Tuesday, July 27, 2010

Does Losing a Customer Matter?

"There is nothing more vulnerable than entrenched success." - George Romney

When a company loses a customer, is it important to understand the reason?  Is business ever so good that it doesn't matter?  Although these seem like ridiculous questions, I've had a few instances lately where companies knew they lost me as a customer and did not ask me why I was taking my business elsewhere.

I recently switched my television service from one provider to another.  When I called to cancel my service, I was told how to return my equipment but never asked why I was canceling.

In another instance, the virus/spyware subscription for my computers was within a month of expiring and the developer, for some reason, decided to renew my subscription (and charge my credit card) without my consent.  I do not like this tactic and, after consistently using their product for several years, decided to call them to complain.  After being on hold for about ten minutes, the recording said that any product can be refunded via their website within thirty days of purchase.  I connected to a representative via the live chat link on their site, canceled my subscription, and asked for a refund.  I was given the refund but not asked why I canceled.

Do They Care?

When I thought about it, there were actually several similar instances over the last few years when a company knew I stopped doing business with them but did not ask why (e.g., newspaper subscription, internet service, web hosting, etc.).  The first thought that came to mind about these situations was that business is going so well for these companies that they truly don't care when they lose a customer.

Although this may be the case for some companies, I'm guessing that the most common reason for the apparent lack of concern over losing a customer is related to resources.  Companies are so thin these days, and, to keep costs down, call centers are so focused on meeting volume targets and time-per-call metrics that there is no time to ask customers why they are leaving.  Combined with the disconnect between marketing, sales, customer service, and quality, and the ability to collect - much less do anything with - the information becomes virtually impossible.

It's Important But Not Difficult

It's always important to know why a company loses a customer.  The companies referenced above were actually lucky because they knew I was leaving.  In most industries, it's difficult to know that a company is losing customers until business has dropped so much that it's difficult to turn things around.

It is absolutely critical - and not necessarily difficult - to know why customers are leaving, and the customer service representatives are in a great position to collect the information.  It should not take too long to ask the question, listen to the response, and check a box on the screen to classify the issue.  With little effort, a company can begin to collect extremely valuable data regarding trends and high-level issues that its customers are having.

Have companies like the ones mentioned above learned nothing from the experience of the U.S. automakers over the last 30 years or so?  No company is so successful that it can afford to lose touch with its customers.  Since the effort may take an extra one-to-three minutes of a call center agent's time, however, some companies may not see the value in such an exercise.  And to be honest, if the company is not going to take action in response to the data collected, they're probably right.

Monday, July 19, 2010

The World of Fashion Evolves

Designs Aren't the Only Thing That's Changing in the Apparel Industry

According to a story in the July 16 Wall Street Journal (link), the apparel industry is facing a number of challenges that are affecting the entire supply chain.  After three years of excess inventories and idle labor, companies throughout the industry are taking steps to reduce the risk of similar exposure in the future.  Instead of reinventing themselves, though, it appears that the companies are dealing with the changes by attempting to push the risk to their customers and/or suppliers.

When industries face a changing environment, companies throughout the supply chain need to work together to respond to the change in a positive manner.  The immediate reaction to drive risks to customers or suppliers has effects that, although not immediately visible, have longer-term effects that are destructive to everyone involved.  It does not help a company to improve its own profitability at the expense of its suppliers or customers.

The New World of Fashion

Among the issues faced by the apparel industry include:
  • Smaller orders placed by retailers to test demand before committing to larger runs;
  • Increased material, freight, and labor costs;
  • Delays in ramping up production capacity because of a lack of confidence in long-term demand.
If smaller runs and increased costs sound familiar, it's because these are issues that have been faced by many industries over the last 30 years.  Change happens in every industry, and those companies that are flexible and able to adapt to (or drive) the changes quickly will be the most successful in the years ahead.

The Focus Still Needs to be the Customer

One of the problems I noticed from the information in the article is that the impetus for change within the industry is profitability rather than the consumer.  As has been proven over and over again in business, changes made without regard to the end customer can have devastating effects.  While a focus on value can increase profits for the company, a focus on profitability will not lead to increased value for the customer.

Two key areas that companies in the apparel industry need to investigate in order to survive and grow in the years ahead include:
  1. Lean Manufacturing  Smaller production runs require improvements in quality, setups, and changeovers.  Lean (when done correctly) gets everyone focused on eliminating the waste that forces longer leadtimes and larger lot sizes.  Lean will also address the issue of increased labor costs;
  2. Closer Factories  Increased freight costs and leadtimes will force retailers to have production capabilities closer to the point of sale.  Although oil prices have leveled out since the initial drop at the start of the recession, it is only a matter of time before they start rising again.  As a result, the benefits of having factories in areas with low labor costs will be offset by increased freight costs.
In an industry that thrives on change at the consumer level, one would think that the fashion retailers and producers would have no problem adapting to changes themselves.  Unfortunately, this does not appear to be the case.  The environment has changed and, as has been the case in so many industries over the years, it's time for a new business model.  The sooner the apparel companies realize this and make the necessary changes to adapt, the sooner they can once again turn their designs into financial success.

