Tuesday, August 9, 2011

Managing by the Numbers in the 21st Century

According to Radical Management, the primary purpose of a company is to delight its customers.

Managing based on customer delight really is a radical change. Today, corporations are "managed by the numbers", i.e. financial results.  Why is customer delight now more important than financial numbers. And how do you know if your customers are delighted?

Delighting the customer is essential because customers can go elsewhere. Never before has it been so easy to compare the features of different products, compare prices or share information about a company’s products, services and support. Nor has it ever been easier for new competitors to enter a market. The cable company is now a telephone company and vice-verse. In short, customers have more power than ever before. So your relationship with your customers is more important than ever before.

Some might say customer satisfaction is enough. What does satisfied mean? It means that the customer has nothing to complain about, but nothing to write home about either. So if your customer is merely satisfied, while he is unlikely to say bad things about you, he is unlikely to encourage friends and colleagues to do business with you either.

It's the customer, stupid!

Others might say, returning a profit to the shareholders (or more immediately, satisfying the boss) is more important than delighting customers. Who is the ultimate source of money in the company? Not the shareholders, the customers! Profits and growth are a side effect of producing genuine value for your customers.

If you are focused on anything but your customers, profits and growth will suffer. If you doubt this statement, think about companies that make you happy: Apple (AAPL) is probably near the top of this list. Look at their profitability and share price over the last 10 years. Then go look at the stocks that make up the DJIA, SMI or most other important indexes. The few companies that are doing well are those that delight their customers! These are not the companies managed according to the classical rules of management. Everyone else is stagnating or worse.

So how do you quantify and measure customer delight?

One of the grandfathers of Radical Management is Fred Reichheld, author of ‘The Ultimate Question’. Based on one simple question, he could classify customers according to their enthusiasm for the company: Promoters, Detractors and Passives. The question was, “On a scale from 0 to 10, how likely are you to recommend this company to someone else”. Promoters answer 9 or 10. Detractors answer 6 or less. His index is called the Net Promoter Score (NPS). You can calculate your NPS with this simple formula:
NPS = %Promoters - % Detractors

An NPS close to 100% mean virtually all of your customers love you and would buy again from you. A score near 0 means your customers don’t care about you. Of course a score much below zero means your customers are warning their friends away from you.

Reichheld discovered that that best growth engines, e.g. Amazon (AMZN), Intuit (INTU), eBay (EBAY), or Costco (COST) had NPS scores on the order of 50 to 80%. Most companies slog along at 5 to 10% and many companies, indeed some entire industries had negative NPS scores. He found that these abysmal scores explained the inability of companies to deliver profitable, sustainable growth.

Scrum, Customer Delight and the Net Promoter Score

What struck me was that many of Reichheld's references are Scrum or Lean references too. Intuit was a featured case study at the Scrum Gathering in Stockholm. Southwest is case study from Leading Lean Software Development from Tom and Mary Poppendieck. And even Enterprise Rent-a-Car featured small teams, daily stand-up meetings and measured NPS monthly at the branch level, in a process very similar to Scrum (with a single entry in the sprint backlog: improve customer delight). BTW privately held Enterprise overtook market leaders Hertz and Avis and is now twice the size of its nearest competitor.

Managing by Customer Delight trumps the classical managing by the (financial) numbers. Scrum, Kanban, Lean (in all its flavors), these are all part of much larger transformation of our economy. A transition to a radically better form of management.

P.S. Want to make your organization a better place to be? Join us for the Zurich Gathering For C-Suite Leaders with Steve Denning and myself: Zurich, Sep 12, 2011