The purpose conundrum

Toby Rubbra, Vanguard Consulting

Toby RubraLocation: UKcontact Toby

For leaders in service organisations struggling with poor Net Promoter Scores (NPS), multiplying complaints, mounting regulatory pressures and disruptive incomers threatening their market share, ‘becoming more customer-focused’ seems like the obvious remedy. To this end, their usual first step is to appoint managers with customer-facing roles and large budgets to drive what they might call ‘client-centricity’.

Yet as if the challenges of meeting their own function’s arbitrary budgetary objectives and targets weren’t enough, the new structure now confronts them with the need for yet more internal meetings to implement and monitor customer initiatives at the behest of the fresh-minted customer directors.
But hang on a minute. In the rush to implement solutions, no one seems to be asking why the organisation became un-customer-focused in the first place. Nor are they questioning whether building what is in effect a new function or sub-function, complete with budgets, strategies and projects, will solve the underlying problem.

The challenge of change

Herein lies the first challenge. If the organisation sees itself as basically successful – in the same position as, and no better and no worse than competitors – there is no compelling case for fundamental change. The leaders’ organisational worldview – basically that articulated 250 years ago by Adam Smith, based on division of labour and functionalisation to increase productivity, with attendant management “norms” of standardisation, specialisation, inspection and extrinsic motivation – remains intact. Part of this functionalised worldview is that operations and customer service are separate, so that there is one director for ops and another for customers. In this perspective customer service is a bolt-on to existing operations which assumes that problems such as poor NPS and rising complaints can be fixed by bringing more resources into play – someone taking responsibility for the customer, managers getting ‘back to the floor’, training the front line or doing stricter inspection.

Actually, the problem goes much deeper than that, to the very heart of management thinking. In today’s functionalised organisations, managers can’t see that the sub-optimisation of service that shows up in complaints and weak customer loyalty is inherent in the way the work is designed, and the way the work is designed reflects assumptions about purpose – what the organisation is there to do.

A question of worldview

Basically, organisations become un-customer-focused because they are torn between two different purposes – serving the customer and serving the shareholders. The problem with trying to serve two different purposes at the same time is that each has its own distinct worldview and its own set of action strategies for management. The balanced scorecard that often sits precariously in the middle between the two only compounds the difficulty by insisting that both are equally important. Why would one treat two differing compasses with equal priority in trying to reach to the same destination?

The prevalent worldview among managers today is that the purpose of the organisation – what it is there to do – is to make money for shareholders. Hence their primary purpose (compass) becomes to ‘deliver profits through increasing revenue and reducing costs’. With the latter hard-wired into personal objectives, promotion and personal wealth it is unsurprising that management ingenuity is focused on sales incentives and the rigorous control of operational costs, rather than on satisfying customers and their needs. Yet the relationship between the customer and the solution is naturally and crucially intimate. Focusing on managing the budget and meeting internal targets has the opposite effect to the one intended, causing existing customers to leave for other organisations that look after them better, and dissuading new customers from replacing them. Perversely, it drives organisations to become un-customer-focused.

Becoming really customer-focused

To create a customer-focused organisation – and to prevent it becoming un-customer-focused – it is necessary to abandon this worldview and replace it with different one.

In the alternative worldview, there is a systemic relationship between customers, the core work and the purpose of the system. There is no split between them. When the purpose is to deliver what matters to customers rather than what matters to shareholders, the organisation drives by a different compass. It focuses on delivering these outcomes and doing so by only doing the value work necessary to deliver what matters. In this way we ensure that our customers get what they want when they want it and, if we are ruthless about just doing the value work, costs fall as waste and failure are driven from the system. As customers talk well of us, more arrive. As a consequence of focusing on the customer, the brand, market share and profitability all improve.

Becoming customer-focused, then, isn’t a matter of adding a few customer-related initiatives to what is already being done. That is just an attempt to paper over the fatal flaw at the organisation’s heart – the confusion over purpose, over ends and means. To become more customer-focused, leaders have to change the worldview that, although not explicitly articulated, is implicit in the measures being used and currently governs how the system is configured and performs for the customer. The only way to change a worldview is the acquisition of knowledge. To acquire knowledge, leaders have first to be curious enough to ask why their organisation was not customer-focused in the first place.

This article appears in Edition One of The Vanguard Periodical: The Vanguard Method in Financial Services. Ask for your FREE hard copy or PDF.

We need to change the way we think about banking

Patrick Hoare, Vanguard Consulting

I started working for The Leeds Permanent Building Society in 1992. It was a different time and now feels like a different world. I was happy in work, as pretty soon I’d learnt to deal with most of the customers’ requests on my own. We didn’t measure it, but I’d guess that 99% of customer demands were dealt with at the first point of contact; efficiency was high, costs were low and service was good. Low costs – now that was something that was measured.

In the early 1990s, the only measure I remember receiving attention was the cost : income ratio (cost per pound of revenue made) and, for those interested, we kept it below 40%; if memory serves, we got it down to 38.6% in 1993. This was an explicit drive for the whole company that everyone bought into, and we used it to rate ourselves against other banks and building societies.

