Musings on Strategic Investigation, Performance Improvement, and Rhetoric

So How Do I Improve Service Then?

In my last post (here), I showed that, all else being equal, better service equals higher growth and bigger profits.  One implicit, but counter-intuitive, element of this is that improving service regularly results in lower costs.

The obvious question that comes to mind for the practical person is, “So how do I improve service then?”

The temptation is to dive straight into benchmarking, systems and process improvement, and incentives.  However, there are three steps I’d advise taking first, which will save an awful lot of work and waste down the line.

Customer Service Performance - I’ll cover it one word at a time.

1.    Customers

Your customers will not be one homogeneous group.  You’ll have different types, which have different levels of value to you, different performance requirements, and will rate your service accordingly.  One simple way to improve your service and profit performance is just to focus on your profitable, amenable customers.

To start, you need make your definition of customer groups as relevant as possible.  Sometimes the obvious splits (small/medium/large, sector, etc) are valuable.  But additional thought about how you group your customers can make the exercise much more insightful.  For example, you could segment by who the decision-maker is: purchasing professionals usually care much more about total cost at specified service levels, whereas people with operating roles care most about service support at a competitive price.

If you look at the value of the different groups (the value of their contribution over their lifetime less the cost of acquiring them – a very different and more relevant number than monthly profitability which ignores acquisition cost and loyalty), you’ll see who values you most.  Chances are that you’ll have different groups that have very different value, and in each group you’ll have a range of service performance and profitability.  You’ll have a series of undemanding high value groups.  You’ll also have some groups of very unprofitable or hard to please customers.

Your first decision comes now.  Which groups do you want to focus on?  Can you turn around the profit and service performance of the nightmare group? Should you – is it worth it?  If you drop a group, does the cost of serving the rest go up or down? Many of our clients have turned around their entire service and profit performance by making some hard-headed decisions at this stage, ditching certain customer groups that were just too hard to acquire and serve profitably, and whose demands caused service problems across the entire edifice.

2.    Services

If you have multiple service or product lines, this is the same exercise as the one for customers above.  Again, the key insight here is to look at the value of a product or service over its lifetime including development costs, and not the regular monthly margin analysis that already appears in Board reports.

Again, you need to make some decisions on unprofitable service lines, and products that diminish your service reputation.  However, service line decisions are generally less clear cut than customer decisions.  Early stage products commonly have poor service performance and poor profitability, some apparently profitable products give you such a bad reputation that your word-of-mouth marketing is negative, so you need to think through the full strategic impact before getting out the hatchet.

3.    Performance

Now we’ve got a handle on how service level and profit differs by customer and product, and have decided who we want to serve with which services, we can now ask the more operational question of “what do we mean by performance?”, and identify customers’ most important concerns.  The key customer service concern in each of our last five engagements for clients has been completely different: active account management, short waiting times, access to technical expertise, personalised offers, and up-time reliability. 

Finding this concern is generally a matter of talking to customers and listening to what’s important to them – you ask a broad question about “service”, they will respond by talking specifically about what’s important to them.  One of our favourite ways of cross-checking this is to ask a series of customers about our client’s strengths and weaknesses, and counting up the mentions for both – the important issues for customers generally find their way to the top of both lists.

Unless you are highly-diversified, there will generally be one big thing to get right that addresses all the major concerns, and if you do this to a level of excellence, then everything else follows.  The big thing for a famous airline service turnaround was making sure the planes took off on time; the big thing for one of our tech clients was 100% server availability. 

This approach of focusing on the one big thing has an additional benefit of automatically deprioritising wasteful or unvalued activity, which is the flip-side of the same service improvement coin.

If you can find time to take these three steps before diving into operational improvements, then you save yourself a mountain of unnecessary work down the line.  To give you an idea of how valuable it can be, I’ll relate the experience of a client of ours.  After the customer assessment, they decided to drop a previous focus on very large customers whose size, complexity and purchasing structure made those customers expensive to acquire, expensive to serve, and very disloyal.  They dropped a product line whose gross profit looked very attractive, but whose customer acquisition cost made it value-destroying, and whose performance was damaging the company’s reputation.  They then focused their service performance turnaround on the key issue of account management, which enabled them to more effectively address other customer concerns about accessing technical expertise and designing bespoke solutions.  In one year, they have doubled total profit and are currently the industry’s service and profit leader.

