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Thursday, July 24, 2008
The Third in a Series on Developing an Effective Performance Management System
Were you thrilled with the new lower price you got by waiting for your iPhone... until you found out the hot new G3 will be coming out for the lowest price yet of only $199? Have you ever rushed to finish your dinner and join a snaking line in front of the movie theater, only to find there is a second, less-crowded showing of your movie starting 20 minutes later? What about that great sale on hot water heaters you saw - the week before yours gave out? Being able to make good decisions that take advantage of opportunities is about more than getting the right kind of information. What value is good data at the wrong time?
Designing your performance measurement system to provide good data with meaningful context at the right time does more than simply providing great information. It makes the information useful and easy to absorb. Now, what do we mean by context?
So how can you keep your good data from going bad? Consider the following five questions.
Chunking information around a few basic concepts allows you to consider all of the information in context at the same time. This means you can spot patterns and relationships more readily, and develop better intuition about root causes and opportunities.
Let's test the power of 'chunking'. Look, for as long as you like, at the letters below. Now look away, and see if you can write them all down flawlessly.
Did you spot the pattern? Did you wonder why three of those letters are included? Or are you still just trying to remember them all?
Now let's see what happens when you have the same letters, but with context. To keep this exercise realistic, we've placed this image below.
Is your reporting actionable?
A report showing declining revenue doesn't tell you
If you chose to report the changes in profitability within the context of what's happening in your top 10% of customers or products, however, you'd target the discussion to the few elements that make up 80% - 90% of the results. Add some trend and target lines, and your opportunities can become crystal clear, rather than clear as mud.
Are you reflecting what's meaningful? Or just what's easy?
Which "truth" you select usually isn't nearly as important as simply selecting one, and insisting that the one you've chosen measures only the final collaborative outcome. It will transform the level of attention your teams give to resolving those communication and process issues.
Whether it's collaboration, innovation, trust or expertise, don't shy away from measuring more nebulous concepts that are crucial to your success. In most cases, the trend is more important than the absolute measurement. Provide the appropriate context to interpret and act prudently, and then measure away. Chances are, you'll see significant improvements simply from providing a clear and public definition of what you value and the results you expect it will create.
Are you distinguishing trends from facts, or just massaging the facts?
If you're really measuring what matters, some measurements won't be absolute and objective. For softer information, keep your presentation focused on trends, not exact values. At the same time, be alert for attempts to muddy the facts when results such as profitability aren't favorable.
But if profit from top customers is dwindling, changing the overhead allocation will only distract resources, not increase profits. Be attentive to changes that can make your decision-making more effective, but stand firm against tweaking measurements that may change the look of trends, but not the facts.
What other contextual elements will make your measures most valuable? And more meaningful?
We work in a wide variety of business types, and what provides context for one business is simply distracting chatter for another. Our advice: think about the decisions you can make about people, processes, products and customers.
For example, let's say that you think you've started to see your sales pulling back, perhaps from a weakening economy. But your sales typically don't occur in a straight line. So what you see when you look at your sales trend is this:
Are sales going up? Or down? In this example you may see a weekly pattern, but it's difficult to see more of a trend than lows going lower, and highs rising higher. Without more context it's difficult to understand what's going on, and even more difficult too determine what you might want to do about it.
What happens if we add a little more context? Let's try looking at it within the context of a weekly cycle.
This picture makes it easier to see what's changing. With so many lines, however, it's beginning to look like spaghetti. Imagine if you wanted to look back over the last quarter rather than just eight weeks. Would this chart be able to provide much context? Would it give you any intuitive sense of what might be the cause of those lower lows, or the opportunity you might be able to take advantage of with those higher highs?
Let's see if a cycle plot can add the context we're missing. Again, this will have the same data, but it's now shown in a different context.
Now is it easier to tell what's happening? Is your mind filling with ideas about what you might check? For example, is that new part-time sales person having an impact on sales? Or by Tuesday are you running out of a key product that typically arrives Wednesday morning? How about that earlier question: would last quarter data be just as easy to understand as these eight weeks? Might they even add more value?
Compare again the first and last pictures in this series. Can you see how even simple contextual changes such as this will help you make better decisions, faster, and less painfully?
Also consider the value you might gain by presenting the answers to some of your earlier questions as contextual elements in the same picture. For example, looking at coverage ratios such as average sales per person might reveal under-staffing on Tuesdays, while Mondays and Wednesdays might reveal the secret for just the right amount of coverage.
