Strategy Speaks: a Peppers and Rogers Blog

Social Media Systems, Trustability, and "the Monkey Mind"

2010-09-02T12:59:26Z

...among people who design software for group use, human social instincts are sometimes jokingly referred to as "the monkey mind."

- Clay Shirky, Here Comes Everybody

In his book The Upside of Irrationality, Dan Ariely, a behavioral economist at Duke University and one of the most interesting and popular writers on the subject, describes an experiment involving two chimps placed in neighboring cages, with a table of food just outside the cages but still within their reach. The food table is wheeled, and either chimp can reach out to pull the table closer to its own cage (and farther from the other's). However, a "revenge rope" leading out from each cage is connected to the bottom of the table, rigged so that if either chimp pulls it the table will collapse and spill all the food onto the floor and out of reach for both of them. Researchers have found that if both chimps share the food, all goes well in this experiment. But if one chimp rolls the table too close to its own cage, the other will sometimes explode in a rage and yank the rope, collapsing the table. According to Ariely, "The urge to punish exists in animals, too....The similarity between humans and chimps suggests that both have an inherent sense of justice and that revenge, even at personal expense, plays a deep role in the social order of both primates and people."

]]> One way to understand the ebb and flow of interaction among people in a social group is to step back and treat the group itself as a kind of system. A system is a collection of individual "parts that work together by way of some driving process," to quote just one typical definition. A school of fish, a galaxy of stars, a hydroelectric dam, the economy of Spain, the global climate, a software application, a beehive - all these are systems, and they can each be broken into individual parts that work together through some overall set of processes.

The behavior a system exhibits to an outside observer "emerges" from the individual actions of its various components, whether these components are bees in a hive, or stars in a galaxy, or buyers and sellers in a market. Interactions between components generate feedback loops that tend to govern the overall behavior of the system itself. Negative feedback loops slow things down, while positive feedback loops speed things up. A thermostat is the classic example of a negative feedback loop. The closer the temperature gets to where you set the thermostat, the less heat or air conditioning the "system" will call for. A bank run, on the other hand, is the result of a positive feedback loop, because the more people go into the bank to take their money out, the more others will also want to do so.

The network of people who interact on a social media site make up a system also, and this system is driven by feedback loops that tend either to increase or diminish the influence of individual participants. It takes all kinds to build a sustainable, prosperous society. Trustability is important, but the willingness to punish untrustable behavior is also vital, and serves as an indispensable feedback loop for many social-group systems.

According to Nicholas A. Christakis and James H. Fowler, authors of Connected: The Surprising Power of Our Social Networks and How They Shape Our Lives, Wikipedia works well because over time a social community of interested contributors develops to participate in fashioning the most authoritative entry for each topic. The majority of these participants are what Christakis and Fowler call "cooperators." They are the people who do most of the work that lies behind Wikipedia's success as a reference tool. By contributing new thinking, writing, and editing, cooperators help others to jointly produce and refine articles in their subject area of expertise. But in addition, the Wikipedia crowd will include a number of "free riders" - people who, in the authors' words, "want to use the credibility of the information established by others for their own purposes." A free rider might highjack a particular Wikipedia entry to publicize himself, or to paint a favorable view of his own company, or perhaps to advance a biased perspective on some politically charged or controversial issue.

What keeps free riders in check, however, and what sustains Wikipedia as a viable example of genuine social production, is the fact that there are literally thousands of "punishers" patrolling various Wikipedia entries. These folks may or may not have contributed their own material at some point, but they take umbrage at the offenses committed by the free riders. Punishers take it upon themselves to control the damage done by free riders - by reversing inappropriate, biased, or inadequately supported entries, by posting chastising notes on the personal "talk" pages of individual free riders, and even (in collaboration with other contributors) preventing some egregious offenders from making further contributions. It is the balance between creating, sharing, and punishing that makes Wikipedia both stable and useful, as a system.

What this all means is that in order for a "culture of sharing" to develop in a social group, it isn't necessary that 100% of a group's members be absolutely trustable. Sharing and collaborating strengthen a group's overall level of trustability, while punishing untrustable behavior sets up a feedback loop to maintain it. So the trustability ethos can develop and flourish in a social group, and can create immense economic value, as long as the "system" contains the right balance of cooperators and punishers, ensuring that free riders are held in check and not allowed to undermine things.

Karl Marx, the Division of Labor, and Employee Engagement

2010-08-09T11:35:02Z

One of the single most important elements of industrial efficiency and technical progress is the concept of "division of labor." The original thesis behind division of labor was stated succinctly by Adam Smith in Wealth of Nations, with his classic description of the pin factory, where each task was divided into standardized steps to be completed more cost-efficiently by different people and machines. When an analogous principle is applied to nation-states we get the theory of comparative advantage, which underlies the benefits of free trade. Both division of labor and comparative advantage presume that people can perform separate tasks and then trade with each other for mutual benefit. Trading is critical. Without trading, among people and nation-states alike, progress is stunted.

]]> By dividing labor and trading for mutual benefit we have now progressed to the point where virtually every artifact around us that is "man-made" can only be produced through the collective efforts of many, organized in a way that is far too complex for top-down management (or state planning), and using expertise that no single individual can possibly possess on his or her own. The economist Leonard Read may be most famous today for an essay he wrote more than 50 years ago to illustrate this point, using an ordinary wooden pencil as his example. As simple as a pencil is, he says, "not a single person on the face of this earth" knows how to make it! Why? Just consider the task of harvesting the cedar wood for making the pencil, using saws and axes, ropes and other gear. Of course, you'd first have to mine and smelt the ore to make these tools, then raise and prepare the food to feed the lumberjacks, clear the land for a road, manufacture and assemble the flatcars or trucks that will ship the wood to the mill, and even pour the concrete for the hydroelectric dam to provide the mill's power. You'd also have to travel to Sri Lanka to mine the graphite for the pencil's core, mixing it with clay enriched with ammonium hydroxide, and then combining the mixture with wetting agents made from sulfonated tallow. Finally, you'd have to cut the graphite mixture to size, dry it and bake it at almost 2000 degrees Fahrenheit before treating it with a hot mixture composed of candelilla wax, paraffin, and hydrogenated natural fats. Read's point is not just that no single human being could ever do all these things, but that no single human being even knows how to do all these things. No one. (Quick: Have you ever heard of candelilla wax or sulfonated tallow? Could you recognize graphite when it is in the ground, before being mined?)

Pin factory or lead pencils, in other words, division of labor and economic progress clearly go hand in hand.

But carried to its logical extreme, division of labor has a dark side as well. Frederick Taylor's landmark theory of "scientific management" was famous for its controversial contention that the best laborer would be a tireless and unthinking automaton.

Enter Stage Left: Karl Marx. More than 150 years ago he suggested that sooner or later workers of the world would unite against their capitalist oppressors. One of the reasons he gave for this prediction was that specialized work was alienating. Marx believed that workers who were tasked with doing repetitive, uniform tasks became disconnected not only from the completed products that would give their work meaning, but from themselves and from their essence as human beings, as well. Today, we would say that such workers are "disengaged" in their work. "Engagement" is one of those fashionable management terms that can have a range of exact meaning, but Hay Group's definition of employee engagement is good enough: "a result achieved by stimulating employees' enthusiasm for their work and directing it toward organizational success."

