Airline Fees: A Race to the Bottom

February 28, 2010

A recent NYT article touched on the issue of charging airline passengers fees for small components of the service experience.  How close are we to the world that a Southwest commercial famously parodied, where customers have to scrounge for quarters to open up the overhead bins?  Not far, it seems.  Airlines have an emotional hurdle to charging extra for carry-on bags, but virtually everything else is fair game.

The economics of this decision are understandable.  Airlines have been losing money on ticket prices, claiming that the prices the market will bear are not enough to cover their unyielding costs.  The revenue they get from fees drops almost directly to the bottom line.  Fees translate into “pure profit” because there is very little incremental cost in, say, sitting in an aisle seat.

But as airlines chase each other down the fees rabbit hole, customer goodwill is likely to follow.  Customers hate being nickled and dimed in-flight, particularly those who fly regularly.  So why do so many airlines think they’ll prevail by giving their best customers a reason to hate them?  It feels like an entire industry is throwing in the towel.

The game is over when service executives assume that customers don’t value the difference between good and bad service. When this happens, whole industries can get stuck in a competitive death spiral where they try to get a larger and larger piece of a fixed pie they share with their customers.  This is happening with airlines today, but it doesn’t have to be this way.  Competing on service can increase the size of the pie and make everyone better off (customers, employees and owners), even in low-margin businesses.

Why is it so difficult to make this leap?  Because differentiating, by definition, requires doing things differently.  Managers with things to lose (a career in a conservative culture) have powerful incentives to keep doing the same things only harder, to run faster than their competitors rather than create a whole new game.

Most airlines are not just running the same, tired race — they’re now asking their customers and employees to do the running for them.  That’s what the proliferation of fees represents.  Rather than delivering an exceptional experience or innovating on costs, airlines are designing elaborate schemes to charge customers extra without giving them anything in return.  And then they’re throwing their frontline employees out there to deal with customers’ angry response.  My advice is to reroute the creativity from fee schemes to service.  We’re getting close to the point where most airlines have nothing to lose from trying.


Toyota in Trouble (the quick and dirty version)

February 25, 2010

What happened at Toyota? Mr. Toyoda himself summed it up nicely, as the NYT recently reported.  In a nutshell, Toyota thrived when it focused on improvement. When that focus shifted to growth the company ran into serious trouble:

In his prepared testimony, released on Tuesday, Mr. Toyoda said he took personal responsibility for the situation. In the past, he said, the company’s priorities were safety and quality, and sales came last.

But as Toyota grew to become the world’s biggest carmaker, “these priorities became confused, and we were not able to stop, think and make improvements as much as possible,” Mr. Toyoda said.

Toyota earned its place as the most celebrated operations story of the past few decades because of its relentless commitment to surfacing problems.  The entire organization was focused on the same worthy goals of improving its cars and improving the way its cars were built.  This improvement philosophy reached beyond the factory floor and included strengthening relationships with suppliers and partners.  Toyota managers famously helped suppliers, for example, to lower their own costs by using principles of the Toyota Production System (TPS).  Growth followed naturally.

And then the company’s goal became selling more cars than anyone else, and the metric it glorified was sales growth.  This may seem like a small shift — from growth as an outcome of improvement to growth as a central goal — but the moral of the Toyota story is that this pivot can be devastating.  Improvement is a powerful, worthy mission for an organization’s stakeholders.  Growth can be (and usually is) associated with compromises, with winning the game at any cost.  Toyota paid a cultural price for this shift.  For example, instead of helping its suppliers reduce costs through operational improvement, Toyota began to mandate lower prices and left its suppliers to figure out the rest.  These choices created an environment where cutting corners both inside and outside the organization became likely.

I want the spotlight to linger on this story for a long time.  There are important lessons here beyond the fall of a once-mighty competitor.  The most important one may be that a company’s purpose matters, in ways that go beyond hard-to-measure outcomes like employee satisfaction and  customer loyalty.  Purpose infiltrates an entire organization, all the way down to the manufacturing of a faulty accelerator. My deep hope is that Toyota shows us both the cost of getting it wrong and the path back to getting it right.  Frankly, I’m optimistic.  The tradeoffs are now seared into the souls of every single manager at Toyota.  The company has a powerful incentive to return to its roots as a role model for improvement with growth as a manifestation.


