By Juan Pablo González
Sixty-one companies on the 2017 Fortune 500 list actually lost money last year (interestingly, Fortune’s list is based on revenue, not profitability). USA Today reported last year that just 28 corporations generated half of the S&P 500’s net income. For business leaders those facts underscore just how difficult it can be to deliver profitable results, especially when so many traditional measures of success emphasize growth.
We’ve seen that challenge up close. One of our manufacturing clients had consistently grown revenues, but profitability was slipping due to pricing and margin erosion. Another client’s sales force wasn’t making its numbers and while leadership asked the team to “sell harder,” it just wasn’t delivering results. At another organization, sales professionals were hitting their targets, but they were selling products that actually lost money for the company.
What’s the difference between the leaders and laggards in increasing net income and operating profit margins? How can leaders transform their teams to put the focus on profitability?
Diagnosing what’s required to transform into a more profitable organization starts with knowing where and how to look for answers. Understanding what drives profitability, not just revenue, requires the management team to think about the business differently. And that means asking — and answering — questions that you may not have raised before:
1. What pathways to profitable growth should we focus on?
When Alice, lost in Wonderland, told the Cheshire Cat she wasn’t sure where she was going, he wisely replied, “Then it doesn’t matter which way you go.”
But executives can’t take the risk of not being sure of their destinations. While there are many routes to profitability, two paths stand out as the most effective: business model innovation and go-to-market effectiveness.
Business model innovation is all about exploring, creating and marketing an effective portfolio of new and relevant products, services, experiences, or business concepts for current and future market conditions. Facing digital disruption and disintermediation from more agile competitors, incumbents may have to rethink their core business model. If the new product pipeline is drying up, successful organizations define new product/service strategies. When traditional markets are saturated, new data analytics to assess and segment the market can uncover different and more profitable opportunities.
Greater profitability can also be achieved by increasing go-to-market effectiveness within the context of an organization’s current sales strategy. Bad “business as usual” habits can lead to holding onto less profitable sales channels, devoting too many sales and customer service resources to the wrong accounts, or selling the wrong mix of products. Let data guide the strategy: profitability by account, by territory, by product or service; market data such as demographics, population trends, competitive penetration, growth potential and the cost-to-serve. It may be time for a new strategy for developing and deploying customer-facing resources — and measuring their performance — in ways that drive more profitable behavior.
2. What two or three things could we do differently to increase profitability?
Perhaps your R&D team has been coming up with some great ideas but they aren’t making it to market. Or your salespeople see significant profit potential in an unmet need that your company could address if it were more nimble. In cases like these, it takes a deep dive into the drivers of value to understand if the organization has the elements of commercialization capability necessary for success. If it doesn’t, some limiting factors might include:
- Time to market — Is your supply chain of suppliers and subcontractors optimized? Can you become a first-mover in your markets and thus command premium pricing until the competition catches up?
- Product portfolio — Are you carrying the expense of offering too many products? Is it time to kill off some of the old standbys in favor of more progressive — or even just fewer — offerings?
- Governance and decision-making — Is the management team suffering from gridlock? What steps might improve the organization’s decision-making speed, quality and execution?
3. What must we do on the path to greater profitability?
Leaders need an objective perspective on what is truly attainable within their organizations. While every organization is different, with its own culture and capabilities, increasing operational effectiveness – an issue for most organizations – is an important place to look for opportunities. Failing to execute efficiently across-the-board will undoubtedly impact an organization’s ability to grow. Learn More
Profitability suffers when different parts of the organization are working at cross purposes, when inefficient processes persist or when critical initiatives suck up resources but are not fully implemented. It is leadership’s responsibility to ensure that all of the organization’s work is integrated and aligned with its mission, vision, and strategy. My Axiom colleagues have written extensively about what’s required to drive successful transformation. The phrase “align, equip and sustain” describes successful strategic transformations, and can and should be applied in driving the changes required to improve profitability.
