How to Win the Game of Trust

Evidence suggests trust forms a barrier to churn

A competitor just introduced a new product that delivers significantly higher performance. Do you worry your customers will jump ship? If they trust you, there’s little to fear. A new study using collaborative games demonstrates people value trust far more than performance when choosing partners.  

New research

Scientists at the University of Maryland recently conducted an experiment to see how feelings of trust guide decisions.¹  Test subjects first played an investment game in which they could keep or invest $10 with three other players. Participants learned by playing the game that one (benevolent) always returned slightly more than the player invested, another (greedy) never returned any investment, and a third (exploitative) returned slightly more than invested in first two rounds and then returned nothing. 

Then researchers asked participants to play a second game, a team version of Battleship. Subjects would choose one of the three partners from the previous game to play with them. Scientists told participants that during the game, all players would select their targets at the same time, shots would be revealed simultaneously and shot sources kept hidden, so no player knew who shot at which target or which board. At the end of the game, winners would split a $50 prize. Subjects saw a chart indicating that some partners were significantly more skilled than others. Faced with the challenge of maximizing their winnings, players had to choose either a better player or one they trusted. 

The scientists discovered that people were nearly eight times more likely to choose a poorly performing but trustworthy partner than an untrustworthy but highly capable one. It was as if skill didn’t matter at all; people’s subjective evaluation of trustworthiness far outweighed their objective evaluation of skill. The “halo effect,” in which one’s initial impressions of another’s character significantly influences later assessments of that person,²  was clearly in evidence.

The game of business

This experiment suggests trust may inhibit customer churn in the event a competitor introduces a game-changing product. People are increasingly skeptical of marketing claims,³  so given a choice of maintaining a trusting relationship or believing a sales pitch and taking a chance on an unknown supplier, customers are far more likely to stay than switch. There are limits, of course. According to prospect theory, customers seriously consider alternatives when promised benefits exceed 2:1,⁴  and high churn may indicate things are worse than they appear. But high levels of trust can buy companies precious time to catch up. When companies enjoy a base of trusting customers, simply sharing product roadmaps and allaying concerns about timelines may be all that’s needed to keep them from switching.

Conversely, the experiment shows just how detrimental betrayal can be. When companies use deceptive marketing practices, treat customers unfairly, or fail to keep promises, customers learn the company can’t be trusted and look elsewhere. This conclusion supports other research that suggests trust moderates customer loyalty. 

Winning trust

People don’t immediately trust each other—they learn to trust over a series of experiences. It’s a process, and like all other processes, relationships can be continuously improved. Therefore companies can design and implement processes that increase customer attachment and lead to higher levels of trust. 

Customer journey mapping is a handy tool for improving processes. First, managers determine the sequence of events that makes up the customer experience, from becoming aware of the company’s offering to purchasing, implementing, using, and eventually renewing or canceling the subscription. Managers then critique each touch point along the journey, looking to remedy frustrating or inefficient steps. When managers include mindful customer experience techniques in the mapping process, they uncover hidden opportunities to strengthen customer bonds along the way. They learn that managing five critical moments in the customer experience makes all the difference. As a result, companies systematically increase trust and customer loyalty. 

Intense competition and fleeting technology advantages characterize the subscription economy, so executive should expect times when their offerings lag competitors.  If companies make it difficult for rivals to dislodge their customers during these times, the countermeasures protect the company’s sustainability over the long run. Strengthening customer relationships then becomes a high stakes game, one companies don’t want to lose. Taking a systematic approach to building trust can separate the winners from the losers. 

Sources:

1. Buntain, C. and Golbeck, J. (2014). Trust transfer between contexts.
2. Thorndike, E.L.: A constant error in psychological ratings. Journal of Applied Psychology 4, 25–29 (1920).
3. Friestad, M. and Wright, P. (1994). The persuasion knowledge model: how people cope with persuasion attempts. Journal of Consumer Research, vol. 21, No. 1, June 1994.
4. Tversky A., and Kahneman, D. (1992). Advances in prospect theory—cumulative representation of uncertainty. Journal of Risk Uncertainty, 5, 297-323

Why Customer Defections Mean Things are Worse Than You Think

“A bird in the hand beats two in the bush.”

John Ray's A Hand-book of Proverbs, 1670

Most SaaS executives assume customer churn rises the minute a company loses its competitive edge. Not so. If customers are switching to top rivals in appreciable numbers, executives should be especially nervous—the situation is already much graver than they think. Research suggests customers leave because they’re long dissatisfied and now view the competition is twice as good. Executives must heed the warnings and overcome their own biases if they want to turn things around.

