Measuring the Financial Cost of Bad Service

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1 Measuring the Financial Cost of Bad Service Making the case for service improvement by accurately measuring the potential return on investment To celebrate CSIA s National Customer Service Week 2007 executive director, Brett Whitford gave a series of breakfast lectures on the financial cost of bad service. The following article expands on the topic and encourages CEOs and executives to make a considered business case for service improvement. A study from US Company Coldwell Banker found that nine out of 10 consumers surveyed declared that great customer service is very or extremely important in deciding whether to give a service provider repeat business. Additionally, 32% of respondents indicated they change providers because of bad service. Despite the importance of satisfying the customer, it does not appear that US companies are properly gathering vital consumer feedback, with just 25% of surveyed consumers reported having frequent opportunities to voice their opinions on their service experiences. About 30% reported they had infrequent opportunities to do so. According to the findings, the average US consumer switched businesses they dealt with twice in the past three years due to bad service. The top characteristics of companies with great service were: Resolving questions and problems (66%); Knowledge of the product or service (49%); Being easy to reach (35%); Understanding requirements (35%). The top characteristics associated with bad service were; Inability to resolve questions or problems (46%); Being unavailable/difficult to reach (38%); Needing to deal with multiple people/ departments to resolve problems (37%); Lack of product knowledge (34%); and Unprofessional demeanour (33%). A study, entitled The Customer Experience Report, Great Britain 2006, reveals that 65 per cent of all respondents moved their business elsewhere after a bad service experience, while more than one quarter - 27 per cent - of Britons also indicate that once their custom is lost, it is lost forever. On the other hand, positive customer experiences have a major impact on consumers brand perceptions and buying behaviour, with 78 per cent of participants saying that they would be most likely to greatly or somewhat increase their custom on the basis of consistently excellent service. Clearly there are costs associated with money wasted on customer acquisition when customers, after experiencing the service offered, defect thus reducing revenue because of poor customer retention. This is especially true as research confirms that long-term customers are more profitable to serve. CUSTOMER SERVICE EXECELLENCE THE MONTHLY MAGAZINE OF THE CUSTOMER SERVICE INSTITUTE OF AUSTRALIA 1

2 Winning back lost custom and reputation is extremely costly as well, with more than half of respondents saying they would require evidence that the organisation s customer service had improved Winning back lost custom and reputation is extremely costly as well, with more than half of respondents saying they would require evidence that the organisation s customer service had improved, and 48 per cent stating that the organisation would have to prove that it valued their custom It is undisputed that customers leave if the customer experience isn t up-to-scratch; we also know that businesses are being mandated to control or reduce operating costs. You may feel your organisation is in a Catch-22 situation: it either spends money to improve the customer experience or cut costs and risk losing customers. A breakthrough is needed in management thinking to resolve this service/ cost dilemma by better understanding the actual Cost of Bad Service and the effect it has on cost, revenue, reputation and customer experience across all key interactions. Most organisations currently offer some poor customer experiences and find it challenging to eliminate the problems that traditionally roadblock success. These include the service/ cost dilemma, where costs increase in ratio with efforts to boost customer experience, while slashing costs often means slashing service. This mindset is not always correct as the cost of delivering poor service may not be properly accounted for and allocated across organisations. A clear correlation between the Customer Service Improvement efforts and savings and profitability has been established in many Australian public and private sector organisations through work carried out by the Customer Service Institute of Australia. While the exact figures and organisations understandably remain confidential, the following savings and efficiencies have been obtained at the same time as customer satisfaction has increased. A Major bank reduced its group customer service budget by 17% through eliminating a number of costs associated with bad service at the same time as increasing profit and moving towards its goal of leading the Roy Morgan customer satisfaction index A Major telecommunications group is beginning to implement Customer Service Institute of Australia recommendation s with an initial saving from just one suggestion of over $1 million. Future improvements in its customer service management system will result from this change. A Government department has reduced complaints being made to its Minister and other stakeholders resulting in significant savings. Similar examples come from Energy Utilities and Banks industries highly regulated by Ombudsmen. Long term Customer Service Institute of Australia members are reporting significant revenue increases and cost savings in the order of 25% to 30% of revenue. CUSTOMER SERVICE EXECELLENCE THE MONTHLY MAGAZINE OF THE CUSTOMER SERVICE INSTITUTE OF AUSTRALIA 2

