Upside Down Operations: Self-Service Can Increase Labor Costs

September 29, 2009

A “self-service” play almost always has a strong cost component.  The model’s logic is that if your customers are doing more of the work, then your employees can do less of it — and can be paid less for it.    Of course, firms look for additional advantages to customers meeting their own needs such as increased retention, but the desire to drive down costs anchors most of these initiatives.  (For a dated look at these type of motivations, see this link.)

I want to share a recent research finding that upends this logic in surprising ways.  Dennis Campbell and I studied what happened to customers after they adopted online banking services, which are essentially designed to drive people away from retail branches that are costly to build, maintain and staff.   The web’s promise of low-cost, scalable self-service business models seemed like a reasonable direction for the banking industry, and so we studied the option to measure just how much companies could save.  We were then shocked to discover that the cost to serve these customers increased after they moved online.

As we investigated this phenomenon, we uncovered something interesting.  When customers move online, they become more engaged with their financial information.  They can suddenly spend hours examining each transaction, and no one is line behind them to hurry them along.  This new consumer behavior, on its own, is not problematic for the banks.  But the  heightened level of engagement can also drive customers to consume more full-service resources from the bank.  Customers now call more.  They have more to say and more to inquire about.  They even visit branches more often.

In other words, an unintended outcome of self-service is increased engagement, and a predictable outcome of increased engagement is the desire to engage even more.  The lesson I take from this research is that managers must anticipate the potential impact of self-service on their customers’ engagement.  If it seems likely that engagement will increase, make sure that the goals of a self-service model go beyond potentially elusive cost savings.  Make sure that improved service is a central part of your agenda.  Indeed, make sure that the project will be considered a success even if costs go up.

Who should pay attention to these findings?  New self-service options that make customer information more accessible are ripe for this dynamic.  Think online health records, not pumping your own gas.


The Cure for Service Complacency

September 1, 2009

The NYT described how the post office is responding to reduced demand as customers increasingly turn to alternatives for exchanging letters.  The action is late, arguably decades late, and not at all uncommon.  When organizations face limited competition (in the case of the post office, it was literally no competition), they often suffer from what I like to call service complacency.  Service complacency is the malaise that infects a culture when good service feels like a choice rather than a business necessity.

While this conclusion may seem reasonable on its surface — you have nowhere else to go, dear customer, so delighting you needn’t be my goal today — it denies an important truth.  Even if your competition is not visible today, your increasingly dissatisfied customers are a beacon for them.  And the new entrants that you can’t yet see often don’t show up in the form of direct competitors, but rather as enablers of the workarounds your customers have already resorted to using.  This is a much more serious threat since the rules of engagement aren’t immediately obvious.

In the case of the post office, customer dissatisfaction had been brewing for decades, but regulation literally gave customers no alternative.  This mix of high retention but low satisfaction was the perfect breeding ground for service complacency.  The post office’s most demanding customers started to get creative, which is often a red flag.   They started using fax machines, then e-mail, then e-mail with attachments.  When FedEx finally entered to deliver original documents quickly and reliably, the dynamics of the entire industry had already changed.  At this point, FedEx was not the post office’s biggest problem.

On the one hand, you could say this is just the march of technological innovation, and the post office could do nothing about it.  I think there’s more to the story than that.  Customers are typically slow to embrace innovation when existing solutions meet their needs.  But when an existing solution disappoints and disrespects them, which was the service experience that many post offices were delivering, then adoption of alternatives can happen at lightening speed.

How should the incumbent respond?  The are two enormous hurdles standing in its way.  First, it has to learn how to treat customers as if they have a choice.  And, second, it has to create an operational culture where controlling costs is a matter of survival.  Neither of these steps will be easy for the post office.  Competition has not forced the post office to care deeply about cost or service, and it’s hard to develop these muscles simply because Congress decides it’s time to start using them.

Today, the post office relies heavily on sending junk mail and packages that we order online.  This will not be enough to sustain it.  Unless the organization recognizes the intensity and range of its competitive threats, a fear that should show up in every single line item and every single customer interaction, then I’m not optimistic it will overcome its service complacency.


Self-Service Innovation at USAA

August 13, 2009

The NYT recently described an innovative new iPhone “app” that allows customers to use their phones to deposit a check.  Take pictures of the front and back of the check with the phone’s camera, and then use its email function to send the pictures to USAA.  Now discard the check.  No trip to the bank necessary. 