Thinking that doesn’t add up

Strangely, people tend to avoid loss even when they are faced with the possibility of larger gains. Research shows that people require more compensation to give up a possession than they would have been willing to pay to obtain it in the first place.¹ Even when all things are equal, repeated experiments show people subjectively weigh gains much differently than losses.

In 1654, French mathematicians Blaise Pascal and Pierre de Fermat proved that the expected value (EV) of an investment depends on the amount (x) and the probability of its outcome (p):

EV = px

For example, say a coin flip determines you collect $100 for heads and $0 for tails. Since the probability of obtaining heads using a fairly balanced coin over a large number of trials is 50%, the likely payout, on average, is $100 * 50% = $50. As shown by the charts, this relationship is true no matter the amount or the probability used in the calculation. Today many financial decisions are made using Pascal and Fermat’s expected value.

But that's not how most people make decisions. Faced with a choice of receiving $3,000 for sure or taking an 80% chance to win $4,000, most people will keep the money, even though the expected value for taking the risk is greater ($4,000 * 80% = $3,200). Prospect Theory in modern economics asserts that rather than apply logic, people instinctively determine value (V) by weighting differences in probabilities (p) and amounts (x) shown below:

V(x,p) = w(p)v(x)

The clean, linear function reflecting objective reality is suddenly replaced with this subjective, nonlinear aberration:²

Intuitively, the irregular curves hold water. People would rather take a 95% chance losing $100 than pay $85 for sure because amounts “feel” equally painful and 95% probability “feels” less than certain. On the other hand, people will take a 5% chance to win $100 instead of choosing $13 cash because $100 seems a lot more than $13, and 5% seems like a realistic chance.

Scientists also discovered that when they tested 50-50 win-loss scenarios, subjects said the following ratios equally attractive to when compared with receiving nothing:³

In other words, faced with even odds, most people want 2:1 upside before taking a risk. A bird in the hand is indeed worth two in the bush!

Why do we think this way? Most scientists believe it’s a vestige of our human evolution. In prehistoric times, survival probably depended upon playing it safe when we had resources and taking risks when we had none. In the modern age, however, our success depends on scientific and social advances, situations requiring thoughtful reflection instead of impulsive action. But since our complex reasoning evolved relatively recently, it often takes a back seat to our more primitive instincts, even when the consequences aren’t life or death. Despite today’s advances, subconscious emotion, not conscious logic, often rules the day. This explains why regardless of the odds, we continue to buy lottery tickets.

Tip of the iceberg

Evidence shows people are far more likely to stay in a bad situation than pursue a better one. What this means for SaaS companies is that once customers subscribe, they are likely to stay. But when customers switch, it’s very serious. Their actions show they’ve already had enough and customers realize competitors offer significantly greater advantages.

As humans themselves, executives likewise have a choice. They can either look logically at their company’s performance gaps and do something about them, or scoff at their customers’ subjectivity and do nothing at all. Like their customers, executives must overcome their own, natural inclination to preserve the status quo even when things are going south. If they can see the advantages of change and take risks to improve organizational performance faster than their customers get fed up and go elsewhere, churn reduction has a fighting chance. Otherwise, perhaps, companies with more evolved thinking will be the survivors.

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

Sources:

1. Kahneman, D., Knetch, J. L., and Thaler, R. H. (1990). Experimental tests of the endowment effect and the Coese theorem. Journal of Political Economics, 98, 1325-1348.
2. Kahneman, D., and Tversky, A. (1979). Prospect theory: an analysis of decision under risk. Econometrica, 4, 263-291
3. Tversky A., and Kahneman, D. (1992). Advances in prospect theory—cumulative representation of uncertainty. Journal of Risk Uncertainty, 5, 297-323

Software Adoption is a Matter of Habit

Six tips to increase user adoption by capitalizing on human nature

In the SaaS industry, customer retention rates depend heavily on the extent to which customers engage with their product, especially during the early stages. The more they use it, the more value they find in it, which increases the chances that they will continue to subscribe. In fact, data from Scout Analytics indicates that customers who use their new software at least once per week over the first six months of their subscription are about 50 percent less likely to churn.¹ Understanding this well, most Customer Success operations focus their churn reduction efforts on encouraging product usage. However, this approach is insufficient by itself because it overlooks human nature, the most influential factor of all. SaaS companies must change customer habits before product adoption is fully realized.

Creatures of Habit

How many times have you driven to work, but upon arriving, had no memory of the commute that got you there? Clearly, driving is complicated. You get into your vehicle, fasten your seatbelt, apply the brake, start the engine, put the gear selector in reverse, look behind you, back out, turn the wheel, apply the brake, close the garage door, put the car in drive—and that’s just getting out of your driveway. You process thousands of stimuli, decisions, and actions in a typical commute, yet it can all be done without much conscious thought.

