AlastairThomson.com

If there’s one expression which immediately makes me think “Oh, lordy, what incredibly dumb thing have they just done?”, it’s this:

“Look how much I saved!”

Now, just in case you think I’ve had some sort of seizure, saving money isn’t a bad idea in itself. As a Scottish accountant who has lived in Yorkshire for 30 years, I appreciate saving money every bit as much as you would expect someone with that background to appreciate it.

The problem comes when someone leads with “look how much I saved!” and not with, for example, “look at how much better we can serve our customers – and it’s extremely cost-effective” or “look at how much our quality has improved as a result of this little tweak to our production process – and it doesn’t cost as much as you think, if anything we make a saving overall”.

“Look how much I saved!” (and yes, it always seems to come with an exclamation mark) is an almost guaranteed sign that what I call dumb cost cutting has just taken place.

Dumb cost cutting is a penny-wise, pound-foolish approach to reducing costs which is remarkably common in organisations which should know better. And while it’s especially prevalent in the public sector, because there’s almost nothing in our universe dumber than the average politician, many organisations in the private sector are also deeply wedded to the sort of short-term dumb thinking that ends up doing more harm than good.

Sadly, there are times when an organisation has to slash and burn. When its very survival is at stake, for example.

But, on the assumption that your organisation is being run by intelligent, hard-working people, those occasions should be rare to non-existent. (If they’re not, you might want to question whether those two pre-qualifying conditions have been met before resorting to dumb cost cutting as the solution to your problems.)

Dumb cost cutting

Before we get into what to do instead, what is dumb cost cutting, and why should you move heaven and earth to avoid it?

It’s very simple to spot dumb cost cutting. That involves taking everything you do and trying to do it cheaper.

It’s not that becoming more cost-effective is a bad thing in itself. You should absolutely be trying to do that.

But when your only goal is “take what we do now and do it cheaper”, you make a number of fundamental errors which are likely to come back to haunt you.

These fundamental errors include: imagining that the only reason your business struggles to make money is because your input costs aren’t low enough; that there is no better process to produce whatever you produce than the way you do it now; and that people only buy products and services like the ones you produce because they are cheap.

If those statements were true: you wouldn’t need a sales team or a website because your products would sell themselves; the Japanese car industry would never have worked out how to out-compete Detroit on price, quality, and reliability; and nobody would ever buy a $2,000 handbag.

So, hopefully we can agree that, since none of those initial statements are accurate reflections of reality, cheapness alone should not be the only guiding factor for making decisions in your business.

Of course cost should be a factor in your business decisions. It just probably shouldn’t be the only factor – other factors are at least as important, possibly more so.

It’s still my favourite example of dumb cost cutting, but just to illustrate the point, I used to work somewhere that dramatically slashed their marketing costs one year and couldn’t work out why, the following year, they had no customers.

There are many things they could, and perhaps should, have done with their marketing budget to make it more effective, but given a choice between saving 5-figures in cost and losing 7-figures in annual revenue, I know which decision I’d be taking.

At the moment, a popular dumb cost cutting technique is to replace people with AI, even though AI is generally terrible at any human-facing activities. So unless you only sell to internet bots, you might want to pay especially close attention during the next section.

How to manage your cost base better

There are three simple ways to manage your cost base better that you should be thinking about whenever you feel the need to reduce costs inside your organisation.

1-Task vs outcome

One of the sad truths about dumb cost cutting is that, at least at a superficial level, it sounds like it works. Even though it usually doesn’t.

And one of the primary reasons it sounds like it works is because what I call “an engineering mindset” has taken root in most organisations. You’ll recognise this – it’s when you take a problem and break it down into its component parts to work out what’s gone wrong, then fix the bit that’s broken to miraculously return everything to the way it should be.

Now, if you’re an engineer solving an engineering problem, this is a perfectly reasonable strategy.

In most other areas it’s less helpful. That’s largely because of a subtlety in the engineering mindset which isn’t carried over to non-engineering applications.

Think of it like this. Every single component in a new BMW can be bought more cheaply than whatever BMW pay for it now. Every single one. I absolutely guarantee it.

However, if BMW replaced all the disk pads in their braking systems with an inferior (but cheaper!) option which meant hundreds more BMWs were involved in accidents the following year, I can guarantee BMW would switch back to their original, more expensive, brake pads pretty darned quickly.

That’s because BMW know that, by and large, people who buy expensive cars tend to avoid models which are more likely to burst into flames than other comparable models.

So anything your business buys, it can probably buy cheaper if you put in the work.

But you don’t just want “cheaper” if you want a sustainable business. You also want whatever your equivalent is of “make sure our cars don’t skid off the road and burst into flames”.

Everything is a trade-off. And where there’s a trade-off to be made, you should always avoid the “bursting into flames” option even if you could save a couple of quid somehow buying an inferior substitute.

2- Customer experience

Most organisations are cocooned inside their own little world. People think about “how to improve their absence statistics” or “how to hit 7.0 on their NPS score”. People build careers on being able to do those sorts of things.

However, when you’re doing something like that, you’re doing it to satisfy an internal driver – your boss, the board, some industry league tables, or something else.

Now, there’s nothing inherently wrong with any of those objectives. All things being equal, you should absolutely be trying to satisfy those objectives too.

However, all objectives like those assume the role of a customer in the process is irrelevant.

I’ve always found that peculiar.

Last time I checked, only customers give businesses the money they depend on to survive and thrive. So your real objective is to provide a service that’s as close to perfection as possible in your customers’ eyes, whatever anyone inside your organisation thinks.

And I can guarantee you that not a single one of your customers cares about your absence statistics, your NPS score, or how many of your KPIs are green on the KPI dashboard this month.

In most organisations I’ve worked at in the past, vastly more time is given up to managing absence statistics, or hauling people over the coals for not having enough green KPIs on their reporting dashboard, than is devoted to finding out what customers really want and delivering that to them.

That doesn’t mean going overboard and spending $1,000 to sell something a customer pays $500 for. You need to keep it in proportion, but that’s not usually a problem – someone buying a $5 handbag normally has an entirely different set of expectations than someone buying a $2,000 handbag.

Manage your business like you sell $5 handbags, and I can guarantee that soon you won’t sell any $2,000 handbags.

And, indeed, vice versa.

Neither is inherently right or wrong, but those are two entirely different customer experiences, which should be reflected appropriately in your cost structure, because they tap into two entirely different customer mindsets.

By and large, people who buy $5 handbags will be delighted if you start offering $4 handbags.

Whereas the $2,000 handbag brigade will be less inclined to buy another one if you start selling $1,000 handbags. They would much rather you developed a $3,000 handbag so their $2,000 handbag acquires some of the higher social cachet of its more expensive stablemate.

Neither is right or wrong, but you need to be really clear which customer experience you’re setting out to satisfy. Random dumb cost cutting in the wrong place is likely to cause more harm than good.

3- Build value vs cut cost

Most important of all, dumb cost cutting focuses on only one part of the equation. The cost of running your business.

Yet how much your business is worth depends on the value it generates not the cost of running it.

Imagine two businesses in the same sector. They sell an identical number of units every year at an identical gross margin. The only difference is that one business sells their products at half the price of the other one.

Business A has $1m in sales, $500k in costs, for a gross margin of $500k.

Business B has $2m in sales, $1m in costs, and a gross margin of $1m.

All things being equal, if they went up for sale at the same time, Business B will be worth at least twice as much as Business A (possibly more), even though they sell the same number of units of the same product at an identical gross margin.

Given a choice, which of those two businesses would you want to be running?

Many – possibly too many – businesses think they are in the cost minimisation game.

Which is unfortunate, because businesses are actually in the value maximisation game.

And although that sounds like much the same thing, it isn’t.

When you think you’re in the cost minimisation game, one of your underlying assumptions is that nobody will pay more for your product or service than whatever they pay now.

Unless you’re selling Rolls-Royces, Hermes scarves, or Hollywood mansions, that’s unlikely to be true.

The question you really need to ask is what additional service or feature can you add to what you do now which, from a customer perspective, will add value to them, and which you can deliver at a cost lower than the additional value you deliver at present.

You’ll develop a more valuable business in the process – and ironically do so by charging customers more, not by cutting costs.

What’s more, your customers will be happy to pay more in return for you delivering much more value for them, even though it costs more than they were paying before.

It really is a win-win when you switch your mindset from cost minimisation to value maximisation. It’s a win for you, and it’s a win for your customers.

Go on, try it sometime. You might be pleasantly surprised at the results.

When you’re trying to assess how a business really sees the world, you’ve got two choices.

You can pour through every page on their website, and check out all their publicly available strategy documents, covering things like their commitments to people, customers, and product quality.

Or you can visit them and ask to go to the toilet.

The first of these will tell you almost nothing. That’s mostly PR puffery which will tend to gloss over any difficult areas and whitewash and/or greenwash their company activities at every turn.

(And, before you say it, AI won’t help. It’ll just summarise the thousands of lines of puffery to the standard of a moderately-intelligent 8-year-old. And I can save you the bother – they all say customers come first, that their people are their most important asset, and that they are responsible corporate citizens who wouldn’t dream of doing anything to harm the environment.)

The second strategy tells you everything.

I used to work in the manufacturing sector, and when I visited suppliers and potential suppliers’ factories, I always made an excuse halfway through the factory tour to nip to the toilet on the shop floor.

What a company really thinks about their people is basically the conditions you find in there.

And what they really think about their people will manifest itself in how much their people are likely to care about the products they would be making for us.

And how much people cared about the products they were making for us directly determined the quality of our own products, and thereby the quality and service we could give to our customers in turn.

It’s a strategy that never failed.

Clean, decently-furnished, well-cared-for toilets on the factory floor always translated into “Grade A Supplier”.

Along the way, I may have gained a reputation as the man with the weakest bladder in the printing industry, but that seemed like a small price to pay at the time…

It’s more difficult with customers

Most businesses aren’t stupid.

There’s usually a big difference between customer toilets, imbued with the gentle fragrances of the Himalayas and fully-stocked with soft towels made from 500 thread count Egyptian cotton, and their smelly, grease-encrusted, graffiti-covered equivalents on the shop floor.

Most businesses will put their best foot forward with a customer, because they are the people bringing money into the business.

Which is why I had to manufacture an excuse for a shop-floor toilet visit to see what was really going on in our suppliers’ factories.

Generally, though, businesses are successful in maintaining the divide between the “front of house” and the “backstage” elements of their business. And not just in how they manage their toilet facilities.

So, while it’s rare I come across this in the wild, finding a business whose customer toilets are in a complete state is pretty rare. They might not care about their workforce in the slightest, but most companies will at least pretend to care about their customers.

Now, that’s not to get all shirty about those days when everything has gone wrong inside a business and, for whatever reason, the customer toilets are in a complete state and everyone inside the business is horrified and endlessly apologetic about the situation.

There, but for the grace of God, go us all.

I tend not to get too judge-y about isolated incidents.

But there’s a café not far from me – part of a nationwide chain – which always puzzles me. Their complete lack of concern for their customers over an extended period of time is so pronounced that I’ve developed a mild fascination with the place.