If you're interested in finding more ideas for providing context to your performance measurement, try this list to jump-start your thinking:
Magazines have editorial calendars; we recommend your performance measurement system has a calendar too. Don't waste time preparing and reviewing information just so the report looks the same each time. Your team will understand weekly, monthly, and quarterly schedules.
Is your information for learning or for monitoring? For example, are you split-testing a concept of marketing, management or financial investments to see which method works better? Are you learning whether a new idea or process is viable or more successful than the old way? Or are you monitoring for problems with service, product defects, or unintended consequences of the new sales compensation plan? Match your measurements and presentation to what you need to know.
Are relationships more important than measurements? If you need to see how differing inputs change results, don't force yourself to use your imagination. Show it all in a single picture, then use your energy to figure out what to do about it instead.
What should you compare it to? Planned results, planned inputs, or what you forecast as results for that level of input? For example, if one 727 has 10% lower fuel efficiency for the same weight as another, will United want to pull that plane in to improve its performance? Or if your sales team has 1,800 leads, will you be more interested in knowing that you that you closed 215 of them, or that your close rate increased 7.5% over the typical 200 you've closed in the past?
Would it be more meaningful to show relationships to sister elements? In the sales lead example above, if you've closed 7.5% more sales, is it important also to show that sales shifted to products with lower profitability? In a changing economy, product preferences often change, which often changes your productivity and efficiency priorities, too.
Is it useful to show projected results? In sales, showing projected results from your current pipeline of opportunities can provide early-warning and manage the shift of work between building relationships and closing deals.
Vetting your measures for context can make the difference between a performance measurement system that's interesting, and one that drives results. Will you make the investment to improve your results?
Letters with Context:
Now are you able to look away and write the series of letters flawlessly? Did you experience a sense of relief as you were able to let go of trying decrypt the message and focus on the meaning instead? And why is IBM the only for-profit on this list?
Note: We'd like to credit Naomi Robbins, Ph.D. for the cycle plot demonstration. See Naomi's web site for a tutorial on creating your own cycle plots in Excel.
Labels: business growth, communication, dashboards, implementing strategy, metrics, performance management, performance measurement
posted by Lorre Zuppan at
9:19 PM
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The second in a series on developing an effective performance management system
You've decided you're finally ready to really transform your organization using performance measurement. You've thought about your business, and what you're really trying to achieve. Now you're prepared to select some performance measurements.
You consult a few resources. Transforming Performance Measurement, an excellent book by Dean Spitzer on creating an effective measurement environment, lists 34 categories of measurements that can be truly transformational. Each category has multiple measures.
Then you see a major marketing firm lists 100 measurements in its marketing metrics toolkit. You try to imagine the time it must take to gather and input the data required to feed all those calculations. Then, you try to imagine having the time to do anything about the results after you absorbed what those hundred numbers mean. Your brain can't really process more than four chunks of information at once. Is this possible?
Talk about transformation. Initially it seemed like a great idea to have a process customized to measure what's really important for your business. Now, the cookie cutter approach, or doing nothing at all, is showing far greater appeal.
Sorting through the possibilities to select the handful of measures most meaningful for you can seem daunting. But it doesn't need to be. Answering some key questions about your business can help you rapidly narrow down the list.
Using Strategy to Determine Focus Areas
Some organizations have a clear, succinct version of their strategy that unifies everyone's activities across all functions and areas. Unfortunately, most don't. If this describes you, you're not the exception. However, to have a productive discussion about which measures will help your team the most, you'll need to have that clarity. So first let's make sure your vision is clear.
Internal vs. External
Business strategies generally have two components:
The external element addresses the business that you're in, the customers you're targeting, and therefore the needs you're satisfying. Conversely, the internal element addresses how you choose to fulfill your customers' needs. So measuring your internal elements identifies whether you're doing the right things and doing enough of them. Meanwhile, measuring external elements determines whether your actions are having the desired affect on your customers and the corresponding financial results.
For your system to be successful, you'll need to have a balance 
of both internal and external measures. To determine which categories of these measurements provide your best candidates, take a look at these success factors for your strategy type.
What's Your Strategy?
There are a number of approaches to effectively defining strategy, but most businesses settle on one of four general approaches.
Low Total Cost
This approach, also broadly referred to as Operational Excellence, is exemplified by companies such as Southwest Airlines, Dell, Ikea, Target, or McDonald's. Businesses pursuing this strategy are known for being the best buy or having the lowest total cost. If this represents your organization, you'll probably choose measurements that emphasize the elements you need to deliver the experience customers expect:
Product Leadership
Do your products and services provide superior functionality or performance in exchange for above-average prices? If you offer particular features or leading-edge functionality that makes your customers willing to pay more, you've chosen the path of companies like Apple, Cirque du Soleil, Mercedes, Starbucks, and Intel as product and innovation leaders. Your measures are likely to emphasize elements that give you the edge in product leadership, such as:
Complete Customer Solutions
When IBM dominated the computer industry, it didn't offer the lowest prices, cutting-edge technology or the greatest computing power. But what it did offer was complete solutions designed for each customer's business: hardware, software, installation, training, maintenance, repair, etc.