How can something so complex become second nature? Our magnificent brains help us simplify life. Because cognition demands so many resources, our subconscious creates habits to increase efficiency. Although the brain accounts for only 2 percent of body weight, it consumes 20 percent of the body’s total energy.² To streamline, the basal ganglia recognizes patterns and creates shorter neural pathways to get the same job done faster and with fewer resources. The brain automatically rewires itself, enabling reflexes to perform tasks that once required more cognitive power. This subconscious rerouting happens all the time. By some estimates, about 40 percent of what we do every day is habitual.³

The Habit Cycle

Habits are made up of four things: a cue, a routine, a reward, and an underlying craving.⁴ A cue is something in the environment that triggers the behavior, the routine is the action, the reward is the positive outcome, and inner cravings are the motivation.

Let’s say you want to start exercising habitually. We’ll assume you want to shave off a few pounds because you don’t like how you look in the mirror. A better self-perception is your underlying craving. Next, to create the new habit, you follow a cue-routine-reward cycle. First, you set up a recurring reminder in your calendar (cue) and then go to the health club every time you schedule it (routine). After the first few workouts you'll start to notice newly toned muscles (reward). It may be difficult to repeat the cue-routine-reward cycle, but if you stay disciplined and patient, your brain rewires itself. Pretty soon, exercising regularly will be automatic. Simple enough.

The problem is that old habits are notoriously stubborn. This is because our brains always take the path of least resistance. Having been more efficiently converted and stored in the subconscious, habits become easier for the brain to recall and execute. Once neurons have been wired together during the learning process, the connections become permanent, so the brain must now expend more energy to substitute a new habit. Conscious repetition causes neural connections to strengthen, forcing the subconscious brain to eventually choose the new wiring over the old. If repetition is lacking, the brain simply defaults to the old reflexes. That’s why reinforcement is so important for creating habits and why change is so difficult. The more entrenched our behaviors, the harder and more frequently our brains must work to replace them.

Making Product Usage Habitual

You should view software adoption within the context of changing habits. Upon subscribing to your service, customers are essentially trying to replace one behavior with another, such as using your online database rather than an Excel spreadsheet to track their information. Your customers’ brains are wired to repeat their former behaviors, so the key to success is to be patient and vigilant, while smoothing their path to change. The following six tips can help:

1. Promote the Motivation—People ultimately change their behaviors because they are inspired to do so. In cases where a department head makes the software purchase decision, it is likely that many users won’t feel personally connected to the motivation behind it. Be sure to repeatedly reinforce your benefits with all users. Cultivate their desire to adopt new habits, such as explaining how the new software saves them significant time and effort.

2. Chunk Large Processes into Small Cue-Routine-Reward Cycles—Any process can be reduced to a series of repeatable steps, and stringing together smaller routines allows the brain to learn, adapt, and reuse skills more efficiently. Running a new financial system is a daunting task, but “paying a bill,” “reconciling a bank statement,” and “running a month-end report” are more accessible and easier for the brain to make into habit.

3. Implement Recurring Cues—Recall that every habit needs a sensory cue to initiate the autonomic behavior. You can provide simple triggers through e-mail reminders with embedded links to start transactions. For example, Facebook and LinkedIn constantly send updates to revisit their website and reconnect with friends, family, and business associates. If you identify and map the routines involved in using your product, you can associate a cue to enact each step.

4. Reward Frequently— Don’t leave progressive adoption to chance.  It is essential to track, display, and reward it at every turn. Recognize customer successes via web pages or e-mails when new users accomplish milestones. Note their “moments of proof,” drawing attention to the improvements that using your software yields. Be sure to recognize both initial and repeat successes to promote habit formation.

5. Leverage the Support of Others— Rewiring the brain is difficult and takes conscious effort. Use your cohort’s shared experiences to encourage fellow users. Whenever possible, train people in groups and let them interact. Just like Alcoholics Anonymous and Weight Watchers, social groups provide a safe environment and unmatched support for people undergoing changes in habit. User groups also increase perceived value and builds affective bonds between the company and its customers, which further reduces churn.

6. Be Mindful—Above all, be patient. Experts estimate a new habit can take from 22 to 60 days to form, depending on complexity, entrenched current behaviors, level of motivation and reinforcement frequency, and even the age of people involved. It’s a process that requires intense focus in the beginning, and typically includes false starts and frustrations along the way. Once the habit is established, however, it tends to stay for the long haul.

Software adoption is about changing habits. To maximize usage and minimize churn, your SaaS company should look a step beyond software features, focusing more on the human beings who use the product and the new habits their brains are attempting to form with it.

