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Tuesday, May 22, 2012

CSM Performance Management Done Wrong

Managers often perceive differences in how individuals perform sales and customer service, implementing management practices that make things worse. Faced with the challenge to improve results, many establish numbers-based, “pay-for-performance” systems to reward good employees and punish bad ones. Motivating by comparing, ranking, and paying people according to their individual results just makes sense. After all, prestigious business schools and prominent corporate leaders espouse meritocracies. The “carrot and stick” approach is so widely used that it must be right. But this philosophy is flawed and counterproductive, especially in operations like Customer Success Management. Why? Supervisors wind up focusing on the wrong things and demotivating their employees.
Call centers are a case in point. Managers keep detailed statistics such as call handle time, call quality and conversion rates. Most then rank agents based on their numbers. A pep talk might sound like, “Bill, I see you are near the top on quality, but you’re only about average on your call handle time. Keep up the good work, but you need to go faster!” In addition to coaching, call centers use a variety of bonuses and awards to single out and further motivate agents, believing it’s the answer for achieving high service performance.
How well does it work? The fundamental question is to what extent performance can be attributed to the process (i.e. technology, workflow, customers, training, policies, etc.) or to the people. We studied this question examining average handle times (AHT) and quality scores (QA) for a group of 55 agents over several months. If performance was due exclusively to process factors, individual rankings would be decided by chance alone. If people factors entirely determined results, ranking would always be same, month after month.
Using statistics no more complicated than the probabilities of flipping a coin, we found that individuals played a role, but nowhere near as much as managers expected. In the agent population, only 13% exhibited non-random behavior for QA and 22% for AHT. Combining both metrics, we showed less than 6% of agents had performance that could be attributed to something other than chance. Clearly, rewarding and recognizing individuals for outcomes dominated by systemic variation was a waste of time—and many agents knew it. Management time was much better spent improving the process than motivating the people.
Surprisingly, experts have shown that reward systems can be demotivating, especially when it comes to tasks people enjoy. Psychologists classify motivation as intrinsic (doing something for its inherent satisfaction) or extrinsic (doing something in anticipation of a separable, dependent consequence). Ask people in customer service why they do the job and most will say it’s not the money but because they like helping people. In other words, service people tend to be intrinsically motivated. Years of scientific analysis confirms that virtually every type of reward that is contingent on task performance undermines intrinsic motivation.1 The flip-side is also true—management threats, deadlines, directives, and competitive pressures also backfire. Quality guru W. Edwards Deming felt so strongly about the obstacles caused by ranking people according to the numbers that he insisted leaders eliminate it in his famous “Fourteen Points for Transformation of Western Management.”2
So does this mean employees shouldn’t be rewarded or held accountable for their work? Absolutely not! In any distribution of people, some will excel and others will struggle. Leaders must help everyone do a better job, and for statistical outliers “manage up or manage out.” But leaders must also understand better results come from better processes, and should make process improvement their primary focus. They should also set aside relative ranking and competitive reward systems, choosing instead to practice leadership and instill teamwork. And not all extrinsic motivation is bad. We found that service employees respond very favorably to team-based goals and incentives that promote cooperation and process innovation—enhancing, not hindering, their natural inclination to serve customers and each other.
And what about CSM functions mixing sales and support? In these cases, small, individual sales commissions may be appropriate, but great care must be taken to balance and clarify job expectations and goals. Many times employees view sales and service to be at odds, and for good reason: customers don't want to be "sold to," but appreciate assistance making a decision. Framing the task as identifying needs when they surface and helping customers decide in a subtle, consultative way tends to be much better received than pressuring CSMs to meet monthly upgrade and renewal quotas at the expense of good service.
Often the road to hell is paved with good intentions when it comes to performance management. With great service increasingly the market differentiator and a primary driver of customer retention in subscription-based revenue models, managers can’t afford missteps. Spending time unproductively improving service performance or lowering front-line employee satisfaction and engagement can be disastrous. Using a more enlightened approach to performance management avoids pitfalls and pays much higher dividends.  
1.    Ryan, R. and Deci, E. (2000). “Intrinsic and Extrinsic Motivators: Classic Definitions and New Directions,” Contemporary Educational Psychology, issue 25, pp. 54-67.  
2.    Deming, W. (1982). Out of the Crisis, pp. 70-85, MIT Center for Advanced Engineering Study, Cambridge. ISBN 0-911379-01-0