3 Clearly an opportunity exists for organisations to measure the cost of non-value adding activities that are caused by bad service in a manner that will ensure that the final figure or size of the prize is accepted by the organisation s leadership team. Such a project will expose problems and wasted effort arising and being dealt with in one place but caused in another place and time. To fix the results of propagated error, an organisation has to learn about the hidden operation. The re-work and cover ups, the hours and days of wasted time in a company of people who constantly correct mistakes. Every time a corrective action is taken, you incur unnecessary re-work. By accepting these events as just the way it is, an organisation mentally hides all the re-work activities from improvement potential. The hidden operation happens in all organisations, fixing the problems, correcting mistakes, dealing with complaints and wasting time and money! Identifying the size of the prize and acknowledging the service issues causing re-work will return these two precious commodities, time and money, back to the business. CSIA has developed a Cost of Bad Service Methodology to measure the financial cost of bad service and the tangible and intangible savings and benefits of reaching Customer Service Excellence. The following diagram outlines the direct and indirect benefits of the Customer Service Improvement Program and how the model works to improve profitability through reduced costs. Figure 1 A Model of Service Quality Improvement and Profitability Improvement Effort Service Quality Improvement Word of Mouth Perceived Service Quality and Customer Satisfaction Attraction of New Customers Customer Retention Cost Reductions Revenues and Market Share Profitability CUSTOMER SERVICE EXECELLENCE THE MONTHLY MAGAZINE OF THE CUSTOMER SERVICE INSTITUTE OF AUSTRALIA 3

4 A little considered factor in justifying the cost and effort of implementing a service improvement program is the fact that there are many cases where bad service is more expensive to deliver than good. As outlined above, word of mouth and reputation risk should not be underestimated as the following example of how the cost of a very simple bad customer experience can be huge: One lost book, one disgruntled customer and a potential million dollar legal fee for Amazon - it s the latest in a series of morality tales showing how companies can be hit where it hurts most due to bad customer experience. The tale begins in October 2005, when Peter Calveley from New Zealand ordered a book from Amazon, which never turned up. One month later, Peter decided to let loose the wrath of Utu upon the mighty Amazon - Utu is a traditional Maori obligation to undertake payment upon others for a wrongdoing. And his chosen form of payment was to inform the US Patent Office that Amazon s famous patent for 1-click payment was in fact covering essentially the same idea as a patent filed 18 months earlier. As if to test Peter s resolve, the US Patent Office replied with a request for $2,520 - the cost of a full patent re-examination. Undeterred, he posted a request for donations, added a Paypal button to his blog site and two months later the fee was in the post. Fast forward to May 2006 and the request for re-examination is granted by the Patent Office. According to Wikipedia a typical patent infringement case in the US costs $1-3M in legal fees - not sure if this counts as an infringement case but one thing for sure, it s going to cost them a lot more than a replacement book and an apologetic phone call. The reputation risk makes the problem worse, once something s been written about you in the press and online, it s very difficult to get it removed. This means that any prospective customer who decides to do a search on your business name could come across it. A little considered factor in justifying the cost and effort of implementing a service improvement program is the fact that there are many cases where bad service is more expensive to deliver than good. A lesson about the price of bad service comes from the Secretary of Transportation in Vermont: Reporting to me was a smart Commissioner of Motor Vehicles named Bill Conway. When we were putting together our budget, I was pushing Bill to cut his expenses. Tell me what we can save, I said, if we don t turn around license renewals almost instantly. It ll cost us more to do that, Bill said. You re just trying to protect your budget, said I. How can that possibly be? It costs you more to process more slowly? CUSTOMER SERVICE EXECELLENCE THE MONTHLY MAGAZINE OF THE CUSTOMER SERVICE INSTITUTE OF AUSTRALIA 4

