Why SaaS Needs Lean Six Sigma

The cloud computing industry loses about $10B every year due to customer churn, and in response, many executives launch improvement initiatives. They assign Customer Success teams to engage new customers, increase product usage and probe for sales opportunities. Other times, executives hold developers accountable for monitoring online customer behaviors and designing stickier user interfaces. Marketers sometimes get into the act, countering revenue losses through new customer engagement programs or by introducing renewal incentives. 

These isolated activities can incrementally reduce churn, but customer defection is a complex, enterprise-wide problem that requires joint effort. Customers leave when a number of deficiencies in sales, development, marketing, operations, and even accounting combine to frustrate them. Instead of assigning a single function or diluting efforts among multiple groups, SaaS companies should address customer attrition holistically with a disciplined and coordinated Lean Six Sigma approach.

Proven and unified

For decades, manufacturing and service organizations have used quality improvement techniques to satisfy customers, save money and increase revenue. Companies have shown repeatedly that relying on personal perceptions and making snap decisions leads to treating symptoms, not underlying causes. Using formal techniques, practitioners first explore difficulties from the customer’s perspective and then analyze data to uncover and resolve “root causes” of problems. As a result, improvements people make are dramatically better and more sustainable. Studies show that companies proficient in quality improvement practices consistently outperform rivals in growth and profitability by a factor of 2:1.¹

Quality methods have evolved over the years to help teams be even more successful. Modern Lean Six Sigma techniques include rigorous financial analyses to target improvements and demonstrate monetary gains. Lean principles remove wasted time and effort, speeding cycle times in engineering, production, and service operations. But best of all, Lean Six Sigma espouses cross-functional teamwork instead of working independently. Ineffective, inefficient workflows and fumbled handoffs between departments are often the most significant obstacles. When greater customer focus and scientific methods combine with better coordination and cooperation, solutions transcend internal boundaries and deliver maximum impact.

Lean Six Sigma in action

A young firm introduces an app that allows people to capture and annotate photos taken on mobile devices. The software then automatically uploads images and links them with documents the user stores in the cloud. During early trials, the founders discover that the software has widespread appeal, so they introduce the product at a low price point, expecting it to sell in high volume. 

But after several months, the executives discover a problem. Monthly customer churn numbers run far above expectations. Rather than settling for myriad, piecemeal solutions, the executives form a cross-functional Lean Six Sigma team to address the issue from a broader and deeper perspective. The project follows DMAIC, the phased improvement process at the heart of Lean Six Sigma:

Define. The problem is straightforward: 2.2% of users cancel their subscriptions each month, costing the firm $5M annually. The team establishes a goal to significantly reduce this number.

Measure: Despite having extensive data on mobile and website usage patterns, the team realizes that little is actually known about their customer churn. Marketing had originally decided to capture only basic contact information in order to reduce sales “friction” during the sign-up process. As a result, there’s no data classifying behaviors by market segment. In addition, the team finds few customers complete the online exit survey upon cancellation, so the reasons why customers leave are unknown. The team hires a third party to collect the missing information. The vendor uses billing records to e-mail and call a sample of departed customers to ask questions about their experience.  

Analyze: The vendor finds that the company indeed attracts a wide range of customers, but after using Lean Six Sigma’s Pareto analysis, the analyst shows that just a handful of segments account for the majority of churn. Surprisingly, estimators at small auto body shops are the largest defecting group. Challenged with extensive visual inspections and impatient customers during peak times, auto estimators purchase the mobile app hoping to speed their quoting process by quickly capturing images and making shorthand notes for later documentation. But the estimators learn that the time they spend copying photos into their company quoting systems negates the time they save with customers. Getting assistance from the software firm to solve the problem isn’t easy. The company’s limited self-help resources and e-mail-only, 2-day customer response time prompts most estimators to abandon the idea after just a few months. 

