Why Vendor Programs?

I was recently asked one of those fundamental questions which initially lead you to doubt the sanity of the asker and then, upon reflection, make you think hard. Here it is (with profanity edited out): “Why are insurers interested in vendor programs?”

Given the RFP/RFI tsunamis of the past two years, it takes an effort to recall the days of the one-page application form  obtained from an adjuster, completed in ink, and mailed back to what had to be a paper shredder – never to be seen or discussed again.

Remember when “contracts” were one-page letters (actually typed on a letterhead and signed by one person who you knew on a first-name basis) and not the multi-signature-bearing shock-and-awe screeds of today that, if ever invoked, would drive you out of business as surely as a claimant will negotiate their deductible with you.

Those were times of trust and much mutual back scratching. The GC repaired what needed to be repaired, the adjuster adjusted things, and both took care of the policyholder. Somewhere along the way a cost was agreed – sometimes tweaked slightly to take into account a favour on a difficult claim in the past and everyone got a good night’s sleep.

But that was then. Before estimating software supposedly made pricing easier to track. Before the building boom, oil sands and the Winter Olympics made some skilled trades tougher to find, hire and retain than getting an IA to process your payment within 6 months. Before the dreaded PSPs.

Preferred Supplier Programs are here to stay. Blame the erosion of insurers’ investment income (and the subsequent need to trim costs of all sorts). Blame the IT firms that saw the opportunity to create estimating software that spew voluminous reports (that keep people employed to produce and analyse these). Blame the consumer for complaining about shoddy service and outrageous charges and skyrocketing premiums. Blame every level of government for ignoring the state of ancient sewer systems that now drown basements in unspeakable fluids as regularly as Big Ben chimes the hour. Blame past generations of consumers whose ozone-depleting lifestyle demands have triggered weather patterns that defy prediction. Blame the big consulting firms that recognised the massive flushing away of funds that used to pass for claims cost management (and went and published all sorts of reports on the erosion of shareholder value and similar ilk).

That’s why insurers are interested in vendor programs.

They’re also interested in these programs because they help create standards so that all policyholders can expect a reasonable level of service. Because it has become impossible not to notice that all the old mutual back scratching led to costs escalating far faster than can be logically explained. Because so many contractors don’t estimate a loss as much as they evaluate what they can charge. Because bigger insurers can hire more experienced people who know how supply chains in other industries operate. Because insurers wonder why they live off razor-thin margins but their supply chain grows as plump and complacent as a brood hen. Because no one has ever met a poor restoration contractor.

Insurers don’t really care about the contractors’ experience of worry, stress, late night calls, working weekends, 18-hour work days, difficult claimants, horse-trading on every job, and free extras offered up on every claim because they go through roughly the same wringer. And they do this for roughly 50% of the income per person.

And, when done right, there really are benefits and win: wins in these programs. Measurable service standards, known processes, agreed pricing protocols, negotiated profit margins driven by sustained business referrals, reliable payment schedules, shared problems, and the opportunity to improve continuously. And, of course, the one spin-off that makes it all worthwhile: a satisfied customer.

That’s why insurers are interested in vendor programs … and why so many contractors are, too.

Advertisement

New Trends

It’s that time of the year again: the twilight days between one year and the next; the easy commute to work while others are on holiday; the perfunctory shuffle of papers from desktop to filing cabinet or dustbin in preparation for a new year; the anticipation of a job bonus (likely spent in advance), and a sense of new things to come in the near future.

It is also a time to reflect on what was or could have been. It’s been an odd year in some ways. We have watched and listened to news about the financial state of our southern neighbour and waited for the inevitable to happen here. One hundred plus bank failures, plummeting house values, soaring unemployment, and a decimated auto industry in the US had to translate into something bad for Canadians. It didn’t for the most part. But it made us nervous and being on edge for the better part of a year is uncomfortable.

So, did you chew your nails and fret in 2009 or did you leverage the benefits of being in a well-regulated economy? Chances are you had a reasonably good year but did you do anything new or did you play safe? Here’s a roundup of some of the best developments of the year:

Marketing

Many contractors continue with old school marketing as a way to secure new business or hold on to existing clients. In some circles there’s still nothing wrong in showing up at a customer’s workplace with nothing but a hail-fellow-well-met attitude for a cursory look at a few service issues. So, if you’re in this camp, you have lots of company and there are still many people who will welcome you into their offices to while away an hour or two. Some of them are happy to continue the conversation through a round of golf, as well. Just keep an eye on the future. These people will eventually be replaced by very different professionals who value their time and who want specifics. You will very quickly find you’re seen as a nuisance.