Monday, July 12, 2010

When Cost Cutting Becomes the Focus

The recent media coverage regarding the Gulf oil spill has reminded me of countless industrial accident and product recall news stories over the years that point in some way to misplaced cost-cutting as a fundamental cause of the problems.  The scrutiny that results from a major incident, however, tends to highlight the companies involved as if they are the exception when, in fact, arbitrary and misaligned cost-cutting is much more common in business than many realize.

It Happens Everyday

I have seen many examples throughout my career where attention was focused much more on cost-cutting than providing value.  In one instance, I was contracted by an energy company to help improve their processes for project planning and execution.  After spending time with some of the people involved in projects, however, it became obvious that the problems were not related to the skills of the employees or the processes and systems used for projects.  The problem was directly caused by an excessive focus on costs.

There had been so much emphasis throughout the company on cost-cutting that people worked as if the company's purpose was to control costs instead of producing oil and gas.  When conflicts arose between cost and production, cost won out every time.  There was virtually no analysis regarding the benefit of getting a well operational ahead of (or even on) schedule.

In another example, a plastic products manufacturer regularly missed its deadlines for new product introduction due to cost overruns.  The company had strict earnings targets and had gotten into the mode of, what many in the organization referred to as counting paperclips.  High-level meetings, as well as measures and rewards for managers, were heavily focused on meeting cost targets.  Because of this, whenever a product development project fell behind schedule for any reason, no consideration would be given to providing additional resources to get back on track.

Value as the Driver

Several years ago, study published by McKinsey & Company showed that a new product introduced on-time but with a 50% cost overrun negatively impacted profitability from the development by 3.5% as compared to a 33% loss in profits for a product introduced six months late but within budget.  There are obviously a lot of assumptions associated with the study, but the point is that getting investments - whether in new products or operations - to produce more quickly is beneficial to the company, even if it involves additional expenditures.  I believe the same philosophy applies to oil and gas producers as it does to product manufacturers.

The most successful companies focus on improving the value their processes provide rather than cutting costs.  Improving in this context does not mean finding shortcuts.  If value is the driver, improvement refers to reducing waste (i.e., anything that does not add value).  If only cost is emphasized, there will be a tendency to cut corners and implement changes that reduce costs without consideration as to the effect on quality, safety, or cycle time.

Value, Value, Value

Getting into a cost-cutting mode most likely occurs because it is much easier to focus on cost reduction than it is on increasing value.  Business leaders need to remember, though, that increasing value is what leads to success.  When the company focuses on continually improving the value it provides, it becomes much easier to keep costs under control.

Tuesday, July 6, 2010

Instead of a Layoff

Those who have read my book, articles, or blog posts know that I do not believe in laying off employees to cut costs.  The long-term damage to the organization resulting from a layoff often outweighs the short term savings in payroll costs (see exhibit 1)

I will admit, though, the last few years has shown that the complete collapse of a company's products or services can dictate drastic cuts as a means for survival.  The questions that need to be asked before implementing something as destructive as layoffs include:  (1) how long do you expect the downturn to last; and (2) has everything possible been done to prevent a layoff.  In other words, a layoff should never be among the first cost-cutting steps.

Even during the last few years, the worst economic period since the Great Depression, there were several well-known companies that did not layoff employees.  Scottrade, AFLAC, Devon Energy, and The Container Store are among the organizations that have never implemented a layoff.  Imagine the loyalty and trust created within these companies by resisting headcount reductions during such a severe downturn in business.

Everyone has a stake in the company.  When a company has a history of layoffs, though, people feel powerless, disconnected, and expendable.  The organization's leaders send a very clear message that employees are not important when jobs are cut in response to a crisis.

Some of the steps every company should take before considering a layoff include:

  1. Shortened Work Week:  Although akin to a pay cut, a shortened workweek forces everyone to participate without the loss of jobs.  Also, receiving time off helps compensate for the reduction in pay;
  2. Unpaid Holidays:  Similar to the shortened workweek, implementing unpaid holidays allow more flexibility in choosing the extent and timing of the cut back;
  3. Hiring Freeze/Attrition:  Although an obvious step, I have worked with companies that laid off in one part of the company while hiring in another.  Any positions that are critical to fill should be done by transferring and training existing employees;
  4. Elimination of Bonuses:  Nobody should receive a bonus during a period that people were laid off.  I was in a meeting several years ago with a large division of a Fortune 100 company where managers decided to implement a layoff in order to protect their bonus accruals - a totally unacceptable action;
  5. Elimination of Dividends:  In spite of what many people believe, the resulting damage to the organization caused by a layoff does not protect shareholders.  By protecting its workforce, companies are actually actually protecting future returns for shareholders.  Studies have shown that companies that resist deep cuts during downturns recover much more quickly than competitors (in terms of earnings and share price);
  6. Focused Kaizen Activity:  Improvement activities should be focused entirely on reducing costs (while improving or maintaining existing quality levels).  Kaizen activities focused on cost reductions will prevent employees from being idle during downturns and assure that the savings achieved will be sustained once business returns;
  7. Pay Cuts:  As a last resort, pay cuts should be implemented to save jobs from being eliminated.  I believe in implementing across-the-board percentage cuts with executives being asked to volunteer a larger percentage.
When people see that company leaders are doing everything possible to navigate a crisis without layoffs, they will become much more motivated and engaged in the organization.  The espirit de corps that results will make the company stronger and ready to take advantage of the recovery much more quickly than others that opted to cut workers as an initial step.