Ritz-Carlton Hotels offers completely, personalized care for their customers' every need while away from home. You'll notice that even strategies emphasizing high-touch customer intimacy and customized customer solutions like Ritz-Carlton, however, are relying ever more heavily on technology to help them identify individual customers and propose custom solutions to meet their needs.
Another example, Netflix, deploys custom recommendations and platform-independent services to deliver your experience wherever you are, on any device, at any time, whether on your laptop in the coffee shop or your surround-sound theater at home.
If you offer your customers an end-to-end solution that makes them feel like you know them and truly care about them, your measures are likely to emphasize the following components:
System Lock-in
Let's play Monopoly! This strategy locks in customers with its dominance. Exchanges requiring a critical mass of mutually interested parties, like eBay, the Yellow Pages, Facebook, or the old Blue Chip Stamps (showing my age!) are system lock-in plays. So are operating systems and tools or complementors linked to them like Microsoft's Windows and Office software dominating the business market - although lately less so.
This strategy seeks to dominate an industry and create high barriers for competitor entry and/or customer switching. If this is your intent, your measures are likely to emphasize:
Identify which of these four strategies most closely matches yours. Then use the emphasis checklists to trigger ideas about what factors are critical in your business.
Balancing the Big Picture
Once you've defined the broad categories, you should next review them for balance. Have you identified the factors that have the most influence on your team's ability to deliver the results you desire? What are the most crucial inputs and processes, and what are the key customer and financial outcomes? Are you striking an appropriate balance between short- and long-term goals, especially for low cost strategies? Have you found dual-purpose measures - lagging indicators for one activity, but leaders for the next? Are you also measuring the things you can't touch, the intangible elements that typically exert the most influence on your results?
From Questions to Measures
Most teams, once provided a framework, have little difficulty identifying hot spots for measuring, if asked in a penalty-free environment. Often the most effective way to develop a focused set of measures representing the greatest opportunities is to perform a series of anonymous, one-on-one interviews with key stakeholders. From these one-hour interviews with executives, managers and selected team members, a clear and consistent view of the results emerges, including:
Feeding back these results, especially when coupled with customer feedback, provokes stimulating, engaged discussion about the real measures of organizational success. There is often a sense of relief as disconnects that have been frustrating delivery teams and executives alike are revealed, along with miscommunication and unintended effects that aren't given voice until accumulated privately. Symptoms are then explored to reveal the underlying issues affecting the performance the team wants to achieve. The feedback is the foundation for dialog that transforms individual visions into a shared future.
The Journey Is The Destination
A performance management system helps you transform your data into wisdom that informs your actions. Converting your data into performance measures creates the information you need to ask questions and gain knowledge. Considering and testing the implications of your knowledge, you gain wisdom informing your actions.
Notice that developing and reviewing the performance measures represents less than 50% of the transformation process. The conversation, the questions, the exploration: together, they're more than half.
What Makes The Biggest Difference
Don't get me wrong. Selecting the right measures is important. The measures you select focus your dialog; they define the activities you'll be focused on. You don't want to leave gaping holes or overwhelm the prep team or yourself with more measures than you can digest. You do want to focus on what makes the biggest difference.
But if you're a little off, don't sweat the small stuff. Gaining wisdom requires learning. You'll figure it out, continue to choose better measures, and move on to gain more wisdom. 80% wiser is certainly better than no wiser at all. Besides, if one thing is certain, it's that what you need to measure, and what you need to discuss, will be changing too.
Labels: business growth, change management, dashboards, implementing strategy, metrics, performance management
posted by Lorre Zuppan at
9:06 PM
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Thursday, May 29, 2008
The first in a series on developing an effective performance management system
Is your performance measurement system delivering what you want? What you expect? Do you have such a system? Developing an effective performance measurement system can be tricky. To paraphrase management guru Peter Drucker, some implementation efforts result in people doing with great efficiency that which should not be done at all. Consider the following examples:
Effective performance measurement can be transformational, but creating a system that has the intended effects requires careful thought and commitment. This series focuses on how to create a performance measurement system that is effective, instructive and data-based, but intuitive. A system that is a competitive advantage, not an administrative burden.