At least 18 months

This has been going on for at least 18 months but, one weekend just before Christmas, it took a turn for the worse. Something I wasn’t sure was even possible.

For about 18 months, the soap dispenser in the customer toilet has been broken. It was one of those clear plastic containers that is screwed to the tiles next to the sink. You push a button at the bottom of the container to release a dose of liquid soap when you want to wash your hands. You know the kind of thing, I’m sure.

Now, this café isn’t somewhere I go regularly out of choice, due in large part to the state of their toilets, but also because about half the times I go there, they make my flat white with semi-skimmed milk instead of full-fat milk, thereby undermining one of the most fundamental laws of the universe. (Although it’s also possible I’m a little pernickety about the way people make my coffee…)

It is, however, particularly convenient for a place I do visit semi-regularly. So when I was out and about just before Christmas and felt the need for both a restorative flat white and a brief stop to relieve the pressure building up on my bladder, this particular café was the most convenient option.

Not expecting much, I nipped to the toilet, where the soap dispenser has been broken for 18 months. The usual ultra-cheap pump-action bottle of handwash placed next to the tap as usual, although this time with no handwash actually in it…so I guess nobody had paid this bathroom the slightest bit of attention for hours, even though they had a lot of staff on and the café itself wasn’t that busy.

The screws which used to be there to support the old, broken soap dispenser were still there, though, sticking out of the tiles.

However, in today’s little twist, it turned out that the hand dryer was now broken too and a roll of that blue paper roll they use in catering had been placed on the floor next to the toilet for customers to dry their hands with.

I don’t know about you, but even allowing for the fact that emergencies happen, of all the places I might put hand-drying paper in the customer facilities, right next to the toilet is not one of them.

Having thoughtfully put in some paper towel for hand drying, however, nobody in this nationwide chain thought it might be a good idea to also have somewhere to dispose of the paper after it had been used to dry people’s hands.

So, piled up in the corner of these customer toilets was a small mountain of discarded, used blue roll, again giving the distinct impression that no member of staff in this café had as much as popped their head around the door of the customer toilets for at least a couple of hours.

I very quickly got about my business…whilst touching nothing I didn’t absolutely have to…and dried my hands on a paper napkin from another café chain I happened to have in my coat pocket. I took that napkin with me and dropped it into a bin outside, then kept on moving.

There was no way I was getting a coffee from that place after experiencing what they really thought about their customers.

The irony

The irony with organisations like this is that they think looking after customers is an overhead cost to be minimised, when (a) usually it costs little or nothing anyway and (b) it’s actually a great strategy to drive revenue growth with a phenomenal RoI.

All you’ve got to do is care. Even just a little.

The cost of fixing that soap dispenser 18 months ago? I don’t know – £50…£100?

Not much however you look at it. But they’ve lost at least £50 in potential sales since just from me as I’ve stopped visiting this coffee shop when I’m in the neighbourhood. It’s become a place I actively avoid unless I have no choice, whether for caffeine-related or bladder-related reasons.

If just one other person felt the same way, on the cost of fixing that soap dispenser, they’re making a 50% Year 1 RoI. That is a level of return you won’t find from many other investments nowadays.

But more than that, my experience is that the people who can’t get the little things right rarely get the big things right.

So, even though this café offers their chain’s usual variety of food options, I never buy food there and only buy my coffee in a takeaway cup.

An establishment that has as casual an approach to the state of their customer toilets is unlikely to be fastidious about their food hygiene standards. Or indeed whether or not they use whole fat milk in their flat whites. The overall impression given by this place is that they are people who just don’t care about their customers.

Now, I’m sure that because they are part of a national chain, the local staff have to get approval from someone to spend money to fix soap dispensers, and similar things. Which is fine – for the sake of a week or two, I’d understand. But after 18 months, either the local staff haven’t cared enough to raise the issue or the national chain’s managers haven’t cared enough to spend £50 for their customers.

Doesn’t really matter which one it is. Neither option gives me a warm and fuzzy feeling or makes me want to spend my money there.

But I’m sure, overall, this outlet must do well enough financially that nobody from head office wants to close it down. There’s limited local competition (the nearest similar establishment is a couple of miles away) so they can, to some extent, milk that for as long as that advantage exists.

However, if another coffee shop chain gets the OK to put an outlet a few hundred yards away, and that chain offers clean toilets and flat whites made reliably with full-fat milk, then, firstly, I’m going to stop there vastly more often than I currently visit the café with the broken-down toilets.

I’ll end up giving them more money just because I’ll go there more often. I might also buy some food from them as well, further boosting their takings. And I probably won’t be the only person.

But, more to the point, what is the cost of keeping your customer toilets at least moderately clean over and above the cost of fixing a soap dispenser?

Effectively nothing. All it takes is for the store manager or a member of staff to care just a little and get things sorted out. Sure, it might take a couple of minutes every now and again to clean the toilets, but the staff are already there and being paid a straight salary whether they do nothing or clean the toilets, so why not clean the toilets?

And it’s cost-effective too. Fixing the soap dispenser or the hand dryer is a one-off cost, but then it means you don’t need to think about those things from that point onwards. The alternative is that part of your intellectual bandwith and a couple of minutes here and there needs to be devoted to sorting out the toilets when, if the hand dryer and soap dispenser are fixed, you don’t need to spend that time or mental energy at all.

That’s why I find it so puzzling when people don’t look after the small details.

In literature, they eyes might be the window to the soul.

But, when it comes to a customer experience, the toilets are the window to how that company really thinks about them.

Decide on the maintenance schedule for your soap dispensers and hand dryers accordingly. Little things really do mean a lot…in your customers’ eyes.

Who has the most important set of eyes in your business?

The board?

The CEO?

The unions?

The workforce?

Your longest-serving employee?

Nope. None of the above.

It’s your customers.

You see, you might have none of the above things…or you might have a woefully incompetent incarnation of one or more of them…but as long as enough customers willingly hand over their money, you’ll have a successful business, no matter what else is going on around you.

Now, at some level, you’re probably nodding along here.

“Of course, customers always come first!” you’re probably saying to yourself.

But ask yourself…do they really?

Because if they did, you’d probably design your systems entirely differently.

You certainly wouldn’t do this…

At the garage

My car needed a little trip to the garage recently. Nothing major – a sensor which was bleeping for no reason and a tiny scratch to the paintwork, about an inch long, which I wanted to be professionally patched-up rather than risking me ruining the bodywork. (I am terminally clumsy.)

I’ve driven Fords for years – when you’re a larger-than-average sized human, Fords are great. Even tiny Fords fit me in nicely but, perhaps surprisingly (to me at least), a huge Mercedes can be a bit of a squeeze. So I love my Fords.

And, for over 15 years, I’ve taken the cars I’ve owned to my nearest main dealer for servicing. They’ve been part of a nationwide chain for most of that time but, until recently, each dealer ran more or less independently.

However I could tell this dealer has been through a few changes when I tried to get my car looked at recently. And whoever was responsible for those changes has clearly never met a customer, or even thought very much about them.

I called up the Service Desk – a group of people I’ve spoken to often over the past 15 years or so. They’re all great people, and very helpful.

However I was diverted to a call centre hundreds of miles away rather than having the people in the local dealer who would do the work on my car pick up the call.

I’m sure someone did the analytics on this and decided this was more efficient somehow, although I suspect it isn’t really. But, at that stage, I was prepared to go with it.

I explained my problem and the lady on the phone said two interesting things.

Firstly, she said I’d need to pay to get someone to give me a quote for fixing my car, and I’d need to leave the car with them all day for them to do that as it was impossible for someone to take a look while I waited in the dealership for 20 minutes.

This was a new one on me – what normally happens is I take my car to the dealership, one of the mechanics spends 2 minutes having a quick look at the problem and someone on the service desk costs of the time and the parts based on what the mechanic tells them.

I arrange to bring the car back a few days later when the parts turn up, the mechanic fixes the car, and I hand over my credit card.

Since the dawn of time, that’s been how these transactions have worked in every garage I’ve ever taken a car of any make to. But not any more, it seems.

So I was a little irritated. But not nearly as irritated as I was by what she said next.

That’s because the call centre agent, having found a time to book my car in for someone to charge me for the privilege of telling me how much it will cost to fix, then told me that I’d have to call a different number to get someone to look at the bodywork – the appointment she had just arranged was purely to check out the sensor.

It gets worse

“Well, couldn’t they just take a quick look while the car is in for the sensor check I’m already paying for?” I asked.

“No,” she replied. “Our bodywork service is now a separate company within the group so I can’t access their booking system. You’ll have to call them directly.”

“So,” I clarified, “I’m going to have to drop my car off with you for the entire day so you can charge me to give me a quote to fix my sensor. And then I’m going to have to bring it back another day to leave my car with the body shop people so they can take a look at it and charge me for a quote too?”

“Yes, that’s our system,” she replied. “It’s standard practice.” (I mean, it hadn’t been standard practice for the 15 years prior to that, but I tried my best to stay calm. It wasn’t the call centre operator’s fault she was working for idiots.)

I tried again. “You want me – at no small inconvenience to my ability to get to work – to let the dealership have my car for two days in quick succession, just so you can charge me for a quote, because it’s impossible for you to arrange for me to get my car looked at by two different people, both of whom work for your company, on the same day?”

“I wouldn’t put it quite like that,” she said, “but there’s nothing I can do. That’s our system. I can’t commit the body shop people to take a look at your car on the same day. You’ll have to take that up with them.”

“This makes no sense,” I responded. “I’ve been to this dealer dozens of times – the body shop bay is literally right next to the service bay. Someone could shout from one to the other and they’ll be able to hear – is it really impossible to coordinate this a little better? I could take one day off work to have my car looked at, but you’re asking me to take two days holiday here just to get my car checked out – and presumably a third day when you’re actually going to fix it. Isn’t there a little bit of flexibility possible?”

“I tell you what,” she continued, “when you speak to the body shop people, if they can’t see your car on the same day as I’ve booked for you, you can always call me back and I’ll get your sensor appointment switched to the same day as your body shop appointment.”

I could tell she was trying her hardest to help, within the confines of the system, but this was completely mad.

I politely told her I’d need to check my diary and called her back, and ended the call.

I never called her back, of course. Instead I called up another Ford dealer, a little further away, and asked them the same question.

“No problem at all, they responded. When would you like to bring your car in and I’ll get both of those problems looked at for you?”

To be fair to the original main dealer, that’s exactly the conversation I used to be able to have with their service desk directly, before someone on an “efficiency drive” decided to make everything worse for their customers.

So, 10 days later, I took my car to the slightly further away dealer, who did a lovely job of looking after my car. I’ve had it back since for a regular service as well and been very pleased with the service I received from them.

I get it…but I also don’t get it

At one level, I get it.

Consolidating your calls in a call centre might well seem more efficient, on some level. But that presupposes that the people in your call centre are better placed to solve your customers’ problems than someone on the ground at the dealership would be.

Which, in turn, means giving them access to the tools necessary to ensure a seamless customer experience, such as sharing both the service booking system and the body shop booking system with your call centre staff.

