In their first year, new CEOs usually cut costs to prove that they are serious about improving the bottom line. In their second year, they have to prove that they can grow the business. In their third year, they have to virtually replace the people and the parts of the business that were cut in the first year. Despite this cycle, cost-cutting continues to be a favoured strategy for many boards. Jonar Nader puts the cost-cutting strategy to the test.
In their first year, new CEOs usually cut costs to prove that they are serious about improving the bottom line. In their second year, they have to prove that they can grow the business. In their third year, they have to virtually replace the people and the parts of the business that were cut in the first year. Despite this cycle, cost-cutting continues to be a favoured strategy for many boards. Jonar Nader* puts the cost-cutting strategy to the test
As you know, there are connoisseurs who can sip wine and tell you its vintage, and musicians who can hear a tune and tell you its key. Similarly, there are company directors who can read a set of financial statements and identify the weaknesses. However, can you identify potential problems before they impact the bottom line?
The key is observing and picking up clues to what is happening in the company, without necessarily looking at the balance sheet.
A good place to start is the annual staff meeting. Watch for CEOs who spin a few motivating lines about "the need to change" and "the need to work as a team". No doubt, references will be made about "the tough market" and "the uncertain times in which we live".
After much hoopla and cliches, the CEO will announce that there are five important objectives for the year. At this point, the auditorium will be filled with the sound of rustling paper as each staff member turns to a blank page, with pen poised, eager to receive the new wisdom.
Looking at the large screen above the stage, the CEO says, "Our first objective this year is to increase our revenue. Second, we must reduce costs. Third, we must increase our profit. Fourth, let's not forget to improve customer satisfaction.
"Fifth ..." Ah, what was the fifth thing?
"Oh yes. Fun! Let's not forget to have fun."
That one slide speaks volumes. It says that the senior management team does not comprehend the principles of success. They speak about the need to focus on growth, but they do not realise that growth is merely a result of other factors. No amount of focus can help an organisation to grow. Growth comes after excellence and innovation are exercised, and to do this, one must be focused while simultaneously aware of the customer; the market; the industry; the world.
Therefore, the CEO would have been better off to enlighten the assembly on what excellence and innovation mean, and how the managers plan to set the foundations for these to flourish.
As for teamwork, no amount of group-therapy can enable a bunch of people to work well together. Teamwork has nothing to do with being kind to each other.
It is all about constructing teams that work within systems that work. In relation to customer satisfaction; when will they learn that it is impossible to offer customer satisfaction? Customers do not want to be satisfied. They just want what they were promised when their money was taken. No two customers are alike. No two situations are the same. The best that you can do is to listen to what customers are trying to tell you.
But organisations only know how to ask questions: "Account number, name, date of birth, postal address, mother's maiden name, password — now, what was it you called about? Oh, you've come through to the wrong section, and I can't transfer you..."
If customers dare to speak up, they will soon be told why it is impossible to give them what they were promised. They will be silenced with the P word or the C word, or the other P word. It's privacy, or confidentiality, or policy, or all of the above; and if you do not like it, there are always S words, because "we're truly sorry, but that's our system..."
When organisations exhaust every possible promotional offer, they scramble to find other ways to improve the bottom line. And this is where cost-cutting comes in. It is a new frenzy and a top priority that says that the business is in trouble — signalling several warning signs.
First, why is cost-cutting suddenly important? What has changed to make it so urgent? Is it because the margins are lower than ever before? If so, why have margins been allowed to diminish, and why are customers assessing products or services based on price alone?
Second, if cost-cutting is the only way to improve the bottom line, where would that type of strategy lead? What will they do when costs can no longer be trimmed and they hit rock bottom?
If cost-effectiveness has not always been part of an organisation's daily routine, then its immediate and urgent introduction is bound to fail. It would be like a gambler who cuts down on living expenses, hoping to put more money towards the very black-hole that necessitated a review in the first place.
Cost cutting is for wimps. Besides, any fool can do it, up to a point. And then what? If cost cutting means closing down a branch, I would want to know who approved its opening in the first place. Unless an organisation identifies how it rewards its decision-making, the same insidious processes will be applied to a chopping frenzy that could well sever important arteries that will lead to haemorrhaging.
Apart from the slash-and-burn approach to cost-cutting, there are ways to educate staff members to look for clever efficiencies.
For example, the team that made Kit Kat chocolates in the 1980s was aware that aluminium foil was more expensive than chocolate, so they found a way to save half a centimetre of foil.
The sheet of foil was placed flat, but the bar of chocolate was not positioned square in the centre. Rather, it was placed at an angle. That simple folding technique was an ingenious cost-saving exercise.
This valuable type of cost-cutting is invisible to customers. If an organisation is not engaged in invisible cost-cutting, it is bound to leave its customers distrustful and dissatisfied.
