There is a big difference between cutting costs and saving money. Although both are looking to free up budget resources, saving money is helpful while cutting costs is harmful to organizations. Here’s an example to illustrate the difference between the two.
To save money, you and your family can turn off lights in rooms without occupants. To cut costs you can turn off lights in all the rooms (occupants or not) and stumble around increasing the risk of falling and hurting someone. Too often businesses mistakenly believe cutting and saving are synonymous. Ask these questions to determine what’s happening in your company.
To save money does your organization:
Spend less because it didn’t need to be spent in the first place?
Prioritize across the company, instead of within a department? More importantly, does your company have the discipline to de-prioritize?
Use the occasion as an opportunity to realign and agree on strategic initiatives?
To cut costs does your organization:
Play “I told you so” political games by intentionally cutting costs in areas they know will be painful to another part of the business?
Eliminate staff/hours without eliminating work? **
Change the level of service it delivers to customers?
Companies that save money check room for occupants. They examine consequences to the firm before turning off lights. At the other extreme, cost-cutting companies stumble around in the dark hurting themselves, their employees and their customers. Some good ideas (and one I don’t favor) here.
Asking employees to shoulder added burdens through more work is a management failure to prioritize and set direction. Providing inferior products or service to customers is an open invitation to your competition.
The pivot point: when times are tough we owe it to employees and customers to save money before cutting costs.
** I call this the “Golden Employee Paradox”. Companies think they are doing a good thing by firing marginal employees first. But since the workload doesn’t change, remaining “golden” employees must do more individually to maintain the same output. The people who remain are the stronger ones who have employment opportunities elsewhere. Paradoxically, the very people the company wanted to save in the first place leave as fast as they can.
Retention Rate – The proportion of customers you keep (versus lose)
Discount Rate – A highly simplified way to conceptualize the discount rate is to think of it as the relative cost of capital. It helps companies determine whether it makes more sense to invest money in a business idea or to put it in the bank.
Margin – the difference between revenue and direct costs to attain that revenue.
I’ve posted previously on the dangers of viewing customer service as a cost. The model in the book shows that companies have the following choices to maximize customer value to the firm:
Improve the Retention Rate – Keeping customers satisfied with their initial purchase makes them likely to purchase more and more likely to recommend others to make the same purchase.
Increase Revenue – Raising prices increases the margin, provided the costs stay the same.
Decrease Costs – Lowering costs also increases the margin. Perversely, it often plays a part in decreasing retention rates.
In a way, the authors are quantifying lost margin (and lost value) through poor retention. The pivot point is that serving customers effectively improves retention, loyalty and ultimately lifetime value. Conversely, bad service delivered poorly can kill retention rate and dampen new sales.
Read a good article today on the HBR blog by Clif Reichard. Can You Sell Without Lying? He approached customer service from another angle – the beginning of the relationship with a customer – sales. Given some of the comments, he must have hit a nerve in a touchy subject – integrity. The great salespeople recognize that:
Their efforts are a solution to a customer problem,
Real value must be created from the transaction,
A single sale of questionable integrity may preclude much more lucrative opportunities later,
Matching customer needs with product/service capabilities is their primary function, and
Sometimes, walking away from a bad deal is a good thing.
The pivot point is that each part of an organization “owns” honesty. If a link in the integrity chain is broken, we all lose. Customers lose because their needs aren’t met. Sales loses because their reputation as a business function is tarnished. The whole organization loses because they spend valuable time trying to recover from an avoidable situation.
I love the debate and fear surrounding social media and its place in customer service. Even Amazon’s purchase plans of Zappos have shown a spotlight on social media. Look, the reality is that the customer – supplier relationship is just that, a relationship. And in all relationships, people want to be heard. Those who fear an open exchange resemble ostriches with their heads in the sand. Regardless, the topic begs some thought especially when you boil it down to a fundamental question a board member recently asked me. “How do you control bad news when it’s available to everyone online?”
Social media brings:
More Risk – In the customer service realm this is a concern point because customers can say anything they want about any topic. This risk is offset by the sheer volume of junk transmitted over the internet… who can check everything?
Less Control – Just as improved communications speed has changed the way the stock market behaves (faster up and faster down), improved communications have made it more difficult
Better Visibility – A two-way street. We now know if/when customers say negative things. And we have a way to respond. The response can be private to the individual buyer or to the community. The online community reacts favorably when companies make things “right”. And often those corrective actions are made public. So both successes and failures are visible. Interestingly, at least one article (The impact of the recovery paradox on retailer-customer relationships) suggests customers prefer companies who fail and later recover well to those that don’t fail in the first place.
Inevitability –We don’t have a choice. Companies that don’t have online communities are seen as trying to hide something.
The pivot point — social media is here to stay. Customers voice their opinions anyway. Social media just means that the opinions can travel farther/faster/broader than before. Over time this faster and broader feedback mechanism will cause companies to act more prudently (with a longer time horizon) and will eventually lead to better products or at least a closer match between reality and expectations.