Division of labor, scientific management and the alienation of the worker are all concepts that pre-date information technology. The modern production process doesn't need efficient workers to be automatons, robotically inserting Tab A into Slot B eight hours a day at the pin factory in order to collect their pay. This is something easily automated. But technology is a two-edged sword. When we aren't conscious of the human need to be engaged and interested in the work to be done, technology can alienate even the information worker. Dan Ariely, in his new book The Upside of Irrationality, tells an interesting story of his own research assistant, Jay. Jay is an information worker, in that he spends most of his day managing Ariely's research projects and budgets. But according to Ariely,

"...accounting software he used daily required him to fill in numerous fields on the appropriate electronic forms, sending these e-forms to other people, who filled in a few more fields, who in turn sent the e-forms to someone else, who approved the expenses and subsequently passed them to yet another person, who actually settled the accounts. Not only was poor Jay doing only a small part of a relatively meaningless task, but he never had the satisfaction of seeing this work completed."

When it is used more thoughtfully, however, technology also allows us to re-integrate the mechanical tasks assigned to individual people, engaging them in their work and improving their enthusiasm and output simultaneously. When a customer service representative is allowed to handle a complaint as a "case" to be tracked from first call to final resolution, for instance, or when a line engineer at an automobile assembly plant suggests a better way to handle a technical support process - these are both examples of how labor is being re-integrated. It is information technology and the increasingly efficient electronic connections we make with others that allow this to happen. Don Tapscott and Anthony Williams, in their book Wikinomics, suggest that ubiquitous electronic connectivity is changing the very nature of work, making it "more cognitively complex, more team-based and collaborative, more dependent on social skills, more time pressured, more reliant on technological competence, more mobile, and less dependent on geography." Because of this, they suggest, firms are decentralizing their decision making, relying more and more on individual initiative and responsibility.

Another way to view this is that computer technology now allows us to divide labor not by the rote, physical steps involved in manufacturing and assembly, but by the actual planning and decision-making processes involved in managing these steps. In effect, rather than just trading physical tasks and manual skills with each other to improve productivity, we are using technology to trade ideas and insights to improve productivity. And our rate of technological progress and economic growth is accelerating as we continue to move "up market" with the division-of-labor concept.

So, as social media tools allow ever more pervasive, immediate, and complex communication and collaboration among people, it may be that the ultimate form of "division of labor" is not turning people into alienated automatons at all. Instead, it will eventually involve replacing hierarchical, top-down organizations with self-organized social groups of individuals, each pursuing a commonly agreed set of goals. We can catch glimpses of this future now, from large companies such as Cisco and ExxonMobil flattening their organization charts to push decision-making down down down, to retailers and up-and-coming firms such as Best Buy and Zappos encouraging their individual employees to use their Twitter accounts to distribute the customer-service task more effectively.

Workers of the world, unite!

Harnessing the Power of Your "Weak Ties"

2010-07-23T12:40:49Z

In all the hand wringing and advice giving that surrounds the hot topic of social media, one thing often overlooked is that networks of connected people have a certain type of structure, and this network structure provides some clues for how to extract benefits from your own social network. Essentially, every person's network of contacts, colleagues, friends and associates (online or offline) is actually a small cluster within a much bigger network, which in turn is just a cluster within an even bigger network, and so forth. Because of this structure, the most useful positions aren't those with the most connections to other people, but those with the most connections to other clusters of people. Rather than the "strong ties" you have with your closest friends or your immediate co-workers, in other words, the robustness and usefulness of your own social network will be based more on the number of "weak ties" you also maintain - that is, ties to the people you don't know quite as well, or don't interact with quite as often. These are the people most likely to be connected to clusters you aren't familiar with and don't have access to yourself.

]]> Nearly 40 years ago, Mark Granovetter of Johns Hopkins University studied the diffusion of information through a social network and suggested that a mix of strong and weak connections is crucial, because every network really consists of many smaller, interconnected networks, and for information to spread throughout the whole population it must be able to "jump" from one social network to another. In Granovetter's words,

"If one tells a rumor to all his close friends, and they do likewise, many will hear the rumor a second and third time, since those linked by strong ties tend to share friends. If the motivation for sharing the rumor is dampened a bit on each wave of retelling, then the rumor moving through strong ties is much more likely to be limited to a few cliques than that going via weak ones; bridges will not be crossed."

Granovetter's paper, "The Strength of Weak Ties," eventually became the most referenced paper on social networks of all time. Weak ties have many implications, suitable for a wide variety of business and personal situations. Suppose you're looking for a new job, for instance. Everyone already knows, of course, that networking is the way to find out about job openings and career opportunities. But not all networking is the same. Because information spreads quickly and thoroughly among people who are well connected - that is, people who have strong ties to each other - if one of your good friends knows of a job opening then chances are you and your other close friends already know of it, as well. But the job openings known to your weak-tie friends - those friends or colleagues with whom you don't interact as often - are not likely to be known to your own friends, or to you. Granovetter, in fact, found that if you're looking for a job you'll get your best leads not from your closest friends or the associates who know you well, but from acquaintances you don't know so well, because these acquaintances are the ones most likely to know people in other clusters, outside your own.

The "weak ties" principle applies to other situations, as well. In the June issue of Harvard Business Review, for instance, David Teten and Chris Farmer make a similar argument when it comes to venture capital investing. They don't call it the "weak ties" principle, per se, but that's what it is. What they've found in their own research is that those firms that share information with others regarding potential investment prospects tend to gain access to a wider network of candidates - essentially leveraging their weak network ties, rather than focusing solely on strong ties. They also cite another recent study by other academics that shows VC firms concentrated in the traditional tech centers (Silicon Valley, NY, Boston) do better than other firms primarily because they "cast a wide, public net" - harvesting the results of their weak ties.

Or consider the question of generating new business in the B2B space, or with regard to expensive, considered purchases. If you use a straight-ahead business development plan you'll develop a laundry list of leads and opportunities to be followed up. While this can be useful, the truth is that a great deal of such business comes in via the referral of others. And how can you increase your access to such referrals? You guessed it - by concentrating on your weak ties, rather than on your strong ties. By developing your own network of industry colleagues and blog or Twitter followers, for instance, you get access to their connections with others. And one of my favorite strategies for B2B competitors is to prepare PowerPoint decks about the benefits of the firm, and then make those decks freely available on the Web site for download and unlimited use. But this isn't a tool for persuading the people who come to your Web site to buy. It's a tool for them to persuade others within their firm. In effect you are arming these weak-tie prospects with the tools necessary to appeal to their own clusters of connections.

And of course, the power of weak ties can hardly be overstated when it comes to generating creative or innovative ideas. All new ideas come from combining previous ideas and concepts. The ideas and innovations available to us human beings can themselves be thought of as a kind of network, with some ideas connected to others, clusters of ideas within other clusters, and so forth. So the surest way NOT to have a creative breakthrough is to rely on all the experts you already know, and all the disciplines you're already familiar with. Your best new ideas - and a company's most breakthrough innovations - will come when you tap your weak ties. These are the disciplines you know less about, or the experts you rarely consult, or the people you associate with less frequently. One study of entrepreneurs showed they are more likely to have "deliberately exposed themselves to different sources of information, by striking up conversations on trains, for example, or maintaining a diverse range of acquaintances, to increase the odds of stumbling upon an interesting opportunity."

