Time to Say Goodbye to an Outdated Concept: Efficiency

2
1,454 views

Share on LinkedIn

They say hindsight is 20/20 vision. Looking ahead is where we have a problem. Most major innovations have brought us kicking and screaming into the future. In this article, I will explain that the time has come to bid adieu to yet another outdated concept, that of efficiency.

Efficiency has been around since the dawn of the industrial revolution and signifies a peak level of performance that uses the least amount of inputs to achieve the highest amount of output. It can be determined by measuring the ratio of useful output to total input. In business, it is generally considered by investors as a method to justify cutting costs, to do the minimum necessary while maintaining a certain production level.

Pre-Industrial revolution, most artisans knew their main customers and generally produced to order. The revolution changed all that. Investors started companies to mass-produce products and wanted the maximum return on their investment. Revenue was in the hands of the marketplace, but profits could still be increased by lowering costs. This focus on cutting costs has been with us ever since. It is not that efficiency is bad, the opposite is true. It is simply that efficiency is no longer the most important factor in the equation.

When we talked about cost/benefit, there was a reason that cost came first. It was easier to control. It was inside the organization and could be tracked accurately through various departments. Benefit, or income, was harder to track because it is external, and not under the organizational control. It was also not seen as a sure thing.

Customer service should be focused on the customer, but in most cases, it was focused on the cost. It was almost as if organizations didn’t see (or didn’t believe) the connection between service and revenue. If the sale was made, we could track how much of the revenue went to cover which costs in which departments. If the customer left without buying because the representative was rude, how much did we lose? How do we measure that? How do we know that the customers will pay more for better service? It’s better to focus on what we do know, and focus on costs.

Enter Value Creation

But the times have changed. There is a new leader taking charge called value creation. Some may call it customer-centricity, VOC, CX, or something else. The idea is customers will buy the service/product that best fulfills their needs. It is not a new concept, as marketers have been talking about this for generations (since Adam Smith in 1776).

But lately, managers have been asking themselves how do consumers choose their products, and the result has been shocking. It turns out that consumers choose the best possible product/service for their needs (just as organizations wish to focus on the most profitable customers). It is not enough to just meet the customer need (minimum necessary), we have to do it much better than the competition. Imagine that, good enough just isn’t good enough anymore. Doing the minimum won’t cut it today, we must stand out and strive to be the supplier of choice.

The good news for businesses is that we can now show that consumers are ready to pay more for a better product/service. This is the underlying concept of value creation or customer-centricity. If the customer will pay more for a better product then perhaps efficiency is not the only way to go. Efficiency says we do the minimum we need to do, to get the job done. We are no worse than anybody else. That used to be the ticket to the game. Value creation says we have to do better than the competition. We have to go the extra mile. That is the element that has been missing from the marketplace, the differentiator. What do consumers want, and how do we get it to them as fast and as great as we can?

Years ago, I had to have a cyst removed from my brain. The local hospital wanted to open my brain to take it out. We went to the best doctor in the country in a faraway city, to get it done laparoscopically. It was well worth the extra expense. I will pay more to get a better solution. You do not have to be efficient, you just have to give me more value-added than the competition.

Don’t Lower Prices, Raise the Benefits

Different customers have different needs, so “one size fits all” no longer works. Dealing with smaller target markets is not efficient, but it allows us to maximize revenue from each segment. How do we add value to our products? We need to ask our customers what they need, what job are they trying to get done, how can we help? Each segment has different needs, thus needing a different solution. We need employees who can see what needs to be done, and do it on the spot. It seems so obvious, why haven’t more organizations done this? It may be obvious, but it is not easy. I have been trying to lose weight now for 40 years. It is such a simple concept. Eat less, work out more, and the weight will fall off and stay off. So obvious, and yet weight loss is a multi-billion dollar industry!

Why not just give a discount? Everybody else does. According to the equation, Value=Benefit/Cost, lowering the cost increases the customer value. The problem is that most competitors will also lower the price. Now you are making much less profit since you cut revenue. Every dollar you give to the customers as a discount is less profit for you. One to One.

What we need to do is to give the customer something that they value, but it doesn’t cost us as much. We still lose a small fraction of our profits, but not nearly as much. Take for example a restaurant. Most restaurants charge for hot drinks after the meal. Most customers don’t want to pay restaurant prices for coffee. What would happen if the restaurant gave away free hot drinks at the end of the meal? Most customers would stay just to get something free. How much does a cup of coffee really cost? A few cents? Factor in that customers will sit longer, and it gets to maybe half a dollar. But if the customer is already staying for the cup of coffee, let him/her see the dessert menu. I will make up the price of the cup of coffee on the extra desserts I sell, and then some. Don’t lower price, raise the benefits. It is much more profitable.

