Why thorough processes delivered to a high standard might account for all the problems in your business

The world is becoming increasingly process-orientated. There are positive aspects to that – if you’re the pilot of a 747, the Operations Director of a nuclear power plant or a surgeon carrying out microsurgery on a vital organ, I’d feel a lot more comfortable knowing that what you do, and the order you do them in, has been designed in a reliable, dependable way.

Even though most of our daily work activities aren’t anything like as mission-critical as those examples, the business world seems determined to introduce ever-greater numbers of processes and procedures to govern every aspect of what they do.

I’m not sure that’s a good thing for a number of reasons, but in my capacity as a Finance Director and CFO what bothers me most about our process-heavy world is that this approach often turns into a really expensive way to do something simple, and can easily lead to a range of less-than-wise decisions.

There is a better way…which we’ll get there in a moment…

But first, the inspiration

This article was inspired by a tweet from the always-interesting Mark Pollard (@MarkPollard on Twitter) reporting on a conversation with Phil Adams (@Phil_Adams). Here it is:

Their conversation was specifically in the context of producing good creative work, but I’d argue this concept matters for just about everything a business does.

The maths is unarguable.

Phil Adams points out, correctly, that even with just a 5-step process, where each step is done right 90% of the time, the likelihood of getting to a perfect answer each time is less than 60% (59.049% to be exact), assuming we’re dealing with a sequence of independent events (quick statistics primer here if you would like a refresher)..

Yet the holy grail for most large corporations is a detailed process with dozens of precisely crafted steps, each done right at least 95% of the time.

For a business process with even just 12 steps, however, each done right 95% f the time, the likelihood of everything happening exactly as planned is even less than Phil Adam’s example above. In fact, that process will only work as intended 54.04% of the time on average for a 12-step process, or not much over half.

Think about this. With a 12-step process where each step is done right 95% of the time, nearly half the time this process will go wrong somewhere along the line.

With a more complicated process, say one with twice that number of steps, you’re down to things going right less than 30% of of the time (29.2%). More than two-thirds of the time, your customers will be disappointed or something will be going wrong in your business. This will inevitably, one way or another, increase your costs.

I’ve worked for some large multinationals in my time and it was never much of a challenge to find processes 24 steps (or more) long. But even in relatively small businesses activities such as manufacturing products, responding to customer enquiries and tendering for new contracts can quite easily have two dozen steps or more to follow before reaching the right answer.

So this is a real problem for many businesses. Especially in large businesses which don’t often realise how often the end-to-end process goes wrong because each department involved in the process trumpets their 95% success rates on the individual elements.

That goes double when the process involves several different departments within the business and everyone tries to claim their share of the credit for doing their bit well, while doing their best to deflect the blame for customer dissatisfaction, or manufacturing inefficiencies, onto some other part of the process for which they are not responsible.

But it gets worse…

After a while, let’s say someone notices that the customer service department has ballooned to 20 people because of the volume of customer service incidents generated. Each of these customer service people costs £30,000 a year with on-costs.

Someone who feels they have a point to prove about how good their thrusting entrepreneurialism is for the business turns up at a management meeting and says something like “over half a million quid a year on the call centre – we need to save some of that cost”.

Strategies what what happens next vary, but common solutions are one or more of the following…

First, starting salaries get pared back. In a high labour-turnover environment like a call centre, there are always people leaving. So, thinks some aspiring company superstar, when one of our £30,000 a year people leave, we’ll replace them with someone on minimum wage so that, over time, we’ll only spend half as much. The Finance Director and the CEO will be delighted, they imagine.

I’m all for saving money and for giving entry-level people an opportunity to embark on a meaningful career. The part of the equation that’s often overlooked is that junior, inexperienced people are very unlikely to carry out the assigned tasks as well as the more experienced person who has just left.

Our 95% success rate for each step in the process goes down to 90%, let’s say. So our 12-step process with each step done right 90% of the time means only 28.24% of transactions will go through properly. And for a 24-step process at 90%, only 7.97% of transactions will go through right first time.

What looks superficially like a smart cost-saving move is often one of the least smart decisions a business can take, for reasons we’ll cover in a moment.

Another popular option is to look at a £600,000 cost and try to outsource the work. Although the outsourced customer service industry doesn’t enjoy the best of press, there are good businesses in there (I know, I used to run one of them).

But the first thing any self-respecting customer service outsourcer will do is ask you to be really explicit on what steps there are in the process, how you want their agent to respond in a number of different scenarios, how the interface to the client’s IT systems will work and so on.