But finally, even if all you're trying to do is to advance your own career at whatever firm you're working for, the "weak ties" argument will help you better appreciate what other executives you should be trying to add to your network. It's long been thought that the best way to get ahead is to hitch your wagon to a senior star, but a University of Chicago business school professor's new book, Neighbor Networks, will soon disabuse you of this notion. A summary of Prof. Ronald S. Burt's book suggests "There is no advantage at all to having well-connected friends." Instead, it is the managers who connect diverse groups that tend to have demonstrably higher salaries. Moreover, this is not because they become linchpins or hubs or gateways to power and information, per se, but rather because managers who maintain contacts in a diverse range of departments are getting a very healthy and intellectually stimulating "exposure to diverse ideas and behaviors." According to Burt, "The way networks have their effect is not by getting information from people, but rather by finding people who are interesting and who think differently from you," adding that it isn't being in the know, "but rather having to translate between different groups so that you develop gifts of analogy, metaphor, and communicating between people who have difficulty communicating to each other."

So whether you're interested in a new job or a better job, more business clients or simply more creative ideas - thinking more carefully about the weak ties in your own network might be a worthwhile activity.

Customer Strategist Martin Förster: Social CRM Requires a New Marketing Skill: Having a Conversation

2010-07-20T16:51:39Z

Many companies today are trying to understand Social CRM and integrate it into their marketing activities. The way they do this is by optimizing their existing campaigns for social media, or sometimes by creating wholly new campaigns revolving around the viral character of social media. These companies are present on Facebook, Twitter, YouTube, and MySpace; they send their marketing messages nicely wrapped through all channels, they reach a large audience of fans and followers. Just like they did before Web 2.0.

What is common to most of these companies is that they understand social media as another channel for campaigns. They fail to grasp the totally new character of social media, the one that justifies calling it Social CRM. By including social media in their channel mix, enterprises are giving up traditional outbound one-to-many communication to their customers. Instead, they are inexorably entering into a continuous multidirectional conversation between not just one but many customers and the enterprise that occurs permanently, that is driven by customers, and that takes place irrespective of the enterprise. The enterprise can opt to participate, but the conversation will continue regardless.

]]> Customers today will not only read and watch the messages aimed at them, but they will also reply, to the company and to other customers. They will exchange about the good and bad of the message and the product and the enterprise. They will compare it with competitors' activities. They will blatantly state their opinion and make it easy for the enterprise to reply. If the enterprise were listening and set to reply.

In traditional marketing, listening occurred only with few and far between market research projects or customer satisfaction surveys. The reach of such surveys within the enterprise was doubtful, as was their impact. Since the survey results were controlled by a few people only, ignorance was often bliss, and so was idleness. Today, the "survey" comprises the complete web 2.0. All opinions are easily monitored and analyzed by anyone willing to make the effort -- the marketing manager, the CEO, or the competition. A multitude of answers is "out there," admittedly often to questions that weren't asked. But since they are on the customers' minds, it might just be worth it to think about them.

And to react. Customers who make the effort to state their opinions and to recommend product improvements don't necessarily expect but would gratefully appreciate a reply from the company. If they feel like they are talking to a wall, they might soon turn to a competitor that is more responsive. They do make it easy for a company to communicate with them: they send clear messages; they often identify themselves with name, picture, and a trail-blaze history of other social media posts. And they make it relevant for a company: they control the flow of the conversation; to a certain extent they can make or break a new product or a company brand.

Yet why do so few companies actually grab the chance to have a conversation? One reason is clearly the sheer number of entries that would need to be monitored and replied to. Yet for such cases companies usually have a set organization: the contact center. Their staff is skilled to interact with customers, to solve problems, and to log improvement recommendations. I believe the issue is more fundamental. Marketing in the past didn't need to enter a conversation. Marketing didn't think along the lines of continuous interaction on a one-to-one basis. And old thinking is hard to change. Marketers grab the cool new creative opportunities that social media offers, but they barely consider the responsibility that Social CRM places on the enterprise.

This changes the nature of campaign managers, communication managers, and customer managers at enterprises and forces them to continuously talk with the customers, instead of to them. This requires new communication strategies, new resources for the conversation, and new skill sets of existing resources. Most enterprises don't yet understand this when creating their Social CRM strategy.

If properly understood, it would be easy for Marketing to join forces with the contact center to involve customers in a conversation, to show that the company cares, that it takes its customers seriously, that it wants to improve both product and customer experience. As long as Marketing avoids the responsibility of replying to their customers, it not only misses out on opportunities to grow customer loyalty, it seriously jeopardizes existing loyalty. The bottom-line effects of jeopardizing loyalty are in turn easily understood. The competition is waiting. But here, the first step is the easiest: analyze where and what customers actually comment and build a response strategy from there.

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About the Author: Martin Förster is a Director with Peppers & Rogers Group

The Most Regressive Income Tax Imaginable

2010-07-16T12:03:49Z

What if we could change the income tax so that it taxes low incomes instead of high incomes? Suppose, for instance, that everyone had to pay 100% of their first $15,000 of income to the IRS, and only after this could they keep any money they earned. Of course, this would provide a terrible disincentive for people to work - it might even make it impossible to find people willing to take minimum wage jobs, which pay about $15,000 a year. No one would want to impose such a tax.

]]> Oh, wait. Yes, actually, they might. This is how we've structured our unemployment compensation system - as one of the most regressive income taxes you can imagine. If you lose your job and are eligible for unemployment, you can collect a varying weekly amount in different states (with the maximum ranging from $405 a week in New York to just $205 a week in Arizona). But if you do find work and take a job, you have to give up 100% of that benefit first. So, if you are collecting $320 a week in unemployment and you take a 40-hour-a-week job from McDonalds or Wal-Mart, say, at $10 an hour, your actual "pay" will only be $2 per hour.

In the debate on whether to extend unemployment benefits, why doesn't anyone see this as a structural problem, rather than an ideological issue? We can't fix the problem of disincentive entirely, but we don't have to limit our options to simply shutting off benefits altogether at a certain point.

For instance, why not allow benefits to phase out gradually after you take a new job? Take a job and during the first four weeks of working you could still collect 50% of your unemployment benefits.

Or how about giving newly unemployed people the option of taking a one-time payment, with no penalty imposed for taking a new job? If you become unemployed, you can choose either to draw a weekly amount for up to 26 weeks (or whatever the eligibility period is), or you can take a one-time advance payment equal to 50% of that total, and no further benefits. (But you wouldn't have to give anything up to take a new job, either.)

The best structural change we could make would be one that allows an unemployed person to have at least some control over his or her own fate. Instead, right now we rob people of control, and subject them to a deadening, one-size-fits-all policy administered with bureaucratic inflexibility. Come on, Washington! It's time for our politicians to join us here in the 21st Century!

Customer Strategist Orkun Oguz: Leveraging Customer Segmentation in Wealth Management

2010-07-14T13:21:21Z

As the U.S. House and Senate make last-minute changes to the final wording of the financial-overhaul bill, one thing seems fairly certain: U.S. banks and brokerages stand to lose billions of dollars in revenues as a result of the new rules aimed at providing additional safeguards for consumers on investments and other products.