Profitability increases when organizations are more agile, able to anticipate shifting market conditions and adjust accordingly. For example, many organizations can benefit by adopting a more effective formal and informal organization design. Break the bottlenecks that keep decisions from being made and executed. Build the capability to leverage a solid fact base and business intelligence as the basis for implementing new ways of working.
Another opportunity to increase operational excellence and profitability lies in building a more capable and engaged workforce. The costs of employee turnover and disengaged employees put a tremendous strain on profitability. Gaps in organizational capabilities often impede the execution of critical work. More effective, well-informed workforce planning can ensure that the right size and mix of capabilities are in place.
A compelling, authentic and distinctive employee value proposition can make talent acquisition more effective by enabling employment candidates and employees to affirmatively self-select into your organization. This has the effect of increasing overall commitment and engagement while reducing turnover and recruitment expenses and ultimately improving profitability.
With 2017 quickly coming to a close, most leaders should be able to forecast with some certainty how likely they are to meet their profitability goals. If you’re not satisfied with the answer, start asking new questions. Which path to profitability is right for your organization? What could you and your team do to increase profitability? And what must you do?
Alice was very uncomfortable in Wonderland. But you don’t have to be.
By Adriano Allegrini
Mergers and acquisitions are central to most companies’ growth agendas. And while a sub-par acquisition will still deliver growth, it will likely not be profitable growth: more than 50% (Forbes) and up to 90% (HBR) of all mergers and acquisitions fail to perform as planned. This either destroys value or yields less value than originally planned.
All mergers and acquisitions are formally or informally priced based on a set of assumptions: revenue growth, margins, etc., usually codified into a 5-year P&L acquisition model, and measured by either Internal Rate of Return or Net Present Value. When a transaction fails to generate its expected value, it points to the possibility management (and the Board) has made the wrong decision. At some point during the M&A process this project was chosen over other capital allocation options based on the set of assumptions that has just been proven wrong.
The reasons why so many M&A deals fail to achieve their profitable growth potential can be divided in 3 recognizable groups:
1 – Target Specific Reasons: “Now we need to grow into the valuation.”
Either the acquired company failed to grow as planned or did not achieve the expected margins. These can be driven by reasons such as:
- Competitors take advantage of the disruption created by the transaction to capture clients / market share
- Acquiring company ends up generating additional financial burden through “big company programs” that can be onerous to the P&L of the target (sometimes called “reverse synergies”).
- Too little investment in the months leading to the transaction, creating a dry pipeline. This is relatively common and difficult to fully capture in due diligence.
- Talent: either the management team is weak or will not adapt to working under the culture of the acquirer. Not hiring or slow hiring for key positions is also common.
- Management distraction: slow new product / client development, some managers disengage due to “life-changing” bonuses and cultural shock
- Integration leadership often is assigned to the person who leads the deal. While this may make sense in theory as “they know the deal and the players best”, corporate development or the CFO usually lack the operational knowledge to conduct an effective integration without losing track of their core responsibilities. Smart companies create integration teams and dedicate someone with an operations background to lead them.
2 – Segment or Secular Reasons: “We did not see this one coming.”
Sometimes the growth shortfall is driven by external circumstances:
- A major economic event happens: it is rare to see an acquisition model with built-in accommodations for a potential recession. However, recessions happen about once a decade. If the business is cyclical, there is a significant likelihood that a recession will happen during the planning horizon, testing the target’s resiliency. While most advisors would not advocate building a recession into the acquisition model, trying to understand how the target performed during the last recession should be a key part of the diligence effort.
- Some systemic or secular risk comes to play. If one invested in for-profit education or coal mining in 2009-10 it is very likely that the transaction did not perform as planned. This happened regardless of how conservative the acquisition models were, as these sectors underperformed any reasonable projection available at the time.
- The market projection is just too optimistic and the target growth rate starts to decline sooner than predicted, heading to maturity. This is relatively common in high-growth markets, early stage businesses, and developing countries. It is common for these valuations to build in expectations of significant growth for a long period of time. There are plenty of pitch books for $10M operations forecasting to reach $200M in 5-7 years. Some will. Most will not.