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


Sources:

1. Scout by ServiceSource blog. 
2. Swaminathan, N. (2008) “Why does the brain need so much power?” Scientific American.
3. Duhigg, C. (2012) The Power of Habit: Why We Do What We Do in Life and in Business. Random House, New York. ISBN 978-0-679-60385-6
4. Ibid.

Customer Loyalty Problem Solving

A three-level model helps focus improvement efforts. 

Customer retention is critical for companies with business models that rely on recurring revenue. The “leaky bucket” that is customer defection robs 

companies of precious revenue and profit. In cloud computing, cutting customer churn in half over the typical customer life cycle doubles company cash flow and gross margin.¹ Even a small churn reduction pays off in the long term when millions of dollars in revenue are in play.

Obviously, improving customer loyalty is the key, but how? Where should managers start? I propose a simple, three-level model to concentrate on the customer benefits that lead to loyalty: Implicit, Explicit, and Experiential.

Implicit Benefits

Customers take certain things for granted, such as reliable wireless phone service, accurate bank statements, and bug-free software. People assume basic attributes come with the service, and when companies fail to deliver on these minimum expectations, customers have little patience. Chronic problems providing what quality expert Dr. Noriaki Kano calls “must-be” quality² leads to customer defections in every industry. In Software-as-a-Service (SaaS) companies, churn can lead to the loss of half of a firm’s customer base during each renewal cycle.

This is why managers must make delivering the fundamentals a company’s first priority. In cloud computing, that means system uptime, secure data, error-free code, and basic product support. SaaS executives must get and maintain control of their technology development and operations processes or prepare for a rapid demise.

Explicit Benefits

Companies promise things during the sales cycle. When deciding between competitive options, customers evaluate each company’s “value proposition” and choose the best option. If promises don’t materialize, customer expectations go unmet. For example, a SaaS company may state that their software creates a certain type of report, but the customer later discovers it can’t. Customers may not return if the issue is severe and the dissatisfaction high enough. If a competitor offers comparable benefits, and changing providers is simple and cheap, potential for churn grows.

Marketing masters Michael Lanning and Lynn Phillips say companies should make strong value propositions their strategic foundation.³  First, managers must choose a winning value proposition, one that focuses sharply on a target market and offers a compelling alternative. Second, executives must deliver the chosen value proposition by translating it into design requirements, bringing it to market, and then providing it in day-to-day operations. Finally, the company must communicate the value proposition clearly and consistently in marketing, sales, and customer service. When promise-making and promise-keeping are in close alignment, customer expectations are reliably met and churn is reduced. An effective strategic management system ensures value propositions aren’t empty promises.

Cloud computing companies competitive in delivering Explicit and Implicit benefits will typically retain 80-85% of their customers from one renewal cycle to the next. But to raise performance to world-class levels of 95% or higher, companies must become proficient delivering a third type of benefit.

Experiential Benefits

Customers prefer to do business with people they know, like, and trust. How a company does business is as important to customers as the product or service they receive from them. When customers have lackluster experiences, churn increases. Just one unhelpful tech support interaction can end a business relationship, especially when the customer feels ignored, devalued, or unfairly treated. On the other hand, service companies that form strong relationship bonds enjoy significantly higher customer loyalty.⁴

Customer Experience Management (or Customer Journey Management) is a technique used to analyze and improve customer interactions. Managers collect data on myriad customer “touch points” (website visits, phone calls, e-mails, blog entries, social media, etc.) and plot each interaction against time. Patterns emerge where gaps and problems exist, and managers can use process improvement techniques, such as Lean Six Sigma, to resolve them.

While addressing functional gaps is the first place to start, research suggests a more mindful approach is the secret to achieving the highest levels of customer loyalty. Underlying all human

relationships are reflexive responses to subtle, social cues that can have a profound effect on conscious feelings and decisions.⁵ For example, our subconscious mind is sensitive to certainty, the ability to predict the future. When a Customer Success Manager begins an onboarding call by saying, “We’ll have you up and rolling in just fifteen minutes,” she provides subliminal assurances to the customer, producing a rewarding dopamine burst in his brain. If additional, beneficial cues accumulate during the call, the brain assigns a positive marker to the memory.⁶  Later, the brain reactivates the marker as it recalls the experience, allowing subliminal emotions to “weigh in” on the evaluation. When companies understand and proactively manage simple social cues through employee training, refined user experience (UX) design and other means, the resulting positive interactions lead to richly satisfying relationships and more loyal customers.

Loyalty troubleshooting is easier when managers focus on Implicit, Explicit, and Experiential benefits. When customer turnover is high, executives should attend to the basics. When it’s moderate, the priority becomes clearly articulating and consistently delivering competitive distinction. And when managers strive for world-class loyalty, being mindful of the customer experience is the path to success.