The application is a great model for self-service innovation.  USAA customers get a solution they prefer to the existing alternatives.  Instead of going to an ATM, they can now deposit a check from anywhere.  Customers get the enhanced convenience of mobile banking without having to sacrifice functionality.  In fact, the mobile deposit service increased the functionality of the traditional online banking experience, essentially overcoming the classic tradeoff between functionality and convenience.

USAA didn’t just transport the same services to a new channel — it designed new services for a new channel.  Bank of America, in contrast, created an iPhone application that only performs a limited set of transactions, all of which can be performed through its online banking program.  This type of solution is far more common and creates far less value for customers, a concession to the tradeoff between convenience and service.  USAA reminds us that great service innovation occurs when we challenge our employees (and often customers) to overcome persistent assumptions.


Lean Thinking at Starbucks

August 5, 2009

The WSJ wrote an article about the recent adoption of “lean thinking” at Starbucks.  Lean thinking is a philosophy popularized by Toyota’s famous Toyota Production System (TPS) that emphasizes rooting out waste in its many forms.  At Toyota, waste might be excess inventory.  At Starbucks, waste might be baristas taking too many steps to travel from the coffee beans to the espresso maker.  After reading the article, I’m not optimistic about the process of Starbucks trimming down.

Scott Heydon has the title Vice President of Lean Thinking at Starbucks, and two of his quotes set off alarm bells for me.  The first suggests that the impetus for the change is to free up the time and space for employees to deliver a better service experience.  The quote:

Mr Heydon says reducing waste will free up time for baristas – or “partners,” as the company calls them — to interact with customers and improve the Starbucks experience.

But Heydon follows quickly with this quote:

If Starbucks can reduce the time each employee spends making a drink, the company could make more drinks with the same number of workers or have fewer workers.

At first glance, this may not sound like an impending disaster.  After all, who doesn’t want better service and lower costs?  The danger lies in the ambivalent framing of the initiative, which is often good enough for the C Suite, but doesn’t fly on the front lines.  If the objective is to enhance the service experience, then a set of activities will reinforce that goal, and the definition of success will be fairly straightforward.  Alternatively, if the objective is to reduce costs, then a different set of activities will be required.  Eventually, these activities will be at odds with each other, and employees will get caught in the tension.

This is a well-worn path that can easily lower performance and increase employee cynicism.  The typical sequence of events is as follows: A manager sets out to make changes with the stated intention of improving the service experience.  Compelling rationale is used, invoking the experience as a driver of premium pricing.  Then, under the banner of improved service, the same manager starts talking about the efficiency gains of the changes.  You’re a barista with more time on your hands? Serve more customers!  Say good-bye to your colleagues!

This is dangerous for two reasons.  First, if your employees believe your commitment to service and then watch you measure productivity gains, you sacrifice focus and trust.  Not only do you breed confusion, but as clarity emerges, employee cynicism is not far behind.  Second, when senior executives begin to prioritize labor productivity over service, they often start to erode the competitive distinction that led to the premium pricing.  It’s one thing to purposefully pivot away from a premium position.  It’s another to creep away from it without making a clear strategic choice.

To be clear, I have seen companies achieve great success through cost-cutting initiatives.  But they were internally branded as cost-cutting initiatives, as a competitive rallying cry for employees and sometimes even customers.  Similarly, I have seen spectacular success when companies commit to enhancing their service experiences — again, internally branded commitments with the requisite decisions and activities in alignment.  I have even seen success with initiatives designed to improve both cost and service.  These typically work when a company is performing poorly compared to its peers and can make improvements on both dimensions, or when a company is in an innovative phase and looking for breakthrough ways to do things.

The problem is the disingenuous internal framing.  By far the most common approach is to try to dress up cost-cutting initiatives as service improvements, which breeds disappointment among employees, customers and owners.  And a tell-tale sign of this charade is shifts in messaging, particularly for multiple audiences.  Starbucks contradicted itself within minutes for the WSJ, which doesn’t make me optimistic that they’ll be an exception to the rule that these initiatives tend to cause more harm than good.


Because Customers Asked for It

July 28, 2009

The NYT recently did an article on the company Lululemon, which has been targeting the niche yoga market.  I had a strong reaction to the interview with the CEO, at the point where the reporter tries to understand why the company had branched out in surprising ways from yoga-related items:

O.K., but why does the chain sell, for instance, rain jackets? Customer demand, Petersen says: “They asked for it.”