3 – Inability to Capture Synergies: “We can’t really cut that, boss.”
Cost synergies are relatively easy to predict, identify and capture at a high level. For these reasons, there are many acquisition models heavily anchored on cost synergies. Unfortunately, achieving goals tracked at a high-level may become much more complicated during the post-merger phase, when new information becomes available and it is necessary to dive into details and implementation plans.
Failure to reach the synergies target tends to happen due to either loss of focus during the integration process or due to shortcomings in the due diligence process: the assumption that the acquirer will be able to eliminate parts of the acquired company structure and execute them centrally at a lower cost may not always be reasonable or feasible.
Also, it is common to see cost synergies captured in the immediate aftermath of the transaction followed by selling or administrative expenses creeping back up in the following years. This highlights the importance of tracking acquisition performance for several years after the acquisition.
On the other hand, revenue synergies are trickier to capture from the very beginning. These are built under assumptions like:
- Accessing the target’s sales channels / customers / resources the acquiring company will be able to sell more of its current portfolio
- Adding the target’s products to the current portfolio will increase its penetration / sales / market share
- Accessing the acquirer’s resources (e.g.: capital, sales force, marketing, R&D) will remove barriers for growth in the acquired organization
- New or unproven products will generate additional revenues
Revenue synergies are usually a contentious area during the negotiation. The acquirer is cautious about its ability to capture them, the target is aggressive in their growth assumptions. On the other hand, revenue synergies are very tempting. The acquirer wants to believe they can be achieved, as they can be source of profitable growth.
This is normally a difficult (or impossible) gap to bridge, making revenue synergies one of the leading reasons why transactions are structured with earn-outs or performance clauses. A performance clause can be described as acquirer and target “agreeing to disagree.”
How can the risk in executing an M&A program be mitigated?
Don’t be daunted! Even with all these risks, M&A tends to be a very important tool in a CEO’s toolkit to deliver on growth expectations, rapidly acquire new capabilities, or penetrate new markets. A
n approach for mitigating the risks in M&A is to ask yourself questions around three areas: Corporate Strategy, the M&A Process itself, and the Tools and Structure needed to source, negotiate, and integrate an acquisition. These questions will help you diagnose where your organization is regarding M&A readiness and take the corrective actions before a major transaction fails on your watch.
1 – Is the Corporate Strategy well defined and understood?
Corporate strategy must be well understood in multiple fronts:
- Capital: What are the capital allocation priorities? What is the desired capital structure? How much capital is available to invest in M&A (vs. organic growth or direct return to shareholders)?
- Risk Profile: making an honest assessment of the organization’s appetite for risk will help define how far out of the comfort zone you can venture, balance the appetite for small vs. large acquisitions, and if a transformational merger / acquisition should be considered or not.
- Role of M&A: What role M&A plays in your organization? Typical roles include: Life cycle management (need to replace declining products); geographic expansion (need access to new geographies); or diversification (need to diversify into adjacencies due to identified weakness in the core business).
- Talent: Is there an M&A team in place? Are there relationships with external advisors (consultants and bankers)? Do you have the team in place to prospect potential deals and build relationships with owners? Is your team ready to project-manage an acquisition process? Can they handle multiple processes concurrently? Is the investment committee in place and with a clearly-defined charter? Is the team ready to perform a successful integration?
- Culture: Is there a clear understanding of the corporate culture and a good assessment of how the target culture will fit?
2 – Is there a well-defined M&A process?
A well-defined M&A process should include:
- A clearly defined “deal flowchart”: a process with clear “go / no-go” gates where the decisions are incremental and aim to minimize “bad” M&A spend. It is all about aborting processes early, before too much time and and too many resources have been invested.
- A clear process to charter, select and deploy diligence teams. These are usually exciting activities but are also added workload, high pressure and tight timelines. Ideally, people selected need to be able to dedicate a good part of their time for the diligence program.
