Monthly Archives: March 2009

Bridging the “Great Wall” Between Front Office & Back Office

Unfortunately, many business people consider the front office (sales, marketing, customer service) to be one entity and the back office (everything financial, administration, support) to be another–and never the twain shall meet. It’s liked the Great Wall of China divides them, with the back office folks huddled inside the wall for protection against the front office heathens.

Total misperception. Problem is, if you perceive, it you’re likely to make that way.

Throwing work back and forth

In fact, front and back offices are highly interdependent, which becomes totally obvious if you map workflows such as: creating a new customer accounts, processing and approving credit apps, going from orders to invoices, applying credit holds, checking inventory or availability, pricing complex configurations or projects, getting configuration quotes from engineering, granting and tracking RMAs (return merchandise authorizations) and on and on. Good process practices dictate managing and measuring these flows cross-functionally. But in reality most companies just throw work back and forth over the wall. Which means work gets dropped and often damaged. Oh, and no one’s accountable, because without common management, the two sides can just blame each other for whatever goes wrong.

Swell.  

What’s the fix?

The fix is so easy it’s painful to think of all the companies caught in front office/back office strife. “All” companies need do is map “as-is” workflow cross-functionally across the entire office environment. But two little secrets. First, work in cross functional teams. The vast majority of office process defects occur “in the seams” where work is handed off from one function to another (or from internal functions to external stakeholders, customers included). Second, map using literal clip art images instead of process symbology (at HYM we call these workflow maps “pictographs”). Using process symbology and talking process-speak with business owners and managers leads to communication breakdowns–as in people nodding their heads agreeing to work a new way with no such intention. 

Facing up to reality

Looking at these literal maps will so horrify line employees and managers alike that taking corrective action is all but guaranteed. The underlying problems here are: 1.) Lack of clear accountability for cross-functional flows, including no measurement; and 2.) Using inefficient work methods for so long that internal folks can’t see the inefficiency–until it’s made too obvious to ignore.

Hey, go fix something today.

Forget About Lead Cost…Please!

What’s wrong with using “lead cost” as a B2B, lead-generation campaign measure? Oh let me count the ways: 1) activity after a “lead” is generated overwhelms “lead cost” in contributing to ROI; 2) “lead cost” doesn’t affect campaign ROI sufficiently to serve as a KPI (key performance indicator); 3) fixation with “lead cost” enables laissez faire attitudes towards what really matters; 4)  “leads,” as marketing and sales commonly use the term, are really inquiries, unqualified inquiries, and shouldn’t be called “leads” prior to successful qualification. But the whole world calls inquiries “leads,” so I’ll join in and stop using all the parentheses.

So why can’t B2B companies get passed judging campaign ROI by lead cost? Three basic reasons: 1) they don’t know any better; 2) they know better but lack the will and/or discipline to collect the data necessary to measure ROI; 3) they collect the data but can’t find a calculation for converting raw outcomes data into ROI information. I’ve already beat my brains out unsuccessfully trying to address the first two issues through articles like this, so it’s on to reason #3.

“The formula” for lead-gen ROI calculation

Here’s our cherished formula at HYM.

 

Don’t panic! I can explain. Let’s take one operand (computational element) at a time.

Selling price minus variable cost (cost of goods sold):  We arrive at this number by taking the average revenue created by all the leads converted to sales and then subtracting the average variable cost across all sales. “Variable cost” describes all expenses that change in consort with changes in the volume of products produced or services delivered. If you’re unfamiliar with the concept, please talk to your CFO.

One caveat–don’t treat selling costs as a variable cost. “The” formula factors in sales expense.

Marketing cost divided by number of contacts:  Nothing more than the good old CPC (cost per contact). For web programs, you can use the number of click-throughs on your site as contacts.

Response rate multiplied by sales conversion rate:  Just what it says.

Qualification cost:  Average cost to qualify one inquiry. If you’re generating sales leads but not qualifying them before forwarding to sales, you should be shot.

