Monday, September 20, 2010

Service Not Surveys

Lately it seems like you can't shop anywhere without being asked to fill out some survey.  The ones that drive me crazy are "Customer Satisfaction" surveys.  Maybe I'm cynical, but I swear there is an inverse correlation between the length of the survey versus the quality of service delivered.

A case in point: I own a Subaru SUV and overall I'm pretty happy with both the car and the the dealer.  In fact, this is my second Subaru from this dealer.  They had a nice no nonsense sales process.  No "I have to get approval from the sales manager" baloney.  But happy as I am with the sales side, I'm less than impressed by their service department.

A few weeks ago, I was driving down Highway 101 when my "check engine" light flashed on.  Normally, I ignore these as it usually turn out to be something minor, like a malfunctioning knock sensor.  But in this case, Subaru tied it to several other idiot lights. The end result was my dashboard flashing like a Macy's Christmas display.

Fortunately (or so I thought), I was only two exits from the dealer.  What luck!  They should be able to figure out quickly whether or not this is a real issue or the usual trivia. For those of you familiar with the "check engine" light problem, you know that it takes a mechanic about a minute to plug a handheld device into the car and diagnose what the potential causes are.

I pulled into the dealer service department.  Now this is the same group that advertises its concierge type service, white glove treatment, free car wash after every service etc. to justify their premium prices.  This is also the dealership that routinely sends out an annual "customer satisfaction" survey.

The service representative was busy so it took several minutes to get his attention.  No big deal;  after all I'm a drop in.  But once I finally got his attention and described the problem, instead of just plugging a handheld device into the car and figuring out whether I was going to need real service or not, I got some sob story about how busy they were and did I want to be scheduled for an appointment next week? "Maybe, " I replied but first I wanted to know if it was potentially something for which is was worth scheduling an appointment.  The dealer is ten miles from my house; an appointment involves dropping the car off for the day and arranging for a ride to and from work.  I also have to find a day when I don't have any off-site meetings.  This is not something I want to do if it turns out to be a faulty knock sensor or some other triviality.

No luck.  The guy wouldn't budge.  So I didn't schedule an appointment and drove off.

Later that day, I decided to visit the Jiffy Lube four blocks from my house, where I get most of my routine (and substantially cheaper) service done, on the off chance they might be able to diagnose the "check engine" light.  Again, all the mechanics were busy, but the manager took the time to stop what he was doing and talk to me.  Thirty seconds later, he has a handheld plugged into my car.  A minute later he asks me to pop the gas cap cover.  He twists the gas cap into the fully locked position and resets the light.  Problem solved.  He then explains how a missing or loose gas cap is a common cause of a false "check engine" lights without once even implying that I'm idiot for leaving the gas cap loose.

Talk about two totally different ten minute interactions.

Being in the service business myself, it once again reminded me that customers are PEOPLE, not an abstract marketing profile, how important it is to treat people as you with to be treated and how important these little interactions are to keeping customers (i.e. PEOPLE) happy. In Subaru's case, while I love the cars, you can bet I'll continue to look for alternatives to their very expensive service department.  In the case of Jiffy Lube, that manager once again cemented a 15+ year customer relationship.  I should mention, that this is not the first time this group has done some little extra for me that keeps me coming back (on top of their quality work and fair prices).

And its not just in service businesses where this is important.  It is the rare product that requires zero support.  If you analyze your product from a whole product standpoint, you'll see lots of places where a support person at your company needs to interact with a real live human being that is a customer.  SaaS ("software as a service") has been touted as one area where everything is customer self service, but I've found that nothing is further from the truth.  The good SaaS companies understand this.  For example, one of the reasons I like Intuit Payroll (formerly Paycycle) is that their chat help line is great (and I hate chat and instant messaging).  It's convenient, timely, and so far, they've always been able to solve my issues. Think about that if you're a SaaS company striving to reach that magic +90-95% renewal rate that seems to be a threshold for survival.  And in addition to being critical to retaining customers, good service can be a formidable barrier to entry for smaller companies, difficult to replicate by a larger, more bureaucratic competitor.

Now in this case, both Jiffy Lube and Subaru have customer satisfaction surveys.  Jiffy Lube's was a quick online thing which I was happy to fill out.  Subaru's is an annual booklet and bubble chart questionnaire that I expect will arrive in the next few months.