Are Acquisitions Making You Soft?

February 20, 2010

Are you buying your customers or truly winning them over?  Whether you grow organically or by acquisition can matter a great deal to long-term performance.  This is not always obvious in the way we evaluate managers — growth is growth inside the culture of many organizations, and so managers on a buying spree often experience a false sense of achievement.  And if you look closely at service businesses on an acquisition binge, a clear pattern emerges:  many are delivering an increasingly inconsistent service experience.  It turns out you can get lazy if you don’t have to earn the business of individual customers.

Acquiring another company can make a lot of strategic sense, but it doesn’t mean that you’re performing better.  I’ve watched the confidence of executives soar as they manage larger and larger companies (not to mention personal wealth, which often reinforces this confidence).  That confidence should be a narrow reflection of deal-making ability, but I rarely see confidence parsed in that way.  Instead, unearned operating confidence gets in the way of realizing that service is actually deteriorating.  And this can spell real trouble when you run out of companies to buy.

Oh, and add this to the challenge — executives with a taste for consumption also tend to leave once a company runs out of acquisition targets.  This can make diagnosing and fixing a service model even harder.

In my experience, organizations fare much better when they think carefully about the impact of acquisitions on their core customer experience.  Acquired customers often have different needs from existing customers.  It’s important to understand these differences,  along with the service model that was built to address these needs.  And then some difficult choices must be made.  Will you operate two service models?  Will you pick one model (typically your own) and hope the adjustment isn’t too unpleasant for your newly acquired customers?  They used to be #1 in the hearts of their service provider, and now they have to compete for the company’s attention. This transition is rarely seamless.  Acquisitions have a reputation for being painful for customers, which can often be traced back to neglect.  This is almost never a deliberate choice, but rather a lack of careful planning and choice-making on the part of management.

My advice?  Don’t wait too long to win over your new customers.  There is only so much they’re willing to endure.  At some point, even though they look like they’re still your customers, they’re really waiting for the chance to jump to a company that will retain them the old-fashioned way:  by earning their business.


Are Your Employees Serving You or Your Customers?

February 15, 2010

I had an unfortunate service experience recently involving Boston Coach, or more specifically, a Boston Coach affiliate.  Boston Coach is a car service known for its national network of premium taxi services.  I get tremendous value out of the service when I travel for work, as I often end up in unfamiliar cities at unfortunate hours.  Knowing that there’s someone responsible for me on the other end, someone who’s accountable for my safety and knows exactly where I’m going, reduces my anxiety (and my family’s) in dramatic ways.

But things can go wrong, as they can in any service, and as they did for me with a recent Boston Coach airport pick-up.  As I stood waiting for my driver, watching the clock tick by and watching every other traveler trickle out of the building, I had plenty of time to reflect on the service failure.  The question I asked myself was whether this was bad design or bad execution, was the employee delivering ineffectively on a good service model or was the model itself broken? By the end of the encounter, more than an hour later, I concluded that it was service failure by design.  This is usually the answer.

Boston Coach has trained me to expect a driver holding a sign with my name on it when I arrive at the location they designate (typically baggage claim or a specified waiting area for car services).  When I arrived exhausted in the Corpus Christi airport, there was no sign of a driver.  I called the company, who put me on hold for ten minutes as they tried to track down the affiliate.  Another thirty minutes later someone pulled up, unconcerned about my experience and defensive about my frustration, which made the subsequent ride painful.  It turns out the driver had followed her company’s instructions to the letter, and the fact that those policies delayed, agitated and disoriented me was not her problem.  I don’t blame the driver for the poor service.  She was clearly motivated by doing her job right, but somehow her managers had made it clear that she serves the company before its customers.

