Compartmentalization Doesn’t Work in a Global Economy

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In 1776, a momentous event occurred that shaped our modern world. I am not talking about the American Declaration of Independence, important, though, that was. I am talking about the publication of The Wealth of Nations by Adam Smith, a Scottish economist and philosopher.

The principles of the specialization of labor espoused in that seminal work sparked the industrial revolution and propelled the world into the modern age of factories, mass production, consumer products and large cities. The idea was, like most world-changing ideas, extremely simple: Split work into small components and you get very good at it, which means you can employ people with less skill and for less pay.



Millions left the fields to work in factories to perform highly repetitive tasks for low pay. Those working in today’s call centers could be forgiven for thinking we haven’t come very far in the last 230 years—hence, the obsession with call-handling time and staff utilization.

More than 120 years later, Frederick Winslow Taylor took Smith’s ideas out of the manufacturing environment and into the office. Taylor defined the way we organize companies today with specialist functions such as sales, marketing and finance. I’d like to think Smith and Taylor would be both surprised and disappointed that we haven’t moved on: that we now condemn customers, and those who serve them, to fractured and stressful experiences created by the functional nature of the organization model. Both Smith and Taylor were fairly customer-focused. It was, after all, mass production that gave the world consumer products at low prices. And for those companies where price or product is the primary source of market differentiation—and who don’t care about the customer experience or employee satisfaction—their models are still perfectly suitable.

The challenge is that, with a few notable exceptions such as the iPod, product and price are no longer sustainable sources of market differentiation. Globalization has enabled companies to tap into low-price labor markets around the world and rapidly source new products from just about anywhere. But it isn’t just product sourcing that is global. Communications are also global, and any corporate issue or misdemeanor is broadcast around the world in nanoseconds. "The bigger they are, the harder they fall’ applies more than ever in today’s customer-sensitive world. Ask Enron.



About branding
I was speaking a conference recently and asked the large audience of sales, marketing, customer service and IT professionals if there was any company they trusted enough to provide the extra information and insight that would be required to refine the way product and service propositions were created and delivered to better suit them as customers. There were no takers. I also asked if anyone was a raving fan of any company and got the same result. So much for brand development.

The fact is that brand, alone, is no longer enough. Ultimately, it’s the customer experience that affects loyalty. And that experience is generally not very consistent. It stems from this universal equation: Profit equals revenue less costs. Each part of the organization is either a generator of revenue or a consumer of costs and sometimes both. Metrics then cascade down through the organization as each component of the universal equation is divided and sub-divided and allocated to each part of the business. In enlightened companies, the top-down allocation of metrics is even checked against a bottom-up perspective. However, once the metrics are allocated, each function, department or team applies a range of innovation, skills and tactics to do things or change things to meet its numbers. The more performance is related to remuneration, the greater the "creativity." But how are these activities aligned across the business to ensure they join up or don’t conflict with something another depart is doing? The simple truth is they aren’t. As long as you meet your numbers, that’s all that matters. And if those numbers are internally focused, productivity-based metrics, you can bet that the customer experience is the last thing on people’s agenda.

A global company decided to ship product components direct from the factory to reduce warehousing costs. This meant customers received two or three deliveries for each order. And customers would call customer service when the first arrived without the second or third. To make matters worse, the distribution manager demanded a 10 percent reduction in charges from the company’s existing shipping supplier. The supplier refused, saying it was already below the margin threshold, and the manager changed suppliers. What he didn’t know was that the original supplier would try several times to deliver parcels if the customer was out. The new supplier tried once before returning packages to the factory. Not only did customer service calls go through the roof, causing them to miss their cost- and service-level targets, but also equipment returns went up 3,000 percent in a month. And customer satisfaction fell to an all-time low. To make matters worse, the calls into customer care were transferred to sales, because customer care did not have access to the shipping system. This took away valuable selling time from the sales teams, which, then, did not make their sales targets. But the warehousing and distribution managers made their numbers!



To combat compartmentalized thinking, we need a new approach. Smith, himself, provided us with a clue when he wrote: "Virtue is more to be feared than vice, because its excesses are not subject to the regulation of conscience." So instead of managing purely by performance metrics, managers also need to guide and prioritize the development of capabilities in a more holistic manner. This way they can align "what they do" with "how well they do it" and become more consistent for customers, more harmonious for employees and more profitable for shareholders. I am sure both Smith and Taylor would recognize this as a logical extension of their thinking. I am also sure they would both say, "It’s about time, too!

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