I also get why a motor dealer might want to organise different parts of their business into different operating entities, so having the body shop operations in a different legal entity to the “selling cars” and the “servicing cars” businesses, respectively, makes some sort of sense. That way they can be clear on the financial contribution each part of the overall business is making.

Although I can’t help feeling that a decent accounting system would solve that problem perfectly well without the additional organisational complexity of working through separate legal entities.

And I’ve always believed in a mantra one of my early bosses used to have: make it easy for your customers to give you money.

If I was designing a system which required my customers to call two separate people and then to potentially call one of them back again to rearrange an appointment, when I would probably, in reality, be speaking to two people at adjacent desks in the same call centre, I’d think I’d completely lost my mind.

However, if I work for a motor dealer, apparently this is all perfectly normal. Standard practice. “It’s our system.”

One thing I’ve learned over the years is that building in complexity means you’re inevitably building in cost – making things more complicated reduces your margins, even if you think you’re increasing them “by being more efficient”.

Think about this.

I used to be able to have a 2-minute phone call with the service desk at the main dealer and get my problem sorted out.

Now I have had one five minute conversation with someone in a call centre, while she explained processes to me that are frankly barking mad. The call takes longer because I can’t quite believe what I’m hearing.

Not only that, but I need to call up a different number to speak with another colleague of hers to get the second part of my problem sorted.

And, potentially, I need to call back the first person to rearrange my first appointment if it doesn’t suit the second group of people to see my car on the same day as the first group of people.

Some genius working for this dealership has turned a simple 2-minute call into two, and potentially three, longer calls because they want to be more efficient?

There is nothing remotely efficient about this process. It’s an abomination, designed by lunatics who have no idea what they are doing.

Guess what happened

The net result of all of this is that, after an exhausting phone call with the first dealer, they are no longer looking after my car after 15 years of giving me a perfectly decent service.

Their operations are less efficient than they were before they started trying to be more efficient.

And they’ve lost a customer who isn’t coming back because his tolerance level for nonsense like this was exceeded by several orders of magnitude in the course of a single phone call.

So Dealer 1 lost every way round.

Dealer 2 has done almost nothing, apart from their service desk answering the phone and being helpful. The cost for them to do that was pretty much zero, and they have already made a stonking profit out of the work they’ve done on my car, which is a phenomenal RoI.

Just from being helpful, and not making their customer do all the work like Dealer 1.

Maybe I’ve reached the age where pretty much everything about the world cheeses me off.

But it’s a long time since I’ve experienced customer service as epically bad as the service I had from the dealer I went to for 15 years, and paid £000s to along the way, just because some clown thought all this palaver made them more efficient.

Ironically, that’s the wrong way round.

If you optimise your operations to give the best possible service to your customers, and cut out all the other nonsense people in your business think ought to happen, you’ll run at a much lower cost than trying to force your organisational will onto your customers.

That’s because, like Newton’s Law about objects in motion being easier to keep moving than to stop, if a customer wants you to X, but you want to do Y, you’ll inevitably incur inefficiencies (and thereby cost) in the process of talking them out of X and talking them into Y.

Sometimes, like this car dealer, you’ll also lose loyal, long-standing customers who aren’t prepared to put up with that level of nonsense.

Either way, forcing your organisational will onto a customer is always…without exception…more expensive than making life easy for your customer is.

Now and again, if you work in a regulated industry, for example, you need to do tell customers what to do for other reasons. Solicitors are required by law to check your identity if you want to buy a property, even though that’s inconvenient at some level for their clients.

But in the absence of a legal requirement, optimise around what’s easiest for your customers and your business automatically becomes more efficient.

Set out to make your business more efficient and, if that means making things harder for your customers, your business automatically becomes less efficient.

That’s why, given a choice, you should always make it easy for customers to give you their money.

There is no more efficient way to run your business.

You’ve probably heard the expression “Ponzi scheme”. Most people have.

And most people equate it with some sort of financial malpractice. But it’s worth digging into the concept a little more deeply so you can recognise one a long way off and take steps to avoid them.

It’s easy to get sucked into a Ponzi-type scheme without realising it. Plenty of smart, intelligent, wealthy people fall victims to them – indeed those are exactly the sort of people a Ponzi scheme needs to attract for it to work.

The problem is that, in general, Ponzi schemes are not promoted as at attempt at large-scale fraud. Most people would run a million miles from that. So the promoters have to be much more subtle.

In today’s article I’ll show you how to spot them and, hopefully, how to avoid them.

Origins

To the surprise of many people, Ponzi schemes are named after a real person – Charles Ponzi, specifically – whose scheme was active in the US during the late 1910s and early 1920s.

We don’t call them Ponzi schemes because Charles Ponzi invented the concept – the concept itself is pretty much as old as time.

But his name ended up being attached to this particular variety of financial fraud because of the scale of his fraud (he cost investors an estimated $20 million in the early !920s – worth 10x or more in today’s money) at a time when the growth of mass media meant the story of his crimes were published to a wide audience.

The mechanics of a Ponzi scheme are relatively simple – although there are a couple of important twists to make it effective at scale.

All promoters do is promise a high return to investors which they pay out of the money new investors subscribe to join the scheme.

To keep this example simple, imagine an investor puts $100 in a scheme which promised a 10% return.

Here, the job of a Ponzi scheme operator is to attract a new investor with another $100, give $10 to the original investor as the promised return on their investment, and pocket the other $90.

Now, the reality is slightly more complicated than that, but at its heart, that’s how a Ponzi scheme works.

Provided you can attract enough new investors, such that you are able to keep paying out the $10 returns to all the prior rounds of investors, everyone is happy. For a while.

As I’m sure will be obvious, there comes a point where fewer new investors can be attracted, relative to the number of people already in the fund, which means there inevitably comes a point when the scheme collapses under its own weight.

While Ponzi scheme operators have 10 new investors for every existing investor, it’s easy enough to pay out the $10s to existing investors and become wealthy on the back of the share of the new investors’ money they keep for themselves.

When those proportions flip and they have one new investor for every 10 existing investors, all of the new $100 investment goes straight back out for cover 10 lots of $10 payments to investors in the earlier rounds.

And if the flow of new investors drops even further, that’s usually the point where the police get called in.

But while a Ponzi scheme in in full flow, the promoter has so much cash they don’t know what to do with it, although buying mansions, fast cars, and having a string of mistresses are all popular options for getting rid of some of it.

And – not that I’m recommending this as an investment strategy – some perfectly innocent, legitimate investors can do quite well out of being in a Ponzi scheme. If you’re an early investor who gets out in mid-scam, before it becomes apparent that the promoter has run off to a country with no extradition treaty, you’ve had a few years of exceptional investment returns plus all your money back.

Whilst a subtle part of the scheme, people getting their money back in the early-to-mid cycle part of a Ponzi scheme is quite an important part of making it seem like a legitimate investment. Without that, the scheme collapses a lot sooner.

And in the early-to-mid cycle, that’s easy enough to do, given the flood of new investors. If a new investor brings $100, and a previous-round investor wants their $100 back, you just give it to them. Provided the proportion of people wanting their money back is low, it’s much better to pay them back and regard that as a cost of doing business, because doing so confers a degree of legitimacy which, in turn, allows you to power ahead and double, triple or 10x the amount of money flowing in.

The two key components

While the mechanics of a Ponzi scheme are, at least conceptually, pretty simple, that’s not usually the hard part of the process (at least for people without a moral compass).

For a really good Ponzi scheme, two distinct elements need to be present:

1-A credible, and legitimate, business idea

Especially in the early days – later on, the momentum of new investors who are hooked on the higher-than-market-rate returns makes this less relevant – you need a business idea that is…or at least appears to be…both credible and legitimate.

Most people won’t knowingly do anything fraudulent or illegal. So Ponzi scheme promoters dress their schemes up with a cloak of legitimacy.

Charles Ponzi’s scheme, for example, was a simple-enough arbitrage play. Without over-complicating the explanation here, the scheme relied on goods being priced differently in two different countries, and shipping them from one to the other to bank a profit.

By way of example, imagine a cabbage in Belgium is worth 10 Euros, but for some reason in the US it’s worth $20 (or about 17 Euros). Provided you can ship cabbages from Belgium to the US for perhaps a Euro or two, you’ve got something that sounds like a decent business. And perfectly legal.

Charles Ponzi’s scheme actually involved postal vouchers, but the principle is much the same.

For the scheme to work at scale, the mechanics of the supposed business opportunity have to be credible and legitimate, as Charles Ponzi’s were initially.

2-The dream

The other key component is the dream. You have to sell investors a dream – and that dream is typically above-market-rate returns with no risk and no downside.

Scheme promoters get extra bonus points if the dream is infinitely scalable. That way, they can position the opportunity as letting a prospective investor in on the ground floor of something that will grow, pretty much without limits, making the investor rich beyond their wildest dreams.

“Look, I’m letting you in on the ground floor here, but when this goes global, your $100 will turn into $1million overnight!”

The dream is important because that provides the motivation to investors so they hand over their cash. Everyone knows they can leave their money in their bank account where it’s pretty safe and they’ll earn a couple of percent a year in interest.

But there’s no dream in that.

Sure, many people will shop around for the best interest rate on their savings, but there are very few people who would describe finding a way to get an extra 0.05%pa on their savings as a dream.

Turning $100 into $1million risk-free and with no downside, though? That’s the sort of dream that opens up a spigot of investor cash.

More than that – it’s the sort of dream where everyone will tell their friends, many of whom will send the promoter their $100s as well.

That’s why, sadly, when Ponzi schemes collapse, as they inevitably all will, they often destroy families and relationships because people don’t easily forgive a well-intentioned, and perfectly innocent, friend’s recommendation to invest in a scheme which ultimately results in all their life savings disappearing into the pockets of a fraudster.

However, a credible and legitimate business idea, ideally which sells a dream, is at the heart of every Ponzi scheme.

Then it’s just promotion

With those elements in place, the only thing that holds a scheme operator back is attracting more and more investors.

So a lot of effort goes into the promotion of the scheme. Not necessarily in selling you the scheme itself – that’s a bit too obvious.

The selling tends to concentrate on the dream. The Ponzi scheme just becomes an easy, obvious way for people to manifest that dream.

That’s one reason why Ponzi scheme operators tend to buy large, impressive houses and fancy cars to boost their business savvy and legitimacy: “Look, I got rich through my cabbage importing scheme, so there’s no reason you can’t do the same.”

Part of it, though, is being able to convince potential investors that the cabbage market, in our example, here can only go up. So even if you’re already running a $100million fund (or, at least, claim to be), investors need to believe it could become a $1billion fund.

At each stage, you need to sell the dream of the next stage otherwise your flow of funds dries up – no sane investor is going to think you’ll be offering above-market returns on a fund that’s worth $100million today, but is going to shrink to $80million in the next 12 months.

So never-ending growth, into the indefinite future, is a key part of the sell.

For the people running our fictional cabbage-arbitrage opportunity, that’s why they start paying medical researchers to run studies proving the health benefits of eating more cabbage. Get someone who works at Harvard to tell the world that eating more cabbage minimises the risks of an early death and cabbage sales are going to spike.