Cast your mind back to the last few board meetings. How often were the terms "cost-cutting" and "cost-saving" uttered? When was the last time someone walked in and said, "I've found a way that enables us to charge customers more, and they'll even be happy to pay more"? A superior business is one that can charge higher prices for its products or services.
By the way, are your customers really your customers? I am not talking about ways to lock customers into contracts. To test if your organisation has a wholesome future, you need to ponder the most frightening question that any business can pose to itself. "Would, if they could?"
Those four words are asking if your customers would leave you, if they could leave you. Meaning, if it were hassle-free, administration-free, and risk-free for your customers to leave you and go to a competitor, would they do it? Imagine asking this question in relation to a spouse. Would your spouse leave you if it were easy to do so, without guilt, or embarrassment, or legal ramifications, or social pressures? Would you leave your spouse if you were certain that you would not have to worry about arguments, or finances, or children?
Only when you can be sure that your customers would remain loyal, can you say that you have any customers at all. Anything else is but passing trade.
Very often, customers feel that they are merely sleeping with the enemy. They do not leave because they see little choice, or they feel overwhelmed by the paperwork. In many cases, customers no longer complain, because they know that any attempt would be utterly useless and frustrating.
They hold back like a ticking time bomb, not daring to speak up because they know that they will be placed on hold and put through to incompetent staff members who could not care less about the issues at hand.
With this level of distrust and disgust, how can anyone dare to suggest that customers would pay more, and with pleasure? To charge more, you need an intangible bond. Businesses that thrive are those that have a bond between themselves and the customer.
The bond (not the contract) is an intangible feeling of pleasure, trust, and comfort. That bond is really the glue that binds customers and organisations together. The glue is the most valuable asset that any business can own.
Before I explain what this glue is, here is another question. What is the most important asset? It is not staff, because staff members do not belong to an organisation. They come and go as suppliers of services. The most important asset is the brand because the brand is the visible seal for the verbal contract. It says that any product with this brand stamped on it will provide all the qualities for which it has become known. The brand must never appear on anything that does not deliver consistently to its promise. So, if the brand is the most important asset, what is the most valuable?
The most valuable asset is the glue that binds your customer to you. In fact, if you look at your balance sheet, you will see that you, too, have recognised that the glue is the most valuable asset. It is there in black and white in your annual report. It is an intangible asset called goodwill. If goodwill is to be worth the amount that you have declared it to be, it must be sticky, whereby your customers would stick with you, even if they were given an easy way out.
Rational or emotional?
To understand goodwill, we must consider the question, "Are we rational beings or emotional beings?" Opinions are spilt down the middle because practitioners do not understand that we are both rational and emotional. So, when it comes to goodwill, people evaluate products and services rationally (meaning objectively), and then they make a decision irrationally (meaning emotionally or subjectively). This can be better explained by saying that people evaluate objectively, and decide subjectively. They even do this when voting for a prime minister.
Customers want to know all the details and specifications, and terms and conditions. Without a competitive set of features and benefits, they will not consider your products. However, objective evaluation only brings you to the starting line. Once customers are satisfied that they are thinking logically, and evaluating their options intelligently, they relax, and start to examine your products based on subjective factors.
Here, they need two things. One, they need to feel good about the purchase, and two, they need to be sure that the person they are trying to impress also feels good about their purchase.
It is for this reason that I dismiss the modern notion that marketing is on the way out. University students ask me why their college is teaching them that marketing is on the decline, and why their professors are claiming that advertising can no longer be justified.
Here is the secret: brand positioning through advertising is rarely performed to make you feel better. It is designed to help you to impress your friends. Meaning that we do not advertise a brand of running shoes to those who purchase running shoes, but to those who see you wearing the running shoes. Such marketing secrets separate the goons from the professionals.
By the way, are you sure that your advisers know what they are talking about? Goons will say that marketing is all about those four Ps, whereas professionals will tell you that the function of marketing is to engineer your company's future. Goons say that branding is all about identity, whereas professionals will tell you that the function of the brand is to reduce sales expenses. Goons think that advertising is about communicating, whereas professionals know that the function of advertising is to reduce the selling cycle. Sadly, very few people understand the function of branding, and fewer still understand how to foster goodwill.
Goodwill cannot exist in isolation, meaning that an organisation cannot foster goodwill with its customers if it does not know how to foster goodwill with its shareholders, its staff members, the media, the influencers, and the public.
Having said that customers evaluate objectively but decide subjectively, I need to emphasise that although the two are very separate mental exercises, they must remain connected at all times. Many organisations who come close, but still fail, are those who sever the umbilical cord between the two.
For example, one of the culprits that undermines credibility is the asterisk. If your organisation lures its customers with fabulous deals, and then ends the offer with an asterisk, then your organisation has failed, because the asterisk dissolves the glue.