This is a choice that all service organizations must make.  Who is first on your employees’ list of priorities?  You or you customers?  In the absence of a clear choice, most employees will put the company first.  It’s just human nature.  The company signs their checks every month and doles out status and other rewards most directly. An exception is models such as high-end restaurant or concierge services where customers pay a large percentage of employees’ compensation.

If you’re not running a five-star restaurant and you really want your team to put customers first (not every company does or should), then it requires very deliberate operational choice-making and alignment.  This includes creating a culture of service that puts customers at the center of organizational life.  If service excellence is part of your strategy, then your employees must observe no meaningful difference between doing their job right and serving customers well.  And they must have the tools to deliver on that observation.  Your average employee must have the training, support, flexibility and incentives to deliver an outstanding service experience.

If you’ve designed a model like that and are still delivering bad service, then go ahead, blame your people.  But they’re typically the last place I look when diagnosing service failures.  Most employees are like my driver in Corpus Christi, earnestly doing the right thing and making your customers miserable along the way.

POSTSCRIPT:

Below is the correspondence I received after the incident from Boston Coach headquarters.  In another post I’ll discuss what we’ve learned about responding to customer complaints.  For now, here is an illustration of what not to do:

I apologize for this inconvenience. I would like to offer you a voucher which would be good for $50 off of your next trip with BostonCoach. Please let me know if this is acceptable and I will email you the voucher as soon as possible.


IBM’s Turnaround: Taking Service Seriously

January 28, 2010

I recently discussed Google’s response to the service demands on its new Android phone.  Google has prided itself on excellence, but has come up short with the Android offering, where hands-on service is a critical part of getting it right.  As I wrote in that post, the phone needs a different kind of customer interaction than Google is used to delivering.  If Google continues to rely on its standard service model, it will continue to struggle.

There was an interesting parallel in the NYT’s recent description of IBM’s turnaround, which has been fueled by its pivot to high-end services.  Why has IBM succeeded where others have stumbled?  In part, it’s because IBM didn’t underestimate the challenge.  IBM managers realized how much change was required to play and win the services game.  That may sound simple, but the emotional barriers to service excellence can be enormous.  Said differently, acknowledging that you can’t deliver great service without some serious soul-searching can be as important as whatever happens next.

What did IBM do differently?  The short answer is everything.  The longer answer is that it took service seriously.  And then changed its products, pricing, processes, human resources, and customer interaction.  For example, instead of designing a product that it then sold into organizations, it learned how to uncover a client’s problem and develop solutions to that problem.  Fortunately for IBM, many of its clients had similar problems, which has permitted standardization across solutions.

IBM gets 80% of its revenues from services. Just a few years ago it was 50%, and not too long before that, services were essentially a hobby for the company.  IBM has demonstrated that it’s possible for a product company to play the service game, but pulling it off requires new attitudes about customer needs — and a deep humility about the road ahead.   When that kind of humility meets those kinds of attitudes, the outcome is happy customers. And when you throw standardization into the mix, now you have a service business.


Will Amazon Kill the Zappos Magic?

January 22, 2010

In a recent NYT interview Tony Hsieh (pronounced “shay”), CEO of Zappos, described his management priorities in this order:  culture first, service second.  This may come as a surprise to anyone who has first-hand experience with the Zappos service model, which consistently produces excellence at virtually every customer touch point.  I myself was surprised.  I’ve heard many executives talk about the need to align culture with service, but I’ve rarely heard someone describe culture as their organization’s primary purpose.

When pushed to explain what got him there, Hsieh reflected poignantly on a prior company he built and sold (for a great deal of money) that had a culture he and others hated.  He vowed never to let it happen again:

When it was starting out, when it was just 5 or 10 of us, it was like your typical dot-com. We were all really excited, working around the clock, sleeping under our desks, had no idea what day of the week it was. But we didn’t know any better and didn’t pay attention to company culture.

By the time we got to 100 people, even though we hired people with the right skill sets and experiences, I just dreaded getting out of bed in the morning…when I joined Zappos about a year later, I wanted to make sure that I didn’t make the same mistake…in terms of the company culture going downhill. So for us, at Zappos, we really view culture as our No. 1 priority. We decided that if we get the culture right, most of the stuff, like building a brand around delivering the very best customer service, will just take care of itself.

