If you want to drive up efficiency and reduce your costs then focus on effectiveness

John Kay one of the UK’s leading economist and wrote the following in his FT column yesterday: ” …profit-seeking paradox – the most profitable companies are not the most aggressive in pursuit of profit.”  A similar paradox applies to efficiency and cost reduction.  If you want to drive up efficiency and cut costs then you should focus all your efforts on effectiveness – from the customer’s perspective.

Generally customers are busy people so why are we getting so many calls from them? That is how I started my investigation into IDV’s sales order processing and customer services team back in 1996?  By asking this question I identified that high value customers were calling in the most: they had placed high value (high volume) orders for a range of our products on one order.  I discovered that on average one sales order resulted in 2.6 deliveries because of stock shortages.  So customers were ringing in to ask the status of their order, why it has been only partially delivered and when they were going to get the rest of their order….

So customers were up in arms because they were not getting the products they ordered when they expected them.  IDV had large warehouses (a fixed cost) that were almost half empty.  Costs in the logistics function were going through the roof because most customer orders required multiple deliveries because one or more products were out of stock.  All because management had handed the stock manager aggressive stock level targets – she met them by cutting stock levels to the bone!

Looking at it from a customer experience perspective I decided to focus on two, customer friendly, operational effectiveness metrics: customer contacts per order placed and deliveries per order.  My intention and commitment was to take out this ‘non value added demand’: demand that created waste (time lost, peace of mind lost) for the customer and waste (higher costs) for IDV.

Then I set about working with the folks to redesign the ‘order to fulfilment process’ that cut across a number of functional groups.  At no time did I look for lower cost ways of handling incoming calls from customers.  Nor did I look at lower cost ways of making deliveries.  Why?  Because that is simply finding better ways to deal with the waste created by inappropriate internal policies and practices.  Instead, I focussed on taking out the root causes of the ‘non-value added demand’ falling on the customer services function so that the IDV got it right the first time and thus saved customers worry and time.  The end result was a big increase in customer satisfaction accompanied by a large drop in costs across the functions (sales order processing, customers services, logistics, warehousing and stock management, finance) that handled the customer order.

Now contrast my approach (which I attribute to excellent mentors) with the way many organisations deal with the customer services operation today. The taken for granted practice is to hide the customer services number, to replace humans with technology, to focus relentlessly on getting the most out of the contact centre agents, to drive labour costs down by moving offshore etc.  They do reduce costs mainly by degrading the customer experience.  The trouble is that they also drive down customer satisfaction, customer loyalty and customer retention; the costs associated with getting new customers to replace the customers that have left due to the efficiency drive are hidden in the marketing and sales budgets.

So here are my tips for improving efficiency and reducing costs:

The smart way to cut costs in customer services is to focus on improving effectiveness – improving the customer experience. How do you improve effectiveness?  By doing it right first time by the customer. Why does this matter to the customer services function?  It matters because somewhere between 25 to 80% of the demand that is falling on the customer services centre is ‘failure demand’. This is the term that I have stolen from John Seddon to replace ‘non-value added demand’.

Failure demand is the demand that the customer has to place on the contact centre because some product, communication, policy, process or touchpoint has failed the customer. This is demand that the company does not want to deal with.  And it is demand that the customer would much rather not place on the company.  An example of this kind of demand is where the customer rings the company because she was promised  a delivery time of six weeks and it is now week 7 and she has not heard anything from the company.  Or the customer calls in to complain when he finds the warranty or the insurance is not worth the paper that is written on.  This means having the ear of the CEO, COO and CFO as the people who will have to make the necessary changes will sit in Marketing, Sales, Product Management, Logistics, Finance and so forth.

Once you have a cultural practice in place to find and deal with the root causes of failure demand you can turn and look at the value demand: the demand that customers place on customer services and which creates value for these customers.  The key thing here is to separate this demand into the simple and the complex.

Simple demand – where is the nearest store, what are the opening times, topping up a mobile phone etc – is a great candidate for self-service through a smart use of information technologies such as websites and IVR.   A great example is the airlines allowing customers to check-in and print their boarding passes: it saves customers valuable time and allows the airlines to save costs.  Another example is electronic banking.  The beauty of this approach is that if it is approached in a customer centric way then customers will thank you because you have improved convenience; you have saved them time – which is often in short supply; and put them in control.