It’s almost nailed on that your 12-step process will have just increased to, let’s say, an 18-step process. However your 95% success rate for each step is unlikely to change. After all, you’ve told the outsourcer exactly what to do, haven’t you, which you’ve naturally based on what your current staff do now.

An 18-step process performed as intended 95% of the time will have a 39.72% rate of successful completion. A similar 50% uplift on a 24 stage process means it’s right just 15.8% of the time.

I won’t even calculate the 90% options – let’s just say they’re almost never right.

These scenarios are not the fault of either the new, junior member of staff or the outsourcer. They’re only working with the material you’ve given them, and frankly they were never likely to result in a positive outcome, although both are common “budget saving” strategies.

The final common approach is to decide that everything is going to be self-service through your website which means you don’t need a customer service department at all.

There are two major problems with this.

Firstly, it is literally impossible to do everything through a self-service website. Even the kings of web self-service, Amazon, have telephone based support for particularly thorny issues…which is, perhaps surprisingly, very good, in my own experience.

If Amazon can’t make an entirely web-based service work, let’s just operate under the assumption that your business is unlikely to achieve a goal Amazon hasn’t any time soon.

The second issue is that developing web self-service options to cover every eventuality is expensive. An external firm will charge a high six-figure sum to develop one for you, or you can do it yourself but you’ll need to beef up your IT department to do it. At least over time, you’re likely to spend as much in IT resources, internal and external, as you’ve been spending in customer service costs.

Oh no, it’s even worse than that…

Sorry to say, we haven’t finished with things getting worse.

All the common solutions lead to an increase in costs.

Hire much less-experienced labour who get things wrong more often and you’ll have to beef up your management resources to deal with queries, handle dissatisfied customers and authorise refunds, special deliveries and whatever it takes to try and put things right again for the customer.

You have fewer £30,000 a year call centre agents, but a lot more £50,000 a year managers to look after the new minimum wage staff. (Again, this is not the staff’s fault, the deck has been unwittingly stacked against them.)

Outsourcing can be a good idea, but if you’ve got a £600,000 a year outsourcing contract which is your main interface with all your customers, unless you’re an extreme risk-taker (which I don’t recommend if you still want to have a business to run in a couple of years) you’ll need a relatively senior manager to make sure the outsourcer keeps on their toes and delivers what they say they will.

So you can probably add £70-80,000 back into whatever savings you make…perhaps even more than that if you deal with complex processes or work in an industry where there’s regulatory oversight to contend with.

And as for the web self-service option, there’s a real danger that you’ll just swap 20 customer service agents on £30,000 a year for 10 software engineers in the IT department, each on £60,000 a year.

The simple, low-cost solution

The biggest, fastest, lowest risk way to reduce your costs (outside the flight deck of a 747 or the control room of a nuclear power station) is to look at the process and take some of the steps out.

If you reduce the steps by only 25%, what was a 12-step process becomes a 9-step process. At a 95% success rate for each step. a 9-step process goes right first time 63% of the time.

That’s getting on for a 20% improvement over the 12-step process, even though the average success rate for each individual step has not improved. In my experience, they often do, just because there’s less going on in a customer service agent’s mind and they’re likely to make fewer errors. But let’s not even factor that very pleasant surprise on the upside into the equation.

If we consider the 24-step process with the same success rates as above, a similar 25% reduction in the number of steps makes it into an 18-step process. End-to-end, that’s likely to work as intended 39.7% of the time. That might not sound like much to write home about, but it’s about 30% better than the old 24-step process.

The changes are even more dramatic when the percentage going right is 90% instead of 95%.

The old 12-step process, now a 9-step process, is now right 38.7% of the time, and the old 24-step process, now 18 steps, is right 15% of the time. That’s a 30% improvement and a near-doubling, respectively, compared to the original success rates.

So next time you want to save money, don’t just work with the numbers, think about the underlying processes. Simplify those and you’re well on the way to a low-risk way to save a lot of your budget.

And maybe ease back on the need to have detailed processes at all.

Years ago, I heard the CEO or Ritz-Carlton speak at an event and they had absolutely minimal procedures for their staff. Instead they told their staff to focus on the customers needs and deliver whatever they, in their best judgement, thought best-served the customer’s needs.

My memory is a little hazy on the detail, but I seem to remember that any staff member could, on their own authority spend a significant amount of money on the spot to satisfy a customer need. It might even have been as much as $5.000, but don’t quote me on that. It was certainly a number in the thousands of dollars.

I remember most of the audience wincing at this approach, but it’s actually one of the smartest ideas I ever heard.

How many complaints did Ritz-Carlton get into their call centre? Almost none as all their customers were satisfied at the point the problem arose. They spent a bit more on the front end, but they saved a fortune in their call centre.