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

Sources:

1. Skok, David (2013). “SaaS Metrics 2.0 – A Guide to Measuring and Improving What Matters,” For Entrepreneurs blog
2. Adapted from Noriaki Kano, Nobuhiku Seraku, Fumio Takahashi, Shinichi Tsuji (April 1984). "Attractive Quality and Must-Be Quality" (in Japanese). Journal of the Japanese Society for Quality Control 14 (2): 39–48. ISSN 0386-8230. 
3. Lanning, M. and Phillips, L. “Building Market-Focused Organizations,” (Gemini Consulting White Paper, 1992).
4. Gremlera, D. and Brown, S. (1996) “Service Loyalty: Its Nature, Importance, and Implications,” University of Idaho and Arizona State University, USA
5. Rock, D. “SCARF: a brain-based model for collaborating with and influencing others,” NeuroLeadership Journal.
6. Damasio, A. R. (1996) “The somatic marker hypothesis and the possible functions of the prefrontal cortex,” Philosophical Transactions of the Royal Society B, 351, 1413-1420. 

Will Kindle Fire's Mayday Spark a Service Revolution?

Amazon warms up the customer experience

One of the hottest Christmas gifts this season is Kindle Fire HDX. It’s a souped-up tablet that includes a new feature garnering a lot of attention. It’s the Mayday button, and it connects you to a live customer service agent over a video link. Press the button, and within fifteen seconds an agent appears on your screen offering help. You can see and hear them, but they can only hear you. The agent has full access to your device, so they can view screens, take control, demonstrate capabilities, or troubleshoot problems. Mayday is available 24/7, 365 days a year, free of charge, and with no time limits on how long you and the adviser chat. Amazon CEO +Jeff Bezos says the company goal with Mayday "is to revolutionize tech support."¹

It’s a smart move, and only part of Kindle’s simple three-part strategy.²  Amazon’s first strategy is to sell premium products at non-premium prices, and the second is making money when people spend on Amazon books and videos. In other words, give away the razor but make it up on the razor blades. The third strategy is fostering customer delight with Mayday. It becomes an important differentiator, especially with Kindle’s target buyers—older, less tech-savvy, avid readers. Amazon handles the burden of helping tech-challenged users, so the new Kindle just may be Santa’s perfect gift for an elderly mom or dad.

The devil is in the details

But along with innovation comes ironing out operational wrinkles. Generally reviews are very positive, but some customers report technical glitches, while others are suspicious about agents having full access to everything, including passwords (Amazon notes screen sharing can be paused).³ Sharing privacy concerns, many corporate IT departments have disabled Mayday links on company Wi-Fi’s to prevent Amazon agents from seeing potentially sensitive documents.⁴

A variety of other issues have yet to reveal their consequences and only time will tell. Christmas Day customer service demand will likely be off the charts as new customers unwrap and try their new toys, which means Amazon may be hard-pressed to meet their promised 15-second service level response time. It’s also not clear how Amazon will deal with multiple languages or serving the hearing impaired. Then there’s the issue of creepy customers, although Amazon says agents are trained to terminate sessions that go off track. Will being telegenic become a job requirement for technical support?⁵ Not all agents have the stunningly good looks of the actors portrayed in Amazon’s TV spot, and unlike call centers, agents’ facial expressions and body language are suddenly under scrutiny on every interaction. How does all this play with labor laws and employee feedback?

Despite the challenges, putting a live, smiling face on customer care is revolutionary. Seeing faces, even those of total strangers, affects us in subtle but profound ways. Neuroscientists have known for years that our first skill as babies is to recognize faces, but they’ve recently discovered that our brains are wired far more extensively for social connection than they previously thought. Experiments show our brains activate reward centers when we see photographs of people who want to chat with us online. Surprisingly, the effect holds true even if the people are total strangers and we’re not that interested in talking to them.⁶ Experts believe our hunger for human connection is a primary driver in how we think, feel, and act, and simply viewing faces satisfies some of those needs. Tapping this deep psychology and delivering a helpful service experience creates a uniquely positive memory with the device and the brand. Amazon’s step toward replacing impersonal call centers with Mayday’s new paradigm could indeed raise the bar on a key factor that drives customer loyalty.

Mayday catches fire

While some techies scoff, saying it is nothing more than a sales gimmick, others think Mayday opens up new frontiers in customer service. They see it as a new era of data integration that will enhance the customer experience.⁷ Software help desk tool vendors are already buzzing about imitating Mayday-like capabilities in future releases.⁸ And industry watchers are thinking about Mayday as a method to collect customer feedback, encourage usage, offer advice, and upsell.⁵

Assuming Amazon can work out the details, making customer care more personal with video can have profound effects on customer loyalty by connecting with our basic human nature. Whatever the outcome, the new Kindle Fire HDX has set the service world ablaze imagining the possibilities.  