]]> For banks and brokerages focused on private client/wealth management services that are looking to make up for anticipated revenue shortfalls triggered by the legislation, customer segmentation and customized communications with affluent clients can play critical roles in enabling them to profile specialized customer groups and to define product and marketing requirements for distinct customer sets.

Traditionally, wealth management advisors have taken a one-to-one approach in managing customer relationships. But that can be extremely daunting, given that the typical advisor manages investments and relationships with 200 to 400 clients on average. That makes it difficult for them to cater to individual customers, most of whom require reassurance and guidance in this topsy-turvy economic climate.

In the face of these existing and near-term challenges, wealth management advisors are encouraged to apply customer segmentation strategies and supporting technologies to help them to logically group affluent clients into specific quadrants based on common characteristics, investment requirements, and product needs. Such tools can also help advisors to precisely define unique strategies for different customer groups and to align support for them more effectively.

Changing the mind-set

Taking a more customer-centric approach to wealth management execution strategies can enable banks and brokerages to more accurately distinguish the investment products and services demanded by prosperous clients. By meeting customer needs more effectively, advisors can gain additional trust with well-heeled clients, which in turn can help open up profitable cross-sell and upsell opportunities with them.

But to obtain those types of favorable business outcomes, banks and brokerages need to shift away from traditional product-centric wealth management strategies to more of a customer-centric approach. That begins with listening closely to the needs of high-value customers and tailoring products and support to meet and even exceed their expectations. By going above and beyond, advisors will see improvements in customer loyalty and increased customer lifetime value, both short and long term.

They're also more likely to see an uptick in referrals from happy customers. According to Financial Planning magazine, 60 percent of financial planners receive one to two high-value referrals per month, while 30 percent of planners obtain three to five referrals per month.

Making it happen

In order to effectively execute the kinds of cultural and process changes necessary to transition to a more customer-focused approach, banking leaders must carefully consider how their wealth management businesses will need to operate going forward, particularly as the forthcoming regulations and compliance costs eat into margins.

The Hartford recently outlined its go-forward business plan, including the development of a customer-centric business strategy for its wealth management business. In announcing these efforts, The Hartford described how the population of U.S. residents ages 65 and older is expected to grow 36 percent by 2020, presenting "significant opportunities" for the company to provide retirement savings, estate planning, and income needs of consumers and small business owners.

One recommendation for helping to satisfy customers' needs is by applying a multichannel approach for customer support, including voice, IVR, Web, chat, and mobile. Studies have shown that a company's most valuable customers tend to use multiple channels for support.

Banks and brokerages can leverage technology in other ways, like monitoring and gauging customer sentiment and investment preferences through the use of analytics. These tools can also help advisors to anticipate customers' future investment and services requirements.

The current financial climate is a worrisome time for both financial planners and their high-net-worth customers. But by taking a more customer-centric approach to product planning and service delivery by using a well-conceived segmentation strategy, customers and advisors alike stand to collectively reap the rewards.

About the Author: Orkun Oguz is a partner of Peppers & Rogers Group. Contact him at ooguz@1to1.com

Customer Strategist Poyraz Ozkan: Move Beyond Segments to Manage Customer Portfolios

2010-07-12T21:15:01Z

Which customer groups offer the most potential? How do you bundle your services to get the greatest return? And how can you balance maximizing customer value (attract, grow, and retain the potential) with acting in the best interest of your customers (customer experience)? These are questions that vex most every company today.

]]> In the telecom industry voice revenues are in continuous decline, while data and content are becoming the new but challenging playgrounds for operators. Add to that the increasing complexities of digital customer expectations, which is driving churn rates higher and customer acquisition costs up. Many chief marketing officers are looking for direction on where to focus their efforts and resources to differentiate and grow.

Understanding customer value with segmentation is definitely the first step for many operators. Customer value information, typically based on ARPU or related revenue metrics, is mainly used to guide investment decisions for marketing, sales, and customer care activities. Typical examples include the development of customized communication to high-value customers or the assignment of special resources to high-value customers in the contact channels.

Value segmentation, however, cannot enable differentiation by itself, simply because value is an outcome. In order to truly understand their customers, organizations must also know the "why" and "how" that leads to the outcome "value." The "why" is represented by a needs assessment -- understanding the underlying motive and need behind interest in telecommunications services. Customers have common needs, shared needs, and differentiating needs from a telecom operator.

Operators must know these needs at the individual customer level, which can be scored in the database. The "how" part is represented by behavior -- how customers use an operator's products, channels, and how they communicate. By putting together needs, value, and behavior, organizations can then create the required insight for differentiation.

Segmentation will have little value unless the operator's resources are aligned to customers. The purpose of segmentation is to activate segmentation to enable "treating different customers differently" via the delivery of relevant offerings to a group of customers (portfolio) based on their needs, behavior, and value. For most operators moving to such an alignment is quite challenging because they are structured and functioning as silos. For true differentiation, customers should be managed across the lifecycle. Such effort requires a disciplined approach that revolves around customer segments and extends across the customer lifecycle.

So, what has to change to enable the proper functioning of "treating different customers differently?"

Aim: Create a clear set of strategy, action, and investment plans at the customer portfolio level

Balance: Act in the best interest of customers while balancing operator resources. This means creating a culture of portfolio ownership and an ecosystem to coordinate the delivery, as well as making a dedicated function within the current organizational structure that will manage and coordinate the entire customer lifecycle

Accountability: Integrate customer planning into the organization's performance management

This approach, customer portfolio management (CPM), is a new, strategic way to deploying CRM that emphasizes customer knowledge, strategic planning, and execution as the cornerstones of a CRM initiative. It encompasses the delivery of the right offerings to specific customer portfolios based on their needs, behaviors, and values across their lifecycle. Like a stock portfolio, the value of a customer portfolio can go up or down. If an operator y can identify needs to influence the behaviors of the customers within the portfolio, the value of that portfolio can improve.

A CPM strategy is an enterprisewide strategy, not contained within one department or business unit. While traditionally segments are the responsibility of the marketing, sales, or customer service departments, customer portfolios can influence actions taken by marketing, sales, customer care, even strategic planning and capital investment, as companies allocate resources and take departmental actions to increase the value of customer portfolios.

For the CPM concept to succeed, operators must change the way they think. Customer portfolios must become the heart of the organization, and the direction of the operator should be coordinated by the portfolio managers. Customer value, needs, and behavior will influence the way companies allocate resources, so the rules of engagement need to change how people work. It requires a huge cultural change, which is hard to swallow for many traditional businesses. However, its long-term benefits -- in the form of organic growth, customer satisfaction, and bottom-line improvement -- will be worth the pain of change.

With CPM, each portfolio has an owner or manager; someone who is responsible for growing the value of the portfolio. A portfolio manager understands the portfolio's value now, as well as what needs to be done to grow its value for the future. In my next blog, I will share in more detail the roles and responsibilities of the portfolio manager.

Poyraz Ozkan is a manager in Peppers & Rogers Group's telecom practice. You can contact him at pozkan@1to1.com.