How much did Ritz-Carlton need to spend in IT resources to develop a self-service model? Nothing at all. The staff member they first spoke to sorted out whatever the problem was and they never had to go onto the website to try to find a way to resolve their issues.

And how much did this really cost Ritz-Carlton? The CEO was a little coy on that point, but he did say that firstly they worked hard to make sure very few customers were dissatisfied, so complaints were relatively few anyway. Secondly, he hinted that the average charge was a lot less than the $5,000 (or whatever the number was).

Of course, some did cost the full allowance, and some went over that limit at which point a manager did need to get involved. The impetus was still centred around making the customer happy, so there were still no calls to the call centre and so on, but a manager had to authorise the budget in light of the amounts involved.

More often, I’m sure the guest’s problems would be rectified with some express dry cleaning or the cost of an extra cab to send on the glasses someone had left in the hotel. Minimal costs against a top-dollar five-star hotel room.

And that, for me, is the secret to cost saving.

To people who hadn’t thought this through, giving every member of staff $5,000 they could spend if they had to sounded like a needless extravagance.

It was actually the cheapest way to run their business. There was just a single step in the process “do whatever it takes to satisfy the customer, up to a limit of $5,000”.

In practice only tiny amounts were spent by staff members and Ritz-Carlton saved a fortune on call centre and IT resources.

I’m not suggesting this is the right approach for every business in every set of circumstances, but there’s definitely something worth thinking about in there.

So next time you want to do things differently in your business, or you’re under pressure to save costs, why not experiment with having fewer steps in your processes, or even just fewer processes, full stop.

Perhaps try giving your people a little more discretion. Even allowing for the fact that they’ll get it wrong some of the time, this is likely to be a much cheaper way of running your business than adding an extra half-dozen steps to your current processes in an ultimately futile attempt to “engineer out” things that go wrong.

It might seem a little counter-intuitive for a Finance Director or CFO to recommend a lighter touch on the process front, but even after allowing for the fact that things will still go wrong from time to time, that may very well reduce the overall costs in your business. And isn’t that what a good Finance Director or CFO is supposed to be concentrating on?

(Photo by Campaign Creators on Unsplash)

How sweary chefs, innuendo-fuelled bakers and exasperated hoteliers guarantee great customer service

Most businesses nowadays at least pay lip service to the importance of customer service. Yet many customers remain dissatisfied.

Astute businesses pick up on that sentiment and try to do something about it. And that’s where the problem starts…

Don’t mistake activity for making improvements

One of my favourite Ronald Reagan quips is “Don’t just do something, Stand there!” It always reminds me that we shouldn’t mistake activity for making improvements. Sometimes “doing something” is worse than doing nothing at all.

And in the pursuit of great customer service, there are nearly always better, simpler and more cost-effective ways of making improvements than introducing new procedures. (In fact I’d argue that I’ve never seen a new formalised procedure, beyond a threshold level, adding any value from a customer’s perspective at all.)

It’s not just new procedures for your customer service reps, of course. Especially in our busy, tech-centred world, it’s tempting to think whatever problem we’ve got, customer service or otherwise, can be addressed by introducing more technology…a revamp for the website, allowing online purchases, optimising for mobile or getting that Shopify store up and running.

Too many businesses think improving service is only about revising their procedures or implementing new technology. Almost nobody spends time thinking about what they should stop doing to improve customer service.

But if you’re serious about creating a world-class customer experience for customers, your first question…to real customers, not a software vendor or consulting firm…should be “what specifically do we do now that irritates or annoys you?”.

Then, whatever they say, stop doing that as quickly as you can unless there’s some legal reason you can’t. And here I mean a real legal reason, not the sort of thing people say when they don’t want to do something. If in doubt, ask to see the precise clause in an Act of Parliament that stops you, Unless someone can show you that, just politely press on regardless.

Of course, you should always seek appropriate professional advice if there’s any doubt, but even where laws and regulations do exist, they’re usually far less all-encompassing than people inside your business, or external parties with an angle to push, like software vendors and consultants, would have you believe.

And in a sense it shouldn’t be too surprising that you can improve customer service by taking things away.

Sweary chefs, bawdy bakers and exasperated hoteliers…

Watch just about any Gordon Ramsay programme when he works to turn around an under-performing restaurant. Part of his turnaround plan is nearly always paring down a hugely ambitious menu with 77 different choices across 8 different styles of cuisine into a dozen or fewer meal options.

Seemingly overnight, the business becomes easier to run, quality tends to be better, service happens as it should and customers leave at the end of the evening, well-fed and happy, intending to recommend the revamped restaurant to all their friends.

