Outsourcing Support Functions.......Sort Of
Customer Service Processes – Companies Still Don’t Get It!
Intoxicated With Complexity - Strategic Planning Issues
Employee Satisfaction vs. Employee Turnover
Sarbanes-Oxley Execution Misses the Mark



Outsourcing Support Functions......Sort of

The outsourcing craze continues in the US and, for the most part, I’m a supporter of it IF you can maintain or improve quality while lowering costs. Unfortunately, that is not always the case but that is a subject for a different article (just call customer service for any of your credit card or loan accounts).

Functions that are not considered a part of the company’s core competency are typically prime for outsourcing. This includes corporate overhead functions. Corporate overhead (i.e. headquarters or non operational functions) can include but is not limited to Human Resources, Legal, Information Technology, Internal Audit, and Corporate Accounting. These groups function for the overall good of the company and, in theory, their costs need to be spread out to operational units since they are the beneficiaries of these services.

Allocation of corporate overhead can be a hot topic at period, quarter, and year end if you have any sort of P&L responsibilities. There are few things that can irritate a business unit manager more than seeing arbitrarily allocated corporate overhead, usually based on headcount or a percentage of total sales, as an expense line item that takes away from their bottom line profitability, especially when they didn’t received any services.

For example, let’s say there was a huge legal issue at one plant or location that required half of the legal department’s time for the year. Common sense would say to assign half of the legal costs to that plant for the year. Through arbitrary allocation, however, other locations would bear a disproportionate share of the legal costs and the location with the legal issues would get a huge expense break in comparison to the legal services they directly consumed. Doesn’t seem right does it!?

Sound activity based costing methods would properly assign those costs directly to the location that consumed the services. I am full supporter of activity based allocations but there is one thing it does not evaluate, value. The costs may be properly assigned but were the services of any value? Could they have received these services at a lower cost or greater benefit elsewhere?

If you’ve read other articles of mine you know that I’m a stickler for metrics and measuring performance and I firmly believe that you can’t manage what you don’t measure. That being said, overhead functions need to be held accountable for their services just like the operational units are.

Let’s stick with the legal scenario. Have the legal department complete annual budget and determine internal hourly rate based on staffing. The goal being that you internally bill out all of your time to the businesses so, at the end of the year, the legal cost center is zero or if you bill more than budget, you actually have income (albeit internal). Inform businesses of your hourly rate and they will be charged directly for legal services if used. The businesses will also have option to use outside legal services instead of being forced to use in house services.

There are two important performance dynamics this scenario creates:

One, the in-house legal department is forced to create value or the businesses will go elsewhere. Their metric is the costs that remain in their cost center at period end. If they provide value and bill hours, their cost center will be zero or negative. If not, costs will remain and they will be forced explain themselves to senior management. This also forces them to market themselves to the businesses like a real, for profit, law firm would.

Two, it puts decision making back in the hands of operations. Now they can choose their legal services. In some instances, a local resource may make more sense or internal corporate expertise is the best route. In others, they may feel the in house source is incompetent or simply unresponsive and they’d like to send a message to headquarters. If managed properly, there are many different benefits that could arise: 

1. A newly efficient and effective in house legal department that delivers value consistently to the business units, 
2. Determine that outsourcing legal services is best based on cost/benefit, and 
3. Determine your “star” performers based on business requests and chargeability, and eliminate subpar performers

A hybrid of insourcing and outsourcing may be an effective way to increase your business performance and is definitely something worth considering in your business.

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Sarbanes-Oxley Execution Misses the Mark

As with a lot of legislation that comes out of Washington, the intention was good but the execution was way off the mark. This time, however, the blame does not rest with the government but with the Big Four accounting firms.

Who would have thought the three sentences in Section 404 (b) on Internal Control Evaluation and Reporting would create such massive fees and resource constraints on American business. The reason, of course, is very simple. It was left up to the Big Four accounting firms to interpret it’s meaning (Cha Ching!!).

