What Business Leaders Can Learn From "Moments of Truth": An Interview With Former SAS CEO Jan Carlzon

In 1981, Jan Carlzon became CEO of the problem-ridden Scandinavian Airlines. Well before he left the company in 1994, Carlzon turned the airline around by focusing on what he later called "moments of truth," the various points at which people with the airline came in contact with airline customers. In this edition of Inside Scoop, CRMGuru founder Bob Thompson talks with Carlzon about what those "moments of truth" have in common with the hot topic of Customer Experience Management and what business leaders can take away from Carlzon's experience.

This interview, which was recorded Jan. 11, 2006, was edited for clarity.

Bob Thompson
I'd like to welcome to our Inside Scoop program Mr. Jan Carlzon. He is best known for writing a famous book called Moments of Truth: New Strategies for Today's Customer-Driven Economy [Ballinger Pub Co.]. That book was published back in 1987, nearly 20 years ago. I think it's still quite good reading. I'd like to welcome Jan to our program. Thanks very much for being with us.

Jan Carlzon
Thank you.

Bob Thompson
I know that you've been quite busy since writing that book and since being the CEO of Scandinavian Airlines, and I wonder if you would just take a moment before we get into the questions I've got for you and bring us up to date on the types of things you've been working on since then.

Jan Carlzon
I left SAS in early '94 and then I joined a group of former executives to establish a kind of venture capital organization, first as business agents, quite loosely organized, and later on, it was established in some structure. The next step was the listed venture capital organization where I am today one of the major owners and the chairman of the organization. In that company, we have especially focused on technology in mobile Internet, as both Erickson and Nokia are noted companies. You have quite a number of well-intentioned developers who want to leave their companies and build new organizations around new products.

The second thing I did was, as an investor, buy into a travel organization, one of the largest in Scandinavia—an airline. The purpose was together, with those private tech companies, to make strategic new directions of the company and to find a new industrial owner. We bought it in ‘95 and we sold it in '97, with a multiple of 10 times the money we paid for it when we bought it.

Bob Thompson
Congratulations!

Jan Carlzon
Yeah, that was a very good exit. After that, I bought into a fashion company, together with a business partner I have been working close with since 1988. That company then merged with another fashion company where we also had some interest and has today become one of the real run wraps on the Swedish stock exchange as a listed fashion company, where we have developed a very special and unique kind of business model for retailer fashion. It's really one of the success companies in the Swedish environment today.

Besides that, I am chairman of the Swedish Tennis Federation. I am on the board of the International Tennis Federation. I am chairman of the British/Swedish Chamber of Commerce, and I also have some other board positions, mainly in companies where I also have a financial interest. But I think that's the best way I could use my resources.

Bob Thompson
You've obviously been quite busy and done some diverse things since you were the head of Scandinavian Airlines.

Jan Carlzon
Yeah.

Bob Thompson
I wonder if we could start by going back to 1981, when you became the CEO, and talk a little bit about the big problems that you saw. Apparently, the airline had been making money. But it was having some troubles, and you came in and needed to do a turnaround. What did you see?

The beginning

Jan Carlzon
In the early ‘80s, the airline industry had one of their 10 years' regular crises. If you look back, you will find that the airline industry has had a crisis situation every 10th year since the early ‘60s. Of course, that's not the airline industry; it's the economic development in the market that reflects in those crises. What I saw, though, was that up to this point, in the early ‘80s, almost all airlines had been working in a quite monopolistic environment, and people in the airline had focused heavily on technical development; on operational development; and on cost administration. I could smell a much more competitive environment establish itself in the early ‘80s but even more so when you got further on into the late ‘80s and early ‘90s.

Bob Thompson
There wasn't much focus on the customer, on passengers and so forth.

Jan Carlzon
No. No, it was not a business-oriented organization, and if you look around in Europe, at least at this time, it was very rare to see an airline who'd made money in their operation. Most of them made their money by buying and selling their assets: buying aircraft, flying them with high depreciation and then selling them in the other end. There was no focus on service as a business issue or service as a profit-driven part of the business.