Throughout this series we'll help you avoid common traps while you:
Setting the Stage: Who will use your performance measurement system?
The most important aspect of your system is social, not numeric. Really. Performance is generated by people, your team. They're also the ultimate user of your measurement system. The output of your system is important, but it pales in comparison to the discussion and discovery it generates.
For many of our clients the learning and changes generated during the creation or update of their performance measurement system exceed their initial goals for the project. Sustaining the dialog through review of the system's results, and through continuous improvements to the measures, generates an ever-growing pool of expertise and a powerful platform for innovation. Without people to read, understand and act on it, however, your performance measurements will be little more than a pile of preserved electrons or sacrificed trees gathering dust on an analyst's shelf.
The culture in which you introduce your system is also crucial. Successful systems encourage discussion and understanding, not punishment and reward. Integrating punishment and reward with your measurements typically generates unintended consequences and encourages destructive gaming of the system. You're likely to end up like the Russian government with super-heavyweight weight lifter Vasili Alexeyev. He was rewarded with handsome bonuses for breaking world records, so he learned to smash them frequently and successively, but by only one or two grams at a time.
Be clear about your strategy. One of the most powerful phases of this process is developing a common understanding about your strategy and what you're trying to achieve. Consider these company strategy statements.
These may all be inspiring words for the right audience, but what do they really mean? Does providing superior customer service not include delivering faster, better and cheaper? Will we provide superior customer service even when it means being unprofitable? If so, how far is too far or how long is too long? Is our commitment to innovation limited to certain industries or product lines? When will we pursue innovation that cannibalizes our own product line? How do we even define innovation?
These are all important questions. Questions for which these companies' team members had a multitude of intelligent, but different and often conflicting, answers. Chances are your organization has similar questions, where it's crucial your team explores the options and develops a common answer that unifies your efforts for maximum impact.
Get clear about the process. If you don't know how the process works, you can't manipulate the outcomes. This is just as crucial for service businesses as it is for manufacturing.
Wells Fargo Turned Banker's Hours Upside Down
Terri Dial turned the concept of a banker's leisurely consideration and thoughtful pace on its head while at Wells Fargo. Bankers' hours, long payday lines and months-long loan approvals were common practice at that time in California banks. Informed by solid analysis but still risking mutiny in the branches, Dial announced Wells Fargo would now open its branches at 8:00 a.m., remain open until 5:00 p.m. or later, and in some locations even open their doors on Saturdays. Not long thereafter, Dial instituted the Ten Minute Max, committing branches to a maximum customer wait time.
Because she and her team understood the business, the stakes and the risks, Dial could choose to change the game, surprising her competitors and making a powerful statement about Wells Fargo's commitment to customers. In the following years Dial continued to change the expectations for banks' customer service. She pushed through initiatives such as compressing loan approval times for most small business loans from roughly three months to one week, then five minutes, and finally the virtual process we now expect to see within seconds over the Internet every day. Painful for bankers? Certainly. But the change was inevitable. Only the leader was to be decided.
Service firms may look at processing times or cross-selling services. Manufacturers may look at end-to-end cycle time or component costs. What's important is to understand the process and develop an understanding of the relationships and causal links. Without that understanding, you may as well be playing the slots in Las Vegas, where what goes there, stays there.
To make your system effective, focus more of your measurements on the inputs you can manage than the outputs measuring the impact of what you changed. Monitoring outputs is important to understanding which efforts have the most impact and why. Learning the intricacies of your inputs is what creates competitive advantage. This typically translates to more leading indicators around people and process than lagging indicators such as financial measures reporting results after the fact.
Look for leverage points. Effective performance measurement is about finding the smallest number of key measures providing the greatest insights. Too often we find dashboards, scorecards and performance matrices offering many pages more of detail than any manager should be reviewing on a regular basis. When everything is important, nothing is, because every effort is of equal value.Archimedes said, "Give me a lever and a place to stand, and I will move the world." When you find yourself falling into the trap of too many measurements and not enough focus, ask yourself which of these measures can have an order of magnitude impact on your business. Which are the 10% that make 90% of the difference? Common triggers include customer retention, price points (net of discounts), and end-to-end cycle time. For Southwest Airlines, it was high utilization as measured by turn-around times between flights, a tangible goal everyone had to work together to achieve. For Dell, it was a measure of cash flow. What is it for your business?