With these high-level decisions made, the other steps of process improvement, systems support, incentives and devolved decision-making responsibility are much simpler and well-targeted.  I’ll save those for a future post.

Latitude Partners Ltd
19 Bulstrode Street, London W1U 2JN

Does better service really lead to bigger profits?

There's some strong received wisdom that better service is somehow financially a good thing. But the piecemeal data around that supports this view is unconvincing, it is often put together by vested interests, such as consultancies that charge fees to help improve customer service, or by idealists who just want it to be true.  It's easy to point to high service companies that generate outstanding results.  But this is a biased and self-selecting exercise, because the opposite is also true - there are lots of inconvenient examples that show low service companies making outstanding returns.  Would you say that Ryanair has better service than BA?  No? So how come it makes more money then?  Service clearly isn't the be-all-and-end-all.  Companies have different business models, different customer bases, different competitors, regulatory environments, sources of economic rent, etc, etc, all of which also affect their financial performance.

To get anywhere on this, we've got to start by comparing like with like.  Here (below) is the most unpolluted evidence I've seen.  This company rents out white vans, and does this through a series of local rental companies.  They're of similar sizes, they all do the same thing, for very similar customers, with the same fleet, and the same rate cards.  But if you look at the performance of the different rental companies, you see two striking things.  First, the ones with better service have better growth rates.  Makes sense.

Here's the more interesting chart.  The ones with better service also have better profitability.

So the ones providing better service, providing more value to their customers, at the same price as the poor service providers, are the ones that also make more money.  And in case you’re wondering about causality – when the worst performer addressed its service problems to climb up the chart, its costs went down as growth went up.

We can speculate all day about the reasons.  Here are a few common explanations:
  • Word-of-mouth marketing: happy customers recommend you for free, and reduce your sales or marketing costs.
  • Better customer retention: there's good evidence that better service leads to higher loyalty (repurchase) - Lexus is commonly perceived to be the highest service car provider in the US and has repurchase rates of 63% versus 30-40% for most other brands.  
  • It could be that it's easier to serve these same regular repeat customers at lower cost: think about how efficient it is at your local coffee shop when you get to the front of the queue, you have the exact money ready, and they have your regular drink ready. 
  • Higher service companies may be the ones that sell to better customers: who'd disagree that more agreeable, cooperative, organised customers make better service a lot easier.
I could carry on speculating about underlying reasons, but that’s an intellectual exercise.  What matters here is that, all else being equal, with better service you make more money.

Instead of speculating about why service increases profits, it’s more useful to accept the link and ask: how do we improve service?

It's tempting to look for a process answer here, following visions of efficient, flawless, repeatable mechanisms.  I’m not saying process improvement doesn’t help, but the highest service companies in our charts were also the most informal, with rule-bending and exceptions happening all the time, and none of these had ever been through a process improvement exercise.
For an answer I can relate to, I'll bow to the wisdom of the most credible person I've heard talk about this subject, an impressive man called David Neeleman.  He was the founder of JetBlue Airways, which at the time I heard him speak was the lowest cost and the highest-rated service airline in the US for the second year running.  Even in the year of its infamous ice storm crisis where passengers were stuck on planes for up to 8 hours, it still came top in national service surveys.

Mr Neeleman's explanation of JetBlue's excellence was all about service attitude at the top and the bottom.  At the top, his own practice as CEO was to take one trip per week on a JetBlue flight, in which he served as cabin crew during the flight, helped with the bags at the airport, and was an obvious and visible role model of the importance of service.  At the bottom, JetBlue's recruiting practice was focused on hiring courteous people who also cared about service.  Candidate's attitudes to other people were observed closely:  did they hold the door open for other people; were they pleasant to the receptionist?  JetBlue also uses measures in the middle, using Bain's highly-regarded Net Promoter Score system; and Bain has shown excellent evidence of NPS benefits, though Mr Neeleman didn't talk about this at all.

So, recruit a team that cares about service, supported by a leader who continually reiterates its importance and acts as a role model for service excellence, then let that group of people work out how to take it from there.  This is clearly only the tip of the iceberg on service improvement, and I'll expand on it with evidence from some our clients’ successes on another day.

But I want to get back to my main point.  Using the best evidence I know about service, it warms my heart that everyone wins - value begets value – and that better service does lead to better rewards.

Relevant links:

About David Neeleman

About Net Promoter Score

Latitude Partners Ltd
19 Bulstrode Street, London W1U 2JN