What I saw was that we had to change the culture of our company and leave behind the focus that we used to have on technical operation issues and, instead, turn our focus to the market and be customer-driven. The whole case that I was driving was to make this very proud and very successful technical operational organization become a business enterprise or business organization. The way I described it to people was I said, "We used to fly aircraft, and we did it very successfully. Now we have to learn the difficult lesson how to fly people."

Bob Thompson
Ah. What was it that caused you to observe that this moment of truth—the interactions between the company and its customers—was so critical and focus so much energy on that idea?

Jan Carlzon
If you follow my thinking, you understand that what I say, actually, is that the assets that you present on your balance sheet have no real value as long as they are not filled up with customers. I mean, aircraft, itself, only causes problems for a company because it's a high investment; you have to depreciate the investment; you have to pay interest to the bank; and all those hurt your profit and loss statement. But the moment you have customers entering into those aircrafts paying for being there then, also, the aircraft gets the value.

In other words, the real value a company has are those customers who were so satisfied with what they got last time, they used the company and their services. And those people working in the company were so motivated that they, again, would perform in front of the customers in such a way that they would come back even the second and the third time. A kind of a perpetuum mobile, a human perpetuum mobile.

And if you realize that the real value—the real value—is the perception of a customer when they use your company's products and services, you will also ask yourself what is, then, the company? And for some time, we thought if we just had very new and nice and technically developed aircraft, people would regard our company as good. But when we questioned our passengers, it showed that 90 percent of them didn't even know what kind of aircraft they were flying. Where did they get their impression or perception of the company?

We found out that they got the perception in those meetings with human resources, the employees working in the company: a salesman over the telephone; a girl behind the check-in counter; a stewardess on board the aircraft; the captain, the way he spoke over his microphone. And all these meetings really constituted the company as such. That's why I said that if those meetings are good meetings, our asset side on the balance side will increase. If those meetings are bad meetings, the value of our assets on the balance sheet will decrease. In other words, the only thing we have to do is to see that those critical meetings are as good as ever and that they exceed the expectations of the customers. Then we are going to be a successful company in moments of truth.

Bob Thompson
You coined the term, "moments of truth," but how did you reach the insight that the customers' perception and what they valued were different from what the company valued?

Jan Carlzon
We questioned companies. We asked them about different things: What is your perception about our head office? What is your perception of our technical and maintenance station? What is your perception about our aircraft and so forth? What is your perception about meeting with people? We found out that the only perception they really had was the meeting with people.

Bob Thompson
So basically, it's a research type of process.

Jan Carlzon
Yeah, yeah, it was research. But we did the research to have a proof point to the technical and operation people, to convince them that their tools were no longer, perhaps, the most important we have.

Bob Thompson
There's been a lot of talk over the last 20 to 25 years about being more customer-centric. Virtually every big company probably has something in their annual report.

Jan Carlzon
Yeah.

Bob Thompson
But do you feel that in your observation and being in business all that time, that in fact, companies are becoming more customer-centric or is it just more talk?

Jan Carlzon
I think some companies definitely have understood that, in today's global competition, there's no way around it; to run a long-term, efficient and prosperous business, you have to be customer-driven. But too many companies—and, I'm afraid, that, at least in Western Europe still, the majority of companies—are more managed by people looking for technical development and cost administration, rather than looking for business opportunities and how to develop a real competitive business.

Bob Thompson
Can you mention a couple of companies that you feel do a particularly good job in Western Europe in being customer-oriented?

Oriental Hotel

Jan Carlzon
I've thought of one, which is a unique example, and it deserves to be told. I just came from a long journey to Asia and we stayed at the Oriental Hotel in Bangkok. That hotel is famous, and it's absolutely breathtaking how they develop services in the smallest item. It so happened once that I was in Singapore and I read in the paper that the Oriental Hotel had become elected the best hotel in the world for the 10th consecutive year. I called the general manager and said, "Tell me, what is the truth? What do you really do to become the best hotel in the world year after year after year?"