Back From the Brink
In Dell Computer's early days, it had a laser-like focus on growth. As it succeeded in growing, however, new challenges emerged. The rapid pace consumed ever-larger amounts of cash to fund manufacturing, faster than Dell could find sources. As Dell teetered on the edge, it discovered a new key performance metric that would make all the difference: its cash conversion cycle time. Dell focused the entire company on reducing its cash-to-cash conversion time, driving it down relentlessly from 70 days to an amazing less-than-zero days. By developing a business process that allowed it to collect the cash for its products before it paid for the units it had just sold, Dell fueled an enormous engine for growth.
Now the market has changed again, and Dell faces new challenges. Will it be able to discover a measure to drive its performance to new heights again?
When you're setting the stage for your organization's performance measurement, avoid the temptation to get it over-with, relying on generic industry measures. Measures of best-in-class performance are only useful for those who want to be in the same class. If you're ready to graduate, select the measures that reflect your unique circumstances - and create a unique advantage.
Labels: dashboards, decision-making, implementing strategy, metrics
posted by Lorre Zuppan at
2:58 PM
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Tuesday, May 13, 2008
How do I mislead thee? Let me count the ways.
If sales grew by 40% last year, but fell by 30% this year, how would you feel about the trend?
This comparison is typical of many dashboards and metrics reports and year-over-year financial comparisons. It would leave most of us feeling that sales were still up overall by about 10%. But before you leave the room feeling comfortably ahead, consider that this, in reality, means that sales have fallen 2% over the last two years.
The fact of the matter is that most business reporting is unwittingly designed to mislead. That's certainly not the intent in the majority of cases. It's more a matter of not knowing what we don't know.
As you review your first quarter results with a thoughtful eye for the months ahead, use this checklist to make sure you're not misled and that your decisions are on target:
This is the same phenomena responsible for the 10% growth versus 2% fall in the example above. When it comes to percentages you can't always trust your gut, so make sure you're doing the extra checking necessary to make sure you're not misled.
Most people tend to be good at simple percentages, but we're not good at taking those same results and putting them into different perspectives. Even when we have the necessary knowledge at our fingertips, we often don't make it to the next step. For example, if I tell you 40% of all sick days are taken on a Monday or Friday, would you be suspicious of long week-ends? (Monday and Friday represent 40% of the days in a typical work week.)
Which would you support?
Would you rather support research for a disease that affects 30,000 Americans a year or one that affects just .01 percent of the U.S. population? Charities, health researchers and public officials often use this principle to present their cause in ways that will motivate us to act. Rather than dispassionately informing us, they persuade by choosing presentations emphasizing their relevance, such as describing an increased risk of cancer in terms of percentage increase in likelihood you'll have the disease (i.e., a 50% increase in your risk of cancer) versus the actual change in the incident rate (e.g., from 0.0050% to 0.0075%).
So even if the trends you're seeing are accurate, are they presented in the most appropriate context? (Note: This is a significant issue with graphs, dashboards and other visual presentations, the subject of an upcoming Grey Matter article.)
Bidding for Bias
In a study by Ariely of MIT, participants were asked to write down the last two digits of their social security number before being asked what they would pay for items. In a real auction at the end of the study, the half of the participants with social security numbers ending in higher digits paid 60% - 120% more than those with lower ending numbers.
This bias, called anchoring, occurs in all aspects of life, including when you're negotiating, evaluating prices and reviewing your financial results. After reading in today's paper that Starbucks says the economic environment is the weakest in company history, as a coffee shop owner you may be pleased if your sales are stable or growing in the low single digits. On the other hand, if you read that McDonald's attributes much of its double-digit sales growth to its new line of coffee as direct competition to counter the Starbucks juggernaut, you may wonder instead why you're not able to achieve the same kind of growth with your personalized service.
The next evening when ticket counter staff walked down to the end of the hall, they saw Frank Abagnale in a security guard uniform with a garbage bag next to him and a sign taped to the drop-box door: DOOR BROKEN. PLEASE LEAVE BAGS WITH SECURITY GUARD. Seeing the sign, and Mr. Abagnale in his freshly-purchased and pressed security guard uniform, everyone dutifully dropped the day's earnings into his bag. Mr. Abagnale tells of sweating bullets at the time, thinking, "Somebody's going to figure this out. It's a hole in the wall with a door over it. How could it possibly be broken?" But no one stopped to question how a drop-box door could really be broken. The consistency of the sign and the security guard uniform were enough to stop everyone from considering any other conclusion.
In the last decade, Kodak repeatedly made the same mistake, continually convincing themselves that their sales were about to take off, allowing them to reclaim their leadership position of an earlier era in the new digital photo market.