Start promoting recipes for cabbage soup and cabbage muffins through a few celebrity chefs and you’ll get the media buzz going nicely.

Get the researcher on all the major chat shows and you’ll spark a stampede for cabbages at every supermarket in the country, allowing you to prepare a graph for the next round of investors which shows the growth in cabbage consumption going exponential.

Project growth at that rate forward a couple of years and you’re letting people in on a multi-billion-dollar opportunity to arbitrage Belgian cabbage prices by giving you their $100. Given the growth rate, it’s inevitable that your $100 will turn into $1million, entirely risk-free.

After all, just look how steep that line is on the cabbage consumption growth chart!

Over-promising and under-delivering

Sooner or later, Ponzi schemes collapse because they over-promise and under-deliver.

In the end, it’s always because the rate of new money coming in falls to a level where scheme promoters can’t cover the interest payments due, plus the occasional redemption to give an air of legitimacy.

That’s how it collapses, in a mechanical sense, but usually something has happened first to slow up the source of new money.

Taking our fictitious example, I have no idea how many cabbages Belgium could grow in a year, but there obviously come a point where the entire country is nothing but one huge cabbage farm, at which point your supply of 10 Euro Belgian cabbages inevitably dries up.

It also gets to a point where people have tried all the cabbage soup recipes from celebrity chefs and, notwithstanding the supposed health benefits, get tired of eating cabbage three times a day. So cabbage sales in the stores tail off.

In the case of Charles Ponzi himself, some basic arithmetic undid him.

Charles Barron (whose name is still immortalised in the Barron’s financial publishing empire) calculated that, for Ponzi’s scheme to work, there would need to be approximately 6000x the number of postal coupons in the world than were actually in circulation.

Eventually all Ponzi schemes collapse under the weight of their own promises. They all pass a point of no return where the end is mathematically inevitable, so it’s just a matter of time before everyone finds out.

For Ponzi scheme promoters, that’s usually a good time to start researching which countries don’t have extradition treaties with wherever they are, because it’ll either be one of those countries, or jail, that they end up from that point onwards.

The middle eight

The concept of a “middle eight” in songwriting applies just as much to Ponzi schemes.

In songwriting, it’s a change of pace or tempo, signalling a change of scene in some way. It might be where the songwriter slips in a guitar solo or a key change, for example.

In Ponzi schemes it’s a make-or-break moment which appears to threaten the scheme, but which the promoter somehow navigates their way through, managing to continue the scheme – generally with renewed vigour and an even greater inward flow of funds than before that moment of challenge.

In our fictional example, maybe a cargo ship full of Belgian cabbages sinks in mid-Atlantic meaning $millions-worth of sales ending up at the bottom of the ocean.

Every mega-successful Ponzi scheme requires a challenge to be overcome. it’s an essential part of the traditional “hero’s journey” story structure.

Ironically, overcoming that challenge can fire up future investors even more because the events can be spun to claim than a challenge which was overcome demonstrates the solidity and reliability of the scheme itself. It’s a little psychological trick but, for most people, a scheme which has overcome a challenge and survived seems more solid and trustworthy than one which has only ever been selling unicorns and rainbows.

For Charles Ponzi, one of the newspaper articles Charles Barron wrote led to a run on his fund. Ponzi paid out $2million over the course of a few days to investors demanding their money back.

But here’s the key.

Charles Ponzi engaged with the crowd demanding their money back outside his offices. He was polite and civil and sought to reassure investors that everything was fine. Even though some journalist claimed Ponzi’s scheme couldn’t possibly work, he’d got it all wrong. Your money is safe with me, he claimed.

Not everyone believed him, of course. They withdrew their cash anyway.

But due to his skill at working the crowd, re-selling the dream of unimaginable wealth for those who stuck with him, and his willingness to pay out the people who still insisted on refunds as a way of demonstrating how solid his finances were, many of the initially-angry crowd ended up leaving their money in Ponzi’s fund after all.

While this episode was the beginning of the end for Charles Ponzi, he weathered the challenge and made enough people believe in his scheme for him to keep it alive a little while longer.

No matter the precise nature of the scheme, the over-promising and under-delivering piece is at the heart of the eventual collapse of a Ponzi scheme.

But a little wobble at some point in the growth curve, a challenge which is overcome, can become part of the narrative which powers the scheme to the point growth goes vertical.

The denouement

The end usually isn’t pretty.

Leaving aside the police leading people away in handcuffs, the collapse of so many people’s hopes and dreams are the cruellest outcomes for people who often didn’t know better, and whose only crime was to trust people who weren’t worthy of their trust.

The number of times innocent people were lied to, with a straight face, and relieved of every last penny they had, is the tragedy of all Ponzi schemes.

The victims become bystanders in a media circus where hundreds of minutes of television are broadcast and thousands of column inches are written. A media circus which makes the victims feel stupid, angry, misled.

Why did they not spot the signs? How come the smart money got out and they were left holding the baby? If only they’d listened to their sister-in-law who said the whole scheme was fake and would never work!

Except, at the time, the people who lost out were swept along by the enthusiasm of the promoter.

Their apparent bona fides – often demonstrated by paying back early investors to crystallise their $million gains. The seeming legitimacy of their business model. The apparent “vertical growth for ever” possibilities.

The untold riches which awaited the faithful if only they stayed invested in the fund through its occasional little difficulties, and ignored the naysayers who weren’t part of the cult. After all, those people were incapable of seeing the unique genius of the scheme’s promoter.

But, in the end, Ponzi scheme promoters can’t hold back the tide.

Even if they are slick salespeople who can convince investors to stay on-board through occasional bumps in the road, eventually, to use our fictional example, they can’t persuade enough people to eat enough cabbage to keep their scheme on the road. It always comes to a nasty end.

Your best hope is never to drink the Kool-Aid that everyone else is drinking, even when people are telling you it’s inevitable that the whole world will eat nothing but Belgian cabbage five years from now.

Even if researchers from every prestigious university in the world concur that a cabbage-only diet is inevitably the best way forward for mankind, given that it promotes brain function and brings improved health to all.

And even if the scheme’s promoters can line up dozens of people who switched to a cabbage-only diet and can testify to its magical properties. They are likely either to be in on the con, or to be gullible enough to believe almost anything the promoter tells them.

As a business leader, you need to see through the charlatanism and avoid getting swept along by promises of magical, risk-free results.

While that’s not always easy, given all the hype, at least you’ll have a business left at the end of it.

The arrival of the internet brought many advantages. Instant global communications. The ability to work anywhere. Finding books your local bookstore was unlikely to stock.

But the internet brought its fair share of problems too – all manner of cybercrimes which didn’t exist before, and making it fast, simple, and cheap to spread extremist views, for example.

On the whole, the internet is probably a net positive to humanity, but (net-net) only benefits humanity by a fraction of its true potential after you factor in all the negatives. If perfection was represented by 100%, I’d say the negatives accounted for about 80%, meaning humanity was just 20% better off – still a positive outcome overall, but bringing nearly as many disadvantages as advantages.

However there is one feature of the internet which drives me particularly crazy and that’s the need to gamify everything – allocating points, scores, badges, unlocking achievement levels, and all manner of other nonsense.

The business world suffers from a similar problem. A focus on numbers that are easy to track, without a moment’s thought about the real objective.

For example, my real objective in having a Kindle is to learn new things by reading books. However Amazon sends me all manner of regular communications to tell me I’m a “gold level reader”, or whatever standard I’ve reached this week or this month.

I understand why. Amazon has no idea if I’ve understood a single word of what I’ve read, but it’s really easy for them to track when I switch my Kindle on, and how many pages I’ve clicked “next” on.

Many digital businesses think that having scores, or leaderboards, or unlocking new levels keeps people addicted to their product as they want to win more points or get to an even higher level.

Frankly, nothing wants me to engage with something less than a software company sending me seven emails a day telling me I’m just 10 minutes away from unlocking the next level.

And the reason for that is it’s really clear, whenever anyone does this, that they only care about themselves, they have no interest in you as a consumer whatsoever.

Who is likely to benefit from you scoring a few more points on a game? It’s unlikely to be you. But it’s great news for the person selling the game because now they have more “loyal players” than they had before. And that probably bumps you into a different email sequence where they try to sell you even more things than they did when you were a mere silver-level player.

Frankly, if playing that game, or reading another few pages on my Kindle, was the most important thing in my life at that moment, I’d do it anyway. I wouldn’t need a prompt.

The fact that I haven’t means that I have more important things to do, but every tech company behaving like a whiny 3-year-old demanding I play a game with them right this minute or they’ll keep moaning and crying until I do, is profoundly irritating.

Unlike children, of which you’re likely to have a limited number around you at any one time, basically every tech company you have ever interacted with becomes a snivelling, whiny 3-year-old who never shuts up about wanting your attention.

None of us needs any more whiny, needy tech companies in our lives.

It misses the point

Even assuming all this needy whining works, at some level, it misses the point.

“Forcing” loyalty by an array of points, levels, or rewards means that loyalty only lasts for as long as there’s another reward someone wants to win. There is a diminishing returns curve at some point beyond which you’ve offered everything that can reasonably be offered and your attempts to force people into loyalty just tails off.

Or people just get bored of Game A and switch to Game B instead.

In a world where switching costs are essentially zero, as long as they can put up with the needy, whiny emails they’ll get for the rest of their life from the producers of Game A, there is very little downside for people to switch to something different.

Although this often comes as a surprise to the makers of Game A, because they confused a surface level of compliance and an appearance of loyalty with the real thing.

Don’t get me wrong, actual loyalty is a very valuable thing.

But even though it’s easy to track how many pages I read on my Kindle, it doesn’t mean I necessarily feel particularly loyal to Amazon in general or my Kindle in particular. There are other ways I can read books – and, back in the day, at least Waterstones didn’t come round to my house 17 times a week to tell me I’d nearly achieved Gold Level Reader status, so I should read a few more pages tonight rather than whatever I had been planning to do instead.

If anything, I read more books before I got my Kindle than I have since. As someone who travels a lot for work, I just find it easier to slip a Kindle into my pocket than an actual book.

While I’m sure Amazon mistake that for loyalty, that would be a mistake.

The reason I read a lot of books is because I have always been highly intrinsically motivated to read more as a way to learn more. I’m not a “Kindle addict” or even an “Amazon addict”, although I’m sure Amazon thinks I’m both of those things. I’m a book addict and/or a learning addict, which is entirely independent of the device I read my books on or the people who sell me physical books.

And intrinsic motivation is a vastly more valuable thing than the appearance of surface-level, points-based “loyalty”. (In quotes, because it’s nothing of the sort.)

The problem with all points-based systems…and yes, this is a metaphor for your work KPIs too…is that, if it works at all (which it often doesn’t), you are incentivising collecting points, you aren’t incentivising the behaviours you want to see more of.

The truth is, no matter how well you think you’ve designed your systems, it’s more or less impossible to design any system so well that you trigger intrinsic motivation instead of the significantly less valuable surface-level, points-based behaviours. Although admittedly the latter are easier to spot.

The Achilles’ Heel for many organisations is mistaking one for the other. You might be surprised how often that turns out badly.