- A process to communicate with multiple workstreams during diligence and integration. The M&A team usually plays a project management role here.
- The knowledge to execute or the resources to outsource initial market scans and target selection
- A process and systems to manage, fill, and refill the deal pipeline
3 – Are there good tools and structure in place?
They simplify decision-making and ensure that the focus on the strategic objectives is never lost
- The initial diligence leads to the initial acquisition model. Usually built with imperfect information, it will lead to the first key gate of the acquisition process, a “go / on-go” decision on pursuing the target: “should we invest the capital and bandwidth to pursue this target further?” Investing the right amount of time, talent, and capital in this phase of the process is critical: too little and you will either pass on good opportunities or worse, spend a lot of time and capital pursuing an acquisition you will give up later in the process.
- A well-established and chartered investment committee is the forum for all key decisions during the M&A process. It needs to meet regularly to discuss ongoing transactions, enabling the team on the front line to move forward in the diligence / negotiation.
- If M&A is an integral part of your corporate strategy, a strong target scoring tool can help focus the discussions in the investment committee. A scoring tool helps steer the investment committee into the data on the target and prevents the conversation from becoming unfocused or emotional.
Just because most mergers and acquisitions don’t deliver on their potential, doesn’t mean that yours shouldn’t. By understanding the three core reasons transactions fail and ensuring that corporate strategy is well-understood, tools and structures are in place and key processes are well-defined, you’ll be well on the road to success. Learn More
Lateral Hiring That Truly Drives Growth: Four Critical Building Blocks
By Mark Masson
Lateral hiring, in concept, is a key driver of a profitable growth strategy – yet, in practice, it fails more often than it succeeds, costing firms and the industry billions every year. Firms have revolutionized how they approach client growth – most notably by leveraging advanced analytics to mine the massive amount of data available on client needs and buying proclivities.
But stunningly, despite the lateral hiring failure rate that plagues professional services firms, most firms have followed the same general approach for decades: search firm engaged, a dozen partner interviews to test that the candidate is “one of us,” and leaders trying to validate if a self-touted book of business is real. Some firms have evolved the process over time (e.g., adding a leadership role in charge of lateral partner hiring), but none appear to have the disciplined and comprehensive approach that decisions of this magnitude require.
It’s clear that firm leaders need to think differently to maximize the potential of lateral hiring and turn it into a successful part of a profitable growth agenda. Though law firms suffer most given the inability to legally enforce non-competes, accounting, consulting and other firms struggle mightily as well. As a provocative example, let’s consider the legal industry:
1,000 laterals per year (note there are well over 2,000 annually in the top 200)
46% failure rate 
$1,160 k average annual partner compensation 
300% typical cost of attrition 
= $1.6 billion potential annual cost associated with failed lateral hires
And this doesn’t even include the hidden costs such as increased cost of defending malpractice that is elevated with lateral hiring. With results like this, you might reasonably think “Why bother?” While ideally a firm disproportionately hires at junior levels and develops a significant percentage into productive and accretive partners, it just isn’t possible to get this right all of the time. There are also situational reasons why a lateral strategy is important, namely:
- Entering a new market without an option to acquire or merge in a firm or office
- Entering a new industry or practice area when developing depth would take too long and put a firm at risk for lagging in the market opportunity
- Shoring up a practice, industry or office after unexpected attrition
Even when lateral partner hiring is approached for these reasons, and not just to add “star power,” creating a successful lateral growth platform requires the strength of four critical building blocks.
1. Align your lateral program directly with firm strategy
Obvious, right? Perhaps, but the opportunity to hire big names, especially from a close competitor, is tempting, even if the link to your strategy is weak or nonexistent. Consider a strategy focused on two prominent private sector industries and deep technical expertise in several areas. Suddenly, a well-known federal government official with a completely different set of capabilities calls to say she’s interested in joining the firm. The scenario is all too common and becomes a high-stakes chase that often ends without bettering anyone involved. Not reconciling your lateral hiring activities with your strategy, jeopardizes the entire value of pursuing laterals at all – and therefore this must be where the process starts.