Even Amazon.com Needs to Take the Customer's Point of View

2010-07-07T15:33:13Z

Amazon.com's goal , as they say in the tagline of their correspondence, is to be "Earth's most customer-centric company." Don Peppers and I love hearing this, and hugely admire what Jeff Bezos and his colleagues have built in the relatively few years since amazon.com first appeared as an online source for books, CDs, and DVDs.

I've been a frequent user of amazon.com ever since, gradually expanding into more and more categories of merchandise. Of course, I depend on amazon.com to tell me which business books I need to read next; even if I don't hear about a particular one, I can count on amazon.com's community-search engine to find the next highly relevant recommendation for me. (Don and I are amused and not a little reassured by the fact that each time we publish a new book, that new book we write heads the list of books we'll want to read next! So we know the relevance is spot on.)

More than once, when we've gone to order a book, amazon.com has reminded us: You've already bought that book; are you sure you want to buy it again? (Haven't we all accidentally bought something we forgot we already have?) Risking the immediate lost sale to save a customer the hassle (and themselves the expense) of returning an unwanted book just makes sense. Couple all this 1to1 with amazon.com's free shipping, low prices, and huge selection and we can see why Jeff & Co. have done so well.

So what suggestion do I have?

]]> Amazon.com, please imagine what it's like to be your customer. You want me to buy a lot of stuff from you, right? In many different categories, right? In fact, the goal is to be Earth's #1 retail destination, yes? I've been buying from you for over a decade, with very few hassles, returns, etc. So why is there a limit to how many items I can put in my cart?

Is amazon.com the only retailer on earth that wants to make sure a customer doesn't buy too much?

In the upper left of the shopping cart is a claim that "Ordering from amazon.com is fast and easy." Let's see. Imagine I am giving a party and expect a few dozen guests. Rather than go to the party store for invitations and decorations, and to the housewares department of a local discount house for napkins, napkin rings, and a few other tabletop items, and pick up the other things I need at drugstore.com, I figure I can get everything I need on amazon.com.

And I can.

But not all at once.

If I buy 4 packages of 10 invitations each, that's 4 items in my shopping cart. Three dozen napkin rings brings me to 40. Three dozen napkins takes the total to 76, and if I then need 36 of anything else, I will be over the limit of 99 items I can buy at a time.

I wrote amazon.com an email and asked if that really makes sense. Here's the reply (which came back only an hour after I sent the inquiry):

+ + + + + + +

Hello,

The shopping cart allows you to add a total quantity of 100 items for multiple item orders into the Shopping Cart Items--To Buy Now section. If you're buying several different items in a single order and need more than 100 total, you'll need to place more than one order. If you're only ordering a single item but need a large quantity, the shopping cart will allow you to add up to 999 of a single item.

If you simply wish to keep items in your cart, you can click the "save for later" button to move them from the To Buy Now section into the To Buy Later section. You'll be able to save a total of 600 items for purchase later.

Anytime you reach the quantity limits, we'll display a message to let you know. Thanks for your comments about increasing the cart limits. We'll consider your feedback as we plan further improvements.

Customer feedback like yours really helps us continue to improve our store and provide better service to our customers. Thanks for taking time to offer us your thoughts.

I hope this information helps. We look forward to seeing you again soon.

Did I solve your problem?

If yes, please click here:
http://www.amazon.com/rsvp-y?c=arbqaqrx3277142951

If no, please click here:
http://www.amazon.com/rsvp-n?c=arbqaqrx3277142951

Please note: this e-mail was sent from an address that cannot accept incoming e-mail.

To contact us about an unrelated issue, please visit the Help section of our web site.

Best regards,

Ajeeth M.
Amazon.com
Your feedback is helping us build Earth's Most Customer-Centric Company.

+ + + + + + +

Well.

What this demonstrates is that even the most dedicated, customer-centric companies need...

to keep listening to customers, and taking the advice of those who are loyal and valuable.

to keep thinking about what it's really like to be their own customers.

to figure out how to get the roadblocks out of the way of doing more business (I just went to two other websites and got what I needed in ONE order each -- they didn't limit what I could buy!).

to take the customer's point of view to provide better experiences and look smarter.

And please, amazon.com, let me know when it's OK for me to buy as much as I want.

Move Over, Management! Employees Will Lead the Trustability Revolution!

2010-06-24T11:00:00Z

Recently a Verizon Wireless customer-service rep blew the whistle on their own company, contacting a newspaper columnist with an allegation that Verizon is now coaching its employees in how to avoid giving legitimate refunds to customers. According to this employee, when people call to complain about unanticipated charges for data access, even though these charges are often due to the way the keys on Verizon's phones are configured (automatically accessing the Web and incurring a data charge, for instance, when they're accidentally pressed), service employees have been instructed NOT to inform customers about having the ability to block these types of accidental calls unless a customer specifically asks how to do so. Moreover, if a user complains about paying unwarranted charges after going months or more without noticing them in their statement, Verizon is only authorizing its reps to offer a single month's refund.

]]> There are two issues in this recent news story. First, obviously, is that Verizon Wireless is practicing a shameless kind of "gotcha!" marketing not worthy of any established brand. They are essentially instructing employees to trick customers out of whatever money they can be relieved of. Second, however, is the fact that this Verizon employee blew the whistle on them. He or she obviously does not agree with the company's policies here. My guess is there are many other employees at Verizon Wireless who also do not like to come to work each day with the goal of fooling customers out of their money.

Of course, you don't have to think too hard to realize that there are lots of 20th Century business models based on fooling customers out of their money, or taking advantage of customer errors (like mistakenly pressed cell-phone keys):

Credit cards are a great example. Those poor souls who are so financially strapped or unsophisticated as to have to borrow on their credit cards month after month after month - for most credit card companies, those are the best customers!

Or consider gift cards. They may be all the rage, but something like 15% of gift cards go unclaimed. Officially called "breakage," this is one of the big financial attractions of gift cards for retailers. I suspect it's also the primary reason that "gotcha!" marketers like Verizon issue their rebates in the form of cash cards, rather than checks.

Mobile telecoms offer dozens of different pricing plans - but if you signed up for a plan that paid them more than you really needed to, do you think they would tell you?

And don't forget retail banks, many of which (in the U.S. anyway) make a substantial portion of their operating earnings in the form of overdraft fees and other administrative penalties for customer mistakes. The margin on such fees can be as high as 90%, but when you build your business model around profiting from your customers' errors, you can't expect them to trust you.

I suspect many of the employees at these companies don't really enjoy the idea of making money off of consumer error or lack of information and would like to do a better job of serving their customers. The problem, of course, is that the executives and managers who set the policies are accountable for quarterly earnings, so they need a financial rationale to act more kindly toward customers. With the kind of customer analytics now available, this financial rationale is no longer hard to come by, but most companies simply haven't gone to the trouble.

Amazon.com, on the other hand, is one firm that makes a religion out of being customer-oriented (as opposed to quarterly earnings-oriented). I once pressed the "1-click order" button to buy a book I wanted from Amazon and received this message: "WARNING: You already bought this book from Amazon. Are you sure you want to buy it again?" Obviously, Amazon would not operate this way if it were managed by Verizon's executives. Verizon's policy would be to sell me the book and then challenge my ability to get a refund, if I happened to notice I had already bought it ("Hey, you ordered it fair and square! What are we, your accountants?").