At first glance, this statement should not be controversial.  The logic is straightforward:  give customers what they ask for, and your business will thrive since you get to guarantee demand before production.  This rationale is particularly attractive in markets where the cost of misjudging demand — exacted through markdowns, stock-outs, and inventory obsolescence — can make the competitive difference.

But this same strategy has also led countless companies into trouble.  Why?  Because customers typically don’t understand the operational implications of their requests.  They don’t have complete information.  Customers often know what they want, but they don’t know whether you can organize your operations to deliver it effectively.  They don’t know what else you’re doing or planning to do, or how the cost and quality of those things will react to their desires.

It is a company’s obligation to consider both customer demand and operational complexity as it decides what to offer.  If adding a product or service is straightforward given your existing operational footprint, then fulfilling requests may make sense.  But if it means expanding that footprint in significant ways, then the decision is much more complicated.

I often see operational complexity run amok in companies, particularly in difficult economic moments.  There can be an overwhelming temptation to create demand, any demand.  I have seen well-intentioned managers in virtually every industry produce what customers ask for and end up with an operating environment that is difficult to control in terms of reliably delivering excellence or profits.  The moral?  Listen to your customers, but know that they can’t save you from yourself.  Only you know the true costs of their demands.


United Breaks Guitars

July 13, 2009

United Airlines baggage handlers broke Dave Carroll’s guitar.  Google United Airlines these days and two links dominate:  United’s official site and a video of a song Carroll wrote called, “United Breaks Guitars.”  The video has been watched over a million times.

Carroll reports that he actually witnessed the instrument’s demise, when fellow passengers on his United flight looked out their windows and yelled, “they’re throwing guitars out there.”  He then began a fruitless campaign of trying to get the airline to reimburse him, a nine-month ordeal captured in the video by a parade of apathetic employees.  United’s explanation?  As reported by the Chicago Tribune, Carroll had made a procedural misstep by not filing a claim within 24 hours.  There was nothing they could do. Sorry.  And so Carroll wrote a song.

There is no question that the video is a PR problem of the worst kind.  As a friend of mine said, “I’ve seen more press about this song than actual United ads.”  Bad service and United Airlines are now powerfully linked in the minds of consumers. But United’s bigger problem is lurking in the hundreds of comments posted everywhere this story is being told, from individual blogs to pillars of the mainstream media.  These comments make a compelling case that indifference towards customers is business as usual at United.

United spokespeople now say that they’re going to use the video to help the company improve its service, and my prediction is that these efforts will fail.  The company’s language is tentative.  If Carroll’s experience illustrates a systematic pattern of failing customers — and the anecdotal evidence suggests that it does — then United’s leadership will need to do something much bigger than launch a superficial service initiative.  They will need to find the courage to return to the blueprints of the business model and take responsibility for the fact that they created a system that reliably produces mediocrity.

Having no direct experience with United’s service design, here’s my guess as to what drove the behaviors that infuriated Carroll:

1. A United call center agent in India turned down Carroll’s request for making good on the damaged guitar.  The agent was selected and trained to comply with an increasingly complex set of procedures, and he was likely measured by his ability to follow these procedures precisely and efficiently.  Did he do a good job?  The policy clearly states that claims must be filed within 24 hours, and he likely had no authority to override them.  His performance is probably also measured by the number of calls he can handle in a day and perhaps even the number of calls he can handle without passing them off.  Now put this individual —  probably the lowest paid employee at United — in a situation where customers are justified in yelling at him all day long, and it’s not difficult to predict the outcome.  In fact, the agent did his job well as the system’s architects designed it.  He followed the rules and handled the call quickly, without bothering his manager.

2. What about the baggage handler seen throwing the guitar?  It is not difficult to imagine his crew being told earlier that day that plane turnaround time is the most important driver of the airline’s success, that times had been creeping up, and that low employee effort was at least partially to blame.  What’s a reasonable response to these messages?  Getting the luggage off the cart and onto the plane as quickly as possible.  This would almost certainly require throwing bags, particularly if the time guidelines made it all but impossible to meet the turnaround goals by respecting each piece of luggage.