Then there are the contractors who have realised that showing up with a smile and a box of donuts doesn’t translate into a secure customer base. They have taken steps to develop their value proposition from a customer’s perspective and have learned to focus on results, not actions. They’re ready for the small but growing number of insurers who take an active and intelligent interest in their supply chains.

Training

Training is always a hot topic. Most contractors have trained and certified their teams to a creditable extent and it’s paying off in better work standards. A certified technician also attracts a higher price-point on estimating software so the investment pays for itself.

A few contractors have taken a step further and turned their attention to helping their customers – the insurers – develop their adjusting standards. Although there’s still a high dependence on half-day lunch-and-learn type training, there are a few contractors who have geared up for something better and more valuable to insurers. There are some exceptionally innovative training programs out there that provide in-depth learning and true understanding of the scoping and estimating process. Their owners are a credit to the industry. Nothing breeds sustainable customer loyalty better than meaningful collaboration.

Smart Hiring

A small number of contractors, mostly the larger networks, have reached into the insurance industry and hired ex-insurance professionals to manage key relationships. This approach has worked the other way, too, as insurers have started to hire ex-contractors to help with job cost transparency. It’s early stages yet but this is definitely one of the best developments in the industry in years. The benefits of this strategy will start to be felt very soon.

Supply Chain Management

Contractors

A truly forward-thinking move made by a major contractor is to review their upstream and downstream suppliers (all the recruiters, building materials suppliers, equipment vendors, and sub-trades that the firm relies on) and to start applying rigorous supply chain principles to them. This will make a huge difference to their final costs and overall service standards. This is not about getting a good deal or best prices – many contractors have done that. It’s about identifying and developing an end-to-end value chain that achieves lowest total costs and highest customer service.

Insurers

A positive development in the insurance industry is the ever-widening professionalism being brought to bear on vendor programs. The task is often difficult because it always involves introducing change and overcoming resistance. However, identifying quality, insisting on measurable service standards, and containing costs will eventually bring value to the ultimate recipient of the combined services of insurers and contractors – the policyholder. That’s long overdue.

Yes, all the positive things mentioned above have been done before but never on the scale now occurring. We will report further on this as we make our way through 2010. Credit is due to the market leaders for taking bold steps in tough times. They have earned their success and all of us will benefit from their actions.

When Business Partners ask for a Handout

What do you do when your major business partner asks you to reduce your profits because they’re not doing too well?

At first, you may find it difficult to believe them, especially if they’re about 100 times your size. However, if they’re showing signs of financial trauma – typically, this includes jettisoning employees in droves and showing up in merger & acquisition rumours – you have to accept their word that things aren’t going too well.

The next thought that may occur to you is why someone else’s poor management should have to cost you, especially if you’re intelligent enough to do well in a depressed market. After all, being a perceptive business owner shouldn’t carry a penalty.

Thoughts may then turn to bleaker outcomes such as what happens if the business partner ends up failing or decides to turn permanently to cheaper partners.

Ultimately, it’s your decision to assist or walk away. No points for guessing what 99.9% of business owners do. It’s better to have 95% of what you had than zero. In addition, if you don’t have shareholders to answer to, it’s an easy decision.

There’s nothing wrong in asking for help during tough times, especially when there’s a long-standing and mutually beneficial partnership involved. In fact, the partnership is likely to come out of the hard times stronger than before. The trouble is not in the act of asking but in the manner of asking. In fact, ‘asking’ for help doesn’t really come into play in most cases that are currently under discussion. Most contractors are summoned to a meeting, are given a set of demands, and sent off with a flea in their ear wondering what hit them. They go back to their office and grab their vendor contracts and realise there’s nothing there to protect them. They start talking to others in the same predicament and the resentment grows. Not because they have to give up 5% or 10% of earnings in the short-term but because they had been lulled into thinking that all major decisions would be discussed and agreed before being implemented. Surprise! Who thought the restoration industry would fall victim to a variant of the Bush Doctrine? Yet here we are, pre-empted, battered, and confused.

However, this is a pragmatic industry. So, the spirit of collaboration defers to expediency and one party ‘saves’ a few million dollars at the expense of their supply chain. Soon, however, there’s another surprise! The supply chain sees no decline in profits during the period of belt-tightening. How can this be? Well, it’s a pragmatic industry. Don’t expect people to give up bonuses too readily, especially in times when personal fortunes have shrivelled. Those line items in estimates have started to bloat in all sorts of funny ways.