To ensure a strong link with strategy, it is important to build a type of alignment “check” into the process for every potential candidate. A dispassionate and credible partner should lead the vetting by seeking answers to such questions as:
What strategic objective would we accomplish if this hire were successful? What options are we foregoing by investing resources in making them successful? Are there other ways we can achieve the same outcome without the cost and risk of a lateral hire (e.g., developing current talent, implementing a strategic client initiative)?
What’s more, such questions should be considered very early in the process – doing so late risks biased thinking as supportive voices have put their credibility on the line and naturally will seek to confirm their perspectives.
2. Leverage analytics to predict successes and failures
Assuming a candidate’s capabilities, experiences and interest are strongly aligned with the stated strategy, much can be learned from a broader data set. What characteristics form the profile of lateral hire successes and failures at your firm?
- Undergrad and law schools attended?
- Previous firms worked for?
- Come in on their own or as a group with team members?
- Practice areas and specialties?
- Match of leverage model in current firm relative to yours?
There are hundreds of potential variables that can form a fact base which advanced analytics (e.g., predictive algorithms) can translate to insights to predict which laterals are more likely to succeed and even where to find the next ones, dramatically improving your success rate. (And, by the way, a large, portable book of business doesn’t need to be one of them.) Yet, despite the tremendous potential upside, seemingly no one is using data and analytics like this to help solve the lateral hiring equation. They certainly should be.
3. Evaluate four critical areas for every candidate (and do it efficiently)
Despite the power of predictive analytics, there will be parts of the picture where data is incomplete or nonexistent. If you want a complete picture of a potential lateral hire, you’ll need to leverage a streamlined process where every interview peels back a layer of understanding in four areas – General athleticism, client relationship development, developing others, and alignment of firm and candidate interests. Unstructured interviews are highly biased and often point to the wrong candidates (evidenced by the low lateral hiring success rate). Interviews need to be structured around specific areas and competencies, and complement and build on one another. The interviews themselves won’t be enough though. You will be much more successful if you pair the interviews with an effective assessment tool. The right unbiased assessment can highlight proclivities in new environments and challenging situations much better than traditional interviews and can add significantly to understanding a candidate’s “general athleticism.”
General athleticism: A candidate’s book of business will likely be meaningfully less once they join. Clients can love individual lawyers, consultants and accountants, only to hesitate at the moment of truth when considering the challenge of dealing with the bureaucracy of a new firm. It is helpful to know if a candidate is entrepreneurial, has the ability to be insightful and think on their feet in front of a client, and can commercialize new relationships effectively. Assessments can better identify these characteristics and prepare you to probe even further in interviews and reference checking, lessening the burden on verifying the touted book of business.
Client delivery and
business development relationship building: Traditional vetting of technical skills and a business generation track record should still be a focus, yet with a twist. Rather than look to vet sales numbers and revenue crediting (which is self-professed and impossible to fully check), vet their client relationship building skills. Rather than raw revenue numbers, understand how they collaborated with other partners to broaden and deepen client relationships over years. Find out how the individual went about introducing colleagues, if they involved associates, and whether they were successful in delivering an institutional client relationship.
Ability to develop others: Isn’t this about the individual’s capabilities? Yes, but properly leveraging others and the proclivity to do so in service to developing stronger capabilities of their team indicates an ability to focus on highest and best use. Once a partner, it is more difficult to get someone to change their behavior on leverage and development – doing so with a lateral partner hire is usually near impossible. Often a candidate who is disinclined toward development attempts to do lower value-added work themselves and focuses inward rather than out to the market often underperforming on business generation expectations.
Alignment of candidate’s – and firm’s – wants: It is easy to get so focused on whether the candidate is right for your firm that you plain forget to consider whether your firm is right for them. This is a two-way contract – literally and figuratively. Everyone loses when there isn’t a realistic preview of the culture, systems and expectations. Have a direct and open conversation about what a lateral candidate is looking for and be sure you can provide enough of it before bringing them aboard.