3. And the front-line service team on the planes and in the airports, the ones who likely fielded Carroll’s original complaint?  These teams are also responsible for all-important turnaround times, which in their case requires managing an incredible range of customer variance, from disabled passengers to families with screaming children and excessive baggage.  They probably regretted the damage to the guitar, but their jobs were on the line in a climate of declining resources to manage the problems within their direct control.  They were probably eager to return to the urgent challenge of getting passengers to their destination with fewer planes and fewer colleagues, to say nothing of fewer tools  (lunch, anyone?) to reduce the growing discomfort of  air travel today.

My point here is that if you’re committed to changing a service experience, try to understand why reasonable, well-intentioned employees are behaving in existing ways.  Only then can you expose the underlying causes of the service failure.  Most change initiatives come up short because they start with Carroll’s basic premise — that employees aren’t trying hard enough or don’t care enough.  In these situations, managers often conclude that inspiration, brow-beating and tweaks to the incentive structure will shame or motivate employees to perform better.  But employees are rarely the problem.  The problem is usually the service model in which employees are operating, which has set them up to fail systematically.

United’s leaders must take responsibility for their central role in frustrating their customers.  This means redesigning the system so that employees can succeed on a regular basis.  If the company follows Carroll’s lead and blames employees for the problem, I suspect that little will change, except the rising level of customer dissatisfaction.  For those with less musical talent than Carroll, this will mean voting with their feet not their voices.  In the absence of accountability at the top, United’s customers will desert them.


Service Showdown at the Four Seasons

June 30, 2009

The NYT described some recent challenges at the Four Seasons.  Among them is healthy tension in the underlying business model, which separates asset ownership from service management.  The Four Seasons — a management company that owns none of  its hotels – has expensive tastes.  And some owners’ appetite for excellence is being suppressed by the recession.

Four Seasons managers want to keep the flowers fresh and the payroll fat to protect the brand and its future.  But the incentives of individual property owners aren’t necessarily aligned with this strategy.  Owners are ready to trade off on some aspects of the service experience to weather the economic storm in their particular markets, and managers are systematically refusing.  Things have gotten so bad in San Diego that the owners of the Aviara Resort and the Four Seasons are now suing each other — after a showdown that included locked doors and accounting ledgers being forcibly removed.

One source of the animosity is that some property owners are pressuring Four Seasons managers to drop their prices.  Managers are pushing back, arguing that once customers are trained to expect price breaks, it’s almost impossible to get them to pay full fare again.  And these managers are right.  If your service model depends on high prices, then it’s risky to give up ground.  But it takes a strong stomach to execute, particularly when you’re feeling quite a bit of financial pain.  As one airline manager said to me, “we need to tie one hand behind our back so that we stop giving discounts.”

The brand’s ownership structure, which gives most owners a a deep view of only one property, may also be obscuring the true source of the Four Seasons’ advantage.  The company competes on standardization and scale, not words we usually associate with luxury.  But impeccable service comes from exquisite attention to the details of an experience, and that experience isn’t necessarily diminished by the fact that it’s being replicated all over the world.  In fact, companies like the Four Seasons achieve excellence because of — not in spite of — a high degree of standardization.  Standardization of operations frees up the time, space and money to compete on a main driver of excellence in hospitality industries:  personalized, detail-oriented interactions with guests.

Prince Walid bin Talal, one of the majority owners of the Four Seasons, described the strategy this way:   “It takes a lot of effort, a lot of perseverance and a lot of consistency to reach the stage that [the] Four Seasons has.”  Consistency is probably a more palatable word than standardization for the luxury market. Now we need a new word for litigation.


What Have Your Customers Done for You Lately?

June 22, 2009

Customer goodwill is also difficult to measure — or even define.  But we know it matters.  Certainly, it makes a difference to the top line.  Customers who like you are more likely to buy things from you and tell their friends about it.  They’re also more likely to behave once they cross the operational boundaries of your organization, which can make a big difference to service companies.  Customers with “good will” are better customer operators, better partners in the sometimes complex project of joint value creation.

How much better?  We still don’t have good universal measures of customer goodwill, but one that comes close is the number of complaints you receive relative to your competitors.  Airline customers tend to complain at a relatively high rate.  One reason is that airline service routinely fails to meet expectations.  Another is that the service is mission-critical for both business and leisure travels.  If you lose my luggage on the way to my daughter’s wedding or delay me for an important meeting, I’m going to want you to feel my pain.