When it comes to automating simple demand and requiring customers to serve themselves you must remember that is not always appropriate.  So you must allow customers to speak with the customer service agents – easily.  For example, the customer is in his car and wishes to move money between his accounts.  This is something he can do himself when he is sat at his desk and connected to the internet; yet it is not advisable when you are driving a car.  It is also possible that your self-service solution breaks: Self Service is not an easy fix or why I love Kylie.

By taking out the root causes of failure demand and introducing self-service channels for simple value demand you will increase customer satisfaction (usually dramatically) and save  your organisation a considerable amount of money.   In one case that I know of,  the savings run into tens of millions of pounds per year.

The final step is to deliver great service on the complex value demand.  For example the customer is browsing your website and needs your help in making the right product choices. One company that uses customer service agents to contact and help customers who have abandoned their shopping carts is putting a £1m+ on the bottom line.  Another example is from the insurance industry: taking care of the customer when a traumatic event occurs e.g. car crash; guiding the customer through the process; doing as much of the work as possible for the customer so as to ease the customer’s burden.  Or the customer is in a foreign land, has a change of circumstances, has no access to self-service and needs help (from a capable sympathetic human being)  in changing her flights and getting to her destination with the least hassle.  Do this right and you win customers for life.

The approach that I advise and have practiced is still the road less travelled.  Why?  Because it is counter-intuitive.  And because it requires the whole organisation to play ball.

How the relentless focus on efficiency drives poor customer experience

Back in early 2008 I met up with Bob Greenberg – the founder and CEO of R/GA the digital agency renowned for their work on Nike+.  Prior to meeting Bob I had studied his background and had come to the firm view that Bob is a genius.  So I was surprised when Bob shared with enthusiasm how he was going drive up efficiency by introducing video conferencing  and thus cutting out all the cost and time wasted by people travelling between offices.  This is identical to the argument used by many in the CRM field and now in the Customer Experience field!

I cautioned Bob that as you drive up efficiency you drive down effectiveness. I mentioned that should focus on effectiveness and accept a certain level of inefficiency: that they go together like two ends of a stick.  He looked puzzled and I could not get my point of view across convincingly even though I just knew that I was sharing a valuable insight with him.

I have struggled to convey this insight to executives working in the realm of customer experience improvement.

Then a couple of days ago I received the latest newsletter from Vanguard.  In this letter they shared a story that a reader of theirs had shared with them – a story that beautifully explains how you drive down effectiveness (the customer experience) as you drive up efficiency:

“I’m a reader of the systems thinking review, and a trade union rep in the public sector with responsibility for a helpline. I find myself arguing with managers who are keen to manage performance using metrics for advisor availability, utilisation, call length, and adherence to roster.  I recently had one of those moments where the penny drops; it was in relation to the management of efficiency.

I was staying in a Hotel, a 20 storey building with two lifts. The restaurant was on the 1st floor, and each morning I would travel down from my room on the 14th floor to the restaurant for breakfast, afterwards I would return to my room to brush my teeth and pick up my papers, and then travel down to ground level and go to my training course. For most of the week one of the lifts was out of order, and the service from the single lift was pretty rotten, you had to wait and wait, usually with other hotel guests stood around tut-tutting and sighing.

Towards the end of the week the second lift came back into service and I noticed something surprising (to me at least.) With two lifts I’d expect the service to be twice as good, waiting times to be halved. But the improvement seemed much better than that. Basically you pushed a button and the lift came. The improvement was huge – though I can’t say I stood around with a stopwatch gathering detailed stats on how two lifts performed compared to one.

As I thought about this, something else occurred to me. The single lift system was much more efficient than the two lift system, from the point of view of the lift and the use of “lift resources”.  With one lift out of order the remaining lift was in nearly constant motion. It started at the bottom picking up passengers waiting in the underground car park, then at street/reception level and then at the restaurant on level 1. It then travelled upwards, dropping the passengers off at their floors. Once it reached the top it changed direction straight away to start picking up the passengers who were by now already waiting to go down, stopping several times to pick up a number of passengers, and of course dropping them off at various lower levels. The lift was highly “available” it was working all the time, and it was highly “utilized” maximizing the number of passengers riding on each journey. But as I said before the service was pretty rotten for the passenger.

Improving the efficiency of the lift would not improve the service to the passenger at all – in fact it could only make it worse.

For me it was one of those – “Oh now I get it” moments.” One lift represents economies of scale, two lifts economies of flow. Concentration on individual unit efficiency can lead to a worse service, and if you try to improve things by going further down the route of more and more efficient use of resources, service will get worse and worse.

As a result of this story I am more able to share my insight with the next executive that I meet.  Thank you, to whoever shared that story with Vanguard.