I learned this the hard way

When I was younger, I had more hair, and I was less cynical. I also used to believe you could use points and targets to incentivise behaviours to a much greater extent than I do now.

Until one day, while I was running a large call centre business.

We were really good at what we did, in a market where customer service standards were generally poor, and I was proud of the business and the people in it.

However, like all large-scale call centre operations, we had an array of targets which represented a “good performance” for our call centre agents, and a regular tracking system to make sure performance was maintained.

One of the most important targets was our average call length. All our costings were based on calls lasting an average of three minutes – a fairly typical call duration at the time for the type of work we did.

And we had one superstar agent who kept his calls tight and was always top of the leaderboard for this KPI. He was so good, we were considering him for promotion to supervisor.

Until we found out why he topped this particular leaderboard.

Part of our systems included regular call auditing, where a couple of supervisors would listen to the recordings of a random selection of calls from agents from other teams and score them against a matrix of factors – how well the agent led the call, whether they displayed good listening skills, how effectively they diagnosed the problem, and so on.

Now, this agent was generally a very good operative, and a nice human being in person. So he tended to score well against those metrics too, making promotion even more likely.

But one of our more experienced supervisors noted something unusual, and went digging.

Her digging got this superstar agent fired.

Ticking the boxes but missing the point

Our superstar agent, let’s call him Kevin, was extremely good at all the things on the matrix. He built rapport, controlled the call well, diagnosed the problem effectively every time.

His recorded calls were often used to show other agents how to do those things.

In a business which prided itself on delivering high levels of customer service, many of the things Kevin did set the standards for others to aspire to.

From the outside, he looked like an exemplary call centre agent, because he not only ticked all the boxes on the performance matrix, he set many of the standards by which other agents were measured.

His call duration stats were the best in the business. And that was on top of all the other things he did so well while handling the calls themselves.

You can see why he was being considered for promotion.

At least, until one of our more experienced supervisors (let’s call her Jill) spotted something.

As part of the normal quality monitoring process, one day Jill was listening to a random selection of call recordings from other teams, which happened to have two calls from Kevin in her sample.

The first call went well, exactly as she expected from someone with Kevin’s reputation.

At least up until about the three minute mark, when the call suddenly cut off mid-sentence while Kevin was talking.

Now, that happened sometimes. It wasn’t unusual for someone’s mobile phone signal to drop out, for example.

But Jill got suspicious when she heard exactly the same thing happen in Kevin’s second call from the same batch.

While calls did drop out occasionally, the odds of it happening twice in the same batch of quality checks were low, especially at the same point in the call, at around the three minute mark.

So Jill dug further and asked for a wider selection of Kevin’s calls.

While most of the calls were fine – and well up to the standard we had come to expect from him when scored against the performance matrix – every call he took which was not getting close to a resolution by the three minute mark mysteriously cut off while Kevin was talking.

With a bit more digging through our systems, it became apparent that what Kevin was doing was preserving his call duration stats by making sure his calls never went much belong three minutes. He just pulled the plug on the calls which were dragging on, to preserve his call duration stats.

Extrinsic vs intrinsic

To be candid, this state of affairs was my fault, ultimately. I had signed off the performance matrix and the review processes. I had thought we had scientifically designed a near-perfect scoring mechanism, entirely appropriate for a business which set so much store by the quality of its customer service.

We put a lot of effort into finding empathetic people who could establish an easy rapport with customers on the phone, and who would move heaven and earth to solve customer problems.

Most of our people were intrinsically motivated to care about our customers and solve their problems, because that’s the sort of people they were.

Even if that meant their call durations occasionally spiked up to six or seven minutes. Because they cared more about the customer than their call stats, if the occasional call took a bit longer they saw the problem through to the end to make sure the customer was happy.

It turned out we’d misjudged Kevin because he was so good at the things on the performance matrix. He was mainly extrinsically motived – that is, he did what he did for the bonuses and the promotion opportunities, not because he cared about our customers.

We mistook a superficial set of statistics as representing the underlying reality of the situation, when, in fact, all those KPIs didn’t accurately indicate the outcomes we wanted at all – an unquestionably first-class approach to customer service.

Putting the phone down on clients with hard-to-solve problems was the absolute antithesis of the business we wanted to be.

So Kevin was fired on the spot.

Not for missing his KPIs – which he hadn’t. He had met or exceeded all of them.

But for not living out the values we really wanted, which was an unswerving dedication to solving customer problems.

We had taken a set of KPIs as a proxy for reality. Kevin taught me that was a mistake.

League tables

While I’m not suggesting for a moment you can run a business without any KPIs, as business leaders it’s important to remember that someone can tick all their KPI boxes and still not be delivering on the business’s mission.

A bit like whether I’m a Kindle Gold Reader this week or not.

If I’m prepared to press “next page” often enough, I can power through enough reading material to achieve any level of Kindle accolade I like.

Somewhere at Amazon somebody gets to tick a box and claim a KPI prize of their own because (they think) they’ve manipulated me into spending more time on my Kindle. In reality, its time I’d have gladly spent anyway, and if I had something more important to do, I wouldn’t have picked up my Kindle in the first place.

So all the gamification was ultimately pointless.

As it is for anyone who isn’t either eight years old or a simpleton. I can forgive 8 year-olds wanting another gold star from their teacher. And simpletons can’t help themselves, so who am I to judge.

But for everyone else, while you can track some KPIs for sure, what you’re really looking for is people who live and breathe your company’s mission.

The question is, given a choice, do your people choose to tick the surface-level KPI boxes or do they take decisions consistent with your mission as a business.

Perhaps paradoxically, one of the main ways to identify what sort of person you’re looking at is an occasional willingness to blow their KPIs out of the water, like the call centre agents who would stay with a call for six or seven minutes instead of putting the phone down after three.

If you’re serious about your mission, occasional KPI “mishaps” should be celebrated and encouraged because, in those fleeting moments, you get to see what someone’s intrinsic motivation really is. The decision point where someone makes a choice to pursue the greater good, in terms of your company’s long-term interests, instead of ticking the box on their KPI sheets.

Yet, in most organisations, doing that would get you fired, because all most organisations do is track the numbers and try to manipulate performance solely through extrinsic motivation – the bonuses, the accolades, the promotions.

Mistaking one for the other, just because all the KPIs are hit, is the biggest disconnect between most organisations and their missions. And, ironically, the biggest reason why customers are less loyal than they were before.

It turns out you can’t gamify your way to success after all.

You only get there by focusing on what really matters, and delivering on that.

And the likelihood of that being a KPI – even a KPI that appears to be measuring the right behaviours, like the NPS (Net Promoter Score) – is pretty much zero.

I’ve always been grateful to Kevin (and even more grateful to Jill) for teaching me a valuable lesson – you can fake your KPIs, but you can’t fake reality.

And of the two, reality matters more if you’re serious about building a business.

The world is full of mysteries.

Why don’t more people find my jokes funny?

Why doesn’t Paul Simon have a Nobel Prize for Literature, like Bob Dylan?

Why can’t Alfa Romeo make slightly more reliable cars so I can post-rationalise buying one?

But one of the biggest mysteries for me is why, given its almost non-existent cost, more businesses don’t leverage the benefits of even pretty basic customer service.

The tragedy is that the bar for customer service is so low, you need to do very little to appear to be twice as good as everyone else.

It’s staggeringly simple, possibly the easiest and lowest-cost way to set yourself apart from the competition. Done well, great customer service will generate a stream of referrals – an astonishingly high proportion of which will turn into customers at pretty much zero cost, if you do it right.

Nowadays, people think “huge expense” when they think “customer service” but that’s only because enough people have been selling non-value adding CRM systems for long enough that people have learned by osmosis to think that looking after customers is expensive and doesn’t work very well.

By and large, that’s because they’ve been doing it wrong.

CRM systems can be helpful in large-scale customer interactions, but many businesses aren’t in that market. It’s amazing what you can do without one – or with a tiny amount of extra effort.

The coffee shop

There’s a coffee shop I visit semi-regularly…perhaps between two and four times a week.

There are about half a dozen core staff in there, who rotate on shift patterns to provide all-day cover seven days a week. And over the 18 months or so I’ve been visiting this coffee shop semi-regularly, the staff behind the counter have come to recognise me as a regular and know my order without me having to ask.

“Flat white, as usual?” the person on the till asks, with a friendly smile, when I get to the front of the line.

After I’ve confirmed that and paid, I have a quick chat with whoever is making the coffees that day about something relatively inconsequential (in the run-up to Christmas, the effort they all put into their Christmas jumper game was a particularly welcome source of material for our 6.30am chats).

All three of us wish one another a good day when the coffee’s ready, and I go on my way.

I’ve never timed these interactions, but this takes a minute or two at most from start to finish.

These people don’t know my name, what I do for a living, or even how funny my jokes are. Yet one of the reasons I keep coming back is because I feel welcome at this coffee shop just because they have taken fractions of a second, in their heads, to realise I come in regularly and always order the same thing.

The cost of doing this is precisely £0 – I’m not taking up any more time than they would be spending anyway taking my order or making my coffee, so this interaction is essentially free to the coffee shop chain. However, I now go there in preference to anywhere else because I’m made to feel welcome in that coffee shop.

Now, this coffee shop chain is not the one which irritatingly asks for your name for them to write on your cup in order to “make you feel more welcome”. The customer service in that chain is universally terrible, in my experience, so this is definitely a non-value-adding activity for them. It means taking an order takes longer, and impact of this process on how that chain makes their customers feel is somewhere between indifference and active loathing. (I’m in the latter camp.)

So, this other coffee shop chain who tries so hard to hit a KPI ends up doing worse than the people who don’t know my name.

Weird, huh?

Except it isn’t, if you remember the role of customer service is in how you make a customer feel, not how many boxes on your internal KPI scorecard you get to tick.

Either way, in my regular coffee shop – also part of a large, nationwide chain – they’ve locked in my regular visits (and, I’m sure, lots of other regular visitors too) by something as simple as recognising another human being and remembering the drink they order every time they come in.

Cost: £0.

Benefits: whatever they charge for 2-4 coffees a week, more or less for ever.

RoI: Off the scale.

(Side note: one of the major problems with customer service is that some people think they’re managing an internal process. Great customer service is how you help customers feel about your business. When you think it’s about managing internal processes, you end up spending £millions on IT solutions that don’t work very well, making customer service appear expensive and low value-adding. Working on how you help customers feel better about your business is almost free and the upsides are substantial, leading to the best RoI of just about anything you can do in your business.)

The hotel

If I’m staying over in London overnight for work, I generally stay in the same hotel. While I’m not there as often as I visit my local coffee shop, I’m there often enough that I recognise the staff on the check-in desk.

They have absolutely no idea who I am, though, and always ask “have you stayed with us before?” to save them launching into a detailed description of the restaurant opening hours and how to get in after the front door is locked at 11pm each night, which they keep for first-time visitors.

Sometimes, I’m asked that question twice in the same week by the same person.

Yet here’s the irony. The reservation system they use to book me in and hand across my room key knows I’ve stayed there before.

I know for sure it does, because the order confirmation I get when I book always says “thanks for choosing us again”. So their reservation system 100% knows I’m a returning guest.