4. Onboard with purpose
Too many firms spend significant time, money and effort to hire high-potential laterals only to let them languish for months on end without formal guidance or support. Some may hold the “trial by fire” method up as the way they learned or the best way to pay your dues, but such an approach makes little sense when so much is at stake and simple actions can lead directly to growth.
Drive accountability for productivity and affiliation through expectations of Partner Sponsors. This means someone familiar with firm processes, people, and resources has skin in the game and, if nothing more, shortens the timeframe over which a lateral becomes productive. Six, 12, and 18-month evaluations should be directly linked to the business case the sponsors of the lateral hire put forward, and the sponsors should be evaluated on the individual’s success as well as their own.
Getting new laterals immediately involved in a client project where they have expertise helps – nothing like learning through doing, and doing so in an area of strength makes it more likely the individual will win deserved respect from colleagues. Additionally, getting the individual involved in firm-building activities (such as marketing, developing new technical approaches, or firm strategy discussions) speeds integration. Many argue that new hires wouldn’t have much to add, but the fresh perspective is often critical to such discussions. More importantly, the lateral connects to another set of colleagues and collaborators on a meaningful endeavor.
Focusing on only one or two of these areas is certain to significantly diminish the benefits and may leave you losing more than you win in the lateral market. True success (profitable firm growth) comes when every part of the endeavor is linked to executing the stated strategy; data and analytics are thoughtfully leveraged; every candidate is thoroughly considered across the four critical areas. The work isn’t finished when a hire is made – productive laterals are onboarded with purpose.
Lateral hiring can be an important part of a firm’s growth agenda, but it must be executed with focus, discipline and stamina, just as any other core part of the strategy. Getting lateral hiring right is within reach and there’s opportunity to lead the market by thinking differently.
Contact Mark Masson. Learn More
By Garrett Sheridan
A question on the minds of most organizations today—and an item that continues to be high on their agendas—is deceptively simple: “How do you drive profitable, organic growth?” Why is it that some companies tend to excel at driving growth while others struggle? What are they doing differently?
To start with, organizations successful at driving and sustaining organic growth do several key things fundamentally better than their competitors.
They use data to determine the addressable market.
Understanding which products are going to be drivers of growth is critical. But effective organizations also take a very data-driven approach to growth, investing in building a detailed understanding of sales potential for every customer and customer segment, including their existing customer base and prospects.
If an organization fails to accurately assess the addressable market, any number of issues can arise that will sidetrack its plans for growth, including a sales force that is too large or, worse still, too small.
They build sales teams aligned with growth targets.
Organizations with impressive track records when it comes to growth know that it is critical to design the sales organization appropriately to deliver on growth strategy and are adept at thinking through the technology and processes (e.g., CRM, or account planning) required to effectively manage the sales process.
They excel at determining what “footprint” is required to build the right sales organization to execute the strategy by answering the following questions:
How many “hunters” are needed to go after new customers?
How many “farmers” are needed to manage existing accounts?
What number, type and quality of people do we need and where can we get them if they don’t exist in the organization today?
How do we get the right metrics in place and the right compensation to drive the behaviors and results that lead to profitable growth?
They avoid the innovation “trap.”
Another thing high-growth companies do better is innovate. A recent Harvard Business Review article explored the four different types of innovation and how they can be successfully deployed to address specific organizational needs, concluding there was no single true route to innovation, and the chosen route must fit the problem or issue being solved.
The trap that many companies understandably fall into is assuming that innovation must be of the disruptive or breakthrough type—product overhauls, new operating models, major strategy shifts or a nebulous, “out of the box” solution to shake up the status quo. After all, innovation must be new, bold, groundbreaking and an about-face from everything we have ever done or known, right?
Not so fast—you don’t need to change the world just yet. Companies that drive incremental or “sustaining” innovation year over year have figured out that it can be very profitable, especially when it’s customer-driven and grounded in the ability to translate customer needs into products and services that deliver significant value. To do this, you will need two things: an innovation engine and a disciplined process (as well as a disposition to take a few risks).