Anyone will tell you that it’s utter folly to show up for a gunfight armed with a knife (unless you’re Britt of The Magnificent Seven). Yet that’s exactly what insurers choose to do when it comes to keeping estimates lean and clean. Face it, 95% of adjusters can’t stand up to a determined restoration contractor. Part of it is because of an imbalance in experience and knowledge and part of it is due to numbers. The contractor is motivated to make every dollar stick because their earnings are directly related to the overall job cost. The adjuster is motivated to keep their file-load under control – too many pending claims draw unwelcome attention – and gets not a dollar in bonus no matter what the outcome.

Now layer a coat of superciliousness on this situation, step back, and see what happens. Insurers will do themselves grievous injury slapping their backs in self-congratulatory pride over extracting a few dollars from a recalcitrant supply chain; contractors will hang their heads in apparent defeat and hand over their lunch money and not a cent will come off those estimates.

One painful lurch forward, engage reverse and hit the zoom pedal: Vendor relations as done by insurance companies. No wonder everyone wants to be a restoration contractor but no one wants to deal with insurers.

Preferred Supplier Programs

Everybody wants to pay less for goods and services but nobody wants a corresponding reduction in value. Imagine what would happen if negotiating a series of price reductions on a vehicle with a car dealer meant progressively losing the wheels, windshield, fenders, seats, heating system, and so on. Few buyers would negotiate because they would immediately see an erosion of tangible value.

It’s different with services. The value embedded in services is often less visible, less dissectible and, therefore, more eagerly negotiated. Some services deliver a physical product. Restoration work is an example. Contractors offer a service but provide a tangible product.

The old approach
Restoration contractors have always relied on enthusiastic marketing to connect with their chosen customers. However, the efficacy of their marketing strategies is questionable considering the peculiar position contractors have placed themselves in – insurers constantly negotiate the price of the service but never the value of the product. Thus, the contractor’s labour rates, job cycle times, profit, and overhead are all open to parley. On the other hand, value content such as delivering high customer satisfaction, exceeding agreed service standards, and providing free risk improvement advice are part of the standard service offer. Whittling costs is now standard operating procedure but withholding corresponding value is unthinkable. The profound folly of this arrangement is rarely questioned and then only in muttered asides. The ubiquitous “doughnut=job” equation (a crude sales technique at best, an acute contempt for insurers’ integrity at worst) has backfired. Contractors have themselves to blame. You just cannot profit from a relationship that relies on mutual back scratching because this is a very limited tactical approach. Eventually it will fail to satisfy one of the participants.

It takes robust strategies to modify the status quo when you have allowed crass commercialism instead of collaborative partnering to steer a relationship for a long time. Most contractors don’t have the time, resources, or appetite to take corrective action. Insurers, of course, won’t solve the problem unless they see some benefit for themselves. Or will they? It depends on the category of insurance company you’re dealing with. More on this later.

Historically, insurance companies’ core competencies didn’t include managing a contractor network. Contractors saw the policyholder as their customer and were left by insurers to handle these in their own way. Local relationships thrived. Everything operated at the tactical level with a heavy measure of differentiation in the delivery of service.

Time for a change
Over time, however, this practice began to be abused. The construction boom of the last decade resulted in new, unskilled, opportunistic entrants to the restoration market. Weather conditions produced new records in claims frequency every few years. Job quality started to become secondary to speed of work. Insurers started to notice a lack of a commitment to service. Rising claims costs added to their concerns. Insurers started to look around for solutions. The auto repair industry offered a convenient guide. There, centralised buying power drove the relationship and repair shops had started to view insurance companies as their customers. Two major components of the relationship were a continuous stream of work to the body shops and regular payment on time, every time.

It seemed an easy template to apply to restoration contractors. So far, however, it has been an arduous undertaking. Most insurers just haven’t invested enough in transforming their operating models or in acquiring professional resources to create and manage sustainable preferred supplier programs. The two major requirements of professionally run supplier programs – maintaining consistent streams of work and paying on time have proved to be notably difficult to implement effectively. Equally, most contractors have elected to bury their head in the sand and refuse to accept the inevitable: the glory days are over. The result so far is sporadically effective supplier programs across the country and many frustrated contractors hankering for the good old days.

Two types of insurance companies
There are two varieties of insurance companies when it comes to effective partnerships with suppliers. First, there are the traditional insurers who still pursue reduced prices as the best way to control costs. They have extensive regional vendor lists and their adjusters have close relationships with contractors. They operate on a ‘win:lose’ basis when it comes to job costing. Then there are the progressive insurers who choose the far more effective way of simply reducing the supply base in return for collaborative efficiencies that produce real financial (and intangible) benefits for all. Unfortunately, contractors don’t really understand the value-based needs of the latter and continue to operate as if price is all that matters, i.e., playing the win:lose game. They’re missing an opportunity to drive change.