5 Independent studies reveal that COBS is costing companies millions of dollars each year and its reduction can transform marginally successful companies into profitable ones. Yet most executives believe that their company s COBS is less than 5%, or just do not know what it is. Today, Bill explained, our rule is to turn around every application the day we get it. If it is complete, it gets processed. If it is incomplete, it gets sent back for more information. If we are going to start queuing applications, then we have to build a queue management system to track the queue and make sure we don t lose stuff that gets held or hold some transactions forever. But that s a relatively small expense. The greater expense, he continued, is in customer support calls. For every day that we delay turning something around, a certain percentage of people are going to call us to ask where it is. So we get more calls. If we are managing a queue, then we have to be able to look in it to see where a particular transaction is. We have to be able to predict when it ll be handled. We have to prepare for calls from legislators who want this constituent or that one given priority. No queue, no problem. When we turn things around fast, we get very few calls. When we do get a call, the status is either we didn t get it yet or it got mailed back to you on such-and-such a date. No requests to jump the queue because there s no queue to jump. So he convinced me and I didn t cut that part of his budget. And notice he was only talking about direct expense. He wasn t even talking about the happy customers who get things back fast. To further underline the cost benefits of a implementing a Customer Service management system the following example is offered. A manufacturing company had annual sales of $250 million. Its finance department was instructed to calculate the total cost of repair, not getting information right first time, rework, scrap, service calls, refunds, sales commission paid on returned product, warranty claims and complaints. This aggregated cost; called the Cost of Bad Service (COBS) amounted to 20% of their annual sales. A 20% COBS implied that during one day of each five-day workweek, the entire company spent its time and effort making non-conforming or scrap products, which represented a loss of approximately $100,000 per day. Experts have estimated that Cost of Bad Service (COBS) typically amounts to 5% to 30% of gross sales for manufacturing and service companies. Independent studies reveal that COBS is costing companies millions of dollars each year and its reduction can transform marginally successful companies into profitable ones. Yet most executives believe that their company s COBS is less than 5%, or just do not know what it is. All levels of executives recognise that a customer service management system is an absolute necessity to survive and succeed in today s business environment. CUSTOMER SERVICE EXECELLENCE THE MONTHLY MAGAZINE OF THE CUSTOMER SERVICE INSTITUTE OF AUSTRALIA 5

6 The diagram below provides a framework for calculating COBS as a percentage of sales. Cost of Bad Service (COBS) as a % of Sales Unnecessary Capacity Rework Compensation/ Refunds Warranty Costs Lost Sales Planned overcapacity to anticipate problems Increased FTE to manage Customer Service Issues Handoffs between silos Reliance on cascade information dilutes effectiveness of communication and training Rework Costs and Restocking costs Non-material rework costs (sorting, handling, downtime and expedited shipping) Cost of credit notes Product performance not as specified Damage, Inspection Data, On time accurate delivery Warranty costs include customer credits. SLA Penalties Cost of complaints handling, Ombudsman/ Ministerial issues and compensation Complaint management Lost Revenue Customer Churn Costs Excess Inventory carrying costs due to fewer sales Inaccurate tracking of customers Poor Customer Satisfaction as surveyed 360 degree view of the customer and all products and interactions Cost of Repair system Not getting it right the first time Cost Per Sale/Customer Acquisition. Cost of Commission on sale that is later reversed Some back-end processes may not kept pace with promises made at point of sale, resulting in the customer needing to contact the organisation to correct errors, clarify information or to arrange delivery of what was promised. Cost of incorrect invoicing The Cost of Bad Service for an average company is estimated at about 30% of sales. When reviewing Australian industry, this can range from: under 3% for companies who have achieved Customer Service Excellence approximately 15%-25% for companies who have spent one year on their customer service excellence journey approximately 25% to 40% of revenue for companies who have not implemented any customer service management system. The savings for non-manufacturing service companies are potentially larger and less understood than manufacturing organisations which have long examined quality processes and are better able to currently account for the Cost of Bad Service. A large Fortune 500 communications company calculated its Cost of Bad Service at 8.6% of sales in 2005 and has set a goal of 5.4% for 2007, which will result in a savings of a little less than $1 Billion per year! Most service projects require its champions to build a business case to justify the capital spend. CUSTOMER SERVICE EXECELLENCE THE MONTHLY MAGAZINE OF THE CUSTOMER SERVICE INSTITUTE OF AUSTRALIA 6