Tuesday, May 15, 2012

Best Practices of Practice Fusion

“I just signed up for this new software package,” my friend Dr. Grace Alessi said over Margaritas at a family outing on Mother’s Day. “It’s incredible!”
Formerly an internist at a family medical group, Grace started an independent medical practice in town two months ago. It’s called Balanced Well-Being Health Care of Fort Collins, Colorado. She and I were catching up, and I told her I was doing work in cloud computing these days. Grace proceeded to RAVE about how wonderful the cloud concept was and how much she liked her new web-based application.
When opening her new office, she had considered buying a software license to manage medical records through her former practice, but the cost would have been $15,000 right out of the box. It was well out of her budget for just getting started. Instead, she discovered Practice Fusion, a freemium SaaS offering that manages Electronic Health Records (EHR) for medical offices.
She couldn’t believe how easy it was to set up and use. “They said, ‘Live in Five’ and they weren’t kidding!” Practice Fusion advertises that any new customer can be up and charting patients in five minutes. Grace said they solved a browser issue on her computer right away and she was rolling, as promised.
“I have a dedicated assistant, Jason, who’s fantastic. I can call for him help any time. He always answers, ‘Yes, Dr. Alessi, how can I help you?’” Practice Fusion boasts over 170,000 users and says it’s the fastest growing EHR application. Clearly the company has found a way to keep an intimate feel while scaling operations quickly. They understand the personal touch makes customers raving fans, and they’ve implemented the technology, staffing, and processes to make it all work. Can they keep it up? The robustness of their strategic management system will ultimately determine that; how well their practices enable planning, execution, and learning amidst rapid growth.
Grace said she didn’t know how Practice Fusion could make money with a free price tag, and commented that after a while she didn’t even notice the ads scrolling at the bottom of the screen. She said she would have paid $100/mo. without blinking since it was still a fraction of what she would have spent. Do the math. With over 170,000 subscribers, that’s a cool $17M per month run rate if everyone felt the same way. I’m left wondering if advertising to physicians brings in anywhere near that number.
If being free, easy to use, and HIPAA compliant weren't enough, Practice Fusion further differentiates by publishing ‘three nines’ of availability in their Service Level Agreement (SLA). In the medical industry, system reliability is obviously a concern. The contract offers service credits if the company doesn’t deliver. Grace didn’t mention this, but to me it’s always impressive to make a customer promise and hold yourself accountable to it.
Looking at what I’ve written above, I need to clarify: I’m a management consultant, NOT a paid spokesman for Practice Fusion. Neither is Grace. But her enthusiasm is contagious—to use a medical term. And like recognizing the attention to detail that distinguishes Ritz-Carlton, a two-time recipient of the Malcolm Baldrige National Quality Award and perennially successful in the commodity-driven hotel industry, I appreciate rare SaaS companies like Practice Fusion that understand unparalleled service is the key to low customer churn, higher referral rates, and maximum profitability. After all, SaaS stands for “Software as a SERVICE.” Sure, some IaaS and PaaS vendors may scoff, saying SaaS providers serving end customers are the only ones needing to worry about good service, but last I checked the acronym applies to them, too.
“I don’t know why anyone would buy anything else. What’s going to happen to the other software companies?” On that cloud computing observation, Grace asked the most important question of all. From their actions, it's clear Practice Fusion intends to be here for a while.