Despite having this valuable information – much more information than they have in the coffee shop, for example – nobody in this hotel chain has thought of flagging the screen reception staff use to book guests in with the information that they have stayed at this hotel before.

It’s a tiny amount of code, not very difficult to do, and easy to get a screen pop when a name or reservation number is entered into the check-in system by the front-desk staff.

Yet, this hotel chain hasn’t put even the tiniest amount of effort into making returning guests feel welcome. And that pervades the attitudes of their staff who, despite being pleasant enough as individuals, don’t say to themselves “hang on, this is someone I see regularly”.

Actually, that’s not quite true. There is one person who does recognise me – I see him about one visit in 10 to this place, so not super-often.

But the first time he checked me in, he asked if I’d had a good day, in that formulaic way front-desk people sometimes do. He was genuinely shocked when I said I had, and then asked him how his day had gone. “Nobody ever asks us that” he responded, and thanked me for asking.

Now, every time he checks me in at this hotel, he greets me as a returning guest without having to input my reservation number and we have a quick chat of the sort I have with the people in the coffee shop, before he sends me off to my room feeling that I’ve been treated as fellow member of the human race, and not someone who was a glitch in the otherwise smooth running of the check-in desk.

Great customer service is free

There is a classic business book, “Quality Is Free” by Philip B. Crosby which I read back in the 1990s. He was something of a godfather of the Total Quality Management movement, for those of us old enough to remember that.

Anyway, Crosby’s fundamental thesis was that doing quality work isn’t a cost. At worst, it breaks even but, more often than not, improving quality adds to your bottom line when thoughtless cost-cutting and corner-cutting would (contrary to popular belief) damage it.

All my experience of business is that this is absolutely true. Getting something right up-front generally costs about 10% of what it costs to put something right after it’s gone horribly wrong.

So it is with customer service.

Great customer service can be literally free to deliver (eg in the coffee shop) or it can cost fractions of pennies per transaction (eg writing the code for a screen-pop for returning customers on the check-in system).

However the RoI is generally significant. If all you can do is get one extra cup of coffee a week from someone, against a base cost of £zero, that’s a phenomenal RoI. Do that often enough and your coffee shop will be vastly more profitable than anyone else’s, no matter how hard they try gimmicks like asking you for your name.

Break the link in your mind with customer service requiring £million IT solutions.

In huge organisations that might be an essential part of how you run your business. But in most organisations, you can do easy, simple things for either no cost at all, or for fractions of a penny per transaction.

Factor in even a tiny blip in your revenues – just one extra cup of coffee a week, for example – and spending time thinking about how you can make your customers feel more positive towards your business will be one of the highest RoI activities you are ever likely to carry out.

That’s not a bad outcome for something as simple as learning how to greet your customers with a warm “hello again!”

It’s the first week after the Christmas break for most people. And if you’re like most people (OK, just me?) you probably overindulged a little over the break. The trousers or skirt you did up first thing on Monday morning, for the first time in a fortnight, were probably a little tighter than you remember them being just before Christmas, weren’t they?

That’s why there are so many ads for weight loss products at this time of year. Fad diets. Gym memberships. Healthy eating plans.

Many of these things come with bold, dramatic promises – “Lose 10 pounds in 10 days” or “Abs of steel in just 30 days” or “Get thin by eating only grapefruit for 28 days”.

Despite the fact that most sentient beings know in their heart of hearts those promises are, to put it kindly, over-ambitious for most people, a lot of products like those sell by the boatload in January.

Of course, by the end of January, they haven’t worked.

So we go quiet for a while, before the approaching summer holidays remind us we need to get “beach body ready” and the whole cycle of scammy ads and over-ambitious promises, followed by plunging disappointment, starts again.

Now, I can confidently say I’ve never been beach body ready at any point my entire life. Unless you like visiting the beaches where migrating walruses like to sunbathe, in which case my body is definitely ready for that beach. I’ll be the pale-looking Scottish one.

However, fad diets aren’t just restricted to your post-Christmas feelings of guilt at eating too much over the holidays. In a lot of organisations, fad diets damage your bottom line in a similar way, ending in the same inevitable disappointment as all those unfulfilled new year’s resolutions to shed the extra Christmas pounds.

So, if you’re serious about your bottom line, here are my tips for healthy cost control to get your bottom line health moving in the right direction for the new year.

Avoid the fads

As with fad diets, cost-cutting fads will take you down the same inevitable path of over-hyped promises and crushing disappointment.

The basic rule is if something sounds too easy to be true, it almost certainly is.

Over the years there have been plenty of faddish cost-control diets. The current one is AI, which claims to magically solve all your problems and reduce your cost base dramatically.

I can’t say this strongly enough – with very rare exceptions outside activities like managing datacentres or writing low-end code – it is a complete lie to say that AI will boost your bottom line performance.

The problem is that, by the time you notice, all your customers are likely to have taken their business somewhere else due to the difficulties in dealing with your business and the truly appalling customer service AI seems to be set up to deliver.

AI will inevitably fail (at least as a mass-market product – again, some specialist areas might well see some benefit), but don’t be disheartened. There will be another fad diet along soon…I’m not sure what it might be yet, but there will be one, I can guarantee you that.

Grifters always need something to grift, so when AI fails, they’ll just pick up the next grift as if nothing happened.

Staying away from fads means you’ll minimise the chances of doing anything stupid and, in the medium-to-long term, just not doing stupid things on a consistent basis means you’re almost guaranteed to be successful. (To paraphrase Warren Buffett’s long-time partner, Charlie Munger.)

Avoid short-term thinking

Any idiot can cut costs…and thereby appear to flatter the bottom line…in the short term. And, every year, that’s precisely what a significant number of idiots do.

I once worked for an organisation where the executive team patted themselves on the back for one of their number slashing marketing expenses to hit a profit target one year. The following year they couldn’t figure out why they had no customers.

You can achieve much the same results if you halt all the maintenance expenditure in your business. But don’t be surprised if your machine break-downs the following year cost you 10x more in engineering costs and lost production than it would have cost to get the scheduled maintenance carried out on your machines when it was originally supposed to happen.

Similarly, you can fire experienced staff and replace them with trainees to bank a massive “instant” cost saving.

Roll the clock forward a few months and I can guarantee you’ll be dealing with a mountain of problems you never knew existed because your old, more expensive, team just dealt with these things and stopped them from ever getting to your desk or cheesing off a customer.

To be fair to the trainees, they don’t know what they’re doing, so chaos ensues.

It’s not their fault (specifically, it’s yours) but chaos is never the sign of an organisation running at its most cost-effective.

Avoid more KPIs

A common reaction to cost pressures is to start tracking all sorts of data points in the hope that somehow, the mysteries of the universe (or at least your business) will be revealed.

While there is definitely an art and science to setting and tracking KPIs, it’s really unlikely that the lack of a KPI is the biggest problem affecting your bottom line.

It’s much more likely that there’s something more fundamental at play. Maybe your price point is wrong. Or you’re selling to the wrong target market. Or your product isn’t competitive with other offerings in your sector.

No internal measurement tool is going to tell you any of that.

But it’s possible – common, even – to compound this problem in a quite spectacular way.

Businesses often set up a new team just to track and measuring of things. That team needs all sorts of fancy software to do their job. Most of your management team is now tied up in meetings about reporting and KPIs instead of managing their part of your business. The cost is phenomenal, but the business thinks more measurement will solve its problems, so they go ahead anyway.

In those settings, I’ve only very rarely seen performance improve. Even then, it was only because the performance previously was so horrifically bad that almost any tightening up of processes would have delivered a positive RoI.

I mean, they still missed the point because the thing they did which made a positive difference might have been 27th on the list of things that would have made the business better, and they completely missed the 26 more powerful bottom line-enhancing strategies above it, but still…they had a positive impact on the business.

So what should you do?

If those are some of the things you shouldn’t do, what should you do?

Well, good cost management is (conceptually, at least) relatively simple. Here are three strategies I always recommend:

1-Manage for the medium term

Every cost cutting decision you take should be considered in a medium-term context, say the next 3-5 years.

If you cut your marketing costs to zero today, that’s not likely to have a positive outcome on sales in a 3-5 year time-horizon. So don’t do that.

Most of the very worse cost-cutting decisions can be avoided just by having a timeline which extends beyond this month or this quarter.

2-Consider the consequences

Have some idea of the impact of, say, a 5% reduction in your customer base because customers don’t like your new, cheaper formulation, or the fact they can’t talk to a human being on the phone any more.

While you might think of your cost base in the same silos you report in your P&L, your customers think of the total experience your company delivers. So there’s a non-zero chance that substituting a cheaper ingredient into your production process will cheese off at least some of your customers.

By and large, you shouldn’t do that. You’d be surprised how warmly some organisations congratulate the person who saved £50k in their department but overlook the fact that their actions cost the business £1million in sales when customers took their business elsewhere.

If the consequences of, say, 5% of your customers taking their business elsewhere would dwarf the benefits you bank from any cost saving idea, by and large you shouldn’t take the cost saving.

It’s tempting to think customers won’t notice, but in the end they all will…and some of them will be bothered enough about it to buy from one of your competitors instead.

Most businesses would lose money if just 5-10% of their customers stopped buying. So not considering the potential damage caused by cheesing off a relatively small proportion of your customer base isn’t wise.

3-Think cumulatively

In many organisations, cost saving strategies are set as “everyone has to save 10% in their department”.

It’s often forgotten that, from a customer perspective, those savings represent a cumulative downgrading in your products and services.

If you save 10% on the ingredients, 10% on the packaging, 10% on the logistics, 10% on the staff time to make the products, 10% on your overheads, and so on, you can easily end up with a customer’s experience of dealing with your business being only half as good as it was before.

So, unless you reduce your prices to reflect that (which would rather defeat the object), you have just made your business less attractive for customers to deal with. There are very few situations in which that’s a smart move, no matter how clever you think you’ve been in getting every department to save 10% from their budgets.

Stay away from fad diets for your bottom line

As for diets, the sad truth is that there is no magic way you can dramatically reduce your cost base overnight with zero pain and unlimited upside.

The only sustainable way to lose weight is to cut out junk food, eat healthily, and exercise regularly.

By the same token, the only sustainable way to build your bottom line is to develop reliable systems, resource them properly, and continuously improve the ways you look after your customers.

I’ll grant you, that’s a lot less glamorous than riding a white steed into your company’s car park with a big flag trailing behind boasting of a new magic solution to the cost pressures facing your company.

But it’s also the only sustainable way.

And a year from now, you’ll be vastly better off than your competitors who spent £000s on “magic instant solutions” in the meantime, only to end up, like every January’s crash dieters, pretty much where they started. Only poorer and more disillusioned.

At the time of writing (who knows, the whole grift-fest might have blown up by the time this article is published) huge investment plans are being announced, seemingly every day, for some datacentre or other to support the “AI boom”. (I put that in quotes because I don’t believe it, but that’s not really the point of this article.)

Apparently, the reason for those massive investment plans is that the big AI companies need “more compute” – that is, ever-increasing amounts of data, chips, and data centres – in order to make their products work.