7 In building a business case, the champions need to capture all tangible benefits that the company would obtain from implementing the program and then place a defensible monetary value on these benefits in terms of annual savings to the organisation. The goal of the business case is to ensure that the project delivers value greater than the corporate hurdle rate for capital investments. Developing Project Metrics One of the crucial elements of the project charter in the defining phase of a service improvement project is the selection of project metrics. Project metrics selected should reflect the voice of the customer (customer needs), as well as ensure that the internal metrics selected by the organisation are achieved. Metrics selected should be simple, straightforward and meaningful. Metrics selected should create a common language among diverse team members. When drafting metrics for a particular project one should consider how the metrics are connected and related to key business metrics. Typically there is no one metric that fits all the requirements for a particular situation. The first step is to identify the actual costs that are created by bad service. There are two types of costs that can be attributed to Bad Service : Visible Cost of Bad Service These include the cost of complaints handling, Ombudsman issues and compensation, rework, cost of incorrect invoicing, commission paid to sales people for services later cancelled or compensated, absenteeism and staff attrition, poor word of mouth requiring increased defensive advertising resulting in higher customer acquisition costs, etc. Invisible Cost of Bad Service Examples of invisible costs of bad service are multiple contacts and hand-offs to deal with a single issue or complaint driving increased Customer Service FTE, Hidden Activities to deal with poor service problems, lost sales due to lack of confidence in company service standards and ability to meet requirements, lost revenue based the lifetime value of the customer when churn is caused by service issues, etc. When organisations start identifying, tracking and measuring both the visible and invisible costs of bad service then they can begin to justify the cost of service improvement projects to deal with these issues. The most common approach used by teams is to understand the size of the prize or total cost of bad service including both visible and invisible. For each project the team will brainstorm metrics, and finally decide what metrics can help them achieve better performance. The team then reviews these metrics with executive management to ensure that they are in synergy with the overall strategy of the business, and an interactive approach may be utilised. Care should be exercised in determining what is measured. Metrics should be based on what, in fact, needs to be measured to improve the process, rather than what fits the current measurement system. Metrics need to be scrutinised from the value they add in understanding a process. Balanced Scorecard Approach To Metrics The Customer Service Institute of Australia advocate the use of a Balanced Scorecard type of approach for the selection of project metrics as a method for ensuring that the project meets both customer and business needs. The Balanced Scorecard approach includes both financial and nonfinancial metrics, as well as lagging and leading measures across the four areas or perspectives: Financial, Customer Service, Operational Processes, and Learning and Growth. Lagging measures are those that are measured at the end of an event, while CUSTOMER SERVICE EXECELLENCE THE MONTHLY MAGAZINE OF THE CUSTOMER SERVICE INSTITUTE OF AUSTRALIA 7

8 leading measures are measures that help achieve the objectives and are measured upstream of the event. Most Balanced Scorecard metrics are based on brainstorming, however the approach of brainstorming can have limited success in establishing sound metrics that have a good balance between lagging and leading measures. While establishing the right metrics to consider it is vital to decide on the benefits, financial and otherwise, of your organisation s service improvement program and resulting Customer Service Management System, the total cost of the implementation of a customer service management system requires financial justification. From the identified savings the total cost of the system (implementation, training, measurement of financials, additional headcount to manage the system, annual maintenance etc.) needs to be subtracted to obtain the Average Return per annum, remembering savings made will be ongoing and usually increased over time as the CSIA s customer service management system becomes more effective and improvements continue. A well framed request for budget that addresses bottom-up operational needs and top-down management requirements, along with well quantified financial justification will go a long way in satisfying all relevant stakeholders to approve the funding for the Customer Service Management System. Financial Justification: What is the financial return from the system? Total annual savings from a national customer service management system Total cost recovery savings Total savings from reduced rework Total savings from reduced complaints and less escalation Total savings from better tracking Total savings from more accurate information from more knowledgeable staff Total savings from improved equipment utilisation Total savings from less expedited and incorrectly routed freight Total savings from reduced complaints and ombudsman or Ministerial issues Total savings from reduced credit notes, discounts & compensation Total savings from reduced inspections Total savings from reduced FTE and staffing turnover CUSTOMER SERVICE EXECELLENCE THE MONTHLY MAGAZINE OF THE CUSTOMER SERVICE INSTITUTE OF AUSTRALIA 8