Employees Can Help, If You Let Them

Organizations started to hire proactive employees. An employee can easily see the problem, but there are policies and procedures in place. Does the employee do the right thing for the customer and get yelled at or fired, or does he/she play by the rule book and keep their job? Where is the support they are supposed to get from their supervisor?

30 years ago, I was just starting out as head of a complaint handling department and playing basketball on the company team with other employees. I heard a story about implementing TQM in the company from one of the other employee players. It seems that he decided to take it seriously, and when a problem reared its ugly head, he shut down the line to take care of it. His supervisor was all over him, yelling that he was an idiot because now they couldn’t make their productivity bonus. The employee said that was the last time he would ever take responsibility at the workplace. The TQM initiative ultimately failed

It is the policies and the procedures that are the biggest problems. Who designs the websites and the IVR responses today, the policies and procedures, the obstacles that prevent customers from getting what they want, that make it more difficult to do business with you? Organizations are talking about being customer-centric, but it does not get translated into what is done. 45 years ago Steve Kerr talked about the folly of rewarding A while expecting B. It is an adage that says that what gets measured gets done, and it is still driving performance today.

Complaint Handling Can be Profitable

If you want to save your business, start by looking at your complaint handling department. What is your ROI? In most organizations, it is negative, a real cost center. Research has shown that it should be a major profit center. I was able to show an ROI of 177% without management support.

The investment (cost) was relatively easy to calculate, it started with all the compensation that was paid out to complainers, continued with other expenses, people, salaries, equipment, and even rent for office space. One cost that was included, against my advice, was an increase in compensation paid due to a failure in manufacturing that caused faulty products (and complaints). In my view, if the problem was in manufacturing, then the compensation was part of the cost of quality of manufacturing.

The second part of calculating the ROI is the change in revenue. I used a modified TARP model to handle that. The model measures the change in propensity to buy due to the successful handling of a complaint. There are several variables that need to be obtained by a survey to determine the change in revenue from complaint handling. These are easily obtained.

I used the same research company that Marketing used to get buy-in for the numbers. While calculating the increase in revenue, I did not include the revenue from word of mouth communications (not social media), despite research that quantified it. This was to minimize the objections of top management.

While presenting my model to management and showing an ROI of 177% (despite underreporting revenue and overreporting costs), my boss got up to say, “Don’t be ridiculous, Moshe, everybody knows you can’t make money from complaints.” Management also didn’t see a connection between complaints and TQM which it was attempting to implement in those days. I decided to leave the company soon after due to a lack of support. My model became the basis for my dissertation, and subsequent research into the strategic implications of complaint management.

Saving Money on Complaints Can Destroy Value

Most organizations do the minimum necessary, making it difficult to complain in the first place, arguing with the customer, not taking responsibility for the customer. Blaming the customer, trying to save money. No wonder that more than 50% of complainants feel they got nothing from the organization regarding their complaint.

This is not the picture of a satisfied customer or a loyal customer. This is value destruction. Let us make it even more difficult for the organization to do business with the customer. This raises the customer cost of doing business with you and increases the probability of your customers defecting to your competition. The 2020 Customer Rage survey has found that almost $500 billion ($494) dollars are at risk to American businesses due to customer problems and ineffectual complaint handling. Saving money on complaints (efficiency) has cost you big time. Now you will have to pay a lot more to acquire new customers. That is not efficiency, it is foolishness.

Creating a New Normal

What can organizations do about it now?

Recognize the Truth

If we pay our phone representatives for the time they spend on the call, calls will be shorter, but customers will not get all the information they need. Now they have to call again, and again. The 2015 Customer Rage survey have found that it takes on average 4.2 calls to get resolution. Now your representatives are handling four times the workload, instead of taking a little longer to get it right the first time. That is not efficient, nor is it effective. That is value destruction.

Zappos rewards their phone operators on whether they make at least two attempts to personalize the phone call, not the length of the phone call (the longest call on record was over 10 hours, and they are proud of that record!) It is the personalization that increases sales, measure it and succeed. Deliver what is important to the customer, the customer will value it more, and possibly pay more for it.