Same for The Great British Bake Off. Hugely talented people try to squeeze too much into their recipes and crash out the competition on a weekly basis. A simpler approach would have produced something they could be proud of, not a “soggy bottom” with the standard of decorative icing a 4 year-old might have been ashamed to bring in for “cake day” at their primary school.

And you see it in just about any edition of my favourite reality show… “The Hotel Inspector”. You can really sense Alex Polizzi’s intense frustration as, for seemingly the umpteenth time, she summons every last ounce of her sorely-tested patience to explain to a hotel owner that their extensive Lego collection has no place in the hotel bar, or that having their pet lizards running free around the hotel might be putting guests off a little, or that “tasteful” Victorian prints shouldn’t be hanging up in a motel tacked onto the motorway services.

What’s fascinating is that all these would-be hoteliers say the same thing… “none of our guests have ever complained about our Lego (or lizards or whatever) so we thought people liked them”.

That’s not completely untrue. If you want to run your hotel as a specialist retreat for lizard-fanciers, there might well be a good business in that. But don’t expect to become the world’s largest hotel group with a lizard-friendly approach to overnight accommodation.

But it’s also true that while few guests have complained, the hotel owner never asked them either. They just presumed that “no complaints” meant “good news”.

It might be astonishing to all these would-be restauranteurs, bakers and hoteliers that their personal eccentricities might not be valued quite as highly valued by their target market as they do, but hopefully it’s not news to you.

So before you try to improve your customer service by adding in more things, have a really good think about what you’re already doing and see if you can remove elements that annoy, irritate or frustrate your customers first.

Your business will be easier to run, your running costs will be lower and your customers will be happier.

The hidden knack to great customer relationships

But there’s a hidden knack to this.

Normally people like me, Finance Directors and CFOs, are happy to do fewer things because they quickly work out if you fire half the call centre then the wage bill halves as well. Usually, not doing things is a popular choice for a red pen-wielding Finance Director or CFO.

However life isn’t as simple as they teach you at bookkeeping school.

Although our sweary chefs, innuendo-fuelled bakers and exasperated hoteliers do cut down the menu choices and remove hotel owners’ personal garbage from their guest rooms, that’s only to get the business to “ground zero”.

It’s what they do next that is the ultimate secret of their success.

Yes, they do fewer things. But they do them so much better than they used to.

Instead of frozen steaks of questionable provenance, Gordon Ramsay brings in fresh, grass-fed Aberdeen Angus steak from an artisan butcher at perhaps twice the price of the restaurant’s more dubious historic choices. Sometimes the prices go up a bit too, but as the value to the customer increases exponentially, even after the price increase, they’re happy to pay the new prices.

Out go elaborate moulds for the finishing touches on a Bake Off cake, but much more effort goes into getting the taste of the icing absolutely perfect which is then just simply piped onto the cake.

Alex Polizzi gets rid of all the pet lizards, but she also does a stylish refurbishment of a previously tatty bar to attract guests and locals alike. They’re now happy to spend their hard-earned cash at the hotel bar in a way they weren’t before.

Building a reputation for great customer service is hard.

In the short term, you can make dramatic improvements in service just by cutting out all the things that annoy or frustrate your customers. To really cement the relationship, you take what’s left and dramatically improve the quality of your solution so that customers see a massive benefit from dealing with your organisation.

Do that well, and you’ll be a world-class service provider in no time at all.

And don’t just take my word for it…sweary chefs, innuendo-filled baking programmes and exasperated hoteliers find this everywhere they go. So you will too.

What could your business stop doing today that would make your customers happier? Ask them…their answers might surprise you…

We should fire him for not hitting his targets…or should we?

Being a Finance Director or CFO means you spend a lot of your time working out what people’s targets should be, tracking their performance against those targets, and reporting any under-performance.

While there are some intellectual challenges to the target setting process, those are generally within the control of the Finance Director or CFO as they are working on a model they built themselves.

What’s much harder to assess is what…if anything…it means when people don’t hit their targets and what…if anything…the business should do about it.

But wait, I hear you say, if someone doesn’t hit their targets, shouldn’t we send them on their way and find someone else who can deliver what we need instead?

If only life was that simple.

Firstly, there’s an underlying assumption here that the person you’ll bring in instead will do a better job than the person you get rid of. I’ve seen this hundreds, perhaps thousands, of times and all I can say is that in a significant number of those cases that assumption turns out to be wildly over-optimistic.

There’s also an assumption that the reason for under-performance is the fault of the individual. This is often overly simplistic. Yes, maybe you have other people who can hit their targets, which in your mind means it isn’t impossible for everyone to do so. But perhaps there are other factors which mean that in practice not everybody can.