So how does this incremental innovation actually work? Take the example of a large medical supplier with over $100 billion in annual revenues and a services line broad enough to incorporate everything from toothbrushes to large diagnostic equipment used in healthcare. Their innovation charter? To better understand how their customers were using their products and increase user efficiencies.
To do this, they spent considerable time in hospital operating rooms where they quickly sized up how typical surgeries were using their products. To their surprise, it turned out that an average surgical procedure needed upwards of sixty instruments, and nurse practitioners were selecting each one individually, essentially rebuilding the wheel each time they prepared for surgery.
How did they innovate? They bundled the instruments into procedure-appropriate packages, creating a far more efficient process for the nurse practitioner. While this may seem like an obvious solution, it created a more on-demand, as-needed inventory aligned with customer needs, reducing preparation time for surgery.
They understand which business capabilities are priorities.
One frequently seen dynamic in high-growth companies is that while leaders are adept at focusing on the revenue side of the equation, they also spend time thinking through the capabilities required to support growth. As a company grows, not all areas experience growth the same way. Highly effective companies think through the organizational-level capabilities that differentiate them and are truly critical to execution.
Consider a company like Apple. One could argue that the most valuable capabilities at Apple are product design and marketing. Consequently, organizations like Apple continue to invest in those capabilities ahead of, and then in support of, growth.
Also, to the earlier point about understanding the needs of customers and innovating around them, Apple managed the neat trick of not only understanding the current needs of customers but anticipating their future needs and, like only a handful of companies, shaping those future customer needs by creating products that addressed needs customers didn’t know they had—opening up a whole new addressable market for the business.
They get rid of walls.
All organizations—without exception—that achieve effective and sustained results have removed formerly existing barriers or silos which were preventing growth.
What happens if you don’t? Take, for example, Sony, a massive global behemoth that many agreed, during the 2001 launch of Apple’s game-changing iPod, had the requisite capabilities to come up with the next revolutionary music player.
So, why didn’t they? Because those capabilities remained locked, stuck within individual business units across the company and unable to synergize into an innovative, competitive product.
Lesson learned. Sixteen years later, many companies that have similar issues have now implemented growth and innovation “councils” to promote collaboration and help foster cultures that are better able to integrate capabilities and harness technologies across functions and business units.
It’s within reach.
Profitable growth is within reach for organizations that effectively integrate their customer needs, market dynamics and capabilities. Easier said than done, right? Yet by doing many of the same things you may currently be executing, but doing them in a more focused, integrated and customer-centric manner, you too can drive and sustain a growth engine just like your competitors.
Now you can answer the question of how to drive profitable growth—but will you?
Contact Garrett Sheridan. Learn More
By Sean Williams
The recent Wells Fargo settlement—to the tune of $185 million—has given business leaders pause to examine the contributing dynamics. A combination of aggressive cross-selling strategy, insufficient employee monitoring, and incentives misaligned with the best interests of customers set the stage for a massive employee fraud in the creation of unauthorized accounts driven by the desire to earn bonus compensation. Learn More
Hardly unique, Wells Fargo is one of many companies placing aggressive goals on customer-facing employees, most in a direct position to inadvertently do harm, and they must carefully evaluate the strategic, legal, and reputational risks.
Clearly, substantial changes are often necessary to remain competitive as employees adjust to new ways of interacting with customers to deliver profitable growth. While post-Wells Fargo activities may include new value statements and requisite hours of training, actual employee behaviors are much more difficult to monitor, and frequently fraught with blind spots.
But how is a leader to know if employees are upholding and reinforcing company policies and standards rather than potentially destroying value by pursuing individual goals at the expense of customers?
One source of safeguarding against these risks is to employ something many companies already have: a voice of customer program.