And he said, "I can't pinpoint anything special, but there could be one thing, Jan. And that could be that we have not given the authority to our frontline people to say "no" to our customers," he said. "We have only given them the authority to say "yes" to our customers' demands and requests. If they, for any reason," he said, "they have to say 'no,'—because that happens, of course; they have to say ‘no' to special requests—then," he said, "but not before then, they have to ask for permission from their own managers."

I promise you that if we go to Western European or the Western part of this world, I would say that the rule is the opposite. You have only the authority to say "no" for any special request. You must follow the service standard exactly. If you want to exceed or do some special favors, then you have to ask permission from your general manager. I think that's the whole difference.

Bob Thompson
I noticed in your book that you wrote quite a lot about empowered employees.

Jan Carlzon
Yeah.

Bob Thompson
You felt that was particularly important. And, going beyond that, it was more about a different organization approach, a flatter decentralized organization. Do you feel like the leadership of businesses are moving more toward your way of thinking, or are they still kind of stuck in the command-and-control types of organizations?

Jan Carlzon
Those companies who really understand the necessity of being customer-driven and business-oriented, those companies will end up with a flatter organization, not as a tool but as a consequence of that, because, if you really want to be business-oriented and customer-driven, you understand that you must give the responsibility not to the top management of the company, not to the middle management but to every individual person managing those moments of truth out there in the front line. If you give away that responsibility and if you are brave enough—because you have to be brave as the CEO to give away responsibility—to give away information and to create an environment where people are prepared to take risks. If you do that, then, of course, the consequence is that you don't need that many middle managers, anymore, because their jobs of giving directions and orders and instructions are not there, anymore.

What you end up with is top management who should not do the business, themselves, but who should create the conditions or prepare the conditions for people to make business out there. The middle management, they should be support groups serving the frontline people, not instructing them. The frontline people should take on responsibility and to be able to do that, you, as a top leader, must be a strategic leader. A strategic leader will tell, "This is my vision and this is my strategy; this is the avenue that we all have to walk down. On that avenue, you have all the freedom to take your own solutions, but we all go the same way. And, if there is somebody in this organization who does not accept and who does not want to go the same way, then you have to leave."

Bob Thompson
You see leadership being absolutely critical to this customer-driven approach. Can you elaborate a little bit on something that we've found in our research over the last several years, that motivating employees to do the right thing is not a simple matter? How do you get people on board with this idea? In the early days, when you came in as CEO, I'm sure that not everybody embraced your approach immediately. How do you deal with those types of problems?

Jan Carlzon
The problems you face are at least two-fold. The middle management are very often people who earlier worked in the front line but who were seen as better and were rewarded by becoming middle management, right?

Bob Thompson
Right.

To serve

Jan Carlzon
To be rewarded by being in middle management means that you get the right to give orders and instructions to your old colleagues in the front line. And here comes now another guy, Mr.

Jan Carlzon
, who says that you should not give any instructions and orders, anymore. You should serve. You should serve your old friends in the front line. What promotion is that? To be a serviceman, you see? Right? So you have to educate people that the best—the most valuable—thing we have to do is to serve all the people that are really managing those moments of truth when they're face to face with the customers.

Bob Thompson
That philosophy sounds something like what I've heard attributed to Nordstrom, which is also quite famous for saying that the job of everyone, from the front line up in the organization, is really to support the front line to serve customers.

Jan Carlzon
It's very obvious, if you think it over. And then the front line, the major difficulties with them was not that they didn't want to take over responsibility. Of course, everybody wants. But some managers, top and mid-management, didn't give all the information to them. They wanted to keep some information to show their power of position, right? I say that the person who has not got the information cannot take responsibility, while the person who has got the information cannot escape from doing it.

So the free flow of the information is one of the pre-conditions. That means that every person should have exactly the same information, and that makes it possible for them to take on responsibility. When talking about the information, we must know that information is not only facts. If you, as the frontline people, should really understand what I, as the CEO, mean—what my business philosophy or my strategy is—then you must also see it. To communicate with people is not only to give information but also to send an emotion to them, "I hear what you say and I feel what you mean." That's very important.