9 Case Study in Bad Service in the building industry. Take a look into the most prevalent of the building industry s customer service issues, window and door installation, which was witnessed on 23 percent of the 100,000-plus site inspections Criterium Engineers has carried out. Specifically, we ll look at what happens when your windows and doors are not installed properly. The Later the Detection, the Greater the Cost When windows and doors aren t installed correctly in your communities, how are the different areas of your business affected? How does timing affect the total cost of this quality issue? Scenario No. 1 (Best-Case): Your Site Supervisor Identifies the Issue It s a clear afternoon, and your site supervisor is visiting homes throughout your Shady Pines community to check construction quality before he gives the trades the green light to install siding. He notices the windows and doors on several of your homes have not been installed correctly, leaving gaps for water to enter and damage drywall, flooring, etc. He stops work, gets the trade super to check on the issue and has him realign his team to go back and fix the problems which could be 20 or more installations per home and on tens of homes just in that community. Scenario No. 2 (Worse): It Becomes a Customer Service Problem Say your site super is having an off day, or the few houses he visits in a community aren t the ones affected by the window and door issues. Six months down the line when many of your homeowners have moved in, problems are popping up, which could affect up to 23 percent of the Shady Pines community. Homeowners are pressing your customer service team to fix the issues; your representative investigates the root cause, coordinates the repairs, tries to appease the unhappy customers, and so on. Scenario No. 3 (worst-case): Insurance Agents and Lawyers Get Involved Your Customer Service team has done its best, but the situation hasn t been resolved to your homeowners satisfaction. First, your homeowner complaints turn into multiple warranty claims. What s the cost of this quality issue to your business in the near-term, and longer-term, given residual annual premium price hikes? Some homeowner claims turn ugly and end up in lawsuits. What are your resulting legal costs and possibly even litigation/punitive damages? Liability costs rise accordingly. The Ripple Effect: Impact on Your People and Reputation No matter when the issue is identified it will affect two other areas you may not already have considered. Marketing And Sales Word gets around the neighbourhood, your reputation gets tarnished, you end up with lower referrals and, potentially, lower home sales. This can have tremendous impact on your brand value. For many mid-size builders, your brand equity is a major component of your company s financial value especially in a time when you may want to sell your business. If you re a giant, stock market-driven public homebuilder, poor public perception or newspaper liability can negatively affect your stock price. Human Resources You start to lose your best employees because they re tired and are losing pride in your company. You now have to find and hire new team members, who by HR experts estimations can ultimately cost your business up to three times the salary for each manager lost. CUSTOMER SERVICE EXECELLENCE THE MONTHLY MAGAZINE OF THE CUSTOMER SERVICE INSTITUTE OF AUSTRALIA 9

10 A Key Tool in CSIA s Methodology - Activity Based Costing (ABC) Activity based costing is an accounting methodology that assigns costs to activities rather than products or services. This enables resource and overhead costs to be more accurately assigned to the products and the services that consume them. With activity based costing, organisations can identify where to remove waste, improve processes and eliminate re-work, as well as understanding what drives their costs. They can also see the degree of alignment of their cost structure with their organisation s mission and strategy. CSIA believes that utilising ABC to establish Activity-Based output data serves as enabler for ongoing improvement programs. Key steps in the methodology involve defining the major business processes and key activities of the organisation using Process and Customer Touchpoint Mapping and tracing operating costs and capital charges to key activities. The tables below demonstrate the differences between traditional accounting models (general ledger style) and activity based cost accounting models, for an Insurance Company s claims department. Both styles of accounting are required, yet that of most immediate value in allowing managers to make decisions is the one on the right the activity-based view. The general difference between the two is the structure: Traditional Accounting (General Ledger) View Claims Processing Department Actual ($) Plan ($) Favourable / Unfavourable Salaries 621, ,00 (21,400) Equipment 161, ,000 (11,200) Travel Expenses 58,000 60,000 2,000 Supplies 43,900 40,000 (3,900) Use and occupancy 30,000 30, TOTAL $914,500 ($34,500) Activity-Based View Claims Processing Department Key / scan claims $31,500 Analyse and re-work claims $121,000 Suspend claims $32,500 Receive provider enquiries $101,500 Resolve member problems $83,400 Attend training $45,000 Determine eligibility $119,000 Make copies $145,500 Write correspondence $77,100 Process batches $158,000 TOTAL $914,500 As we can see from the above tables, the activity-based view allows more transparency of where activities that stem from bad service exist and how much they cost. In this view, we can see that Analyse and re-work claims along with Resolve member problems are high volume areas. In making one or two efficiency changes, the organisation has an opportunity to save money and improve service to customers. CUSTOMER SERVICE EXECELLENCE THE MONTHLY MAGAZINE OF THE CUSTOMER SERVICE INSTITUTE OF AUSTRALIA 10

