I remember back in the 90s when Economic Value Added (EVA), People Value Added (PVA) and Customer Value Added (CVA) were all the rage. The idea was that businesses should be managed by looking after shareholders (EVA), staff (PVA) and customers (CVA) in equal measure. Sounds sensible doesn’t it: Businesses should be run with the bigger value equation in mind.
But it didn’t last. When the going got tough for businesses as the Internet bubble burst, the first measure to be dispensed with was PVA. Leavers were not replaced, pay rises were capped and training was cut. And when the going got tougher still, CVA was quietly dropped too, as businesses scrambled to protect EVA at all costs. Product quality and value were quietly reduced, product promotions increased and customer service was cut.
Welcome to 2008. We are at the start of what the OECD thinks will become a prolonged recession, possibly lasting into 2010. Businesses have already started to make knee-jerk cutbacks without thinking through their predicament. The same cutbacks I remember from the last recession. And the one before that too.
And there is the key problem. Businesses, or rather the managers that run them, haven’t stopped to think before making cuts. They haven’t stopped to think how they can prosper doing BETTER, not just by doing less
- Better Customer Focus – They haven’t stopped to think which of their customers are the most valuable to them and if they should focus on these customers at the expense of less valuable ones.
- Better Value Delivery – They haven’t stopped to think about how they deliver value to their customers and if they need to be delivering more value to increase customer profitability.
- Better Staff Collaboration – They haven’t stopped to think about who within the organisation is involved in delivering value to customers and if they need further support to deliver even more value.
- Better Profitability – They haven’t stopped to think about how this creates value for shareholders and if they can grab ‘value share’ from competitors making knee-jerk cutbacks.
- Better Value-based Competition – And they haven’t stopped to think about how they should ring-fence this profitable value at the same time as they significantly reduce costs by applying proven tools from Lean Thinking.
As I pointed out in a previous blog post on What Private Equity Teaches Us About CRM in a Downturn, businesses can both increase value delivered to customers and reduce costs of doing business with them at the same time. This requires managers take a hard-nosed look at the customer value equation, at how they deliver profitable value and at who should be involved in doing so. This isn’t just the best approach to take in a recession either, it is the basis of How Customer-Centricity Drives Profits too.
Whilst a recession brings hard times, businesses who adopt the right improvement mindset and arm themselves with the right tools can prosper by doing better, not just by doing less. These are the businesses that will be in even better shape when the recession ends and managers’ minds turn once again to growth.
What do you think? Can businesses prosper in a recession by doing better, not just by doing less? Or have you started your knee-jerk cuts already?
Post a comment or email me at graham(dot)hill(at)web(dot)de to get the conversation going.
Graham Hill
Independent CRM Consultant
Interim CRM Manager
Further Reading:
Graham Hill, What Private Equity Teaches Us About CRM in a Downturn
Womack & Jones, Lean Consumption
Graham Hill, How Customer-Centricity Drives Profits
Graham – extremely well put. Guess it’s that time when we’ll start seeing CEOs desperately holding onto their bottom lines, while letting go of their employee and customer bases that produce their profits. You’d think adults would be able to figure out how profits are generated.
Dick
I appreciate your article, Graham, and agree with all your points. One phrase in particular struck my attention: “Businesses should be run with the bigger value equation in mind”. Certainly business decisions should always consider impact on customers’ experience, and what that means to both short- and long-term bottom line. It’s dangerous when managers forget that everything they do affects customer experience and brand equity (i.e. revenue and profit don’t happen unless customers make it happen)!
Lynn Hunsaker, http://www.ClearAction.biz, mentors executives for superior customer profitability by preventing customer hassles and churn.
Your points are well made, Graham. Even in the worst economy imaginable, not all customers will leave, and not all employees are too costly to retain. The trick is to know which ones.
Better information and insight are always valuable to a business, but even more valuable in a downturn, because in a downturn the difference between knowing and not knowing can literally be the difference between success and failure, as a business.
A smart business will always try to make decisions based on balancing the short-term and long-term value created, and this is especially applicable to customer relationships. Because customers have memories. Maybe it will cost more to serve a customer better today, but will that extra cost pay off later in a more loyal customer, or a referral, for instance? Yes, we have to consider the short-term cost, for sure, but balance is what is needed. A smart business decision-maker won’t simply ignore the long-term.
In my view, however, the problem is that most businesses just aren’t that smart, and as a result they are never well balanced when it comes to considering the long-term value issues involved in their decisions. On the whole, businesses are far too concerned with short-term value – you might say they are obsessed with it. Then, when a downturn happens and the short-term really IS more important than before, they are at a loss as to what to do. They have no more tools in their toolbox.
Dick, Lynn
Thanks for your comments. They are much appreciated
Don
I agree with your comments so much. It is not only important, it is critical that companies balance the short with the medium and long-term during a recession. Companies need to understand how the bigger value equation operates over all three time-scales and to respond accordingly now, so that they don’t destroy their value creating potential in the more distant future.
It is this obsession with the short-term and in particular with the rounds of knee-jerk cost-cutting going on at the moment that spurred my post in the first place.
In some ways, it reminds me of the early 90s when business process reengineering became all the rage. Companies went through rounds of mass redundancies, particularly of middle managers, all in the name of reengineering. They did cut their costs significantly, but they discovered later that they had also cut their ability to respond to changes in the business environment.
It can happen so easily when you take your eye off the value equation.
Graham Hill
Independent CRM Consultant
Interim CRM Manager