Excel-lens is a publication of Service Excellence Partners. Our unique approach helps founders at early stage companies better scale operations and manage growth. Contact us today.

Sources:
1. Dan Seifert on September 25, 2013, “Amazon launches Mayday, a virtual Genius Bar for the Kindle Fire HDX: Amazon is including live tech support with its new tablet, no pants required” The Verge. 
2. Todd Bishop on September 25, 2013. “Jeff Bezos explains the next step in Amazon’s strategy — the ‘hardest and coolest’ part” Geekwire. 
3. Timothy Stenovec on October 2, 2013. “The Mayday Button May Actually Convince You To Buy The Kindle Fire HDX” Huffington Post. 
4. Matt Hamblen on September 26, 2013. “New Kindle Fire HDX's tech support button could push IT to yell 'Mayday!'” Computerworld. 
5. Software Advice, December 11, 2013, “Is Amazon’s Mayday Support Model Right for Your Organization?” CSI: Customer Service Investigator. 
6. Matthew D. Lieberman (2013). Social: Why our Brains are Wired to Connect, Crown Publishers, New York. ISBN: 978-0-307-88909-6
7. Neal Schact on September 29, 2013. “Did Amazon Just Fire Another Shot Heard 'round the World?” Nojitter. 
8. Joe Panettieri on November 26, 2013. “Amazon Kindle MayDay Button: Can MSP Help Desks Respond?” MSPMentor 

Discipline, More Than Creativity, Fuels Growth

Most entrepreneurs shun formality, but structure at the right time enables faster growth.

Zappos is known for its creative workplace

Inside most start-ups, free-wheeling innovation and agility abound. The fewer the rules, the better. And why not? Unencumbered by bureaucracy, entrepreneurs can let their imaginations run wild, create breakthrough products, and make tons of money.  Most entrepreneurs scoff at rigorous planning, analysis, or financial modeling found at larger companies—it just slows them down.

Thought leader, entrepreneur, and consulting associate professor at Stanford University Steve Blank agrees, saying today’s “lean start-ups” require less formality. (1) Rather than spending months on research and business planning, entrepreneurs list their educated guesses about the business opportunity and then validate them with prospective customers. Instead of old-fashioned project management that delivers a finished end product, engineers in start-ups practice “agile” development, constructing products incrementally through frequent iterations and customer feedback. Lean start-up approaches favor less structure, smaller teams, and highly creative environments.

But early traction does not guarantee long-term success. Once a new product shows potential, it must be property marketed, delivered, and supported at scale. The company must generate positive cash flow to be sustainable, and eventually pay a return to investors. These activities are very different than those taking place during the early creative process.

Stanford’s Start-Up Genome Project offered entrepreneurs a roadmap for successful company development. (2) After studying thousands of new ventures, researchers identified four distinct “Marmer Stages,” each with its own challenges and milestones:

The Discovery and Validation stages match the creative process described by Steve Blank: quick development and refinement of ideas, leading to early sales. But things change during the Efficiency and Scale stages. After verifying market acceptance of their initial product, founders must hone their business models, customer acquisition processes, and delivery processes. They must get funding, hire staff, and build infrastructure to support fast growth. Instead of spending “right brain” time imagining and creating, entrepreneurs must now spend “left brain” time analyzing and structuring.

Eventually all companies must evolve their management systems if they want to continue growing. (3) Informal management styles that worked well in the beginning break down as the company expands out of the entrepreneurs’ personal span of control. (4) Founders soon realize they can no longer do everything themselves; they must delegate tasks and coordinate the work of multiple groups. At this point, disciplines they implement serve to make organizational goals explicit and stable. Effective management systems facilitate goal alignment, resource allocation, accountability, learning, and control.

Surprisingly, it's not creativity that rockets a start-up to success. Instead, research shows that greater discipline accelerates early-stage growth. Studies at Stanford and the University of California Berkeley concluded that deploying management systems associated positively with successful, high-growth start-ups. (5) Studying seventy-eight firms over a five-year period, they showed new ventures that implemented management systems grew at three times the rate of those that didn’t:

“Think about a car: the faster it goes, the more sophisticated the technology required to keep it under control. At the very elite racing levels, Formula 1 teams have highly complex and extensive systems infrastructure both on and off the tack. The same logic applies to growth with start-ups. The faster they need to go, the more management systems infrastructure they need.”