11 ABC doesn t eliminate or change costs, it provides data about how costs are actually consumed. ABC doesn t eliminate or change costs, it provides data about how costs are actually consumed. In the above example, if you wanted to reduce costs using traditional data you would have to decrease salaries, or decrease costs of supplies. You don t know enough to change the forms, processes or overhead costs. In order to correctly associate costs with products and services, ABC assigns cost to activities based on their use of resources. It then assigns cost to cost objects, such as products, processes, rework or customers, based on their use of activities. This information assists in making decisions about pricing, outsourcing, capital expenditures and operational efficiency. Customer service improvement teams can use ABC to determine the cost and benefits associated with their reengineered processes and systems. This cost and benefit analysis will then become part of the overall business case for the project. An ABC approach will account for: Activities/processes (comparing before and after the customer service improvement project) The frequency and cost of the activity/ process (comparing before and after the customer service improvement project) The do-nothing scenario (what would happen if we do not do the project) Which processes provide value (i.e. are needed to attract and retain customers, result in operational savings) The steps needed to develop ABC data include: Step 1: Define the major business processes and key activities of the organisation (Process and Customer Touchpoint Mapping). Step 2: Trace operating costs and capital charges to key activities. Use existing accounting and financial data which includes labour and capital equipment expenses and any other resource that can be changed/eliminated. Some reports to analyse include: budget, general ledger, supplier invoices. Step 3: Link activities to processes and identify the cost drivers. The best way to do this is to actively engage the doers of the process. Have the doers of the process identify where the costs come from then seek out data from that source. Step 4: Summarise the total costs for each process. Step 5: Once processes are reengineered then the new costs must be tabulated. Finance as a Business Partner A key decision made at the design stage of the customer service improvement project is that finance has to be involved in the customer service improvement project from the very beginning. This may sound easy, but in fact it is not, especially in the beginning. Many operations people see the finance people as bookkeepers, scorekeepers or auditors. Operations people typically do not like it when those finance guys get involved in operational decisions. This is the first big barrier to overcome. Throughout the process, finance works closely with teams to identify the benefits of a given project. Many times projects actually report more benefits than process owners originally envisioned due to insight provided by the finance representatives. During this period, finance and the process owner agree on how the benefits will be calculated once the project CUSTOMER SERVICE EXECELLENCE THE MONTHLY MAGAZINE OF THE CUSTOMER SERVICE INSTITUTE OF AUSTRALIA 11