The Big Four alone was allowed to determine what complying with section 404 would mean. In the end, they determined it meant covering almost every area of a business with little regard for true risk. They knew they were in the leverage position of dictating to their clients what “compliance” meant and that their clients would put up little to no resistance to their requests. Therefore a full blown, “soup to nuts” internal control assessment review was required which would result in maximum chargeability and profitability for …..the accounting firms!!!

These firms were throwing any warm body they could find on these projects. Unfortunately, the spirit of the legislation has not been followed. The spirit was to put in place internal control mechanisms that prevent more Enron’s and WorldCom’s from occurring. These massive failures were caused by significant accounting irregularities which were initiated at the highest levels in the company. They were not due to errors or weaknesses in less significant sub processes.

Many of these less or insignificant sub-processes were loaded with “key controls” as defined by the accounting firms. This resulted in businesses committing significant amounts of time, energy and resources to processes that were not critical. The funny part is that the accounting firms have finally admitted it after hearing an earful from roundtable CEO’s. The May, 2005 guidance from the Public Company Accounting Oversight Board (PCAOB) stated that future compliance efforts should, “tailor their audit plans to the risks facing individual clients, instead of using standardized checklists that may not reflect an allocation of audit work weighted towards high risk areas (and weighted against unnecessary audit focus on low-risk areas).”

Did it really take billions of dollars spent to realize this or was it simply year one “cash in” time for the accounting firms? You know the answer.

These firms understand risk management and they did prior to Sarbanes-Oxley. In this case, they chose not to apply it in order to maximize fee revenues. The accounting firms will argue that internal control benefits have resulted from the efforts. This is true but, in most cases, the benefits have been incremental and have been completely out of line with the costs of compliance. Is spending $1,000 to gain $1 of benefit a good business decision?

Now a more risk based approach will be okay this year after the guidance was issued by the PCAOB.  Don’t hold your breath for any fee refunds!! 


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Intoxicated With Complexity

I was talking recently with a good friend who is a senior manager for a large public company. Many times our discussions turn into strategy discussions and I’ve noticed a recurring theme: Complexity! In fact, my friend consistently says, “My company is intoxicated with complexity!”

We both laughed at how many times we’ve sat in strategic planning presentations looking over 80+ page strategy documents with executives bloviating about the direction of the company only to leave the meeting more confused. The pretty graphs, arrows and flowery wording are very impressive in form but the clarity was just not there.

Why are strategies so complex and what can be done to change that? My complexity theories include:

1. Existence Justification – Obviously there are a lot of talented people in upper management or they wouldn’t have made it as far as they have. A stumbling block can be that management has to come up with some unique and/or complex strategy to justify their existence and to show why they make the “big bucks!” Unfortunately, in some cases it is an “ego” thing as well. Executives like to show how smart they are or how much smarter they are than the regular worker. Instead, they outsmart themselves by delivering complicated and confusing messages that few people can truly understand.

2. For The Sake Of… - This refers to strategies related to growth for the sake of growth or diversification for the sake of diversification. Some strategies are “We want to be a $10 billion in five years!” or “Increase Revenue By 15%.” Why? Just because?? In many cases, that is the answer, “Just because.” Revenue growth for the sake of revenue growth alone is not a sound strategy. In fact, it is not a strategy at all. It is a financial metric that helps to evaluate the success of a strategy. Others say it’s time to “diversify.” Many times it is diversification into areas with little or no expertise. This is risky but the strategy tends to sound really good.

Some questions to ask when reviewing or initiating strategy planning:

• Can the strategy be explained on one page?
• Can it be explained effectively to the lowest level employees?
• Can employees at all levels understand how their performance helps to achieve the strategy?
• Does the strategy conflict with the company’s mission, values or ideals? • Does it include growth or diversification for the sake of …?
• Does the strategy include straying away from core competencies?

Negative answers to these questions does not necessarily mean they are bad ideas it simply means more work needs to be done to ensure the strategy is clear, easily explainable, achievable and consistent with the best interest of the company.