Recently General Electric made the same error, announcing to the market that they were still on track despite numerous threats to multiple core businesses in their portfolio. Just three weeks later, instead of earnings growth, GE reported a 6% drop in profits, somehow surprised by the effects of the real estate market and slowing economies. (This prompted former GE CEO Jack Welch to comment on CNBC that Jeff Immelt, his handpicked successor, "Has a credibility issue.")
Despite all these biases, one thing we do know is that being aware of tendencies and biases can help us to be vigilant in mitigating their effects. So keep your eyes open, always be vigilant, and remember to be aware of information bias. You know... the tendency to want more information, even when it won't affect your actions. Any questions?
Labels: communication, decision-making
posted by Lorre Zuppan at
10:17 PM
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Friday, April 25, 2008
Choices. As the economy steps into recession, we all begin to adjust to the choices we need to make. Some have already acted, but many of us are still trying to define the wisest course. Whether you're a global powerhouse or a main street retail shop, the shifting landscape offers both opportunity and risk. The choices we make will determine whether we thrive, survive, or see our fortunes dive.
How do you make the right choice? Here are five tips.
Don't worry about making the perfect choice. We can struggle for weeks or months between similar choices. The truth is, many different choices can be successful. As management guru Peter Drucker said, about 10% of what you do leads to 90% of your results. Focus on defining that 10%. Playing out a few likely scenarios for your top options will make you more comfortable with your choices, and better at getting the most out of them when you finally implement your decisions.
How good is it? Information, even from reputable and respected sources, won't improve your decision if it's not answering the right question. Consider whether your information may be flawed or misleading given the question you're answering. Thinking About Information Differently
If Apple had chosen whether to develop the iPod based on consumer surveys, where they probably would have heard we wouldn't buy one, or had estimated the potential size of its market based on the popularity of other products serving a similar function, like the Sony Walkman and other me-too portable music players, it's unlikely I'd have an iPod at my desk today.
But Apple realized that consumers are notoriously poor at accurately predicting whether or not they'll buy something. The company also recognized that consumers wanted things the Sony Walkman couldn't deliver, so "stealing" the current Walkman market wasn't an appropriate comparison. Instead Apple looked at its information differently, ultimately making a very successful choice to single-handedly create a new market of iTunes and iPods to drive industry sales, convert PC users to Apple lovers, and become the wolrd's largest music retailer, surpassing even Wal-Mart recently.
Close That Door Before It Shuts Itself
We all have a compulsion to leave the doors of opportunity open, even when we know we're damaging our overall success. This desire doesn't seem to change, regardless of how many other doors are there or how valuable the current opportunity we're pursuing. In 2004, researchers at MIT decided to see just how strong this compulsion is.
They devised a computer game with, literally, doors of opportunity. Players chose to enter through any of three major doors on the screen. Each knock on a subsequent door rewarded the player with a pay-off: 5.8 cents, 6.5 cents, 3.5 cents, etc. Players' earnings grew with each knock. When players could knock on whatever door they wanted, their earnings were pretty substantial, at least for college students.
But then the game was changed. Each time a knock was made on another door, the neglected doors would shrink, disappearing altogether after twelve knocks elsewhere.
Players became obsessed with not allowing any door of opportunity to disappear. No matter how successful they were with Door #1, they would frantically shift back to knock on Door #2 or Door #3 before it disappeared.
Realizing that knocking on those doors rewarded them with substantially less money did not stop their compulsion to keep the doors on the screen. Even when the game was changed so that a vanished door would reappear on command, players continued to knock on the less profitable doors to keep them from disappearing -- to the tune of about 15% lower earnings. They just couldn't stand to lose the opportunity of being able to knock on those doors later.
We all want to make the right choices, and as Areily and his researchers at MIT proved, we're compulsive about not losing out on opportunities, lucrative or otherwise. But these good intentions don't always lead to good choices. After all, good choices do require good analysis, but they also require the action to make them real.
You'll never know whether you really made the right choice at the right time, except perhaps in retrospect. By being conscious of your natural tendencies and how they affect your organization, however, can lead you to a more successful determination of when you have all the information you need to act.
Just as Buridan's donkey didn't know the piles of hay were equal until he got within sight of them, you won't understand your choices until you considered the options. Being smart about how you consider them is important. But once that's done, don't starve your business with debate over which pile of profit may be incrementally better. Choose one, and make it yours.
Labels: decision-making, implementing strategy, prioritizing
posted by Lorre Zuppan at
3:13 PM
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Thursday, April 10, 2008
John has been in sales for years. Until a few years ago, he spent about two-thirds of his time on the road wooing clients. John's travel partners -- hotel chains, airlines and his credit card company -- all showered him with special treatment to earn his loyalty. Then John was promoted. Although he still travels frequently, more often people now come to him.