The problem that Verizon and other such firms are coming up against now is that their employees are customers, too. They go online and into stores to buy things just like you and I do. And as customers they find themselves dealing with two different kinds of firms: There are the old-fashioned, industrial-era firms like Verizon, designed to squeeze every possible penny out of each immediate financial period (shades of BP's oil-drilling investment philosophy!), and then there are an increasing number of new-era firms like Amazon that have designed their processes around the objective of earning and keeping the trust of customers, based on the novel theory that customer trust is actually a highly valuable financial asset for a business. When it comes to handling mistakes, repairs, refunds and other problems, a lot of consumer businesses now buy in to Amazon's customer-centric model, from online marketers like 1800flowers.com and Zappos, to offline marketers like Apple, Bed Bath & Beyond, Target, and Wal-Mart.

It is the most natural thing in the world for a customer service employee (or any employee, for that matter) to want to treat her customer the way she would want to be treated herself, if she were the customer. And that's why Verizon's whistleblower blew the whistle. He or she was upset at the company's untrustworthy behavior toward its own customers - customers the Verizon employee was now being asked to treat poorly.

It is likely to be an increasing trend. A recent academic study found, for instance, that today's workers often break their own company's rules in order to better serve customer interests - and it is generally the best employees who do so first. The study's author, PhD student Cheryl Leo from Australia's Queensland University, calls it "pro-customer defiance." One employee in the study, for instance, "hinted to a customer that his organisation wasn't acting fairly and approaching the ombudsman might be the best way out." Moreover, Leo said, "some participants expressed a feeling of righteousness in their actions. They saw it as a moral action...Some study participants said they did it because it was 'always right to help others' or 'if it was me, I would want to be treated this way'."

Indeed. We all feel that way.

What Am I Missing?

2010-06-22T21:35:07Z

In all the sad stories about the poor little rich boy who wants his life back, Tony Hayward, CEO of BP, has been excoriated and vilified ad nauseum by people who need to shake a stick at something. But those who expect him to get fired, to lose his livelihood as have so many others because of BP's clumsiness at great depths, are making it too easy. If the whole idea is to fire Hayward, then we first have to believe that if only he had not been at the helm of the rig, if only someone better, smarter, more aware, nicer, had been there instead, then none of this would have happened.

I don't buy that.

]]> In the Congressional hearings and OSHA testimony given earlier this month, well-meaning lawmakers were looking for answers to help them figure out how to write more and better legislation -- rules and regs that would prevent future oil spills and the subsequent ecological and financial disaster -- from happening in the future. Better well linings. Stronger drill bits. Checking and doublechecking. Less kissing in the back room with the regulators. But the talk was too much about why Hayward didn't have the answers to the specific questions and who made the decisions that led to the disaster, and not enough about how the decisions could be made by anyone at BP.

Of course Hayward didn't make the decisions about the Deepwater Horizon oil rig, or how the regulations were followed or not in the Gulf. In a typical organization, only a handful of top officials will be responsible to the CEO, whose mandate is something broad like "Get more oil, as profitably as possible, from the Gulf of Mexico." Then the people who answer to him and the people who answer to them, and so on make the decisions and set the budgets and take the actions that actually get things done. If Hayward himself made all those decisions, or even knew about each one, the company would grind to a halt. In fact, such a company could probably not have more than a hundred or so employees. That doesn't mean Hayward shouldn't have completed his internal investigation and known all the faces and facts before he had to say "I don't know" 66 times at the hearings. But he shouldn't have known everything before the spill.

No, the idea that we need to get to the bottom of this so we can understand how to prevent it from ever happening again -- how to react and react intelligently -- cannot come from what BP did wrong, but why.

Here's the heart of the issue: If, in the past 60 months, Exxon had only one safety violation, Citgo Petroleum had two, Sunoco and Conoco Phillips each had eight, and yet British Petroleum had 760 safety violations, then this is not about how they drill or how they process oil or how they skim or any of that. The real question is this: What is the fundamental difference between the way BP is run and the way the other four companies are run that has created an environment at BP that has served as a petri dish for risky and unsafe and illegal behavior? What is the difference in the hiring and employee selection and training process? What is the difference is the way employees are motivated, compensated, rewarded, and promoted? How is the short-term balanced against the long term when middle managers gather round the water cooler? What is the difference in corporate culture, or what Don Peppers and I refer to as "what employees do when no one is looking"?

Customer Strategist Orkun Oguz: The Key to Successful Customer Relationships Is Effective Employee Engagement

2010-06-02T13:44:12Z

Products don't generate revenues. Customers do. But in order to satisfy customers and build the types of trusting relationships that will help companies maximize their revenue potential, organizations must first have properly motivated and engaged employees.
Employee engagement involves the steps that companies take to capture the hearts and minds of their employees, and motivate them to give their best effort to customers.

You can't become a customer-centric organization until you've become employee centric. Your company is only as strong and effective as your customer-facing staff. There will always be critical moments for your customers that no CRM suite or marketing script can address. Only an engaged, caring, customer-facing staff can handle these types of instances properly.

A highly-engaged employee typically feels more connected to the business and its performance. In fact, according to a study by Hewitt Associates, the level of employee engagement at companies that have achieved compound annual profit growth of at least 10 percent for a five-year period is more than 20 percent higher than at single-digit growth companies.

In addition to connecting customers with the right employees who are incented to fulfill their needs, companies realize other meaningful business benefits from having engaged workers. Employee turnover will be reduced, particularly in high-churn areas such as contact centers. HR costs will drop as companies have to devote less time and capital to recruiting new employees. That will also lead to lower training costs as companies retain longer-tenured, knowledgeable workers.

Nevertheless, the HR-related cost savings that stem from these actions pale in comparison to the impact that a highly engaged employee will have on cross-sell/upsell rates and other favorable business outcomes that result from happy, satisfied customers.

Employees are not equal

Just as companies need to treat different customers differently, they also must treat different employees differently. Not just in terms of compensation, but also how each employee responds uniquely to different styles of communication. They also have different needs and motivations; they each bring a different value proposition to the organization. Because of their unique qualities and capabilities, individual employees also require different types of training, acknowledgment, project assignments, and career progression paths. Some employees have a strong aptitude for assuaging customers who are upset. Other workers are adept at seizing opportunities for upselling customers at just the right time.

Decision-makers also need to recognize that there are roles within the organization where an employee's impact is considerably greater than their rank or pay grade. For instance, contact center agents don't rank among the highest-paid employees in most companies, yet their impact on the organization's business outcomes with customers is substantial. Such groups should be identified and handled with special care.

While business leaders can't necessarily pay contact center agents more, they can segment employees based on their skills or value to the organization and provide them with different types of incentives. These can include flex hours for working mothers or tuition support for workers attending night school. Incentives can also be tailored to meet an employee's particular motivation. For instance, some employees value public recognition of their efforts by senior executives in town hall-type meetings.

Another effective technique for motivating and engaging employees is by placing them through a variety of rotational job assignments. This will give high-potential employees a chance to learn more about different parts of the organization while strengthening their skills, as well as the company's bench strength.