From being the one explicit driver, the cost : income ratio has now disappeared from view into the notes at the back of the annual accounts. In 2014, KPMG reported cost:income ratios at five major banks of between 51 and 87%, with the depressing long-term trend set to continue. Between 2009 and 2014, the UK banks’ cost : income ratios deteriorated faster than in any other developed nation.

Patrick graph
KPMG 2015 ‘Banking results 2014: A paradox of forces’ April 2015, p11

How can this be when banks spend so much time, effort and, yes, money on controlling costs? What strategies are being put in place to bring about improvement, and is there any evidence that they work? Let’s look at some of them and the thinking they are based on.

1. Reduce costs by setting up ‘centres of excellence’ where roles are specialised and risk can be carefully managed and mitigated

The skills I used in 1992 have largely been transferred to remote service centres, ever bigger in size and smaller in numbers. This trend is based on a belief that economies of scale will reduce costs, a belief that has also led to service centres increasingly being outsourced and offshored. But we’re missing something here.

Something that used to involve one person (for instance agreeing and processing a secured loan) now requires input from up to 10 people, lengthening the time to complete the transaction and driving up customer frustration beyond recognition. The result is mushrooming failure demand (knock-on demand caused by the organisation doing something wrong or incompletely for the customer the first time), which is then dealt with by drafting in extra resources. Needless to say, the cost: income ratio soars. ‘Economies of scale thinking’ needs to be replaced by ‘economies of flow thinking’.

2. Drive change and cost control through central functions like IT

Large IT and change programmes designed to reduce long-term costs command huge budgets and are run by central teams remote from the reality of what happens on the front line. The programmes have plausible intentions, but 90% of IT projects fail to deliver. IT and change teams drain money and resource, while headcount is removed from a bemused and harassed front line. Since the initiatives are never used to study the system from a customer’s perspective, the real issues go unearthed and undealt with. In sum, the return from the massive IT spend is disappointing at best. Once again the current thinking – putting IT first as an instrument to drive change through to the customer – is exactly back-to-front, creating huge extra costs.

3. ‘We can drive improved performance by strengthening support functions’

IT and change programmes aside, I have seen a big increase in bank ‘support’ areas. Organisations have come to believe that the key to improvement is through performance management – managing people. Back in 1992, in an environment of low-cost : income ratios and flat-rate bonus schemes for all, six ‘personnel reps’ were sufficient for an entire company. Compare that to today’s small army of people dedicated to HR, performance management and bonus calculations. In some places, HR teams are outsourced and/or offshored and re-christened HR Direct. I see a similar growth in risk, audit and compliance teams, all adding substantial cost but no value. The problem is not the people, stupid; it’s the system!

4. Cost cutting by channel management

The thinking here is that moving customers to cheaper channels will reduce costs. If a transaction costs 67p online, £2.81 by phone and £9.50 face-to-face, pushing the online offering seems a plausible response. Yet it fails to take into account two things.

First, not all customers want to use online banking channels exclusively, and those that don’t will take their business elsewhere. Second, unless it is informed by understanding of demand and what matters to customers, the design of the banks’ internet offering is likely to be poor, meaning that frustrated customers have to visit the branches anyway to get what they require. Better to design against demand and free up customers to use the channel of their choice. Concentrate on creating value for customers, not cost per transaction.

5. ‘We need help – we can’t do this for ourselves’

As a consultant myself, I’m flabbergasted at the number of consultants employed by the banks these days. Some of the big consultancy firms have had teams in some banks for years. What is the return on these contracts? The justification must be that it will save money in the long-term – but is that really happening? With a different level of thinking, banks can learn to study their systems from a customer’s perspective and unlock massive potential for themselves, at the same time-saving a huge bill from the men and women in sharp suits – a double benefit.

6. Increase revenue by selling more products

What about increasing revenue while reducing costs? The preferred strategy in banking has been to increase marketing budgets to build better products which will bring in more customers. This done, the next stage is to incentivise staff to sell more of these products, the primary aim being to increase product holding per customer – for example, if the holding is currently 1.3 products per customer, the goal is to increase it to 2.5. Customer Relationship Management tools are then acquired at large expense to prompt colleagues to push products to customers, turning off many while persuading politer ones to accept the products only to regret it afterwards. Or ‘project teams are established to work with ‘Products’ to dream up ‘the best offering in the marketplace’. In my experience, this tends to be people swapping amazing ideas against a backdrop of wanting to at least match what their competitors are offering.

So, what’s the impact here? Once again, the key point is that decisions are made away from the front line. Analysis usually reveals that customers want products that work, rather than sing, dance and salute. Then, there’s the cost of incentivising people to sell the products. Banks are currently taking a hit of £40 billion – yes, that’s right, £40 billion – in compensation and fines for the mis-selling of endowments, personal pension schemes and PPI. After the endowment fiasco of the 1990s, you might think the banks had taken on board the dangers of incentivising people to meet sales targets, but experience suggests otherwise. Fines and costs of mis-selling packaged bank accounts are just starting. There are other hidden costs. Many ‘sold’ products are never used. In one study I carried out, 54% of new accounts opened in one of the major banks were never funded – so all the work selling the accounts and providing cards, PINs and statements to fill them was money tipped straight down the drain.