Change, or Fight, Bad Policies

How do we get started? 30 years ago, while managing a customer complaint department, I started asking my staff at our weekly meeting: What was the number one policy that interfered with doing their job? I then took it upon myself to figure out a way to overcome the problem, cancel the policy, change the policy, or ignore the policy.

For instance, if a customer complained that they broke a tooth on one of our products (which contained nuts, and sometimes shell pieces), the policy was to refer it to the lawyers, and not handle it ourselves. We felt that this was a slap in the face to the customers, daring them to “prove it”. So, instead of referring it to the lawyers, I gave the order to pay the dentist bill plus send a nice gift basket to the customer. A few months later my boss found out and got mad. He was afraid that everybody would start complaining about broken teeth, and the company would be paying everybody’s dental bills. I pulled the records and was able to show that there was no increase in dental complaints. There was, however, a huge decrease in the compensation money paid to the customers, and the customers were much happier. The only ones upset were the lawyers. The policy was changed.

Make it easier for the customers to do business with you. Start by making it easier for your employees to get their job done!

Solve the Root Cause

Utilize the complaint department not only to bring your customers back but to solve the root cause of the complaint, even if (especially if) it was not your fault. That is all the customer cares about, solving the problem. Only the organization cares about whose fault it is. There will be time later to solve the root cause. If the customer succeeds, then the organization succeeds. It is a very simple formula for success.

The current crisis has made it especially difficult to get good service, or even to give good service. Some organizations don’t even try, blaming the virus, it is not their fault, they tell the customers. Other organizations, even though they are understaffed, do the maximum to help customers, and brighten their day, despite the virus. There are excuses and there are results.

I have noticed which is which. I am transferring my support to those companies that made the effort to help me and show that they cared. The first type of company saved a little money for a few months on employees’ and customers’ backs. The second type of company earned customers for life. You can’t buy that kind of advertising. Your customers will bring you their friends, just because you cared. Now you can take your advertising budget and use the money wisely in other parts of your company (or just increase your profits).

Make it Easy for the Customer

Value is measured as benefits divided by costs. The biggest value creator today is hassle-free service. Saving the customer time and effort lowers the customer’s cost, which exponentially increases the customer value. Instead of efficiency, we need to be focusing our efforts on making it easier for the customer to do business with us. If we learn anything from the current crisis, the transition from efficiency to value creation should be at the top of the list.

2 COMMENTS

  1. Hi Moshe: the vignette you described about the employee calling out a quality problem and shutting down a production line in the process is common ethical quandary. Employees are often faced with trading off what is the right thing to do for one set of stakeholders (customers) versus the interests of others (co-workers). Too many companies exacerbate these dilemmas by creating conflicting goals, and penalizing employees for acting in accordance with their personal values. The outcome you described, “The employee said that was the last time he would ever take responsibility at the workplace. The TQM initiative ultimately failed” can only be described as a travesty. The result of management failure. Had senior executives established the right priorities, and if employees felt safe bringing up issues, the result would have been better all the way around.

    On the matter of companies accepting culpability: reimbursing customers for injuries such as chipped teeth might seem a proper or even magnanimous gesture, but it can be a tacit acceptance of culpability (could the dental veneers, crowns, or bridges have been installed improperly in the first place? . . . . ) .

    In the US, companies are well-advised to be highly circumspect about such concessions. I always recommend discussing any customer service policies with Legal to determine whether a customer service action might have the unintended consequence of increasing a company’s legal risks. This is one reason in the US so many service agents use the carefully-scripted dodge, saying, “I am sorry you experienced difficulty using our product,” and not “I am sorry that our product didn’t work as it should have.” While the latter might seem appropriate for a given situation, it opens a legal can of worms.

  2. Thanks for the comment.
    Regarding the conflicting goals, I am reminded of Steve Kerr’s article, “On the folly of rewarding A, while expecting B”. This is definitely a managerial problem. I recommend checking all policies and procedures at least once a year, or after any change in strategy, just to make sure everything is on the same page.
    Regarding the culpability issue, I agree not to accept culpability. Again, 99% of your customers just want to know someone cares, and that the problem gets taken care of. For them, a quick and fair response is why they do business with you. Sending it off to Legal for their input, slows the process down, and upsets the customer. Now, you have upset all your customers. I prefer upsetting the 1% , which I won’t be able to hold anyway. A recent Customer Rage survey found that while almost 70% of complainers expected an apology, only 1% of them received one. That does not make for happy and satisfied customers.

LEAVE A REPLY

Please enter your comment!
Please enter your name here