I've scheduled it for an appointment  with my round file.

Monday, September 13, 2010

Determining Your "Natural" Growth Rate

4th and final post in a series on Strategic Growth

As we close this series on Strategic Growth, the question arises, how does one determine a company's inherent growth rate?  While the answer "it depends" is accurate, it's not terribly useful.  To get a useful answer, let's ask the question "what typically constrains company growth?"

In most cases, the answer is hiring and growth capital, with the latter often, but not always, being the restriction on the former.  Given this, there is a financial planning tool called the Sales Sustainable Growth Rate Model that can be used, under certain conditions, to give a rough estimate of the funds required for growth,

******** ALGEBRA ALERT! ********

The Sales Sustainable Growth Rate (SSGR) Model
The model stems from the premise that the supply of funds must equal or exceed the demand.  Demand for funds is caused by growth (SSGR).  Dissecting equation (3), the sources of funds are retained earnings, invested assets, debt, and new equity.  All figures are calculated as percentages.

The main limitations of the model are that the ratio of sales to assets (or investments) is relatively stable over the planning horizon.  This means that the model degrades if there is a large build up in capital assets (causes the model to overestimate SSGR), high inflation, or time horizons over five years. Note that this model is most useful for a company with existing operations and operating cashflow vs. an early stage company still trying to reach cashflow breakeven.

The net upshot of the model is that the growth in the total equity base must meet or exceed the growth in sales.
Equation (1) shows that SSGR can be financed from two sources:  funds raised from equity (NER) and "internal" funds (earnings and debt). 

The Internally Sustainable Growth Rate (ISGR) in Equation (2) represents the sustainable growth that the company can get without giving up control to external shareholders.

Equation (3) shows how ROE is related to profit after taxes, debt financing level, and interest paid on the debt.  Debt is commonly used to lever up ROE. (Because debt does not result in ownership transfer, it is considered internal financing.)

Internally Sustainable Growth Rate
For reasons that will be made clear, growth funds for an early stage startup almost always need to come from a new equity infusion, whether it is "friends and family" or institutional money.  But for cash generating businesses, growth can potentially be funded internally.
Focusing on ISGR and rearranging key terms as in equations (4) to (7), ISGR can be increased by:
  • Increasing profit after tax
  • Decreasing or eliminating dividend payouts
  • Increase financial leverage (more debt)
  • Increase operating leverage (e.g. improving inventory turns)
Obviously except for operating leverage, none of this works for early stage startups running a loss without access to debt (and consequently not making dividend payouts), hence the need for new equity issuances.

How Google Stacks Up:  An Example
To show you how it works, I've plugged Google's numbers into the model.
From a financial perspective at least, Google has sufficient resources to fund its projected growth without needing to issue additional stock with perhaps a bit of headroom.  Does this indicate that Google could be more aggressive or that some other constraint is holding them back?  Maybe.  Or maybe Google management is just erring on the conservative side in preserving cash for downside risk management in the still uncertain economy or to retain flexibility in its acquisition strategy.

Strategic Growth in Summary
To conclude, the question you should be asked yourself is what is the right growth rate for my company?
  • What are my industry competitive dynamics?  Do they require fast growth? Or do we have a decision to make?
  • If controlled growth is an option, what are our barriers to entry?  Or what barriers do we need to erect?
  • Is controlled growth desirable?  Why or why not?
  • If controlled growth is our objective, how will we limit customer acquisition?
  • If fast growth is our objective, are our business systems, people, and finances adequate to support it?  What plan is in place to ensure that we don't allow product/service quality to fall apart?
Finally, remember to revisit this question periodically.  Your company and your industry will evolve over time.

Saturday, September 4, 2010

"Freedom from Labor" Day

In the last two weeks, we've gotten the kid's back in school and taken our final summer outing, a Boy Scout and family camping trip to Lake Del Valle.  Now I'm tired and look like this (although with less fur and shorter ears):

The 5th member of the Oh Family:  Cottonball Oh
Thank God for what I call the "Freedom from" Labor Day holiday.

No post this week.

Hope you enjoy the long weekend as well.