Good Analysis, Bad Method

I nearly wrote a blogpost last week about customer service, or the decline thereof, based on a nice piece by James Suroweicki in The New Yorker (click here for full story), He accurately analyzes a problem I've been railing against for a lot of years:

The real problem may be that companies have a roving eye: they’re always more interested in the customers they don’t have. So they pour money into sales and marketing to lure new customers while giving their existing ones short shrift, in an effort to minimize costs and maximize revenue. The consultant Lior Arussy calls this the “efficient relationship paradox”: it’s only once you’ve actually become a customer that companies put efficiency ahead of attention, with the result that a company’s current customers are often the ones who experience its worst service. Economically, this makes little sense; it’s more expensive to acquire a new customer than to hold on to an old one, and, these days, annoyed customers are quick to take their business elsewhere. But, because most companies are set up to focus on the first sale rather than on all the ones that might follow, they end up devoting all their energies to courting us, promising wonderful products and excellent service. Then, once they’ve got us, their attention wanders...

This attitude has never made any sense to me. It is, as Suroweicki writes, always more expensive to get a new customer than to keep an old one, so, in a tight-money environment, why wouldn't you spend less to keep rather than more to acquire?

My guess has been -- I don't have any research to prove it -- that it's the sex appeal. It's simply sexier, a bigger rush, to land a new customer than to keep an old one happy. (I wonder if this is why so many people seem to be better at courtships than at marriages?)

In response to the article, one reader responded as follows (I haven't found the "letters to the editor" section on the magazine's website, so I'm providing the text rather than a link):

Many years ago, I owned a small business. Two members of my staff handled customer-service calls. They were told that they didn't have to listen to customers screaming at them but that, instead of hanging up, I preferred they give the really tough calls to me. I would begin every conversation the same way: "Mr. Jones, I understand there's a problem, and I'm here to solve it. But, before we get to that, there are a few things I'd like you to know. On the way to work today, I got two flat tires. When I finally got to my desk, I found a letter from the I.R.S. telling me that I'm being audited for the past three years. And, as if that weren't enough, I just got a call from my son's school. I was told that he has been suspended indefinitely. But enough about me, Mr. Jones. How can I help you?" At that point, I could hear the wind go out of Mr. Jones's sails, and a calm discussion would ensue. If you can get people to take a deep breath, and put things in perspective, customer service can work more effectively for those on both sides of the divide."

The analysis is correct: If you can get people to put things in perspective, customer service can work more effectively.

But the method? Lying to your customers as a way to do customer service?!?!

I don't think so.

Most customers don't call customer service screaming for blood immediately. Something else has gone wrong along the way. Usually, it's a sequence of indifference that makes them madder and madder, so that by the time they have gotten to the business owner or the vice president or whomever, they're steaming. Or it's the call-center-from-hell automation system (press "1" for a different problem than yours, press "2" for something else entirely, press "Mom" on your speed dial if you want someone who cares).

The way to deal with infuriated customers isn't to lie to them at this point -- by the way: just imagine, Mr. Ex-Small Business Owner, how your former customers will feel when they read your letter -- but to deal with their problem immediately before they get so angry they can't "put things in perspective."

In other words, your customer-service representatives should have had not just the responsibility of dealing with customers' problem, but the authority to see to it that the customers were satisfied.

Whatever it took.

Oh, that open-ended offer is going to get me into trouble.

Not really.

Most customers aren't out for blood. They have a problem, and they want it fixed. And they want to be treated respectfully and honestly.

The first thing to do is to listen. Really listen. Let them tell the whole story without interruption, even if it's the 238th variation on the theme that you've heard. It's not the 238th for them (at least, we hope not! And if it's the 238th for you ... well, you have a set of problems all your own that need fixing, don't you?).

Acknowledge that the customers' issues are real problems, whether you think they are or not. It's real to them. (Note that your lawyers may not like this suggestion: "You're laying yourself open in the event of a lawsuit," they will warn. Ignore them. If you deal with the problem promptly, and fix it, there won't be a lawsuit. Suits come about because you've screwed up.)

Ask your customers what it would take to make it right. Unlikely as it may seem to you, most of them are quite reasonable: "The toaster broke the day after the warranty expired." Do they want your store, your savings, or your first-born child in recompense for this disaster? No. "Gee, all I really want is to get it fixed or replaced."

Then fix it, or replace it. Done.

And you, Mr. Ex-Small Business Owner, haven't had to get involved. You haven't had to waste your more-valuable (or at least more expensive) time. And best of all, you haven't had to lie to your customers.

A Fee That Developers Love and an Ethicist Hates

Here a fee, there a fee, everywhere you look a new fee.

We've gotten used to them -- the fee airlines charge to check your bag (or the fee that they charge for your carry-on), the fee for parking in a previously-free lot, the fee for ... you name it.