How do you “get the culture right?”  In Hsieh’s case, he and his team decided to live and die by a series of core values:

…we formalized the definition of our culture into 10 core values. We wanted to come up with committable core values, meaning that we would actually be willing to hire and fire people based on those values, regardless of their individual job performance. Given that criteria, it’s actually pretty tough to come up with core values.

I was particularly moved by his take on his own role in designing and protecting the Zappos culture, which involved a central responsibility to create an environment where other people will thrive:

Maybe an analogy is, if you think of the employees and culture as plants growing, I’m not trying to be the biggest plant for them to aspire to. I’m more trying to architect the greenhouse where they can all flourish and grow.

So what happens to the greenhouse once Amazon buys it? I wrestled with this question when I wrote about Zappos culture in a post last year, as I was getting ready to go on a case visit.  We wrote the case just as the Amazon purchase was going through (for just under a billion dollars).

Amazon has clearly indicated its respect for Zappos culture and its desire to leave the company alone to continue to deliver wold-class service.  My hope is that Amazon can resist the temptation that has tripped up so many other acquirers, the temptation to provide a bit too much help the moment the acquired misses its numbers, a tweak here, a tweak there, to improve its performance.  That kind of help can be a lethal blow to the true drivers of a company’s value.  In the case of Zappos, I’m not convinced its culture could survive this well-intentioned support.


Google’s Service Problem

January 15, 2010

The NYT recently described Google’s customer service supporting its new Android phone.  The article described how customers can’t call Google for help and that it may take up to 48 hours for the company to respond to email messages.  The article referenced one customer who has been trying for a week to talk to a live person. Still no luck getting through.

This article made the front page of the NYT business section because it’s a story about Google, not because it’s a particularly rare or surprising service phenomenon.  When a service model designed for one type of customer needs (e.g., using web-based adwords) is then used to serve an entirely different set of needs (e.g., after-sales service for a new type of phone), there is predictable turmoil.

The interesting part will be to watch how Google responds to the realization that it’s trying to meet wildly divergent service needs — what I call distinct operating segments — with a single operating model.  In my experience, the company has some choices to make if it wants to deliver excellent or even adequate service.  Option A is to serve one operating segment well and essentially ignore the other.  That’s not as bad as it sounds.  Southwest Airlines optimizes its service model for low-maintenance travelers. When high-maintenance travelers come along, it doesn’t turn them away, but it also doesn’t work very hard to accommodate them.  Southwest serves one segment with excellence and asks everyone else to adjust.  This is the definition of focused service.

Option B is to create a distinct service model for each operating segment.  If Southwest is an example of focused service, I call this approach multi-focused service.  To execute well on a multi-focused structure, Google must convince itself that multiple service models are better off under the same corporate roof.  I’ll talk about that more in later posts, but the key is shared services.  While shared services are often appealing at first glance, the model can be very difficult to pull off.  (Here’s a link to an HBR article where I touched on the concept of shared services briefly at the end.)

There are many examples of excellent organizations operating with either focused or multi-focused service models. But there are far more examples of organizations doing neither.  Instead, these organizations work hard not to disappoint either operating segment too much, which ensures a limit to the anger and outrage, but also ensures mediocrity.  It’s the path of least resistance because customers complain more about bad service than they do about the absence of excellence.  A hard truth about service is that you often have to disappoint some people in order to delight others.

The responses by two of Google’s employees seem to foreshadow the direction it’s taking:

Katie Watson, a Google spokeswoman, said no one was available to speak about the service problems. But in an e-mail statement, she said, “Solving customer support issues is extremely important to us.”

Andy Rubin, Google vice president for engineering in charge of Android technology, gave a similar response, indicating that its challenge was to reduce its email response time from days to a couple of hours.  These statements suggest that Google’s still committed to using its existing service model to serve an entirely new operating segment.  I’m hopeful that abandoning this fantasy is an outcome of these initial service difficulties.


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