The team then examines internal factors. Investigating the technical issues, they learn that the company’s online database can’t exchange data in the formats commonly used by repair quoting systems. Customers buy software online and the firm provides no special attention or information to help estimators in the beginning. The company’s heavily burdened customer support team handles all tickets on a first-come, first-served basis, forcing customers to wait equally long periods for help. When estimators get into trouble, their options are few. It’s no wonder they’re leaving in droves.  

Improve: The team enhances the product and redesigns the process to make estimators more successful. Engineers research the most common exchange formats and discover they can develop an API that automatically imports images into quoting systems without the need for manual intervention. The plan calls for Marketing to add a single question during the sign-up procedure to assign each user to their respective market segment, allowing the company to better track behaviors. The team then proposes hiring a Customer Success Manager to reach out each estimator within a day of their subscription to help integrate the API, ensure the estimator gets the results he or she desires, and create a stronger working relationship. The team advocates “triage” (a Lean Six Sigma technique) in Customer Support to separate the estimators’ trouble tickets and deal with them first. Thanks to the use of simple statistical tools, the team calculates that the improvements will recover about $1.5M in lost revenue. Adding up the cost of implementation, the team finds the expense makes up a small fraction of the segment’s expected customer lifetime value. Management gives the go-ahead and the team coordinates and implements the changes. 

Control: Estimators are delighted with their new experience. Churn drops 82% in the segment and more auto shop estimators join based on strong recommendations from their associates. Overall, the company’s monthly churn drops by 38%, boosting topline annual revenue by $1.9M. What’s more, estimators who left come back, generating another $220K in revenue. Product managers notice new product and service opportunities in the market segment, promising to grow it even further. The Lean Six Sigma team then standardizes the approach and turns its attention to next group of departing customers. They repeat the DMAIC cycle and lower churn even further. 

It’s a better way

Had each SaaS company function done what they naturally do and worked within their own silos, the results would not have been the same. They would have proceeded without an in-depth understanding of their customers’ challenges. Functional leaders would have prioritized their activities around their favorite projects or according to whatever was most pressing at the time. As a result, improvements would have been typically myopic and disjointed, failing to benefit specific customers or deliver clear economic gains. 

Perhaps it’s time for a different strategy. The Lean Six Sigma method encourages SaaS functions to join forces, focus intently on customers, develop comprehensive solutions, and achieve more impressive results. A holistic improvement strategy may be just what the industry needs to retain more customers. 

Excel-lens is a publication of Service Excellence Partners. We increase customer loyalty and business performance in the cloud computing industry. Contact us today.

Source:
1. Hendricks, K. and Singhal, V. March, 2000. The impact of Total Quality Management (TQM) on financial performance: evidence from quality award winners. DuPree College of Management, Georgia Institute of Technology

Remembering HP: Habitual Performance

“It’s just how we do things around here.”

I still recall the conversation between the Hewlett-Packard worker and the Tellabs manufacturing VP.  It was 1993, and we were on trip to HP’s Loveland Manufacturing Center, a key production facility in northern Colorado. Back then I sold HP test equipment in Illinois, and we were hosting a group of Tellabs executives on a benchmarking visit. My sales colleagues and I were building relationships and sharing manufacturing “best practices” with the hopes it would motivate them to buy more HP gear.

We were touring the production area and one of my customers pulled aside a passing worker, asking him about some charts hanging on the wall. The guy stopped for a few minutes and pointed to the diagrams, describing what each meant. “This one shows the count of defects by type. It looks like they were having a problem with the solder application. And over here, it looks like the adjustment dropped the defect rate by about 30%.”

A bulletin board labeled “PDCA Storyboard” prompted the interaction. A management presentation earlier in the day talked about the division’s Total Quality Management journey. HP used “Plan-Do-Check-Act” as its corporate improvement method, and the PDCA Storyboard showed the step-by-step progression. The presenter had made the bold statement that the quality practice was everywhere. It had become entrenched in the division’s operating system.

The Tellabs VP smiled and said, “So you’re saying you don’t work here but you can tell what this operation is doing?”

“Yeah. I’m on one of these quality teams in my area. We use PDCA to increase our yields, too.”