Selling cost:  Track the percentage of sales calls made on campaign leads over the sales follow-up period, then take that percentage of all relevant sales costs.

Fulfillment cost:  Hopefully you’ve moved on to using PDFs instead of glossy product information brochures, almost zeroing this out. 

That’s it for the terms. Now let’s discuss the whys and wherefores of the calculation.

The rationale behind the math

The formula says that average gross profit for a closed sale should be greater than or equal to the variable cost of the sale, with “equal to” representing break-even. To extrapolate from the value of a single transaction to total campaign profitability, you simply multiply this average gross profit (or loss) by the number of closed sales. Which begs the question why are we calculating the return on one transaction, rather than the whole campaign?

Two good reasons: 1) the math is so much simpler using a single, average transaction; but more importantly, 2) looking at a single transaction creates a formula ready-made for running “what-if” projections and pre-campaign modeling.

CPC (the numerator) divided by response rate multiplied by conversion rate (the divisor):  All we’re doing here is allocating all marketing cost to only closed sales. The concept is simple, in words at least. Dividing the CPC by the response rate allocates all marketing costs to just inquirers. Then, dividing that number by the conversion rate shifts all marketing cost down further to only closed sales.

Qualification, selling and fulfillment costs divided by conversion rate.  Because these costs apply only to inquirers, we just need to divide by the conversion rate to allocate them to closed sales only.

Q.E.D.

Is calculating  ROI worth all this work?
Yah sure, it is. Let me give you several examples.

  • Many clients are running ongoing lead-gen programs when we start engagements. They usually don’t know whether they’re making or losing money. Applying “the formula” tells the true story–and provides a critical tool for identifying what’s broken and what can be optimized.
  • On a more granular level, we’ve worked with numerous clients that think they’re saving money by skipping qualification. Invariably, their campaign ROI is in the toilet, with selling costs disproportionate to revenue. Using “the formula” (and lead-gen experience) to project the revenue increase and the sales cost reduction proper qualification would provide usually disabuses clients of that errant thought. Not only do the financial returns from qualification overwhelm qualification expense–but qualification often makes the difference between substantial sales returns and no sales whatsoever.
  • I was running a print, lead-gen program for a division of Pitney-Bowes, which wanted to kill the more expensive placements. Until, that is, “the formula” showed them the most expensive per-lead source was the most profitable. In fact, profitability of lead sources was almost inversely proportional to lead cost.
  • “The formula” got me fired by American Express by showing that AXP’s ill-fated Financial Services Direct initiative was going to do a face plant–which I duly reported, to the chagrin of AXP execs. But “the formula” didn’t lie. AXP lost its shirt, and a whole bunch of AXP execs had to “walk the plank” from the top floor for their foolish optimism. Boy, did I look good. After the fact.
  • On another AXP engagement, we applied “the formula” for up front modeling and learned that to generate positive numbers, we’d have to 1) change a planned two-step mail program to a one-step; and 2) keep our CPC brutally low. “The formula” was right–with one exception. We hadn’t dared plug in a response rate value 8X industry average.  We forgave “the formula.”

And I could go on and on.

Yup, “the formula” really is worth the work. You betcha it is.

Streamlining Your Front & Back Office to Save Salary Dollars

Deep recessions put a double whammy on businesses. First, most companies have to reduce staff. That’s a given. But they need to do it right to reap the full savings. Unfortunately, the majority start downsizing much later than business conditions warrant. Plus they typically stab deep into flesh while trying to trim out fat–as evidenced by the frequency of companies slicing off customer-facing employees, only to start losing customers along with service staff.

Second, when not made correctly, substantial staff cuts reduce scalability, compromising capability to spring on new opportunities. So companies suffer now, when they cut–then suffer again when either recession-driven opportunity pops up or economic recovery kicks in.

Isn’t the recession bad enough by itself?