But yesterday's New York Times introduced me to a new fee: the "resale fee" (or "capital recovery fee" or "private transfer fee") that some real-estate developers are charging, permitting them to collect 1% of the sale price every time the property changes hands, for up to 99 years. [Full article, by Janet Morrissey, here]

A growing number of developers and builders have been quietly slipping "resale fee" covenants into sales agreements of newly built homes in some subdivisions. In ... [one particular] contract, the clause was in a separate 13-page document -- called the declaration of covenants, conditions and restrictions -- that wasn't even included in the closing papers and did not require a signature.

I find it hard to believe that I'd be legally liable for a fee that I haven't been told about and that I don't have to sign for, but let's ignore the legality for a moment and think about the ethics.

I'm not alone in having ethical qualms about this, fortunately. Morrisey quotes Justin Ailes, director of government affairs at the American Land Title Association: "The idea that someone who has no ownership stake or interest can continue to collect revenue off of a property that they may have built up to 99 years ago exploits an already complex transaction and doesn't pass the smell test."

The concept is also opposed by the National Association of Realtors and the Center for Responsible Lending, among others.

Developers, apparently, see this "as a creative way to get new financing."

In fact, according to the chief operating officer of Freehold Capital Partners, it's a "win-win deal" for developers and home owners, because "the fee is a fair and equitable way to spread development costs [including building roads and other infrastructure], and results in lower costs to the average homeowner."

The home page for the Freehold Capital Partners website has a link for a brochure with more information on "capital recovery fees" which are described as "a real estate financing solution designed to more efficiently structure the economics of real estate projects." Who could argue with so laudable a fiscal goal?..... Just give me a second.

Now, no one can deny that some developers, like some homeowners, are currently upside down on their loans and are in deep financial trouble.

But neither can anyone deny that this is a singularly shady way to try to get out of the situation.

There are plenty of homeowners who rode the surge in home prices upwards by flipping a series of houses, and are now holding the bag and crying for help. Since they're not as essential to the overall economy as the major banks who encouraged them in this risky behavior, the homeowners are not likely to get much of a government bail-out. Whether they should is a topic for another day.

Should the developers be eligible for government help? That too is another issue.

But, to use Ailes' "smell test", the developers' "resale fee" is the wrong way to go.

In one example the Times used, not only did the homeowners not learn of the resale fee until after the closing, but even the home builder was not aware of the fee.

Even if a prospective owner learns of the fee at the time of the closing -- does that strike you as fair? Given the number of houses a prospective buyer has probably visited, the negotiations that he or she has gone through to reach an agreed-upon price, the inspections and banking arrangements, and everything else that's involved in buying or selling a house, this fee seems like adding insult to injury. Moreover, given that a standard mortgage is 20% down (sometimes less), a 1% resale fee will amount to 5-10% of the buyer's downpayment -- which is significant, and not something to be thrown at you when you're signing the final papers on your dream house.

The Buck Stops Where?

According to a 193-page report released yesterday, British Petroleum (BP) has concluded that "multiple companies and work teams" were responsible for the devastating 20 April 2010 Deepwater Horizon disaster.

Per the executive summary (here; BP press release here),

The team did not identify any single action or inaction that caused this accident. Rather, a complex and interlinked series of mechanical failures, human judgments, engineering design, operational implementation and team interfaces came together to allow the initiation and escalation of the accident. Multiple companies, work teams and circumstances were involved over time.

This sounds just like a mea culpa, doesn't it? Well, maybe not.

In fact, it sounds more like an effort to deflect as much culpa onto other parties as possible, especially Transocean (which owned the rig) and Halliburton (the rig's cement contractor).

Note that on the same day that BP's report was issued, news came from the Gulf that the well still has not been fully sealed (New York Times story here), "as engineers worked to better understand the well's condition."

The report laid out a number of significant errors, human and mechanical. Some are well-known, such as the failure of the "blow-out preventer" (which was raised from the ocean floor over the Labor Day weekend and will be analyzed by government investigators); others are less familiar, such as the particular cement slurry that was used at the bottom of the well.

Both Transocean and Halliburton have raised objections to BP's findings.

Tiernan Ray, on his Barron's blog, reported that Transocean said, "This is a self-serving report that attempts to conceal the critical factor that set the stage for the Macondo incident: BP’s fatally flawed well design. In both its design and construction, BP made a series of cost-saving decisions that increased risk – in some cases, severely." (Side notes: I like calling the biggest oil-spill disaster ever an "incident", don't you? "Macondo" refers to the Macondo Prospect, the part of the Gulf of Mexico in which the Deepwater Horizon well was located.)

Halliburton's response was a little more measured, and did not specifically deny some of the more serious allegations, saying only: "Halliburton remains confident that all the work it performed with respect to the Macondo well was completed in accordance with BP’s specifications for its well construction plan and instructions.... The well owner is responsible for designing the well program and any testing related to the well. Contractors do not specify well design or make decisions regarding testing procedures as that responsibility lies with the well owner." (Full response in Ray's blog, here)

In the end, we may learn that actions taken by Halliburton and Transocean did indeed have an impact on the scale and scope of the disaster. But being (partially) at fault is not the same thing as being responsible. It was BP's well; Halliburton and Transocean were contracted by BP; the buck should stop with BP.