12 Many times projects actually report more benefits than process owners originally envisioned due to insight provided by the finance representatives. is implemented. At the end of the process, immediately before transferring ownership of the solution to the process owner, there is a second official review by finance and a recalculation of the expected benefits using the data gathered during the project, the customer service improvement team does not become involved with calculating the benefit. They can focus only on the improvement process. During the 12 months following the date solutions are implemented, the company captures and reports the benefits. After that period, a new baseline is calculated using the already improved Key Performance Indicator (KPI). From that time forward, only incremental benefits beyond the new baseline are captured and reported. If there is room for additional improvement, a new customer service improvement project is generated. While the involvement of finance in a project begins before the involvement of the customer service consultant, it also continues long after the customer service consultant has transferred ownership of the solution to the process owner. Some projects start capturing benefits during the initial phase of the project since some portion of a solution may create immediate benefits even before the entire solution has been executed. Every month, all the benefits as well as the performance indicators are reported internally in a standard format. By doing this, there is continuous tracking on the KPIs that are being improved and also the financial impact of those KPIs on the bottom line. Both indicators are compared with the official target that was agreed to at the time the project was launched. By applying financial knowledge, business savvy, change management and common sense, the finance department and your organisation s management will know with certainty that the organisation s customer service improvement program has accomplished beyond what was targeted both on a customer satisfaction level and financially. Conclusion I trust the points above demonstrate how organisations, by focusing on the wrong financial data, actually deliver poorer service more expensively. I would like to conclude this overview of the cost of bad service by providing an example which demonstrates how not properly understanding the cost of bad service can be more than a reputation risk. The story is from Harvard Business School Professor W. Earl Sasser. In this edited transcript, Sasser discusses how a seemingly harmless budget trim upended an airline s plan to pamper its best customers. Airline Case Study One of the companies I ve had chance to work with is a large global air carrier. And working for an air carrier is really great, the chance to fly first class. At some point, I had to give a presentation to their top management group. I was going to give the presentation right at the airport. First class flight from Boston to that location. It was really a great meal, great service. Everything was perfect. As we pulled into the gate, the plane (was) met by someone on the ground. The person CUSTOMER SERVICE EXECELLENCE THE MONTHLY MAGAZINE OF THE CUSTOMER SERVICE INSTITUTE OF AUSTRALIA 12

13 It told me a lot about the pressures of an organisation, and the discontinuity between making budget and not making it. said, Would Professor Sasser meet the special service agent?. I was feeling a little uncomfortable because I was going to talk about customer service and customer focus and these folks were really sort of showing me stuff I d never seen before. They were doing a really outstanding job, so it was like, What am I going to tell these folks? It told me a lot about the pressures of an organisation, and the discontinuity between making budget and not making it. We got into the golf cart. We went through customs...we took my passport and just sort of waved it. We were down in baggage claim in about ten, twelve minutes. And I said, Wow, this is unbelievable. So I asked the woman, This service that you re giving to me, do you give to other folks? She said, Sure. We have a frequent flyer program, and this frequent flyer program identifies our very best customers. And our very best customers often fly one or two times a week. Now, you re not in that category of frequent flyers, but because you re talking with the top management group, you re in that category for the day. Now, first thing, is it okay to discriminate in favour of your best customers? Can you use that information? You re not bothered by that? She was trained to handle this service. She was pumped because she had degrees of freedom. She could have rented a limo, written a ticket for another airline if that was necessary. Anything it took to satisfy this customer at the very top end. So, I kept quizzing her about this and it was obvious that they d done a lot of homework. They understood the value of this customer to them. After about twenty minutes, I ran out of things to talk about, and the bags still hadn t arrived. The first-class folks had just come down, and I had expected the bags to be there when the first-class folks arrived. The standard would probably be that when first class arrives, have the bags there. Coach people came, no bags. Now we re all waiting, and it takes an hour before the bags arrive. I m a little upset because I need to get on with my presentation, getting checked out and so forth. But, I m a little happy too, because now I have something to talk about. And so I m holding this little story in my back pocket waiting for the appropriate time in my presentation. As I did my presentation, I started talking about the service bookends. The first encounter and the last encounter are where the people really remember the service bookends. And as I started describing what had happened to me, I was very accurate. I told about everything. Up until this point, the faces were looking up, all the executives were looking me right in the eye. And I started telling this story. Once I got past that it was a great flight... and I started waiting in baggage handling the eyes no more eye contact. It s all gone. After the presentation people came up to talk to me. There was a person just standing over to the side. When the last person finished, this person walks over and said, I m responsible for baggage handling at the airport. And I said, I m sorry that I told exactly how it happened. I didn t make anything up. I thought you should know that... it s very complicated when you re in the airline business, because there s so many interactions on the trip. Some of them the airlines control, some of them not. But that last interaction can have a big impact. CUSTOMER SERVICE EXECELLENCE THE MONTHLY MAGAZINE OF THE CUSTOMER SERVICE INSTITUTE OF AUSTRALIA 13