But wait, it gets worse. While most manufacturing companies at least know how to reduce production employment in a half-way rational manner, even if they don’t always show it, the vast majority of front and back office managers and service company managers don’t have a clue. Nor should they, because the concept of designing office process with the same rigor we apply to manufacturing process–using a process approach designed for highly variable office environments–is a foreign concept throughout business. Most office process change efforts consist of cramming manufacturing process methods down office throats–only to have office and service staff regurgitate everything process they’ve been fed.

It can get so bad that at one of our past clients multiple office people would stand and flip the bird to the six sigma team as it retreated to its hovel.

 

Cutting the office workplace down to size

Mistake #1 in office process redesign is trying to squeeze out every last penny of “unnecessary” cost–which, ironically, tends to lower the ratio of work done per salary dollar spent, the exact opposite of what’s intended. Creating a Spartan office environment reduces work quality, increases the volume of repair and recovery work, creates bottlenecks that lower throughput, and kills morale. It also kills customer relationships. Sprint tried this approach and so turned off customers that it’s single handedly fueling the growth of both AT&T and Verizon.

A  Aligning process to strategy and technology to process

Smart companies facing a deep recession don’t practice “scorched earth” cost-cutting. They understand the first obligation of office staff is to carry out business strategies. When process fails to align properly with strategy, the two elements work at cross purposes–creating inefficiency, internal friction and customer flight. Plus, process–strategy misalignment increases the quantity of non-value-adding work performed, which increases the number of non-value-adding  employees.

We saw this in spades when we worked with a large credit union a while back. Following alignment, they didn’t just reduce staff, they cut an entire function and combined several more. And when we reviewed HR which had five staff members and planned to add one more, we discovered that three could do the job. Extrapolating that 50% reduction across several other bloated departments shows the labor-saving alignment can achieve.

But wait. Isn’t process supposed to align with technology?

Hardly. Instead of subordinating process to technology, companies that “do process right” mold technology support around process. They use technology to enable process, not lead it.

r   Surprising benefits

Redesigning work to achieve internal alignment must occur in proper sequence–first redesign process, then redesign technology support. When this occurs, companies realize surprising benefits. Not only can they shrink office staff further than they could using the “cost squeeze” approach, but there’s an unexpected benefit. The smaller office staff can provide more responsive customer service and increased customer attention. Why? Because proper alignment, with its focus on streamlining, reduces unnecessary “touches”–and even layers of supervision.

The first time we rolled out our Visual Workflow office process approach, a brave VP of a supervisory function stood up and said, “My function is redundant. We’re superfluous.” She resigned the following week.

T  The final step–aligning people to process

All well and good, but don’t put the tools away yet, because there’s one more key alignment companies must make to achieve the desired results–significant reduction in office staffing requirements, complemented by improved customer relations. Just because a company intelligently redesigns office process does not mean staff will just migrate to the new work approach because they’re told to. To cite the old HR saw, “People don’t mind change. They mind being changed.” And when you tell them to change, they resist.

So how do you overcome human nature?

Simple. Don’t tell them to change. Involve relevant staff in redesigning process right out of the blocks–ideally in cross functional teams, since so many office process defects lurk in the seams between functions. Involvement creates buy-in and ownership. And it greatly mitigates resistance to change. 

Also, implement change across multiple levels. Changing responsibilities and accountabilities on one level sets off a chain reaction. Management has to reset expectations to match up with redesigned work. And staff further along the work chain must be ready to receive new output. These aren’t just process issues, they’re people issues companies must address with training and support.

D Does the resulting staff reduction merit the effort?

Absolutely. On average, using People & Process Alignment techniques we’re able to create the potential to shrink office staff by 15%. In times like these, that’s huge. In past times, most clients have used the excess staffing to cover attrition or launch new initiatives without hiring. But during this recession, many companies will have to lay off instead. The good news is, and “good” is relative here,  by properly aligning strategy, people, process and technology companies can do more front and back office work and better work with fewer people. For some companies, that could mean survival.