The other pre-condition is to create an environment where people are prepared to take on risks, because to take responsibility means that you take on a risk. There are two forces that control every step in our lives. The one is fear, and the other one is love. I don't use the word, "love," when I talk to business people. I say, "respect and trust," but it is love. If you create a fearful environment, you can forget about delegating responsibility to frontline people. Why should anybody take on any risks or any responsibilities if there is a fearful environment and I feel that I can get a penalty if I make a mistake? But if you can create an environment where people feel that there's such a respect and trust in me, that as long as I do my best and I'm not making sabotage, nothing bad will happen to me if something goes wrong.

They will help me. They will try to correct me, but I will not get the penalty for it. Then you widen up the capacity of every person, and now, it starts to happen. A well-informed person who not only hears but also feels what you say and who works in an environment where there's lots of trust and respect among people, there you get efficiency; you get creativity; you get long-term profitability and competitiveness.

Bob Thompson
Most of what you've talked about, Jan, is about customers, about leadership and about people.

Jan Carlzon
Yeah.

Bob Thompson
And within all that, of course, is having a good strategy in the business, to begin with. But I wanted to spend a moment and talk about another term that's been somewhat of a buzzword, if you know what I mean—

Jan Carlzon
Yeah.

Bob Thompson
—called CRM, customer relationship management. And in the time we have, we could probably have a long debate about what it means and what it doesn't mean. But I'm just wondering if you could give your quick perspective from what you've heard about CRM. What do you like about the idea and where do you think it's gone astray?

The expected "surprise"

Jan Carlzon
I'm afraid, and I'm sorry, I'm not specialist in defining the CRM situation, but what I am talking about is actually customer relation management: How should we manage a company to really create the best customer relationship situations?

It's nothing else. What I tried to give is a framework, and I'm not talking about how you should develop a specific structure. I say, for example, that the flat organization is not a tool; it's a consequence of this. I say, "Don't send out instructions. Communicate to people so that they understand what their responsibility is." I talk very much about those values. But there's one thing that might be said about CRM. Many people in many companies believe that they can let people in the front line, for example—or in the factory—perform the service or develop it or finish the product but in a very controlled way, where management has developed service standards, for example, or product standards down to very individualized forms. What I'm afraid of is that you can't define, for example, a good service.

I used to give an example of how we in the tour operating company where I started my career surprised our customers by putting baskets of fruit or a bottle of wine and a hand-written card into their room when they came to the tourist destination. Everybody got extremely happy, because nobody expected it and they all thought it was a kind of individual service to them. The year after, our advertising manager, who must not have been related to Einstein, wrote in the brochure, "You should know that when you travel with our company, there's always a surprise waiting for you in the room."

Bob Thompson
That's not much of a surprise, then.

Jan Carlzon
That was the fruit or that was the bottle of wine or that was the hand-written card. But it was no surprise, anymore. So they didn't exceed any expectations, and obviously, it was not good service, anymore. On the contrary, some people thought, for example, "Oh, was it only a bottle of wine?" The only thing that could happen was those occasions when we forgot to place the surprise into the room. Then it was a very negative experience. What I'm trying to say is that what is good service in one occasion could be quite expected or bad service in the other occasion.

Bob Thompson
Managing the expectations is the key thing, isn't it?

Jan Carlzon
Expectation is the key thing. And, I say, good service. It's you and me here and now and nothing else. What you expect from me and what I deliver, that is good or bad service. It happens now. It happens here. And you can't build too many structures, too many definitions and too many controls.

Bob Thompson
It sounds like you need to allow some room for creativity, because trying to program everything reduces this pleasant surprise or experience that the customer might receive.

Jan Carlzon
Yeah.

Bob Thompson
I wonder if I could ask you one last question. What do you recommend for business leaders to do, looking forward to the next five to 10 years, if their goal is to build a sustainable competitive advantage and not to be good to customers just because it feels good? Do you feel that customer-centricity is important for that? And if so, what should they be doing?