 “Come on. You’re not just a ‘plant’ walking by, an expert trying to impress us?” the executive chided him.

His response was working-man authentic. “No,” he said, shrugging. “It’s just how we do things around here.”

I could tell my customer was satisfied. He shook hands with the worker and thanked him. Without saying a word, I knew what he was thinking: It’s true. HP really is this good.

As a company HP was well respected, but it wasn’t because it was the most inventive. It didn’t come up with SPC or kanban or anything else the Tellabs executive hadn’t heard of. It wasn’t because HP only used the most advanced technology. The tour showcased some shiny, new equipment, but most was conventional and well used. It wasn’t because the company didn’t make mistakes. Over the years, the exec had dealt with the occasional HP hiccup. But where Tellabs and others would talk about fundamental change, HP would do it. And do it well.

HP had great people and great discipline. The company had a knack for studying something interesting, trying it on a small scale, refining it, rolling it out consistently, and making it all natural. Author Jim Collins calls this empirical creativity matched with fanatic discipline; direct engagement and practical experimentation followed up with utterly relentless execution in accordance with consistent aims, performance standards, and methods.¹ HP’s behavior, like other dynasty companies Collins studied, allowed it to dominate the test equipment industry for nearly seventy years.

Things have changed since 1993. The HP division became part of the Agilent Technologies spin-off, the manufacturing unit was offshored, and the HP brand has lost some of its luster since the time of “Bill and Dave.” Tellabs also changed. After heady growth, the company suffered from the telecom bubble burst; painful cutbacks, management changes, and eventual renewal as a networking products company.

I’ve changed, too. A career in sales led to marketing and operations, eventually leaving HP to start three companies and work for two more. Sparked by my time at HP, I spent many years exploring why some organizations performed consistently better than others. I learned and applied lessons in my own companies and others through the Baldrige program and the occasional consulting gig.

I’m convinced high performance boils down to simple, disciplined management systems that make people, planning, execution, and learning all more effective. It's true for organizations large and small, no matter the sector. But success always depends on great leadership and the tenacity to see it through. When excellence becomes a matter of organizational habit, long-term success is assured. 

And that’s what reminded me lately of the wisdom and discipline of a great company. Years ago they made it all happen, captured in one simple remark:

“It’s just how we do things around here.”

Footnote:

1. Collins, J. and Hansen, M. Great by Choice: Uncertainty, Chaos, and Luck--Why Some Thrive Despite Them All. Harper Business, 2011. ISBN 0062120999.

Scaling Up? Think Hamburgers.

Your new venture is catching fire and you need to ramp up operations quickly to handle demand. Where should you look for pointers? Try McDonald’s, Burger King or Wendy’s.

The Start-Up Genome Project analyzed thousands of high tech start-ups and found that successful companies progressed through four predictable phases. Dubbed the “Marmer Stages,” each involved a different set of objectives; Discovery was crafting and testing the idea, Validation was refining product features and generating initial orders, Efficiency was making customer acquisition and delivery processes repeatable, and Scale was ramping up and generating aggressive growth.¹ A successful mantra was “nail it, then scale it”—confirming that the product, marketing strategy, and business model all worked before stepping on the gas with big capital, staff, and infrastructure investments.

So what happens when the time comes for a start-up to scale in a big way? Suddenly the game changes from “tinkering” to “ramping,” generating volume quickly to establish market position and cash flow. It may sound silly to high tech entrepreneurs, but fast food franchises offer unique insights—they’ve made scaling up a science. Intel CEO Andy Grove looked closely at McDonald’s. In the late 1970’s, he believed Intel’s success depended on making their embryonic microprocessors as reliably as hamburgers, saying “We have to systematize things so we don’t crash our technology.” He kept a hamburger box on his desk with a mock logo, McIntel, to remind everyone of the strategy to grow with profitable scale.²

Franchisers offer four great lessons for quick and efficient early-stage expansion:

1.    Simplicity. Ordering “off-menu” may be fine for high-end restaurants, but fast food stores limit choice to what’s on the menu. Subway’s deli-style assembly and Burger King’s “Have it your way” only apply to a narrow range of options. Lesson: To scale, new companies must limit choices in the product offering. In the Validation stage, start-ups often “pivot,” experimenting with the product and pricing before they find something that sells. But every new version comes with added complexity, time, and hidden cost—documentation, training, software, accounting, and support. Pick your target; you can’t be all things to all people, so choose ONE profitable segment and stick to it. Rationalize your product line so that at least 80% of your sales come from just a few versions, and resist the temptation to add more. Product simplification is better for sales, too. Studies show too many choices confuses people, slows decision making and lowers satisfaction.³

2.    Standardization. In the fast food world, uniformity in supplies, equipment, training, software, and work processes promote consistency and quality, no matter where the franchise is located. Standardization also leads to economies of scale, which allows franchisers to improve performance and lower costs in their supply and distribution chains. Customers value predictability, which causes repeat visits, recurring revenue, and brand reinforcement. Lesson: As sales gain traction, consistency becomes essential to grow profitably and keep customers coming back. In the Efficiency stage, further refine product specifications, value propositions, and delivery processes, documenting best practices. Redesign if necessary to meet financial targets. Implement standard metrics and process checks to ensure consistency and quality. Consolidate anything that gives you purchasing leverage.

3.    Leadership. An industry expert states that if a franchise has a proven business concept with sound training and support, 40% of a franchisee’s success will come through their own hard work and talent.⁴ McDonald’s is renowned for careful selection and training of its franchise owners. Applicants must demonstrate past business success and financial resources (a new store typically requires a $1M+ investment). If they make the cut, they spend three days in a McDonald's restaurant, working and learning about the business. If they advance, franchisees must then spend a nine months at Hamburger University before opening a store.⁵ Lesson: Good leadership and development are essential for ramping up. Growing companies tend to promote from within and skimp on management training.  As a result, teams struggle and executives spend valuable time firefighting. In the Scale stage, look beyond top technical skills and choose leadership experience or attributes instead. Then, take sufficient time to develop the knowledge and skills required for good management.

4.    Strategic Management Systems. Opening new stores is a key business process for franchisers, meaning they take a systematic approach to planning, screening, contracting, implementing, and supporting new franchises. They deploy advanced Point of Sale (POS), staffing, and inventory management systems in each store to track real-time metrics, fill work schedules, and optimize supply chains. Visibility to rich data in turn facilitates learning and adjustment at corporate headquarters. Effective management and communication methods also promote execution across a distributed network. Many franchisers use regional or district managers to continually communicate, coordinate changes, and resolve issues with franchisees. Lesson: Entrepreneurs must develop mature management systems to support expansion during the Scale stage. Create a deployment plan and develop the right infrastructure. Define a small set of the most important metrics and implement systems to track, analyze, and report them. Develop enterprise-wide planning, execution, and review practices to align the increasingly complex organization, drive changes, and institute continuous learning and improvement. 

Start-ups are by nature quick-moving and creative, but adopting disciplines like those used by fast food franchises makes growth rapid and profitable. Making this transition is critical for early stage companies, and high volume operators can offer important lessons for every growing enterprise.

Footnotes:
1.    Compass blog: cracking the code of innovation, 2012. http://blog.startupcompass.co/tag/lean%20startup
2.    V. McElheny, 1977. “High Technology Jelly Bean Ace,” New York Times.
3.    B. Schwartz, 2005. The Paradox of Choice: Why More is Less, Harper Perennial, ISBN 0060005696.
4.    G. Nathan, 2012. “Best Practice in Franchisee Selection,” Franchise Relationships Institute. http://www.franchiserelationships.com/articles/BestPracticesinFranchiseeEvaluation.html
5.    L. Magloff, 2013. “What You Need to Open a McDonald’s,” Chron http://smallbusiness.chron.com/need-open-mcdonalds-10513.html