The basic ingredients to create partnerships
As stated above, many insurers haven’t yet acquired strong supplier management skills. However, just a few basic ingredients make a good preferred supplier program
1. An open relationship with the supplier
2. Good communication, especially on job progress
3. Comprehensive baseline metrics
4. Collaborative measures to achieve and measure these metrics
5. Active management of these metrics and related service level agreements
6. A strong understanding of the restoration business’ drivers

Any supplier able to offer the above immediately distinguishes themselves as professional partners. The knowledgeable contractor knows this and cultivates their relationships with insurance companies along these lines. The goals are always

1. to make it easy for the insurer’s employees to work with pre-qualified suppliers
2. to make it possible for the supplier to reduce costs and improve service at the same time.

You can start building effective relationships by thinking about the steps below (the first three are vital):

1. The most important step that few really think about: Cover the high-level stuff (the strategy) thoroughly. The details (the tactics) will fall into place later
2. Be selective in defining strategy, not exhaustive. It’s better to collaborate on a few outstanding objectives than on a mass of mediocre things. The prime reason why partnerships fail is because the core strategies are overwhelmed by a morass of undeveloped intentions
3. Focus on results, not actions. For example, don’t attempt to agree on a step-by-step service procedure; instead, agree that service will meet an agreed standard. Many partnerships stumble because they rely only on achieving tasks, not results
4. Spell out your own purpose in forming a partnership. Say what you’re trying to achieve up front. It’s too late later and, in any case, this is a good way to ensure you think through everything at the outset
5. Pinpoint the stakeholders who can help or hinder the relationship and deal with them first
6. Encourage ideas from all stakeholders. Participation leads to commitment
7. Consult within your own organisation before approaching or agreeing to work with potential partners. You may be the boss but you will learn something new if you do this. If you’re not numero uno, this advice may save your job!
8. Make initial informal contact with possible partners to find out what drives them, their attitudes, and what their major interests are
9. Expect the partnership to develop over time before you can formalise it. This can take a long time but shouldn’t if you work diligently at it
10. Be candid and honest.

Conclusion
All this is easy enough to say but difficult to implement. Anyone who has created a successful supplier: buyer partnership will tell you that it requires some resolute evaluation and comprehensive planning. The biggest barrier usually is admitting that something needs fixing. That’s because dysfunctional relationships don’t require a lot of maintenance once they’re allowed to go out of whack. Just the occasional whining keeps them going indefinitely. An effective relationship, on the other hand, takes a real effort to establish and maintain. Liken it to a treadmill: It goes round forever, it can exhaust you if you try to sprint all the time, you’ll fall off if you lose your concentration or falter, you can injure yourself if you overdo it, and it’s a wasted expense if you don’t apply it. Your best results are achieved by working with a trainer and working to a plan.

Identifying Your Primary Customer

Definition of customers

Restoration contractors who work on preferred supplier programs always have a great interest in customer service. After all, without a robust customer service plan their business would quickly falter. As a result, customer service initiatives get a sizeable share of marketing resources.

However, determining who the primary customer is can be confusing. The standard definitions of a customer are

• the party that purchases your goods or services

and/or

• the ultimate beneficiary of your services

An embedded requirement within these two definitions is that the primary customer should provide repeat business as it is unrealistic to think you can effectively sustain a rate of 100% new business in this industry.

Current practice

Applying these definitions to the primary relationship in a preferred supplier program is an inconsistent practice in our industry. Here is a summary of the various views on who the primary customer is:

1. “the party that most influences the flow of incoming business”, otherwise known as The Adjuster. This strongly held view has directed many millions of dollars to pizza and doughnut vendors.
2. “the party that pays you”, i.e. the insurance company. This view holds that the ultimate buyer holds the key to success.
3. “the party you directly service” or the policyholder, because even though they do not pay you, they are the main beneficiary of your services.
4. Some point to less obvious parties such as brokers and shareholders.
5. Finally, a few make it far more personal and consider their immediate boss to be their ultimate customer.

Identifying the primary customer

The Adjuster: Many contractors focus intensely on adjusters but fail to ask themselves two qualifying questions: (a) Do adjusters pay you? (b) Are adjusters the ultimate beneficiary of your service?

Adjusters are definitely stakeholders in the overall scheme of things but cannot be your primary customer unless they actually control the flow and quality of incoming jobs. They used to do this but their influence is declining. Of course, they can affect the timing and amount of payment on every job you complete but it is generally in their interest to see files closed quickly.