There are also techniques that can be applied to help motivate and incent employees based on compensation levers. For example, companies can create special teams of contact center agents who are particularly adept at retaining high-risk customers. Agents who work in such groups can be compensated differently, including performance-based pay or bonuses that are tied to customer satisfaction and churn rates.

Applying the Golden Rule

When decision-makers take steps to motivate and incent their top-performing employees, they should be sure not to overlook their "B" team players whose contributions to the company are also critical. The best way to do this is by setting transparent performance and rewards criteria for all employees, including the availability of training programs and the requirements for reaching different pay levels. The criteria itself can be based on an employee's performance grades and their direct and indirect influence on customer satisfaction scores.

Highly engaged and motivated employees are more likely to go above and beyond the call of duty for your company's customers. Ultimately, that will lead to happier, more satisfied customers whose loyalty will be reflected in their business value to your company.

About the Author: Orkun Oguz is a managing partner at Peppers & Rogers Group.

Is Facebook Trustworthy? (I think not.)

2010-05-21T19:06:30Z

In a recent post I suggested that Amazon, Apple, and Google are imminently trustable companies, appearing always to put their customers' interests first when devising new products and business strategies. And it's truly gratifying to see three such customer-oriented firms succeeding so well. But what about Facebook? Given all the recent concerns over Facebook's privacy protection policies, would you say it is as trustworthy as these other firms?

]]> The plethora of online and offline stories about Facebook's handling of its members' personal privacy seem to be centered around the issue of the firm's rather uncertain and fluctuating commitment to protecting its members' interests. Every couple of weeks, it seems, Facebook re-defines the privacy rules that govern its member-shared information, with the result that, as the Financial Times recently noted, not only has the company "gradually eroded the privacy rights of its users, but it has done so in a confusing and opaque way. Facebook's privacy controls are now so complex and hard to understand that many have been nudged into 'sharing' a lot..." Indeed, the Electronic Frontier Foundation is in such a huff about these changes that it was moved to publish a visual time line cataloguing Facebook's transition from its initial 2005 promise to share personal data only with friends, to the current warning that any application accessed via Facebook would be given "General Information" about the user. In a less successful company, many of these irregularities and confusions might go unnoticed, but Facebook now numbers roughly half a billion subscribers, so everything it does gets subjected to scrutiny.

Mark Zuckerberg, Facebook's founder and principle owner, turned 26 just this month, and so perhaps it shouldn't be a surprise that someone of his age would place less importance on the privacy issue than many older consumers do. There is, after all, a distinct generation gap delineating people's attitudes toward the importance of protecting personal privacy, with the younger generation generally less concerned about privacy breaches than their elders. (If you doubt what I'm suggesting here, then just ask your 20-something niece or nephew how concerned they are about the personal information they reveal to others through mechanisms like Facebook, YouTube, or Flickr. Watch for stifled yawns and the telltale roll-of-the-eyes "whatever" look.)

Even though they may be less concerned with individual privacy, however, these younger consumers are even more obsessed than their elders are with honesty, transparency, and authenticity when it comes to online corporate interactions. So it isn't quite as easy to explain away the capriciousness with which Zuckerberg's firm has tinkered with its "terms of trade" when it comes to members' privacy rights. Not only does this indicate something about Facebook's lack of commitment to its members' interests, but there has also been a patent lack of authenticity in its many different official explanations for its actions. This is definitely not a "transparent" company by any definition of the word.

If Zuckerberg truly believes that the interests of his company's users should be primary, as can be said of many other highly successful new-age companies (including Amazon, Google, and Apple, of course), then he ought to have a reasonably clear picture of how to structure the privacy protection issue, in a way that properly reflects his generation's attitude as well as the basic principle that customers come first and transparency is vital. This, unfortunately, does not appear to be the case. Rather, it seems this is one Generation Y member who not only has little regard for privacy, but might have just as little regard for the interests of his users, as well.

As intelligent and ambitious as he his, by many accounts Zuckerberg is not a very nice person. That is, he is apparently the kind of person who likes to bully, cheat, or rip people off for the sheer fun of it. Business Insider claims to have uncovered a great deal of incriminating dirt in the story of how Zuckerberg founded his company back in 2003, after blatantly deceiving some Harvard friends who had come to him for help with a similar idea (later settling a lawsuit they filed against him for more than $60 million). These stories might be attributable to his immaturity at the time, or they could reveal a deeper character flaw, but from the standpoint of a Facebook user such a distinction hardly matters.

When stories are told about Google founders Sergei Brin and Larry Page, they often revolve around their maniacal obsession with the user experience. These entrepreneurs worried about delivering people the search results they wanted as fast as they possibly could, and then getting them off the Google site, so users would have the best, most convenient experience possible. Google's investors worried about the firm's ability to monetize its fantastic success if all they were doing was hustling customers immediately off their site (clearly, this was not going to be a business based on forming a "portal," or a single site where a user's every desire would be met with no need to leave). But Brin and Page were insistent, and the user experience remained their most central, all-consuming concern.

When stories are told about Facebook founder Mark Zuckerberg, on the other hand, somehow they all seem to revolve around his sleaziness and willingness to deceive, including not just the question of whether he ripped off some friends who trusted him, but whether he isn't playing all his users for suckers. Little is ever written about Zuckerberg's concern for Facebook members. Why is that?

Business Insider, clearly no friend of the Zuck, has one additional very scary clue, in the form of some instant messages between Zuckerberg and a friend, in the very early days of "The Facebook," when Zuckerberg was only 19. He had just launched "The Facebook" from his dorm room at Harvard. According to Business Insider, the IM exchange went as follows:

Zuck: Yeah so if you ever need info about anyone at Harvard

Zuck: Just ask.

Zuck: I have over 4,000 emails, pictures, addresses, SNS

[Redacted Friend's Name]: What? How'd you manage that one?

Zuck: People just submitted it.

Zuck: I don't know why.

Zuck: They "trust me"

Zuck: Dumb fucks.

Biased Information and the Financial Meltdown

2010-05-18T16:38:55Z

The ratings agencies, including Moody's and S&P (a unit of McGraw-Hill) are under fire for not doing a better job in evaluating various financial securities and derivatives products during the sub-prime housing boom and the run-up to the 2008 financial meltdown that has so seriously undermined the world economy. Recently Moody's released information that it might be the subject of an SEC investigation over its presumed "false and misleading" ratings of various products. The company maintains its innocence, of course, and nothing is proven until all the evidence is presented to a judge, but it's widely thought that the big ratings agencies failed miserably in their jobs of providing reasonable and prudent financial ratings to guide investors.

]]> There are at least two potential reasons for this. First, the financial derivatives they rated were incredibly complex and difficult to evaluate. They included not just bundles of home mortgages themselves (which would be complex enough), but also products that provided "insurance" against the possibility that these mortgages would default, packages of bundled mortgages separated into different risk tiers (or "tranches"), and so forth. The ratings agencies put together the most sophisticated economic models they could manage, given the data available, and then based their ratings on these models, which were released to the financial community. But investment bankers had a strong economic interest in getting the highest possible prices for those bonds that represented the lowest possible cost (translation: they wanted to get the highest possible ratings for their bonds from the agencies, while providing as little genuine "safety" as the ratings agencies would accept). So these seven-figure bankers constantly probed the agencies' rating models, which had been created by five-figure analysts, and frequently they did find loopholes. So the reliability of the ratings system was rapidly undermined, with catastrophic consequences for the world financial system.