In a surprising number of cases, a thorough investigation into the reasons for an apparent under-performance throws up some systems or process issues outside the control of the staff member which means they were never going to achieve the targets which had been set.

Of course, statistics cuts both ways, so just as there are people who vastly under-perform against some sort of average, there will be people who vastly out-perform. That, after all, is how calculating an average works – there will always be some people above the line as well as some people below the line.

So just not hitting a target (which is nearly always calculated as an average of some sort) doesn’t necessarily mean anything at all. I once heard a speaker say that at school he was in the 10% of the class that made the top 90% possible.

It was a matter of fact that he was below the class average, but statistics says that any time you measure the performance of a group of people, somewhere around 50% of them will probably be below the average of the group as a whole, and a broadly similar proportion will be above it.

The degree of variation is the key here.

W. Edwards Deming’s work on statistical control is the definitive manual on acceptable degrees of variation in work performance. I won’t go into the maths in detail here, but in Deming’s book “Out Of The Crisis” he shows how to calculate the level of acceptable variance in a stable system that’s operating under statistical process.

In our modern world full of “knowledge work” this is less obvious than when people are watching over car parts hurtling down a high-speed factory production line. But exactly the same principles apply.

In Deming’s world, the acceptable degree of performance around an average, or arithmetic mean if we’re being statistical about it, was +/- 3 times the square root of the average actual performance. (Please note that whatever you had set as a target isn’t relevant for this purpose as there may be factors affecting the group as a whole, either positively or negatively, which could make any target either too easy or too difficult to achieve.)

When you work through the maths, you’ll realise that the boundaries for acceptable performance are much wider than businesses typically allow in their performance management systems where amounts somewhere between 0% and 5% tend to be arbitrarily used to determine an acceptable degree of shortfall, if any, in meeting targets.

Deming’s view, as one of the foremost management thinkers of all time, is that the responsibility for under-performance is more often down to management’s poor understanding of the laws of statistics and unwillingness to improve the systems and processes used in the business which would raise the standards of everyone working in it.

And if you don’t think that’s possible, have a chat with your front line staff and your customers. I can guarantee they’ve got a long list of things that would help the business run more smoothly, even if you can’t immediately think of anything.

That’s not your fault. If you’re not working on the front line you’ve no way of knowing what that experience is like.

But it is your fault if you never ask the people who do work there how to make things better for them, and, in the long run, for the business too.

So next time someone isn’t meeting their targets what should you do?

Apply a bit of Deming’s thinking, even if just in concept without getting too deep into the statistical modelling, to work out whether the problem is really with the member of staff or with the systems and processes instead, even if other people are somehow able to achieve the targets.

Perhaps without realising it you just got lucky in the employee lottery and ended up hiring a bunch of people who happened to be unusually good performers who somehow managed to get the results you were hoping for in your initial planning assumptions.

More often than not firing people is a very expensive way of trying to solve a problem. Studies have shown that the cost of recruiting and training a new person to replace someone who’s left can equate to between six and twelve months’ salary.

And if all you end up with is someone the same or only slightly better…which statistically is a likely outcome…all you’re doing is loading cost into the business for no meaningful return.

So next time you’re wondering whether to fire someone who isn’t meeting their target, pause for breath. It’s probably not going to help solve whatever you think the problem is.

For sure, it’s harder work getting stuck into the issues and unpicking whatever is getting in the way of people hitting their targets. But it’s the only way to fix the problem for good.

Maybe a few exceptional performers can hit the targets anyway, even with less-than-perfect systems and processes to support them, Building your business model on the basis that every person you hire will turn out to be an exceptional performer is an assumption I’ve seen many business make, explicitly or implicitly. Although I’ve yet to see one where that superficially reasonable-sounding objective was ever their experience in reality.

Mostly those businesses were on a perpetual “hire ’em and fire ’em” cycle which led to enormous hidden costs within the business…bloated HR departments to handle all the hiring and firing, costs for advertising vacancies, reductions in customer loyalty and lifetime value as a result of putting rafts of under-trained, less-experienced new hires on the customer service front line and many other costs that dragged the business down, although they never appeared explicitly on anyone’s budget report. (If they had, someone would have done something about it long before now.)

Don’t be that business. Next time someone appears to be performing poorly, break out a calculator and see how the numbers stack up first. The staff member may well be doing their best in a difficult situation…the problem may, in reality, be something else.

I can’t claim statistics is always fun. But, done properly, I can claim that it helps prevent making the same mistake over and over again without realising it…which has got to be a good move for your business.

(Photo by Annie Spratt on Unsplash )