If only they can buy enough “compute”, claim the AI companies, all their problems will be solved, and we’ll inevitably reach The Singularity in the next six months.

To use a word a good deal more polite than the one I normally use to describe the AI industry, this is hokum.

Now, to be fair, in the early days of the AI industry, it wasn’t. Or perhaps, more accurately, I didn’t know enough about it yet to form that view.

That’s because, despite a 30 year career as an accountant, I have remained relatively optimistic and upbeat about what humans can achieve. I was as excited as anyone else when those “magic black box” AI technologies came out of the woodwork in the early 2020s, because I like to try new things.

It’s always easy to say “no”, of course. But during my career, I’ve generally found that, while this sounds like the safe option, it’s usually anything but. Saying “no” to everything guarantees that you stay pretty much where you are while the rest of your industry passes you by. You’re on the road to irrelevance if you carry that stance to extremes.

Now, if your business is selling antique-style scarves, say, which are hand-dyed and hand-stitched using the original methods and machinery from the 1870s, you probably should say no to every new idea about how you can make your production more efficient – in that sort of business the tradition – the inefficiency, if you like – is the main reason people can sell scarves which functionally serve the same purpose for £2,000 on a boulevard in Paris and 99p in a branch of Primark.

That extra £1,999.01 is, in part, to compensate you for the relative inefficiency of your traditional methods because if buyers didn’t do that, their only option would be a 99p scarf from Primark.

But if you’re reading this, it’s unlikely you’re selling £2,000 scarves from a Parisian boutique, so we can put that option aside.

Saying yes…with conditions

So, to anyone who isn’t in the Parisian scarf-selling sector, saying “no” all the time is rarely a good idea, even if you are an accountant.

Because if your business isn’t innovating, it’s highly likely one of your competitors is. And that means, at some point in the not-too-distant future, your business will be left behind. Ultimately you might not have a business at all.

For that reason, in the early days of a new idea, you should ideally by trying to say yes, if you can, to get it to the point where you’ve got enough of a proof of concept to make a final decision with a much better chance of making the right call.

Now, that doesn’t mean every manifestly stupid idea should get the green light. But it is to say, if the idea isn’t completely barking, you should probably try to let it run for a bit if you can.

In general, a little bit of early stage proof of concept work is relatively inexpensive and, you never know, it might turn out to be the most brilliant idea your sector has ever seen. Taking a chance here and there is unlikely to materially hurt your bottom line, and it might just be the foundation for an exciting new chapter for your business.

There is another important reason to take this approach where you can.

Assuming you employ competent, hard-working people, the idea probably isn’t completely mad. By green-lighting a little bit of exploration, you’re showing them respect and appreciation, which is rarely a bad thing.

But if you kill the idea on the spot, your team will start dreaming about their idea when they should be thinking about your business and your clients, and there will always be an “if only we green-lit that project in 1997, imagine what sort of a business we could be today” vibe about the projects which were summarily canned.

Your best option is to do a bit of exploration (with not a lot of money, and not a lot of time, until you know there’s something worth taking forward).

However your green light should come with some conditions. That way, you can either kill the idea if the conditions aren’t met, or give yourself the confidence that there could be something in the idea which you want to explore further.

Impact

One of those conditions should depend on the potential impact of the idea on your business.

It’s a matter of personal taste, but if someone proposes an idea which might not transform the world, but which is fine as far as it goes and doesn’t cost much to implement, my default setting is just to tell people to get on with it. There’s no need for formality, reporting, and meeting conditions if you’re moving the stationery cupboard from one side of the Reception desk to the other – just get on with it.

For more serious projects, though, business impact is critical, otherwise you risk key members of your team frittering away their time and energy on projects which are inconsequential in the context of your business as a whole.

Here I’m probably looking for a minimum 5% impact on the top line or a 2-3% impact on the bottom line, for a first cut.

Anything less than that is unlikely to generate an RoI on the time, effort and money which will need to go into the project.

So the first port of call is a “back of an envelope” calculation of the potential impact.

Again, if it doesn’t have that 5% impact, but is inexpensive, you might as well do it anyway. It won’t cause any harm and it means the person whose idea you green-lit is more likely to come forward with another idea in the future – and that could be the one which turns out to be transformational.

But if you’ve got a 5%-er, the next stage is to do a proof of concept.

As a general rule, if something doesn’t work small-scale, it won’t work large-scale.

Large-scale is where you drive your efficiencies and make a return on your investment. But there’s nothing magic about scale – if something doesn’t work when it’s small scale, it won’t work when it’s large scale either.

The step ladder

Going from an idea to a full-launched product is like a step ladder. You have to take the next step before you can take the one after that, for example.

And if you think about it, there are multiple steps to any project which is going to have a significant impact on your business as you move from the “prove it in the lab” stage right through to having a finished product on supermarket shelves.

For example, in the early days, you might use only the staff members working on the project to direct how the project goes. At the later stages, you will almost certainly want to involve a survey group, or a taste panel, made up of ordinary members of the public to double check that the idea your team had stands a chance of making it in the real world.

Whatever those stages might be for your business, once you’ve green-lit an idea, there needs to be an understanding that the project is only green-lit for each stage in turn. Giving the OK up front doesn’t mean one of your team has the authority to build a new factory in Outer Mongolia – it might just be OK’ing a train ticket to visit the Mongolian embassy in London to start researching potential sites.

If you take this approach, however, you will find that some projects – no matter how promising they seem up front – gradually run out of steam. Generally that’s because a good idea in a lab is not necessarily a good idea, or at least a do-able idea, in the real world.

When a project starts to run out of steam, that means the momentum has turned downwards and, usually, the law of diminishing returns has started to kick in.

If that happens at Stage 2 of a six-stage process, I can guarantee you that this project will never be successful in the real world. The worst thing you can do is persist with an idea that clearly isn’t delivering results. The kindest thing to do for everyone involved is to congratulate them warmly on the good idea they had, reflect that the real-world data isn’t coming in as people had initially hoped, and wind the project up completely.

Neither you nor your staff should be upset about an idea not working.

Just having an idea good enough to be green-lit in the first place means you’ve got someone there with some real potential for the future. You should be nurturing them, not demoting them, when an idea is canned at Stage 2 of 6 – probably, they’re the people who will come up with an even better idea next time.

Not more, but different

However, what I usually find is that an idea which is stuck at Stage 2 won’t get any better if you throw more resources of the same type that were deployed up to that stage.

Ultimately, there’s an economies of scale question to be resolved, of course – will an idea which works in a lab also work on a fully-automated assembly line in a vehicle manufacturing plant, for example.

But the way you get round a problem about things not working in a lab is rarely “more lab”.

Almost always there was some fundamental misunderstanding about the process, some conceptual blockage, some principle which doesn’t work as well in practice as it does in theory at the heart of the problem.

“More lab” doesn’t address any of those issues. It just piles up costs on a project you are eventually going to have to can anyway. That’s just not smart.

Think of it like being a championship dancer.

The difference between being an OK dancer and a champion dancer isn’t knowing the steps any better. You needed to know them already to get up to “OK” level.

Going from “OK” to “champion” means working on your musicality, the grace and elegance with which you use your body to tell a story, the way you draw influences from the greats of dance history to delight other championship dancers even though most of the general public won’t even spot the little bits of homage you’re paying to one of the greats.

None of those things are “doing steps harder”. They are entirely different activities.

And that, in a nutshell, is the issue I have with AI, and the industry’s claims that, if only they had more computing power they could solve all their platforms’ problems.

Ever since I experimented with AI early doors, I’ve found it underwhelming (issues of intellectual property theft and morality aside).

And as investment has poured into the sector, the results have not become any more whelming (is that a word?) than they were before.

Going from Ver 3 to Ver 4 has become a yawn-fest – and, if anything, performance is getting worse from one model to the next, which is hardly a positive sign.

More importantly, if “more compute” was the answer to AI, we’d have solved all of AI’s conceptual problems well before now, after spending the first few hundred billion dollars, and we’d just be in scaling-up mode, which I accept would take significant capital investment.

But normally, you’d only put in that investment to scale up a project which was already working in principle.

You don’t pour investment into an idea that’s run out of steam in the hope that scaling up will fix a conceptually broken model.

That’s never going to work. The only people who like it when that happens are the bankruptcy lawyers because they are the people who stand to gain the most, ultimately, from a multi-billion dollar investment into technology which fundamentally doesn’t work.

Throwing ever-increasing amounts of the same resources as you’ve deployed up to now in the hope that this will fix any product development problem is at least unwise… and possibly insane. You need to do something completely different to reach excellence.

Perhaps start by thinking less like a tech exec and more like a dancer. At least dancers understand that excellence is unlikely to be reached by doing more of the same, and more likely to be reached by integrating ideas you haven’t work on up till now into the equation.

Alternatively, you could just decide it’ll never work and can the project before it bankrupts your business.

But, whatever you do, don’t keep doing what you’re doing.

As Albert Einstein said, the definition of insanity is doing the same thing over and over again, while expecting different results.

I wonder if tech people have ever heard of Albert Einstein? All the available evidence suggests they haven’t.

The first time I heard the expression “the map is not the territory” was from my old pal Joseph Pritchard.

At first, like many things Joseph said over the years, it didn’t make much sense to me. But in the years since, I’ve kept coming back to this expression as summarising the root of a lot of the problems inside organisations.

The example Joseph used to help reinforce the point was the classic London Underground map, drawn by Harry Beck, which is rightly seen as an iconic piece of design work.

However, if you know London at all, you’ll know it’s not an exact representation of the city. Far from it – some of the stations appear much closer together on the London Underground map than they are if you walked or drove between the two – others are much further apart.

Does that mean the map is useless, given its many inaccuracies?

Not at all. For a start, the fact that the London Underground map has lasted in much the same form since the 1930s suggests that generations of Londoners and tourists have had a lasting benefit from it. Despite the fact it’s widely known to not be an exact representation of the city of London on the ground.

But also, in communications, there is a trade-off to be made between total accuracy and ease of transmitting the information.

When I explain double-entry bookkeeping to someone who’s never done it before, I use a Sherlock Holmes story to explain how it works. I don’t start with “well, back in 1494, an Italian monk called Luca Pacioli wrote a book called Summa de Arithmetica, in which he set out the principles of debits and credits we use today.”

Is there some information that accounting nerds might find fascinating between 1494 and today that I skip over when explaining double-entry bookkeeping through my Sherlock Holmes story? There certainly are.

But I’m not usually wanting to give someone a Mastermind quiz on “The History of Double-Entry Bookkeeping: 1494 to the Present Day”. I just want them to understand how it works so they can do their job properly.

I’m very conscious that the map is not the territory when it comes to my explanation of double-entry bookkeeping – instead, I deliver a “map” of how to navigate it which helps people understand how double-entry bookkeeping works in a simple-to-understand and, I hope, memorable way.

Ditto Harry Beck with his London Underground map.

He wanted people to find their way around London easily. He wasn’t nearly so bothered about explaining that Charing Cross and Embankment stations are much closer to one another at street level than the Tube map would make you think.

The problem isn’t the map

The problem with this sort of communication isn’t the map.