Michael Lewis, in his book The Big Short, gives some great examples of how bankers were able to game the system, based on the agencies' ratings models. According to Lewis, for example, they easily figured out that the agencies

"didn't actually evaluate the individual home loans, or even look at them, before issuing a rating on a bond made up of these loans. What they had was a model that characterized the portfolio of mortgages in a loan based on their AVERAGE characteristics... To meet the rating agency's standards - to maximize the % of triple-A-rated bonds created from any given pool of loans - the average FICO score of borrowers [i.e., credit score] in the pool needed to be around 615. But the opportunity for the Wall Street firms lay in the fact that this average could be reached in a number of ways. A pool of loans composed of all 615 scores was far less likely to suffer huge losses than a pool composed of half 550 and half 680. A person with a 550 was virtually certain to default and should never have been lent money in the first place. But the hole in the rating agencies' models allowed such a loan to be made anyway, and then pooled with some high-FICO borrowers to serve as collateral for a AAA bond!"

But yet another reason the agencies' ratings might not have been as objective as they should have been goes to the heart of an issue that is central to how information is created and disseminated, and will likely become more and more important as more information is disseminated online. This has to do with something economists call "agency bias" or "agency costs." This term does not refer to the ratings agency, but to the bias inherent in any action in which one person is acting as an agent for another. The agent's natural bias is to act in his own self-interest, even though he is obligated to act in the interest of others - either the ones who hired him, or some other constituency. Agency bias is what professionals are supposed to be immune from. Doctors (at least under the US's current healthcare structure) have a natural economic self-interest to perform more tests on a patient than are really needed, and to keep a patient ill for longer than necessary. Lawyers have a natural economic self-interest to extend the lawsuit or other case that their client is involved in. The reason we call these people "professional" has largely to due with the fact that professionals are expected to ignore their own self-interest, and always to act as the unbiased agents of their clients, representing their clients' genuine interests as if they were their own. Whenever an agent doesn't put the interests of his client ahead of his own self interest, it creates "agency costs" and erodes the efficiency of the economic system.

Here's the problem with respect to the ratings agencies: They are paid for their services by the investment banks on the "sell side" of the financial community. But the ratings themselves are supposed to inform and benefit the buyers of these financial instruments, not the sellers. If the agencies had actually admitted that many of the financial instruments were simply too complex to be accurately "rated" as to their genuine risk to investors, then they would have had to turn down a whole boatload of highly profitable engagements from Wall Street's eager sellers. The agencies' own self-interest was to procure more and more assignments from the investment banking community, while the bankers were interested in procuring the agencies' ratings in order to sell more and more financial derivatives. This is classic "agency bias."

However, if you think about it, agency bias like this affects not just lawyers, doctors, and ratings agencies, but literally every enterprise that has employees. Employees themselves are the ultimate agents, each one honor-bound to act in the interests of his or her employer at all times, but tempted on a daily basis to serve their own self interest, as well. When a business pays commissions to employees for generating product sales, it is explicitly acknowledging that commissionable sales are in the business's interest. And as the financial meltdown demonstrated, sales commissions can often prove irresistibly lucrative. Many of the individual traders who participated in the run-up to the crisis knew full well that some of their deals were not very sound. After all, they themselves were the ones who were gaming the system in order to con the rating agencies into issuing higher ratings. But hey, if the bank didn't want these deals in the firs place, they wouldn't have agreed to pay such high commissions, right?

Moreover, agency costs can be expected to play a more and more important economic role (with significant consequences) as companies gradually "virtualize" their organizations, adding independent partners to do work formerly done by full-time employees, and contracting with outsiders to outsource an increasing amount of work that used to be considered more central to an enterprise's functions.

The increasing costs of agency bias are likely to make it even more important for companies to base their future success on earning and keeping the genuine trust of customers, employees, and other economic partners.

Honesty, Part III. QUESTIONS YOU SHOULD ASK YOURSELF

2010-05-10T13:11:46Z

In presentations to business groups, I often emphasize the importance of always trying to earn the trust of customers. Customer trust may be the single most important asset any business can have, and two conditions must be met before a customer will trust you:

Intent. The customer has to perceive that you have the right motive - that is, that you intend to act in the customer's own interest, and that you won't sell the customer's interest short when that advances your own business goals.

Competence. You must be capable of carrying out that good intent in a reasonably competent manner.

]]> Both these conditions must be met for a customer to trust a business. Either one, by itself, will not be sufficient. It does a customer no good to deal with the best-meaning company in the world if that company doesn't have enough competence to deliver on their good intentions.

The problem is that customer trust is too often overlooked by busy executives, under pressure to show immediate financial results in their operations. It's easy to overlook the central role of customer trust in the success of a business, because trustability is not something we normally measure and report to shareholders on any regular basis.

If you want to begin to understand your own company's attitude toward customer trust, these are the kinds of questions you should ask yourself:

Do you ever find the need to have one story for the company but another for the client?

Do you remind customers when their warranties or service agreements are almost up?

Would you rather sell to knowledgeable and informed customers, or to uninformed customers?

Do your salespeople make more money by selling products? Or by building relationships?

Honesty, Part II can be read here, and Honesty, Part I can be read here.

Honesty, Part II. CONFESSIONS OF AN HONESTY "PRUDE"

2010-05-07T13:00:00Z

Dear Abby,

I have a good friend who is a fairly senior businessman, responsible for a whole division at his firm that sells professional services to corporate clients - usually large corporate clients. He's become very successful, and every time we see each other I find myself marveling at his accomplishment, having built his division into a high-growth business in just the few years he's managed it.

]]> But there is something very unsettling to me about the way my friend deals with his clients. We get together every few months, and often when we're driving or walking somewhere, or just hanging out, he'll get a business call on his cell phone and of course I can't help but overhear him. What bothers me, however, is that my friend apparently has absolutely no regard for the truth when it comes to telling his own managers what to say to a client. In pricing negotiations, for instance, I've heard him suggest complete and utter lies, such as "tell the client this is absolutely our biggest possible discount, because the head office forbids us to undercut the rest of the company," or "tell them the hourly rate can't be reduced on this contract because of our prior contractual obligation to this subject matter expert."

Even in casual discussions with his colleagues, when so much as a minor inconvenience is threatened, my friend might make up a totally bogus excuse for dealing with it. To overcome a scheduling conflict I've heard him tell his secretary to call the client and tell them he got delayed on his flight (when he didn't), or that his boss unexpectedly convened a must-attend senior-staff phone meeting (not true).

What bothers me most about these overheard comments is the complete casualness with which my friend bends, twists, and undermines the truth. Not only does he show no remorse whatsoever, but in many cases I've heard him suggest a lie when it really wouldn't have been much more trouble just to explain the truth carefully.

Am I a prude here? Does anyone else get the willies when witnessing such constant prevarication? What should I do? Should I approach my friend and tell him how much his constant fibbing bothers me? Or should I butt out because it's none of my business?

Signed,

Honesty Prude