But timing is crucial. The Start-Up Genome Project found one of the most frequent causes of early business collapse was “premature scaling,” that is, ramping up before sales traction supported it. (2) Examples included hiring too many specialists, managers, and salespeople too quickly, and spending too much on marketing before validating the product-market fit. Just as entrepreneurs must adopt new disciplines to scale the business, they must also be disciplined about when to do it.

It seems counter-intuitive, but discipline, not creativity, is what ultimately drives growth. Creating and validating ideas is essential in the beginning, but a shift to effective and efficient execution at the right time becomes paramount. Entrepreneurs must understand this critical transition and adjust accordingly if they want the wild success that compelled them in the first place.


Excel-lens is a publication of Service Excellence Partners. Our unique approach helps founders at early stage companies better scale operations and manage growth. Contact us today.

Sources:

1. Blank, Steve. Why the Lean Start-Up Changes Everything. Harvard Business Review. May 2013, pp. 65-72.

2. Max Marmer, Bjoern Lasse Herrmann, Ertan Dogrultan, Ron Berman. Start-Up Genome Report Extra. s.l. : Stanford University, 2012.

3. The Five Stages of Small Business Growth. Neil C. Churchill, Virginia L. Lewis. May-June, 1983, Harvard Business Review, pp. 1-11.

4. Edward Lowe Foundation. The Significance of Second Stage. Cassopolis, Michigan : Edward Lowe Foundation, 2012.

5. Antonio Davila, George Foster, and Ning Jia. Building Sustainable High-Growth Startup Companies: Management Systems as an Accelerator. California Management Review. May 2010, pp. 79-105.

Reduce the Finger-Pointing... Naturally

Where do organizational “white space” problems come from? Our DNA. But we can also use our genetic predisposition to solve them. 

Chances are you’ve experienced it. When you call a company for help, you get the proverbial runaround. After explaining the problem and hearing “That’s not my department” several times, you’re transferred endlessly, leaving voice mails that go unanswered. It’s totally frustrating. Nobody takes responsibility because your issue falls between the cracks--into the "white space."  

You may work in an organization that behaves this way. Within your group, people perform tasks smoothly, but there’s friction with other groups. All too often, work doesn’t flow. Stuff gets “thrown over the wall,” there’s finger-pointing when things go wrong, and customers pay the price. The “white space” between the boxes on the organization chart is usually where the ball gets dropped.¹ 

White space issues can paralyze. Legendary for silos, General Motors’ white space issues led to long, costly product development cycles and poor quality. Rather than cooperating, some departments wouldn’t even speak to each other. Flawed management philosophies such as Management by Objectives and pay-for-performance made the situation worse, causing sub-optimization—an insidious game of “I win, we lose” between functions. In a failed attempt to change, GM implemented a complex, matrix-management scheme that confused who was in charge, diluted accountability, and put the company in decline.² And GM isn’t alone. So widespread are white space effects in industry that quality master W. Edwards Deming highlighted them in point nine of his famous Fourteen Points for Management: “Break down barriers between departments.”³ 

Experts cite the lack of a “systems view” as the cause for white space problems. Most managers perceive the organization’s work as vertical and functional rather than horizontal and cross-functional. Consultants Geary Rummler and Alan Brache observed, “(Managers) often don’t understand, at a sufficient level of detail, how their businesses get products developed, made, sold, and distributed.”⁴ Author Peter Senge observed the same, noting, "we tend to focus on snapshots of isolated parts of the system, and wonder why our deepest problems never seem to get solved."⁵ Hence, lacking a broader understanding, managers concentate on activities within rather than between groups, and chasms slowly form. 

But the root causes may go much deeper than a lack of perspective. Psychologist Jonathan Haidt believes moral judgment is based on automatic, not conscious reasoning.⁶ Buried within the human psyche is hardwired social behavior that influences our choices and actions. Haidt identified five behaviors:

• Caring/harm—deep fondness for people with whom we have biological or social attachments, and the violence we can do to those we don’t
• Fairness/reciprocity—our need for mutual exchange and even-handed application of punishment and reward 
• In-group/loyalty—close association with our tribe’s identity and suspicion of other tribes
• Authority/respect—our tendency to obey those in positions of power
• Purity/sanctity—our desire for social order through conformance and control

Where did these innate responses come from? Evolution. Our survival as a species depended on our ability to live in groups and cooperate with one another. Imagine the outcome if we had never learned to hunt, share resources, or protect our kin through collaboration. These five moral threads made possible group cohesion, coordination, and harmony. During a millennia of natural selection, they became our operating system for creating ever larger and more successful organizations—first tribes and clans, and then nations and empires. 