The Insurance Company: There’s a strong case here. Insurers buy your services on behalf of their policyholders and pass on most of the benefit of your expertise to them. Insurers do derive some direct benefit from you. First, they obtain some financial benefit (that’s a big part of all preferred supplier programs) by way of streamlined processes and pre-agreed costs. Secondly, you help them attain certain customer service levels (if all goes well) with all the attendant benefits that this brings. Thirdly, they are the source of repeat business.

The Policyholder: Since your business runs on a steady inflow of job referrals, we can conclude that the individual claimant isn’t your most influential customer. After all, how many claims will you get from the same policyholder? Of course, how you serve them is important, as this will help establish the boundaries of your success with the insurance company.

Brokers and Shareholders: They can make things difficult if you don’t handle them properly. However, they are not your customers. They neither provide you with a sustainable source of revenue nor are they the beneficiaries of your service. They are, at best, stakeholders.

The Boss: This very narrow outlook will likely keep one’s employed status precarious and unpredictable.

Conclusion

Your primary customer is a mix of two parties: insurance companies and the adjusters who work for them. It is a common mistake to treat them as mutually exclusive. Your marketing plan has to cater to the micro (tactical) needs of adjusters and the macro (strategic) systems embodied by the insurance companies that employ the adjusters. Understand the relationship between these two and make sure you fully leverage the opportunities offered by them.

Resolutions

It’s time for our annual exercise in self-delusion: making New Year resolutions. Let’s get the personal ones out of the way first. There are three major groups:

1)    Getting healthier (includes joining a gym, quitting smoking and/or drinking)

2)    Becoming a better person (includes spending more time with family, getting organised, being more spiritual, being more charitable, going green)

3)    Managing money (includes getting out of debt, spending less, quitting gambling)

 The analytical reader will point out that some of these are mutually exclusive i.e. spending less and joining a gym? That’s the nature of resolutions – they start out as prodigious challenges but always contain a hidden ‘out’ which, when inevitably invoked, allows us a plausible and dignified surrender as in

“I didn’t like what I was becoming”

“Hey! Tobacco company workers need to make a living, too”

“You married a slob so I’ll stay that way for your sake”

“I fell off the wagon the night Petruzelli annihilated Kimbo Slice”

Corporate resolutions are somewhat different from personal resolutions. For starters, they flush more money down the drain. They may also confuse employees, tie up resources, bewilder customers, and waste time. Here are nine resolutions that shouldn’t appear on any business owner’s list and one resolution that must:

1. Engage employees more efficiently and its corollary, conduct regular meetings
2. Delegate more and its corollary, throw your brightest employees into the deep end
3. Invest in learning and its corollary, get everyone identically certified
4. Promote your company and its corollary, tell your customers about resolution #3
5. Give back to the community and its corollary, join a volunteer group
6. Keep an eye on costs and its corollary, make do with what you have
7. Plan thoroughly and its corollary, don’t implement until you’re 100% sure
8. Embed consensual decision making and its corollary, being the boss is everyone’s job
9. Offer the best prices and its corollary, beat the competition every time

Yes, all the above must be avoided. Resist their alluring messages of employee development, team spirit, rational goal setting, cost management, winning against the competition, and community participation. You will achieve diddly squat. Here’s why:

1. Regularly scheduled meetings (as in check-ins, follow-ups, keeping track, and updates) are very nearly useless. At best, they signify a weak-kneed inability to let others get the job done. At worst, they force people to make up stuff when there’s nothing new to report. Instead, agree reporting milestones in advance. Make sure these are about results, not actions (you want to know what was achieved, not what was done to get there).
2. Don’t delegate just to stress-check an employee. The result will tell you nothing. In fact, if you really understand your job, you won’t have to delegate anything because the only stuff on your desk will be the stuff only you can handle.
3. Learning for the sake of getting a few letters after your name is pointless. It’s worthless if the learning needs of everyone are expected to be exactly the same. It shows you are not focussing on individual capabilities and are building a team of clones.
4. Please don’t tell your customers that your employees are clones. You’ll scare them to death.
5. Do community work on your personal time. However, you will get some mileage out of getting a group of employees to do something together.
6. Don’t cut corners with worn out equipment or overworked employees. You’ll end up paying more in the long run.
7. If you wait until you’re 100% certain of everything, you’ll miss the right moment to act. Move when you’re 75% to 80% sure. How do you know you’re “80% sure” in terms of planning? It’s when your business smarts tell you that you have enough information to fire up. Trust your instincts. You’ll figure out the balance 20% along the way.
8. You’re the boss. Employees feel better when you assume a strong leadership position. It’s OK to listen to opinions but don’t get everyone around a table every time a decision has to be made. Consensus by committee leads to paralysis by analysis.
9. Your customers buy value. Don’t confuse them with pricing. Differentiation sells better than price. You’re in the business of confidently providing peace of mind. Cost is a secondary issue. Burnish your strategic value proposition, not your price-lists.