Product warranties also sever goodwill if they do not extend to the perceived life of the product. It would be insane to provide a 12-month warranty for a product that anyone would agree should last for five years.
What is it, if it is not pure theft, when an organisation takes a customer's perfect money and delivers substandard products?
How can any organisation say it fosters goodwill when it takes $700 for a modem that lasts only 13 months? To me, that is unethical and fraudulent. One purchases a modem to use it for a reasonable time. Thirteen months is not reasonable for a leading brand. I would never have purchased it if the advertisement said, "Give us $700 of your hard-earned perfect money that never breaks down, and we will give you a modem that will blow up on the 13th month."
Fostering goodwill with suppliers cannot be achieved when organisations do not pay their bills until after 30 days. The glue is dissolved when excuses are given about systems and policies.
Your suppliers work very hard to deliver on time, and the moment that they do, you owe them the money. They are not your bank. In this electronic age, there are no excuses for delays. Any organisation that relies on its suppliers to bolster its cashflow is not an organisation worth knowing.
The truth audit
Here are some simple ways to test the robustness of your organisation and its readiness to foster goodwill:
• On your web site, go to the Contact Us section. Fill in your details and see how long it takes for you to receive a real, complete answer from a real, contactable person.
• Go to the White Pages on-line and look up your company and see if the listing shows your postal address. If it does not, then how are people supposed to contact you when they are fed up? If it only has a central number, call it and see if you can be put through to the executive office. I bet that your request to speak with the CEO's PA will be declined. If the White Pages listing shows an e-mail, write to it and see what kind of response you receive.
• Write a strong letter of complaint to yourself and address it "Open addressee only" and see if the letter ever reaches your desk. Every organisation that wishes to foster goodwill must have a separate complaints e-mail that is hosted on a separate server so that no-one within your organisation can access it. Similarly, the postal address for all complaints must go to a separate and dedicated postal box that only one or two people can access.
• Call your help desk and see who speaks first, meaning will you get to speak, or will you be ignored until you satisfy their laughable identification procedure? If you are asked to identify yourself before you can ask the simplest of questions, then you have an organisation that does not know how to listen. Furthermore, try this: call the help desk and ask that you speak with the shift superviser, and if you hear any string of words other than, "Yes, I'll put you through", then you have no hope of ever fostering goodwill. Just try it and see what happens. One large credit-card organisation told me that the manager of the section did not take calls from the public. It did not matter that I was a long-standing customer. There was no way I was allowed to speak with the supervisor, and no-one would tell me the name of the manager of the section. I have since cancelled my card. Recently, I called my cable provider and asked the receptionist for the name of the manager responsible for the cable network, and I was told that such information could not be given out. We all have horror stories, but can you be certain that such stories are not being told about your organisation?
• Send someone to a job interview within your organisation and see if they are told that they are expected to work crazy hours. I saw an advertisement for a job with an airline that said that they are looking for happy and jolly workaholics. That is sheer abuse. Imagine if your staff members purchased eight items from your store, but walked out with 12. You would call the police. Why then should you pay them for eight hours and then steal another four hours without paying them?
• And speaking of job interviews, do your managers understand the expenses that candidates go through to attend job interviews? It would be unforgivable to expect candidates to get dressed, get into town, pay for transport, tolls, and parking, and take a whole day off, and fret the night before about the interview, only to find out that your people are not really sure about the headcount, and only to find out that the salary, had it been revealed, would have enabled the candidates to eliminate themselves without going through the draining experience. I would forbid any manager from conducting an interview until the candidates have first received a full job description, job goals, salary breakdowns, terms and conditions of employment, seating arrangements, and even told simple things like whether or not a parking spot would be available.
• When was the last time you sent some mystery shoppers to give you simple feedback about your organisation? Talk to the mystery shoppers over morning tea, and cut through all the reports and statistics. In fact, do not look at the statistics. Learn to speak in words and feelings, not in stale numbers and graphs.
• When was the last time you popped into a department unannounced and took a staff member you had never met to lunch? These tactics are not meant to make anyone feel special. They are designed to give you first-hand knowledge about what is going on, and what you can do to make some glue that will bind your customers, suppliers, influencers, managers, and staff members to your brand.
Raising one's price is not a new concept. People have always been willing to pay extra. Ask any 18-year-old, whose running shoes are at least $200 overpriced. Everyone knows this, including the person who paid the extra money. They paid it with pleasure, and they will do so again. Those who do not believe that it is possible, are those who do not know how marketing works. When faced with the challenge to improve the bottom line, their mind turns to cost-cutting.
* Jonar C. Nader is the author of How to Lose Friends and Infuriate Your Boss, and chairman of consulting firm Logictivity. He welcomes your comments at Jonar@Logictivity.com
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