One of John's travel partners monitors their high-value customers carefully, but they made a mistake. When John's travel costs declined, they decided he was no longer as valuable to them. The personal touch disappeared and his benefits were yanked with an impersonal "to serve you better" note.
As the senior sales executive, when the time came to evaluate the quality of potential long-term partners, John had little trouble assessing whether this company would rise to the top, or fall to the bottom. As so many companies do, they defined high-value customers by looking at spending trends today. By narrowing their definition to the most obvious data, they missed John's whole company's high-value customers of tomorrow.
Who is The High-Value Customer of Tomorrow?
Certainly, you want to be as profitable as you can be today, but not at the expense of tomorrow. Where are the high-value customers of tomorrow? You can get a foothold in realizing who they are by looking at today's.
Start by seeing where today's high-value customers came from, especially those who recently joined the list and those who are falling off, to gain insight into finding your most profitable customers of tomorrow.
What do less profitable customers have in common with your high-value customers? Do you have occasional users or influencers in your existing customer base that can be converted? Is one of your smaller customers taking over competitors -- perhaps competitors using alternative suppliers? Consider why your high-value customers consider you as their best alternative. Then mine your existing customer base for others that have the potential to realize the same value.
How did today's customers become high-value? Many probably didn't start their initial relationships with you as high-value customers. Identify the primary paths your high-value customers have taken. Should a change in customer contact name trigger activities that maximize sales growth under the new manager? Do currency fluctuations beyond a certain level or certain trade policy changes create greater opportunities? Or do shifts between certain products or services signal early signs of growth? Identifying tomorrow's potentials and building your relationship today will require far less investment than trying to woo back a former customer tomorrow.
Reading the Future of Bar Codes
As an example of how technology affects high-value customers, consider the bar code reader. Once, they were all similar to the ones at your local grocer's check-out counter: a stationary reader over which you pass the item's bar code. Everywhere bar codes were used, the product had to be brought to the reader. The manufacturer assumed the market for its new portable reader was the same as that for its old stationary reader market. They didn't think about the many new possible uses for the portable reader.
This simple oversight of the new feature's impact ultimately carried a great cost to the company. Priced too low for the dramatically increased demand, supply chains were not protected for their most valued customers, and even those who received the product were disappointed by the quality of a manufacturing process pushed beyond capacity to meet demand. Quality, reputation and relationships in tatters, the company's ability to fight off new competitors was significantly weakened and its long-term profits irreparably lowered.
Predicting the road ahead. Now that you know what a future high-value customer looks like, what can you do to increase the likelihood that they'll be yours? What traits tell you who is most likely to convert? Not all predictors are equal. Consider what traits are simply correlated versus those that signal a change. Be mindful of your assumptions; what changes might make that relationship cease to exist? How predictive is your measurement: can these traits predict historical customer behavior? If not, can efficient small-scale tests help validate and prioritize investments? Early identification and special treatment for future high-value customers can produce far greater returns on your investments than simply applying the same great tactics to your customer base as whole. Using Your Discoveries Effectively
Identifying your high-value customers reveals more than who has the largest sales volume. It simultaneously provides the means to accelerate your growth and reduce your costs. As management guru Peter Drucker once said, more often it's about what you need to stop doing, not what you need to start. Identifying your high-value customers of both today and tomorrow:
So don't settle for simply determining who generates the most revenue, or which accounts generate the largest profit margins. Instead, aim to understand the bigger value equation. It will be one of the highest value activities you perform.
Labels: business growth, customer retention, high-value customer, implementing strategy, marketing, planning, prioritizing
posted by Lorre Zuppan at
7:58 PM
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Thursday, March 27, 2008
During challenging economic times, it's more important than ever to focus on the profitability of your business. What are the keys to sustaining profitable sales? What vulnerabilities might your competitors discover and exploit? And how does the changing environment create customers, cost reductions or other advantages you can snare?
Certainly its important to consider these questions from a grand perspective to develop a sense of the key decisions you face. But these important questions should also be viewed through the lens of your high-value customers: current and future. These are the clients that provide you the highest return for your investments in them, the ones often responsible for 80% or more of your profits.
Yet often, under the strain of difficult decisions, this fuel for profit is ill-defined or, worse yet, its unique needs and contributions are ignored altogether. Frequently, this creates a domino effect: first, sales weaken; next, profitability drains, then, core advantages begin to wither from lack of resources. All too often, the business sputters onto life support and eventually fails. Meanwhile competitors with seemingly comparable offerings thrive or even grow.