But not if your Southwest Airlines.  Customers file official complaints about Southwest far less frequently than they do about other airlines, even when Southwest has similar mishaps.  Their customers also go above and beyond the call of duty in helping Southwest succeed.  A favorite example of the value of this devotion is captured in an HBS case written by Jim Heskett.  Early in Southwest’s run, an airline called Braniff International offered a 60-day “sale” on tickets between Dallas and Houston — Southwest’s core market — for half the price of Southwest’s fare, $13 instead of $26.  Southwest countered with an ad proclaiming that “nobody’s going to shoot us out of the sky for a lousy $13.”  And the company gave its customers a choice:  pay either $13 or $26 for exactly the same seat on Southwest.  80% of Southwest customers chose to pay $26.

Would your customers stick around if your competitors cut their prices in half?  There are lots of reasons that Southwest has thrived in a difficult service environment, but one primary reason is their ability to answer yes.  Let’s call it customer goodwill for short.


Employee Goodwill

June 17, 2009

British Airways has asked its employees to work for free for a month.  As CNN reported, the airline sent an e-mail out to its staff that “offered workers between one and four weeks of unpaid leave — but with the option to work during this period.”

How would this e-mail go over in your company?  What kind of relationship do you need to have with your employees for this message to be taken seriously?  In my experience, organizations spend a lot of time trying to measure the unmeasurable, trying to value concepts like culture and goodwill.  We know that these things often make or break the deal with customers and employees, but they don’t fit easily into a spreadsheet.  I would suggest that the organizational uptake on management’s offer to let people work for free is a very good measure of employee goodwill.

Employee goodwill matters in the best of times, particularly for service businesses.  As Heskett, Sasser, and Schlesinger argue in the Service Profit Chain, it is difficult to create value without employees, and so it helps to take great care of them.  But employee goodwill may matter even more in the worst of times, as the British Airways experience illustrates. The more that employees feel an organization is devoted to them, the more likely they’ll be to share the pain of adversity.  Strong relationships with your employees may help to buffer you against an unforgiving competitive environment.

On the flip side, antagonistic relationships between employees and organizations are never a good idea, but they may be disproportionately costly when the environment turns ugly. This dynamic is playing out around us with the widespread rise in layoffs and salary cuts.  Some of these wrenching decisions are being made a context of mutual trust and mutual regret. And some are happening in an environment of fear and anger, with untold costs to everyone involved, including customers.

We don’t yet know how the British Airways story will end, but I have a prediction. I think we’ll be able to confirm what we suspect, that employee goodwill makes an enormous competitive difference, particularly in hard times. And we may finally have a way to measure the size of that difference.  In the spirit of what-you-measure-is-what-you-get, this may increase the chance of its occurrence.


Leadership in Absentia

June 9, 2009

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The decision to lead is not particularly complicated, at least not on the surface.  It’s a simple, often quiet commitment to create the conditions for other people’s success. The NYT had a great illustration of this philosophy in its article on Clarence Otis Jr., the CEO of Darden Restaurants.  In Otis’s words:

…leaders really think about others first. They think about the people who are on the team, trying to help them get the job done. They think about the people who they’re trying to do a job for. Your thoughts are always there first…you think last about “what does this mean for me?”

I was particularly moved by one of his reference points, his predecessor’s response to 9/11:

…we had an all-employee meeting…One of the first things he said was, ‘we are trying to understand where all our people are who are traveling.’ The second thing he said was: ‘We’ve got a lot of Muslim teammates, managers in our restaurants, employees in our restaurants, who are going to be under a lot of stress during this period. And so we need to make sure we’re attentive to that.’ And that was pretty powerful. Of all the things you could focus on that morning, he thought about the people who were on the road and then our Muslim colleagues.

Otis went on to describe a sometimes trickier part of the leadership task — giving people the room to learn and grow, and ultimately to succeed in your absence. Sometimes this means stepping down not up, being passive rather than active, being silent rather than vocal. These are not the leadership acts we tend to celebrate, but sometimes they’re the most crucial. This balance is Otis’s current focus:

It’s less and less about getting the work done and more and more about…getting the right people in place who have the talent and capability to get the work done and letting them do it… you’ve got to give other people the chance to speak, voice a point of view. Some people are passionate, but it manifests itself in a different way, and so they’re more reflective in conversation. And so, you’ve got to leave some space for them to fill.


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