Jan Carlzon
In today's global competitive world, the code I have found to success is that we must focus on customers as individuals, not as buyers of our products and services but as consumers of our products and services. And we must get rid of all waste. This is a kind of code that was quite similar to the one that [former General Electric CEO] Jack Welch developed when he said—quite naïvely, but extremely cleverly—"I suddenly found out that it was not only productivity that made it, but it was a combination of productivity and service." That sounds ridiculous, but for him, it was quite funny.

What I say is that if you are leading a company, you must decide who my customers are and where I find them. And, having done so, you must decide the business you are going to deliver to those customers. Having done that, then you can start to take away all costs—every single dollar that is not related to that specific business product and customer segment.

Having done so, you must develop an organization and information system and a structure that makes it possible for you to find the individual customers in the market. And focus on them, not as buyers of your airline ticket or your truck or your computer once. But see to it that you follow them as a kind of a married couple over time and that you deliver surprises to them from time to time, as you would have done if you had a very loving relationship like a marriage. By doing so, you should secure that this customer will buy the same equipment or the same truck from you, even the fourth and the fifth time they change their products.

Bob Thompson
So that comes down to having the loyalty of customers that are important to your business strategy.

Jan Carlzon
Yeah, it doesn't come by itself. It has to be educated. It has to be organized. You must invest in all those items that can help give the organization the information it needs to have the knowledge and the culture to make this happen. I can tell you a story. A very close friend of mine has about 5,500 trucks. He must be one of the biggest truck owners.

Bob Thompson
Trucks?

Jan Carlzon
Trucks. Multi trucks. What do you call them in the States?

Bob Thompson
Are these pick-up trucks or big commercial trucks?

Jan Carlzon
Big commercial trucks.

Bob Thompson
That's a lot of trucks!

Jan Carlzon
It's fantastic, and it covers big areas, like Southeast Asia and Australia. He changed around 1,200 trucks per year. He used to give these orders to three different truck producers. Today—for the time being and I really hope it can be corrected—he only has one truck delivering. The value of one truck, I guess, is around 60,000 U.S. dollars or even more. If you buy 1,200 trucks, it's quite a big turnover for a truck company to sell those trucks. The reason he's not buying from all the three he used to is not that their products are less good or less technically developed. It's just because they didn't have the focus on him as an important individual customer.

One example: One of those companies changed their management, and he called the local representative and said, "I would very much like to pay a visit to this new management." The answer was, "I'm sure it would be interesting, but you know, they are so occupied, it might be very difficult."

He said to me, "Jan, why should I buy? I don't buy one single car from them. Why should I?" Perhaps, this example is lame, but it also shows how extremely important it is to focus on your big customers and to build very close customer relations to them.

Bob Thompson
I think it's a great story. It makes a point that I've seen in other research, that it's about how customers are treated and how they perceive the relationship.

Jan Carlzon
Absolutely.

Bob Thompson
Most companies focus on the speed of delivery, the price, the sort of functional aspects of what they're delivering and they forget that people have an emotional involvement. Most researchers have found that it's over 50 percent of what they think is valuable. It has nothing to do with what they're actually buying but the interaction and the treatment and the feeling that goes with that.

Jan Carlzon
Exactly. If I fly an MD80 or an Aerobus or a Boeing, who cares? One flier's as good as the other. So it's the way the airline salesman and the airline relate to the customer that makes the whole difference, I would say.

Bob Thompson
That's a great comment to close on, that relationship is quite powerful when it's managed correctly.

Jan, I very much appreciate you taking time with us to discuss your insights. And, on a personal note, it's great actually talking to you, because your book, Moments of Truth, was one of the first books that I ever read about what we now think of as CRM. Now there's a new sort of buzzword called Customer Experience Management, which is taking ideas that you had 25 years ago and trying to make it more of a systematic approach. In our research, these concepts are being adopted. It's great to have a chance to catch up with you and get your point of view.

Jan Carlzon rapidly turned SAS into a moneymaker when he took over in 1981. He spelled out his philosophies in the best-selling Moments of Truth. Carlzon is chairman and a cofounder of the Scandinavian Venture Capital organization Ledstiernan, through which he is involved in more than 20 emerging companies.