And the one corporate resolution you must make and keep: Revisit (or create) a comprehensive disaster recovery plan. You’re in the business of fixing disasters. Don’t let one take you down.

Best wishes for 2009!

Failure Demand

There’s a depressing fad in our industry: We publicly boast about how we go beyond the call of duty when a gaffe is uncovered, refunding money, fixing things free of charge and so on. Indeed, many advertise their plans to redress wrongs in advance. I don’t understand why we think the public will be better disposed towards us just because we freely acknowledge our industry’s imperfections. This is not Hollywood or politics. Serving people who have suffered a property loss is serious business. Shaky standards, focussing on fixes instead of flawless service, and Teflon-coated accountabilities aren’t going to endear anyone to their chosen markets.

Professional standards aside, there are other issues hidden in unreliable service. Here’s a look at a problem that eats into resource expenditure and professional reputation like no other. This is the demand on resources caused by an organisation’s own failures, or failure demand.

Contractors rely on customers to hire them for services. Typically, the contractor gets a call from an adjuster; someone records the details (location, contact numbers, and so on) of the damaged property and passes the information to someone to go out and inspect the property and assess the damage; an estimate is created. Once the estimate is approved, restoration work commences, often with sub-contractors involved, sometimes not; the job is completed, the paperwork is filed, the contractor is paid, subs and other suppliers are paid, and the file is closed.

Now suppose the location details are not recorded properly in the first instance or someone fails to show up at the agreed time. Suppose the estimate is incomplete or is challenged by the adjuster. Suppose the subs don’t show up on time. Suppose the materials’ order is inaccurate. Suppose there are defects in the work performed. Suppose the site isn’t cleaned up properly at the end of the job. Suppose the subs don’t send in accurate invoices. Suppose the contractor’s back office doesn’t send properly documented final invoices to the insurance company within an agreed time frame.

How often does one or more of the failures described above occur? My guess, based on years of observation, is 95% of claims contain one or more of these failures. An organisation may pride itself on correcting its mistakes every time they occur but they are eating up resources in managing failure demand. Consider this: How much time do you spend dealing with issues that arise solely because your processes are incomplete, inadequate, inappropriate, or poorly embedded in your organisation? Track calls made to you and record the percentage that relate to failure demand. Check the list for repetition. You will likely see the same issues appearing time after time.

A high level of failure demand is a major reason that adjusters avoid a contractor. It’s an incredibly wasteful way to run a business and when combined with a cheerful “we fix our faults” attitude, it’s a recipe for disaster. There is often a horrible attitude that poor standards are defensible as long as an organisation fesses up and fix their faults. Not so! Every occurrence of failure demand erodes profits directly (by consuming resources) or indirectly (by way of reduced confidence levels in the organisation). Let’s be clear: There is nothing wrong with placating an irate customer. One has to remedy their failures. However, please don’t be smug or nonchalant about it. There is no excuse for a professional to fail. They are paid to perform perfectly. Their covenant with the customer is to deliver every promise contained in their marketing material. Flawless customer service is not a privilege, it’s a right!

The true professional treats failure like poverty – there’s no disgrace in it but it’s best avoided and never trumpeted.

Shotgun or Rifle?

How often has a cold-caller approached you with, “I have a product that will wow you!”? How often has this verbal spamming tactic led to a sale? I expect that your answers are ‘often’ and ‘never’.

I can’t begin to count the number of times I have observed contractors marketing their firms when vying for a spot on a vendor program. They will enthuse about their business experience, their national reach, their certified experts, their incredible software, their ability to service the quirkiest customer, their loyal staff, their temperature-controlled storage facility, their fleet of well-equipped trucks, and their drying equipment. The barrage concludes with a reference to difficult claims where they saved the insurer thousands of dollars despite working with a gormless adjuster. The shtick ends when two copies of a plastic-covered spiral bound booklet containing a PowerPoint presentation full of fuzzy photos slide across your desk.  This is your cue to do jubilant back flips straight into the contractor’s wallet.

Then there are the less pushy types that call at odd hours every two weeks and leave cryptic voicemails saying they have spare capacity and are willing to take on some more work and they have 35 years of experience in wrought iron railings.