What Fuels The Engine?
When your car runs out of gas, you know what fuel it needs: unleaded gasoline, diesel, ethanol, or bio-fuel. You know that pouring in the wrong fuel can ruin the engine. Similarly, defining your high-value customers helps you understand the fuel you must acquire and preserve to keep your business humming profitably.
The Dual-Valve Approach
High-value customers bring you the most profitability because you bring them value. In exchange they return value to you. When you stop bringing that value, they become yesterday's high-value customer. As both you and your customers change and evolve, your pipeline to profitability must include your high-value customers of today, and those of tomorrow. If either valve closes, the pipeline empties and the engine dies.
Getting a Handle on True Profitability
Today's high-value customers aren't necessarily your biggest customers -- those with the highest purchasing volume. Many other factors influence the value customers return to you. What does it cost you to sell to and serve them? How long do they stay - like an annuity, what's their lifetime value? You'll want to consider each component in the checklist below:
Costs To Service.This step involves looking for patterns in costs after sale - costs that can vary significantly by customer: return rates, customer service calls, warranty costs, payment timeliness or collection costs. In 2007 Sprint "fired" over 1,000 customers because their repeated calls to customer service demanding credits to their bill was costing thousands of dollars in refunds alone. Costs that were effectively passed on to more desirable customers through diminished service or higher rates. These 'complainers' were the 1% of customers making the vast majority of the difference in customer service and return costs.
This cost of service analysis is especially tricky, however, for larger organizations because their internal systems provide a false sense of confidence and validity. It's easy to forget that these systems were not often designed with your specific analysis in mind, and even if they were, their somewhat "Black Box" calculations are subject to the same garbage-in, garbage-out and pro-rata allocations that infect other data.
Where could differences between customers make a significant impact on net profit? Consider this question systemically, holistically. Then tailor your skepticism and testing accordingly.
Consider the full revenue stream, then allocate realistically. Don't rely on your accounting system to provide these answers. GAAP accounting is for investors. It doesn't provide the precision you need. Instead, use your Customer Relationship Management system, other customer service data, and carefully constructed data dives to define truer revenues and costs by clients.
Once you've created this estimate, verify the total value you've estimated is comparable to the financial results of a selected period. In other words, if you add up your estimated values for this year's earnings, is it close to actual results? If not, compare the detail until you find the differences that don't make sense. Make sure your allocation makes sense before moving onto the next step.
What's your customer structure? Now that you know who really adds the most profit, what can you learn from your basic portfolio structure? Does Pareto's Law apply -- are you making 80% of your profit from 20% of your customers? As the percentage of customers providing the bulk of your sales decreases from 80%/20% toward 90%/5% or lower, the vulnerability of your business increases. However, this same skew in your results also means you're likely to discover a lot of "low-hanging fruit" within your existing customer base - fruit that can mature into tomorrow's high value customers.
Walking The Tightrope Between Profitability and Cash Flow
One of our clients had eye-popping gross profit margins and phenomenally high customer evaluations, but seemed to constantly struggle with profitability and cash flow. Looking at averages per customer, it was difficult to spot the culprit.
However, a quick analysis by type of sale revealed the fundamental issue. Each sale involved a significant set of "per sale" costs that didn't fluctuate whether the sale was $500 or $50,000. With more than 90% of sales representing less than 5% of sales dollars, the client was losing money on every one of those smaller sales. This was a very expensive form of advertising, and an endless source of headaches. Once the company realized what was happening, pricing was immediately changed to break-even until they could do further analysis (on tomorrow's high value customers). On the few occasions they did lose a customer because of price, they were happy to pass the losses on to their competitors whose sales teams were often compensated for totals sales, regardless of profit.
As you go through this checklist, you'll almost undoubtedly discover customers costing you money to serve. If your best customers are funding these profit drains, it's time to take action. Most would recommend "firing" these customers once they're discovered, but don't do that yet. There's another step you need to complete first. Are some of these the high-value customers of tomorrow?
The Bottom Line
Recognizing your high-value customers can help fuel your sales pipeline and keep your company profitable with the least overall effort. By looking under the hood to discover the nuances of your customer base, you can determine which customers truly make a difference. You'll understand their vulnerabilities, their common elements, and how they react to the changing environment. By viewing your customer base through the lens of current and future high-value customers, you can more readily provide the value they need before returning value to you.
In our next post, we'll explore Part 2 of this story: Who is your high-value customer of tomorrow?
Labels: business growth, high-value customer, implementing strategy, marketing, prioritizing
posted by Lorre Zuppan at
7:10 PM
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