14 I just wanted to drive home that point. Sorry, if I caused you any problem. He said, I m not surprised it happened. I said, What do you mean, you re not surprised? He said, This is the last week of the month. This is the last month of the quarter. I have deliberately understaffed baggage handling to make budget. Now, what about that? He said, I deliberately understaffed baggage handling to make budget. First question is, did this person make budget? Probably did. Probably it is a cost centre, and I suspect this person was rather close to either meeting or not meeting budget. And it also told me a lot about the pressures on an organisation, and the discontinuity between making budget and not making it. Not making it even by a little bit is bad. Making it is absolutely great. And therefore, this person did something because they were close to meeting their budget target. What s the implication of this behaviour? Does it have any consequences? Economic consequences? What are they? Would someone who was on that airline this time would consider flying another airline the next time he or she had a chance to fly? Most likely Baggage handling That s not going to affect my revenue, right? Whose revenue is that revenue that I ve lost? It s my best customer! MEE BRETT WHITFORD Executive Director Brett Whitford Executive Director Customer Service Institute of Australia Brett Whitford is the founder and an Executive Director of CSIA. He is the author of five best selling business books on technology, best practice and customer service. His business experience is extensive, including joint ventures with International Prentice Hall. Brett is currently completing his new book on customer service, showcasing some of Australia s top organisations. Brett founded Beaumont Publishing House at 22 and listed his consulting, Brett Whitford is the founder a certification and publishing company on the Australian Stock Exchange in December Director His of CSIA. He is the au experience and expertise makes him a highly sought after speaker and he often lectures selling for universities, business books on international conferences, radio and television. practice and customer servic experience is extensive, Brett, along with selected CSIA members, recently wrote Australia s first Strategic Customer ventures Service with International Pr Management MBA unit for Deakin University. is currently completing his customer service, showca Brett is considered Australia s leading customer service consultant. He has worked with some of Australia s top organisations. Australia s, and the world s, top companies and government departments such as Nokia, Johnson & Johnson, Defence Housing Authority, Medicare Australia, Aurora Energy, Optus, Telstra, Brett Manitoba founded Beaumont Pub Telecommunications Services, Energex, Queensland Rail, Brisbane City Council, Manningham 22 and listed City his consulting, Council, Warrnambool City Council, Service Essentials, Westpac, ANZ, AAMI, Yarra Valley publishing Water, company Ergon on the Energy, Fone Zone, Colorado Ltd., and numerous other organisations. Exchange in December 2000 and expertise makes him a hi speaker and he often lectures international conferences, rad Ph: Brett, along with selected recently wrote Australia s Customer Service Manageme Deakin University. CUSTOMER SERVICE EXECELLENCE THE MONTHLY MAGAZINE OF THE CUSTOMER SERVICE INSTITUTE OF AUSTRALIA Brett is considered Aus customer service consultant. with some of Australia s, 14 and companies and government d

15 Certi ed Customer Service Manager Course Certificate and Diploma for Customer Service The Customer Service Institute of Australia is currently taking applications for its two day Certi ed Customer Service Manager Course (CCSM). Some additional course work is required. The CSIA has worked with leading organisations to develop a training, assessment and certi cation program leading to Australia s first and only formal and nationally recognised Certi ed Customer Service Manager designation. Organisations can now benefit from qualified service professionals. The course includes a workbook and a two day workshop followed by an assessment. By meeting Government criteria certain candidates may attract incentives of up to $4,000. I would like to congratulate the Customer Service Institute of Australia for putting together such a practical program in the CCSM Course. I have found its exibility very valuable in allowing me to work at my own pace and in implementing what I have learnt almost instantly through the workplace based activities and assignments. Anthony Keyes, Baxter Healthcare For more information Phone: SSIA C Certified Customer er vice M anager

16 Celebrate CSIA s National Customer Service Week

17 Brett Whitford Executive Director

18 What is the Cost of Bad Service? According to research, consumers switched businesses they dealt with twice in the past three years due to "bad service

19 What is the Cost of Bad Service? 65 % of all respondents moved their business elsewhere after a bad service experience, 27 % also indicate that once their custom is lost, it is lost forever. Winning back lost custom and reputation is extremely costly Over 50% of respondents say they would require evidence that the organisation s customer service had improved 48 % state that the organisation would have to prove that it valued their custom.

20 The top characteristics of companies with "great service" were: Resolving questions and problems (66%) Knowledge of the product or service (49%) Being easy to reach (35%) Understanding requirements (35%)

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