Every marketing guru on the planet will tell you: Know your customer. Make sure the value you sell responds to customer needs that may change from customer to customer. Don’t assume your entire market has a set of needs that correspond exactly to what you want to sell. Be customer-specific. Don’t deliver the same message to everyone. Position yourself to provide specific, measurable value to each customer in ways distinct from your competition. Don’t use a shotgun where a rifle is needed.

Here’s a 10-step primer:

1. Dissect the competition: What drives your most successful competitor? What ruined failed competitors?
2. Know the value of your target markets: What do they spend in your main market? What will they spend in the future?
3. Articulate your strengths: What do you bring to the table? If you can’t identify anything meaningful, take up another profession.
4. Be flexible: Be prepared to work on aligning your key strengths with your target markets.
5. Zero in on compatibility: Don’t sell on price to a service-driven insurer or vice versa.
6. Get your business processes aligned with your value proposition: Make sure you can really support this compatibility. Develop a relevant common service platform. Don’t expect to get away with Hyundai processes for Cadillac services
7. Be consistent: Once you’ve developed a common service platform, make sure it works 100% of the time.
8. Market that consistency: If it works, flaunt it.
9. Be real: Deliver on your promises from the top down. Every employee is accountable to provide flawless service to every customer every time. Make no exceptions.
10. Measure the results: Don’t just say you’re good. Prove it. Be transparent with the results of your service.

Only by aiming your strengths at a customer’s needs will you succeed in delivering true value; research your market thoroughly; don’t try to be all things to all markets; blow away the competition.

The Price isn’t Right!

Many businesses harbour delusions of trouncing their bigger competitors on price. Let us get this said up-front: Competing on price alone is suicidal for smaller enterprises.

A major misconception is the notion that price alone drives business competition. Yet think about the last time you shopped for an SUV. Think about the last time you bought anything with a designer label. Those products exist even though they buck the low-price trend. In fact, those products flourish because they are expensive. Instead of lower prices, they offer lavish after-sale service, a superior shopping experience, personalised service, carry greater cachet, or have a reduced risk of defect.

If you think, “Those products have nothing in common with the crazy market I operate in – no adjusters, no manipulative insurers, no demanding policyholders, and no complicated software. Heck, my services have been marginalised to the status of a commodity,” you are wrong. They all have their own version of your competitive problems. No, the reason they flourish is that they have made a choice. They have chosen to lose on price leadership but to win on differentiation. 

Consider the logic of this statement: There can be just one price leader in the market (it doesn’t matter whether this is a local or regional or national market). This leader is usually the biggest player – think Wal-Mart. The business principle behind the size advantage is simple – they can distribute fixed costs over more units than anyone else and thus charge a lower unit price.

Let’s take a look at those big guys – the cost leaders. They’re very similar to each other: large pyramids, rigid controls, big on status quo, heavy on reporting, not a heck of a lot of innovation going on.

Now think about those expensive brands I referred to earlier – the ones that chose the path of differentiation. Novelty and modernisation drives them. They don’t want the whole enchilada. They spend on finding new ways of servicing their chosen market segments. The secret is getting fewer customers to recognize a difference that is worth paying for.

“OK,” you say, “that’s all well and good when it comes to fancy goods but our customers don’t want to pay big bucks for Cadillac service. We live in the real world.” You might as well grab a live wire and dive into a pool.

Competing on price makes you a sitting duck. Every one of you has had a price-related headache with an adjuster along the lines of “You’ve overcharged. I’m going to knock 15% off your final invoice or else my supervisor will (insert violent action) my (insert body part).” All you can do is cry into your handkerchief and maybe charge the next job a bit higher to make up the “loss.”

Dry your eyes. There is a simple solution. All you need is a magnifying glass and a shot of sodium thiopental (that’s “truth serum” in case you’re not a Schwarzenegger or ‘Kill Bill’ fan). Here’s how it all comes together:

Use the magnifying glass to scrutinise your organisation’s capabilities and determine how you deploy these capabilities. Look deep. Here are a few cost-killers that force your prices up:

1. Are you a mitigation expert moonlighting as a restoration contractor?
2. Are you a residential loss virtuoso handling an abundance of commercial business?
3. How long do you wait at your local building materials store for service? Queues are your retailer’s way of telling you they see their employees to be more valuable than yours. Can you do anything about this? Have you tried?
4. How many times have you revised a job estimate because you and the adjuster never agreed a scope at the outset?
5. How often do you go back to a job to tie up loose ends (sometimes something as silly as cleaning up cigarette butts and coffee cups)?
6. How often are your invoices returned because the paperwork is incomplete?
7. How often do matters escalate to you because someone down the line didn’t answer a customer’s calls?