How could a voice of customer program help a bank address its blind spots in employee behavior? Obviously, customers will not know—at least not immediately—if a bank employee opened an account for them without their permission. But a voice of customer program employing outreach to recently-opened account holders asking for customer feedback on the sales process—a common activity—can illuminate such a disconnect.
But such an approach is not foolproof in that this type of feedback is solicited only from the small number of customers who have opened accounts, and many will routinely decline the interview for reasons that have little to do with unethical bank behaviors (e.g., customers commonly believe there was a mistake). Beyond customer declinations however, it may be likely that either the email address or phone number designated to the new account is bogus.
However, if the question was asked of any customer conducting any transaction on an active account, it would provide a broad data sample that could easily be used to monitor and evaluate employee behavior, notably illuminating any discrepancies between the customer’s assertion that they have not opened an account and bank records indicating otherwise. More importantly, these disconnects will reveal potential problems in branch locations where new goals have been rolled out, strategies implemented, etc.
Such dynamics transcend the financial services industry, certainly, and an effective voice of customer program can be useful for managing risk from employee behaviors in any company. For example, many automobile manufacturers reimburse dealer service departments for the parts sold for repairs, but not for actual car repair. This creates a subtle mismatch between the ideal activities of the service personnel (repairing cars) and the service for which the manufacturer is paying (installation). Such a disconnect creates easy opportunities to “game the system,” which in turn creates clear risk for the manufacturer.
When a customer returns for the same service on the same vehicle, the manufacturer can safely assume that the repair was not correctly performed on the first attempt. But the manufacturer may be unaware if service personnel created duplicate entries for the same repair, if repairs sold were not required, or if the customer had repairs performed elsewhere.
These blind spots can be easily addressed by asking the right questions of customers. For example, inquiring with a customer as to when the last time a specific repair was performed may indicate if service personnel unnecessarily replaced parts not yet past their lifetime expectancy.
In the insurance sector, companies that are increasing pressure on claims can install new processes and due diligence, but the clear potential to harm claimants means that insurance companies should be auditing customers to ensure such processes are being followed. Manufacturers changing warranties and retailers modifying return policies could also better manage risks by more frequently surveying the customer experience.
Of course, collected customer data may never be perfect—and will be effective only insomuch as the customer remembers interactions. For example, in the earlier banking illustration, the customer could incorrectly remember opening an account, when such a transaction in fact occurred, or inaccurately recall the bank, if they do business with more than one.
But this random noise will not change significantly over time or vary much by location, which are exactly the indicators a bank should be seeking. And the voice of customer data can provide vital information exactly where there are few other options for examining employee behavior. To realize monitoring value of voice of client programs, the programs should be integrated into the strategy implementation and risk management processes. Consider the following five steps:
1) Examine the new strategy with the appropriate cross-functional team of leaders from strategy, sales, marketing or human resources. Identify where the new strategy unintentionally incentivizes employee misbehavior toward customers. Eliminate as many of these incentives as possible.
2) Explicitly list any remaining potential avenues for employee misbehavior. The more specific about the different ways this misbehavior could manifest, the better.
3) Work with the data and analytics function to map out which of these manifestations can be identified today, and which could be monitored through existing infrastructure with some additional work. Think through the analytics and reporting that would be necessary to ensure that what can be seen, will be seen. The remaining manifestations of employee misbehavior are the blind spots.
4) Work with the voice of customer program to shed light on the blind spots, by asking the right questions of the right customers at the right time. Make sure that the voice of customer program and the data and analytics functions work together to produce integrated reporting for the leadership on the manifestations of misbehavior, including rates, trends, and locations. Establish baseline values of customer responses before rolling out the new strategy, goals or incentives.
5) Make sure there are no remaining blind spots. If blind spots remain, or new blind spots are identified later, consider adding a customer survey or other data collection mechanism as necessary to address the new blind spots.
This approach helps ensure that problems are identified before they become widespread, which will help put both executives and regulators at ease while minimizing situations where employees may feel encouraged to act against the best interests of the customer, mapping and monitoring such behaviors to course correct when required.