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Employee Satisfaction vs. Employee Turnover
I recently read an article in my favorite business magazine on the value of employee exit interviews. It went into great detail on the benefits of gathering data from departing employees. It talked about maintaining confidentiality, asking open-ended high impact questions, proper timing of the actual interviews, etc.

I agreed with its content and recommendations but view it as only addressing the back end or “lagging portion” of the employee management process.

When I say “lagging” I mean gathering information and data on things that have already happened. For example, information on financial statements are lagging indicators. They provide information on activity in the past. Although valuable moving forward, it’s too late to make changes or adjustments in the period it is reporting on.

In the case of the exit interview, the information is lagging related to these employees since they have already decided to leave the company. In most cases, the exit interview is way too late in the process to save a valuable employee. The majority of businesses today manage based on lagging indicators.

Best in class companies, however, excel in using leading indicators to drive performance. A better leading question is, “Could we have identified the employee’s issues earlier in the process and kept them?”

Leading indicators are measures/metrics that warn you in advance of potential issues. A good real life example of a leading indicator would be the “low fuel” light that appears in your car when you are low on gas. This light triggers you to take action prior to running out of gas. An exit interview in this scenario would involve asking questions after you ran out of gas. Although it is valuable information, it was not helpful in preventing if from occurring in the first place.

An effective management review process includes a good mix of leading and lagging indicators. Creating leading indicators for the employee management process involves effectively evaluating employee satisfaction. There are many wonderful books on measuring employee satisfaction so we won't discuss this in this article (see recommended books section).

The point I want to make is that improving employee satisfaction (leading) will drive improvement in employee turnover (lagging) rates. If you manage the leading indicators effectively, the lagging indicators will take care of themselves. 

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Customer Service Processes – Companies Still Don’t Get It!

A key component of customer loyalty is how well a company handles complaints. I have a fresh example to illustrate! I bought a top of the line, king size memory foam mattress six months ago and it already has a lump in the middle. It has a 15 year warranty on it so I called customer service. They are sending out a third party to determine if there is a defect which is fine.

The customer service representative then informed me that if the mattress is defective and needs to be replaced, there is a $50 charge that I must pay for them to deliver the new one and take away the defective one. I told her that doesn’t make sense that I would have to pay a delivery charge for their defective mattress. She calmly and politely informed me that in the small print of the agreement that I signed, it clearly stated that I was responsible for these charges if the mattress was defective. I didn't check the small print but I’m sure it is there.

I’m not sure what occurred in their customer service process design meetings (if there were any) but they were obviously looking at the process from an internal, short term financial point of view. The cost to deliver goods was to be passed on to the consumer……for their defect!!

Although this may satisfy the short term financial metric, it fails miserably on the longer term, more critical metric, customer satisfaction. In my opinion, there is a simple solution that satisfies both metrics. They could delivery the new replacement mattress free of charge (what a concept!).

This satisfies the customer who is upset that the product was defective but at least the company stands by their product and makes the replacement as positive of an experience as possible.

From the financial perspective, a financial analyst could determine the defective mattress rate (for simplicity, lets say one defect for every 50 sold). If the average delivery cost is $50/replacement, then that cost could be spread over every 50 mattresses sold by adding a dollar to every initial delivery or adding a dollar to the sales price. The customer, at the time of sale, could care less if the delivery fee is $20 or $21 or if the sales price goes up a dollar. It would be transparent to them.

The end result is a satisfied customer who would consider buying from the same store again and the cost of redelivery is covered indirectly. The result of their current process is that I will never buy another mattress from them.

They won’t be able to measure that directly but it will show up in future sales since there will be less repeat business over the long term. I know this sounds so basic but I am continually amazed at how many companies do not understand customer service and satisfaction.

This isn't any different than the nice hotel that wants to charge me, on a separate line item, an extra .50 for a newspaper. Just give me the freakin’ newspaper and build the cost into my nightly rate!!

Some companies just don’t get it!! 

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