Saturday, May 12, 2012

Loyalty, by Design

Most customers defect because of how they were treated, notably during the initial business relationship (see "What Starts Right, Stays Right"), but product and service design can also be a major factor in customer churn. In the cloud computing business, there are few barriers to entry, competition is increasingly fierce, and the cost to switch providers is low. Since customers can cancel subscriptions any time they perceive greater value elsewhere, Cloud Service Providers (CSPs) must create compelling solutions, treat customers exceptionally well, and always stay one step ahead of the competition.
But in many ways, CSPs are no different than any other business. Fast-moving, high performing manufacturing companies have long known that better product and process design yields better results. Often CSPs don’t do the basic market research, solution definition, and validation required for developing exceptional, well-differentiated products. As a result, inadequate design approaches hinder a CSP’s own ability to retain customers for the long term.
So what makes a good design? It’s simple: innovating when customer requirements are known, not assumed. Engineers are natural problem-solvers. Presented with challenges, they’re quick to come up with solutions. Add to that time-to-market pressures and their answers come even faster. But knowing exactly what problem developers are trying to solve is essential, and collecting more information in the beginning often feels unproductive.
Left alone, software engineers develop products based on what they presume to be customer needs and desires, which can spell disaster down the road. The top reasons for IT project delay are unclear customer requirements: expansion of functionality or “scope creep,” and “gold plating,” or over-engineering things that don’t matter.1 In start-ups, this can spell certain death. The Startup Genome Project says building a product without a validated product/solution fit is a common failure point stating,"It's widely believed amongst startup thought leaders that successful startups succeed because they are good (re)searchers and failed startups achieve failure by efficiently executing the irrelevant." 2 Senior leaders must keep their engineers’ natural impulses in check by instituting a process that places intense focus on understanding market needs well before any coding begins. A little more time doing it right up front means much less time, cost, and risk fixing it later.
Great product designs come from:
1.       Market Requirements Analysis. Using secondary research to size market opportunities, select attractive market segments, and evaluate competitive position. Using qualitative, primary research to uncover unmet or under-met needs. Using quantitative surveys to further clarify and prioritize needs.
2.       Solution Design. Brainstorming and creating an exciting, realistic, achievable, solution concept at a block diagram level that is distinctly better than the competition, addressing market needs with new technical capabilities.
3.       Value Proposition Refinement. Summarizing the design’s compelling benefits, competitive differentiation, and tradeoffs (such as cost or conversion) customers must make when buying the solution. Testing the design concept, feature and pricing options, and Value Propositions with target customers to set the final design details.
4.       Requirements Definition. Converting the final solution design into very explicit features, system capabilities, software modules, and specifications for the development project’s scope of work. Establishing performance goals for potential technology partners (e.g. cloud applications, APIs, and managed infrastructure) intrinsic to the solution. Creating process requirements, metrics and goals for internal service delivery capabilities, including onboarding and customer care. 
5.       Development. Assembling and integrating capabilities, writing and testing code to meet requirements and fulfill the Value Proposition. Creating channel and marketing partnerships to communicate the Value Proposition. Developing internal processes and negotiating Service Level Agreements (SLAs) with technology partners to deliver the Value Proposition.
So how is greater customer loyalty achieved? It begins in Market Requirements Analysis. Leading companies conduct a deep investigation into customer challenges using carefully chosen, open-ended questions to surface underlying needs. Then they use tools like Kano surveys to classify potential solution attributes into “must-have,” “more-is-better,” and “delighters”— unexpected features and benefits that elicit emotional response and attachment, resulting in greater loyalty. Knowing what truly matters to customers helps engineers not only target the right problems but consider breakthroughs. Project teams then test final design features, benefits, and pricing using discrete choice surveys. They summarize with clear, compelling, and competitive Value Propositions, explicitly stating what customer promises the company will make and how it will keep them. Well-crafted Value Propositions articulate why customers will buy, renew their subscriptions, and refer other customers. Only when all of this is done do top-performing companies begin writing code.
CSPs that jump to the obvious miss opportunities to develop anything other than “me too” solutions, creating an offering ripe for high customer churn. Given the significant economic impact defecting customers have on revenue and profit in subscription-based models, using a more market-centric design process is the first step for generating high customer retention and loyalty.

  1. Goldratt, Eli (1997). Critical Chain, North River Press, Great Barrington, MA, and McConnell, Steve. (1996). Rapid Product Development, Taming Wild Software Schedules, Microsoft Press, Redmond, WA.
  2. Marmer, M., Herrmann, B. L., Dogrultan, E., Berman, R. (2012) Startup Genome Report Extra on Premature Scaling: A Deep Dive Into Why Most High Growth Startups Fail, Startup Genome.