Our evolutionary success, however, has sown the seeds of our modern-day destruction in business. We create white space problems because it’s natural for us to do so. When firms get larger and competition for internal resources becomes intense, the organization splinters. Our survival instincts take over. We subconsciously revert to our evolutionary roots and protect our own tribe at the expense of the larger community. 

It takes many generations to evolve even the smallest biological changes. But if our core behaviors are intrinsic and immutable, how can we solve the white space problems we create? One solution is to introduce new tribes within the organization to counter their effects. 

Process management methods use cross-functional teams to traverse the white space. For example, leading manufacturers create new product introduction teams including representatives from R&D, manufacturing, product marketing, finance, and customer service. Often these groups are project-centric, small (7-9 people), co-located, headed by a strong leader, focused on transcendent goals, and adherent to disciplined processes. A senior executive carefully forms the team and supports their efforts through high-level reviews and behind-the-scenes functional diplomacy. Through deliberate process design, the five underlying social threads are present—bonding with fellow group members, fairness in equal representation, forming an in-group with its own identity, obedience to powerful leaders, and conformance to an orderly process. By following natural tendencies, individuals in the new tribe execute a smoother process across functions, suppressing the effects of white space between their tribes of origin.

We can’t change our DNA, but if we understand it, we can use it to our advantage. Capitalizing on our innate behaviors, we can mitigate white space issues by using new process management techniques. Doing so subverts silos and streamlines workflows for the better. 



Sources:

1. Rummler, G. and Brache, A. (1995) Improving Performance: How to Manage the White Space on the Organization Chart, Jossey-Bass Publishers. ISBN 0-7879-0090-7
2. Whitacre, E. (2013) American Turnaround: Reinventing AT&T and GM and the Way to Do Business, Hachette Book Group. ISBN 978-1-4555-1300-0
3. Deming, W. E. (1982) Out of the Crisis, Massachusetts Institute of Technology Center for Advanced Engineering Study. ISBN 0-911379-01-0
4. Rummler, G. and Brache, A. (1995)
5. Senge, P. M. (1990) The Fifth Discipline: The Art & Practice of the Learning Organization, Doubleday. ISBN 0-385-26094-6 
6. Haidt, J. (2012) The Righteous Mind: Why good People are Divided by Politics and Religion, Pantheon. ISBN 978-0307455772

Tech Check: Apptegic

Boston-based start-up Apptegic formally launched its new offering at TechCrunch Disrupt NYC conference last month, officially joining the fray in the emerging customer engagement measurement market.  Given the very high cost of customer churn on revenue and profitability, tools such as those offered by Apptegic allow cloud computing companies to proactively monitor and respond to customers in an effort to reduce or prevent churn.

Apptegic is similar to competitors JBara and Totango. Like them, Apptegic’s mission to help firms understand their customers in order to keep them, make them successful, and sell more to them. Each examines customer visit frequency and online behaviors, helping software engineers identify product changes and enhancements. Each enables Customer Success Managers to identify trends and personally respond to “at risk” customers, or identify those who may be receptive to up-sell or cross-sell opportunities.

But Apptegic does some things differently. The company offers greater depth of understanding by collecting more data and adding the ability to score interactions against essential Key Performance Indicators (KPIs). By analyzing more data than simply which product the customer purchased or how often they used it, the application allows better conclusions to be drawn about specific customer segments and behaviors, enabling more relevant, context-dependent decisions. Reporting capabilities are correspondingly more advanced, allowing analysis over different periods of time and with greater stratification (e.g. by user, account, and segment) which can better assist product and service improvement efforts. Apptegic then delivers more sophisticated filtering capabilities to generate responses in real-time, directly and automatically from the customer’s application. Online actions can include sending tailored customer support or marketing messages that automatically and intelligently guide customers to their next steps.

Apptegic’s product offers potentially greater advantages for many cloud computing companies by promoting better targeting, scalability, and predictive modeling. In circumstances where less information is collected or known about target customer segments during the sales process, Apptegic allows more ways to analyze and segment users according to common needs, value, and profitability after the fact. Through greater automation, customer service and success management can be less manually intensive and more productive, allowing companies to focus their more expensive human resources on market segments and accounts that truly justify them. Having more variables also enables more robust churn modeling. Companies can design and run statistical experiments, testing and optimizing customer “treatment” strategies even further, resulting in approaches that have the greatest impact on customer retention at the minimum cost.

Apptegic’s early clients include Constant Contact, Vela Systems and Dyn. Pricing varies from $200 to $4,000 per month according to account structure, number of unique users and events per month, and number of Apptegic users at the customer site. The company offers a free trial period for those who want to kick the tires. For more information, visit Apptegic.

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.