Now the truth serum: Do you have strategies, systems, and a structure that supports the kind of losses you actually handle? Are you actively identifying and managing your business sources, your target market, your supply chain, and your available resources? Of course not! Life isn’t that simple. You take what you can get or you don’t make a living.

Take that magnifying glass out again. This time take a close look at your customer (identifying your true customer is the subject of a later posting – for now we’ll assume it’s your favourite insurance company).

Now shoot that serum again. Do you know which of your products, services, and processes that customer values the most? Have you actually sat down and discussed their needs? Do your customer surveys elicit only the good stuff (to put into brochures or on websites)? Do you dig deep enough?

Now take a look at the other end of the business chain – your suppliers. Do they know what services and products you value? Have they actually sat down with you and discussed your needs? Are they doing positive things to meet your needs?

You know the axiom ‘if you’re not measuring it, you can’t manage it.’

So, assemble all the information you can – but make sure it’s real, that it’s specific, that it’s current. Yank out the magnifying glass; take a close look at the data. Pump in the serum. Are you really serving your customer? Is your supply chain serving you?

Assuming you’re still on your feet, sit down and list all the value-creating opportunities you’ve identified. There may be just one or two. There may be dozens. Work out a way to attain these opportunities in every single action and statement you and your employees do and say. Then play ‘pass it forward’ and get your supply chain on the same wavelength.

You know the axiom ‘better to be a master of one trade than a jackass at many’. That one plays right across the entire supply chain. Think hard about this.

Destroy all thoughts of ‘nearly right’ and ‘good enough’. Excellence in everything is paramount. Get your processes aligned so that you breed value creation. Embed systems to monitor how value-driving processes work and reward the people who make them work.

As a business owner or business manager (same responsibilities), your #1 job is to create recognisable, proprietary value. That is, processes, services, or systems that your customers (not you!) acknowledge set you apart from your competitors.

Higher priced businesses who deliver better value will defeat lower priced competitors who don’t every time. You can bet your life on that.

Are Bottlenecks Choking You?

The setting: A major storm hits a major city bringing twelve hours of heavy rainfall.

The result: Contractors’ phones are ringing off the hook for the next 10 days.

The effect: Your project managers and estimators gallop in all directions for three months, your paperwork piles up; four months later, you have paid most of your subs and materials suppliers and your line of credit goes into overdrive. Five months later, you’re still sending out your invoices for jobs completed months earlier. Seven months later, you’re still chasing outstanding payments and your accountant makes crazy eyes every time he sees you.

You are the victim of a process bottleneck.

Simply put, a bottleneck in a process occurs when incoming demand exceeds output capacity. There are two types of bottlenecks:

• Short-term – triggered by temporary events like employees going on sick leave or vacation
• Long-term – caused by faulty processes – often most evident at month-end or other recurring cycle

Both varieties cost you in lost revenue, sub-standard service (see Failure Demand), dissatisfied customers, and stressed employees. You can’t do much to avoid short-term bottlenecks; however, you can moderate their effect with proper planning (staggered vacations, backup employees). Long-term bottlenecks require a more robust solution.

First, though, how do you identify a bottleneck? They’re sometimes difficult to spot in a business process. They’re often impossible to spot when you’re the cause. Think about something in your routine (daily, weekly, monthly) that consistently causes you stress. Some indicators that point to the presence of a bottleneck are

• Delays: For example, the gap between completing a job and sending out your invoice exceeds 5 days
• Backlog: Piles of paperwork related to work completed accumulating on desks (possibly yours)
• Friction: Stressful relationships within an organisation caused by questionable deadlines

A common cause of bottlenecks is superfluous levels of supervision. This occurs most often in organisations that have grown from one-man operations to something bigger. There is an inherent desire for the owner/manager to approve everything even though there’s no actual need for this. Giving up ‘control’ in such situations isn’t easy but is always beneficial. The manager gives up a pointless task and the employee gains confidence from the new accountability and trust.

There are several tools to help you analyse the situation. Process flowcharts are one of the easiest ways to identify bottlenecks. By breaking down tasks, you can easily spot where pileups are likely to occur. The key is to fully dissect every component and then work out which activities add value and which ones don’t. It often requires resolve to acknowledge and drop a long-standing but value-eroding task.

All analysis tools help bring your attention to the root cause of the issue. In a surprising number of cases, the solution requires a relatively simple correction to be made in your process. This highlights a major flaw with many processes – they can hide bottlenecks quite effectively because once in place, a process is seldom reviewed, even when outputs are clearly deteriorating. So, remember to review all your processes as your organization evolves or else you risk throttling your business’s full potential to prosper.