The startling upshot of all this? Overall, the major banks show a 227% increase in costs between 2000 and 2012. Meanwhile the cost : income ratio, at best stable, for most banks continues on its merry upward trend.

And, it’s set to get worse.

I recently had the dubious pleasure of spending six weeks with a project team tasked with the digitization of a bank. The top line was this. A team of 45 was put together in London, more than half of them external consultants and most of the remainder bank colleagues from areas such as ‘change’, ‘compliance’ and ‘risk’. The two token frontline colleagues were largely marginalised. We were asked to imagine customer journeys using personas, dream up what a perfect journey would look like and then play that journey out in front of ‘live’ customers (paid to come in and answer loaded questions). The ‘creative’ consultants drew up storyboards and imagined how a customer could walk past a bank and be sent a phone alert telling them about the latest products available online, while a business case was drawn up to show how many frontline staff could be culled on the back of these great ideas. So, huge costs and no study or understanding of demand or how the current system works for customers.

Doesn’t anyone care about profit?

When I began work in 1992, I had no targets and I worked with a set of principles based around ‘Customer First’. Morale and customer advocacy were high; staff turnover, fines, complaints and cost : income ratios low. Since that time, the drive for standardisation and centralised control and a fierce focus on reducing costs has perversely driven up costs inexorably. My conclusion: instead of worrying about costs, volumes of customers and market share, banks need to move back to a focus on the measure that says it all: the cost : income ratio.

The past 20 years have seen a wholesale destruction of banking morale, reputation and cost : income ratios. In the next 20 years that needs to be reversed by a return to customer-shaped profit centres where potential and innovation are unlocked, central support is available on a subservient ‘pull’ basis and the system is governed by principles and measures related to customer purpose. Using the right principles alongside 21st century technical and other advancements, properly employed, makes a return to cost : income ratios of 38.6, or perhaps even lower, entirely feasible. What’s needed to achieve them is not transformation through large investment programmes, but a change in management thinking. Are the banks prepared to embrace it?

This article appears in Edition One of The Vanguard Periodical: The Vanguard Method in Financial Services. Ask for your FREE hard copy or PDF.

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  • Is integrating services a good idea?
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The Vanguard Method in healthcare

In July 2015, GE Healthcare Finnamore invited John Seddon and Andy Brogan to spend a day with senior executives from the acute sector. Edward Parkes, GE Healthcare Finnamore, wrote a summary of the event: Demand, Variation and Systems Thinking.

It is available free of charge.  Leave us your email below to download the summary.  

Please note that the summary of this event is a 6.5MB PDF.

An exploration into the failure of Lean

Are you curious about Lean’s failure to have an impact on the bottom line?

John Seddon and Brendan O’Donovan (Vanguard’s Head of Research) have written a new paper: An exploration into the failure of Lean.

It is available free of charge.  Leave us your email below to download the paper.

The purpose of the paper is to show that the ‘Lean’ movement is based on a flawed interpretation of innovations that originally occurred at the Japanese automotive manufacturer Toyota in the 1950s.

Seddon and O’Donovan argue that the codification of Toyota’s innovations ran counter to the instructions of the original architect of the Toyota Production System, Taiichi Ohno. As a result, modern leaders, spending millions on Lean programmes, are discovering that the results don’t fall through to the bottom line. Seddon and O’Donovan also illustrate what could and should have been done – and still can be done – to emulate Taiichi Ohno’s innovation in service organisations today.

The Vanguard Method in youth protection wins award

Youth Protection Region Amsterdam (Jeugdbescherming Regio Amsterdam), working with Vanguard Netherlands, won ‘The best public sector organisation of the year 2014’.

The jury said:

“Youth Protection Region Amsterdam has made a profound change in its methods and culture with a lot of guts and passion. Passion, pride and professionalism in this organization is nicely connected.

This has led to a dramatic performance improvement and a big increase in well-being and professional pride of the staff. In a system that is grim, gripping and tough. The success achieved by contemporary mobilization of ‘bottom-up learning from the professionals.

The organization has become substantially cheaper and the quality of its performance has improved tremendously.”

Results summary:

60% reduction in ‘out of home’ placements, 50% less protective measures are now needed, 45% less probation measures are required and referrals to the service have fallen by 28%.   Staff sickness has also reduced by 26%.

Further information:

On 27th January 2015, the annual Government Awards 2014 took place in the Hall of Knights in The Hague.

100 applications were received, 10 organisations were shortlisted, and 4 finalists were visited by the jury.  The jury judged the award on the following criteria:

  • mission enthusiasm,
  • effectiveness,
  • cost consciousness,
  • reliability,
  • expertise,
  • openness,
  • learning ability,
  • good employment,
  • resilience,
  • and community involvement.

With a population of 1.4 million residents in Amsterdam, Jeugbescherming Regio Amsterdam support 6000 families and over 12000 children with child and youth welfare, protection, and probation.