Frequent Flyer card my suitcase had qualified for a special “Priority Handling” label so I was looking forward to getting my suitcase quickly and rushing off ahead of the pack to the taxi rank. Sadly, after all of the luggage had disappeared off the carousel there was no sign of my case, so I made my way to the airline’s baggage handling office. I was joined by another passenger who had experienced a similar fate. The Airline staff assured me that my suitcase had landed and recommended I went back to check the carousel again. This experience was repeated another 3 times. From my interactions with the airline staff, I managed to get the impression that losing one’s baggage was not a completely unusual experience. My heart sank as I looked at the back wall of the hall which was filled floor to ceiling with damaged suitcases in glass cases awaiting collection from their owners

After an hour and a half of going back & forth from the luggage carousel to the airline desk, the airline staff finally conceded that perhaps my bag was lost after all and I was given a claim form to fill in. I was given an 0800 number to contact and a tracking reference number and that was it. I had a sense of disappointment and unfinished business but I had to move on and let other passengers register their lost baggage too.

There’s no such thing as a “free breakfast”
I headed off to my hotel (minus any luggage) and checked in. The receptionist noted down my comment that my luggage had been lost and hopefully it might arrive in the next 24 hours. The receptionist realised I was a Gold member of their hotel loyalty system, so she kindly gave me vouchers for free breakfasts for my stay in Manhattan. Sadly, by this time it was too late for the dinner out I’d planned, so I went off to bed to dream the night away with visions of lost clothes, deodorants and shavers! I guess I wasn’t too worried that I could replace my lost items in the morning, after all America is the land of retail plenty. And as I was staying just off 5th Avenue, which is lined with clothes stores, it wasn’t going to be too difficult to get replacements in the morning.

In the morning, fortified by my free breakfast, though looking a little rough, unshaven (or should I say with designer stubble) and with crumpled clothes, I headed off to the shops and quickly purchased everything I needed. I guess as they were happy to process my credit card without phone verification I can’t have looked too bad. So at this point, it was an opportunity for me to think through the series of events as an interesting example of managing “the customer experience”. My airline goes to the trouble of writing hand written thank you notes each time I fly with them, and yet when it looses all my belongings – all they give me is a piece of paper and that’s it

It’s great that it’s free – but is it useful?
The hotel gave me a nice free breakfast but I would have preferred a shaver & some deodorant! If I think about a number of the budget hotel chains in the UK where they are happy to give you free shaver, foam, combs, deodorant etc. if you’ve forgotten them, there’s much their my American hotel & airline could learn from them.
A great technique for managing these unfortunate experiences was pioneered by Jan Carlson (former CEO of SAS Scandinavian Airlines) who coined the expression “moments of truth”. A “moment of truth” occurred whenever an employee interacted with a customer; Carlson said that these moments left an impression – good bad or exceptional.

Carlson applied 4 guiding principles for managing these “moments of truth” positively:
· Everyone needs to know and feel they are needed
· Everyone wants to be treated as an individual
· Giving someone the freedom to take responsibility releases resources that would otherwise remain concealed
· An individual without information can not take responsibility whereas an individual given responsibility can not help but take responsibility

The technique is fairly straightforward to implement. I guess a start is to get your service operations team together and ask them to map out the service experience from the customer perspective. Whenever you come across a “moment of truth”, you can then work out with your team just how best you can handle that sticky situation. I like to use the high-tech toolset of 2 sets of Post-It notes in different colours for such work – available from all good stationers ;-) Use one pack of Post-Its to map out the service experience from a customer perspective, and then use the other pack to define the main alternative events that can occur at each “moment of truth” and the best options for your own staff in how to deal with these. [For a more extensive and sophisticated approach try the “moment mapping” technique described in “Building Great Customer Experiences” by Colin Shaw & John Ivens]. I guess an even simpler approach is the Nordstrom approach; their employees are given the freedom to decide for themselves and have the single rule “do whatever you think is right for the customer”.

Don’t let disappointing service lose you your most valuable customers
And the end to this tale. Well my suitcase was located during the morning and arrived over at my hotel. I was able to locate my special shirt, tie & cuff links. [On a fashion point here – I’m convinced English mens’ shirts are more stylish than American shirts]. It made my day when the client’s PA complimented me on my cufflinks (OK – it’s a small pleasure but still a delight). On the business front though, one of the key lessons is that a poor service experience is one of the key drivers for customers switching suppliers. The disappointing experience causes customers to shop around other suppliers and they may well find a better value option losing you a very valuable customer. Best to make sure that your “moments of truth” are well managed.

As for me, I’m now minded to try out Silverjet Airways (see http://www.flysilverjet.com/) the new low-cost all business class airline – they offer fantastic service (flat beds, 30 minute check-in and even fly Carbon neutral) with much lower prices.

I’ll update you on the experience hopefully after my next trip to New York :-)

Best wishes John

Helping high-value service businesses increase revenues and margins

John Corr (Managing Partner)
Tel: +44 20 7748 2225
Email: johncorr@closequarter.co.uk