It’s mistaking the map for the territory, and thinking that one is an accurate representation of the other.

Imagine, for example, someone who gets a contract to replace all the paving stones on London’s pavements, but they have to arrange deliveries of the required number of paving stones to each Tube station, and the stones delivered to each station have to reach to the next station on the line, where the next delivery batch awaits.

If all they were given to plan with was a London Underground map, this would be a complete fiasco. At some stations 10x the number of stones required would turn up. At others, not nearly enough.

So, of course, no sane person bidding for this imaginary contract would prepare a quote based on the Tube map. They would get out on the streets and measure all the distances for themselves, before calculating the number of paving stones required to stretch from one station to the next, and arranging their paving stone deliveries accordingly.

But many organisations get confused and imagine the map really is the territory.

That’s not entirely the fault of people running those organisations. For people who need to learn something about a specific discipline or activity, we have to break the process down into small chunks and build up gently from there. Especially early on, we will generally skip over a few of the trickier details because, at that point, the person we’re teaching don’t know enough about the discipline to go into depth to understand fully.

That’s the way most of us are taught at school and university, whatever subjects we took.

The problem here, though, is that not only are you just given a map when you are being taught about any field of endeavour, and not only does that convey very little understanding of the real-world nuances you’ll encounter. But also, the map you’re given is only partial.

Imagine, for example, having to navigate from Plaistow, on the District Line, across London to Perivale on the Metropolitan Line, but only being given a map of the Northern Line to accomplish your mission with.

Now the map of the Northern Line might be factually accurate as far as it goes (with the accompanying “map not being the territory” caveats, of course). It’s just completely useless for your objective of travelling from Plaistow to Perivale on the London Underground network.

Some areas are harder than others

Confusing a map with the territory is where many organisations go wrong.

That’s especially true for people in those organisations with a background in tech, engineering and…ahem…accounting.

Those professions seem to find it very easy to confuse the map with the territory, largely because they all work mostly on surface logic. People with those backgrounds sometimes struggle to see features which are beyond the realms of pure logic and/or which are not visible on the surface, even when those features represent a major driver of the problem.

Which isn’t entirely the fault of those professionals, because, in most academic realms, but those three in particular, you get to progress in your career by going deeper into the nuts and bolts of a subject.

By the time of my final professional exams, for example, the work I was doing was still double-entry bookkeeping at heart, but it was a transformatively more sophisticated version of what I’d done in my very first double-entry bookkeeping class a few years earlier.

Unfortunately, most real-world problems don’t present themselves like that.

They generally can’t be solved by going deeper. They can only be solved by going wider.

If you work in tech, engineering, or accounting – or, heaven forbid, you’re a politician, who are particularly poor at this – you’ll find that hard to cope with.

Relatively few people from those professions are comfortable moving into an illogical world where deeper motivations drive people’s behaviours than whatever they can see on the surface.

In the interests of full disclosure, I wouldn’t claim this is something I do perfectly myself. So I’m not being disrespectful to the professions mentioned above (although I’m very happy to be disrespectful to politicians).

I’m just illustrating how hard it is to solve problems when all you’ve got is an entirely logical, surface-level view of the world, and a map which will be of very little help getting you from Plaistow to Perivale.

An example

Let’s make this real with an example.

At the moment, politicians are making a lot of fuss about the cost of the NHS. And, in the unholiest of unholy alliances, politicians seem to think that “more technology to drive efficiencies” is best the way to bring the costs down.

In general, that’s baloney. Although not surprising from two groups as intellectually challenged as tech folk and politicians. One group is super smart in the computer lab, but super dumb in the real world. The other group isn’t even smart in a computer lab.

But, when the problem is defined by politicians as “how do we run the NHS but spend less money on it?”, it’s easy to see why people as dumb as the average politician thinks that tech might have the answer. And it’s equally understandable why tech people are more than happy to sell tech solutions which claim to do that (although they rarely do, in practice).

Thinking more broadly, instead of more deeply, you get an entirely different perspective.

Because of cuts elsewhere in sectors like education and social care, the NHS has become the public service of last resort for many.

Which makes no sense, because inside a busy A+E department is just about the most expensive place to try to solve many of the problems which only present themselves there because people have nowhere else to go.

Compounding the problem, if you introduce more activity into an already insanely busy, high-pressure environment, you’re very unlikely to make that more efficient.

More likely everything becomes dramatically less efficient and, because people are waiting longer and longer for treatment, and that treatment can only be superficial because another boatload of ambulances just turned up with 20 more people who need urgent treatment, outcomes are poorer as well.

Which, in turn, means many those same people will be back in a few weeks’ time because whatever problem they had last time either hasn’t been fully dealt with, or they’ve found themselves in exactly the same situation again. For example, an old lady who had a fall this week and ended up in A+E, in the absence of any other intervention, is pretty likely to have another fall in a few weeks’ time and end up in A+E again.

In that environment, unless you’re a tech industry grifter with a product to sell, or a politician being paid off by a tech donor, defining the problem you’re trying to solve as existing entirely within a busy A+E department will likely deliver little or no real world improvement – although it will have the usually not-coincidental side benefits of making lots of money for the tech company and the politicians concerned.

Going broader, not deeper

Of course, sometimes problems get solved by going deeper, not broader. Especially when the problem is an “in domain” problem.

If I prepare a report which doesn’t add up to the number I thought it should, I’m going to check that the Excel formula is correct, and that the range of cells the formula is working with are correctly specified.

As is, for example, a piece of code not delivering visitors to the intended page destination when they click a link on a website.

The solution to those problems is not “out there”. It’s “in here”, within the same domain where the problem manifests itself.

But that’s true of relatively few problems nowadays. The biggest problems of our time will not be solved by “in domain” expertise.

It’s one reason I think AI will never work. The people running AI companies think the reason their software is largely nonsense is because of a shortage of deeper, in-domain expertise. I can pretty much guarantee it isn’t – not least because of the fact that, after spending several years and billions of dollars in development funding, it that statement was true, we would already have perfect AI everywhere. Yet it’s still mostly garbage.

There’s another element to the problem of reducing the cost of the NHS that tech folk, politicians, and a fair few accountants, I’m sorry to say, don’t fully appreciate.

And that’s because the ultimate low-cost solution might involve spending more money somewhere else.

Those groups find that really hard to understand, but as any good CFO knows, the secret to truly effective organisational cost reduction is understanding that what matters in the end is the balance of costs across the organisation, not the spend in any specific department.

For example, if I can spend 2x what I spend now in Department A, but save 10x that amount across Departments B, C and D as a consequence, the lowest operating costs for the business as a whole are reached by doubling Department A’s budget.

Remarkably few organisations will make that choice in practice, I’ve found…to my eternal mystification. But what we’ve done here is move from thinking deeper to thinking broader and, like most of the problems in the world today, that’s where you’ll find almost all of the solutions.

I say that with confidence because, given the amount of time, money and resources spent over the last several decades trying to solve problems by going deeper, we’ve got more problems in the world than ever. If “deeper” was the solution, most of the world’s problems would have been solved by now.

And they haven’t. So we need to try something different, and go broader instead.

Where to start

For the NHS, there are two woefully neglected areas of our public services which directly lead to bulging A+E departments, and packed hospital beds.

Firstly, fix the education system so that people have hope for the future and a decent job to go to. There’s been a criminal lack of investment in education for as long as I can remember – especially in our Further Education Colleges which could be a tremendous source of economic growth if anyone in government ever cared enough about them to invest properly in the skills that lead to jobs, which in turn lead to vibrant, healthy communities.

A tiny fraction of the multi-million pound budget required to build and equip a brand new hospital, were it to be invested in FE and the education sector more generally, would return many times the economic and social benefits of a new hospital to patch people up after they have already become unhealthy and despondent.

Secondly, invest in social care. The NHS spends a large proportion of its budget dealing with the problems of frailty in old age, one way or another. Again, tiny factions of the budget for a new hospital spent on social care instead would minimise the number of times some of the most frequent client groups (not just the elderly) turn up in A+E for help because they have nowhere else to go.

While those two actions on their own won’t solve every problem in the NHS, they’ll make a pretty good start. And, despite spending more in some areas (eg schools, colleges, and social care) the savings from not having to build more and more hospitals will lead to a lower cost of public services overall.

To solve problems like this, we need to remember that the map isn’t the territory.

Once we define “the map” as “how do we reduce the cost of an emergency operation in A+E?”, we stop looking for solutions outside the operating theatre in a hospital. Even though that’s where the biggest solutions are likely to be found.

For tech folk and politicians, the map is the territory. They are incapable of thinking any other way.

So, when it comes to any areas where an unholy alliance of tech folk and politicians are to be found, you should give their solutions about as much credence as you would to a guy who gives you a map of the Northern Line to help you find your way from Plaistow to Perivale.

Unless you want to go down the tubes.

What you think you want ain’t necessarily what you need.

In a previous role, I used to help companies turn around their bottom line financial performance.

Nearly always, at the start of the assignment, the client would say something like “I know we’ve got a good business here. We just need to make more sales, then everything will be fine.”

And, nearly always, that wasn’t actually their problem.

That approach kinda makes sense as far as a P&L goes – mathematically if you increase your revenue line and keep all your other costs the same, your bottom line increases.

But, for a really good CFO, your P&L is only part of the picture. And not even a very big part of the picture at that.

For one simple reason. By the time something lands on your P&L, it’s already happened. You can’t do anything about it. P&Ls just report on history.

And while that’s valuable in many ways, if your P&L isn’t where you want it to be in bottom line terms, there’s very little point spending more time analysing your P&L. That’s not where your problem is.

Your problem lies “upstream” of your P&L.

Swimming upstream

There were some financial analytics I used to do first, just to get the lay of the land, but generally my first port of call was the company’s gross margins.

Because if you want to grow your bottom line, you’re extremely unlikely to be able to do that if your gross margins aren’t high enough.

So, quite quickly, I’d generally move the conversation from a pressing need to do something about the bottom line, through a conversation about needing to “sell more”, to the real issue which was that the gross margin wasn’t high enough to cover the company overheads and leave a profit.

Now, there are two important caveats here.

Firstly, you need to make sure the gross margin is calculated correctly – which in an amazing number of businesses it isn’t. That’s a topic for another day, but if the gross margin which shows up in your P&L isn’t a true gross margin, all your decisions from that point onwards will be sub-optimal at best, and will quite likely make things worse.

Secondly, what I’m talking about here is your gross margin in cash terms, not in percentage terms.

There is absolutely no certainty that a business with 80% gross margins (assuming they calculated them correctly, of course) is a more profitable business in bottom line terms than one with 20% gross margins.

Sure 80% margins make it sound like you’re a business mastermind, but if your 80% gross margins translate into a gross profit of £1million and your overheads are £2million, you’re not going to solve your bottom line problem any time soon, even if you get that 80% margin up to 90% or 95%. The maths just doesn’t work.

In the interests of balance, the other common option at this point is to take an axe to that £2million in overheads.

I’m not for a moment saying that’s never the right answer – occasionally, when a company is in deep financial distress, there’s no other option to steady the ship fast enough – but taking an axe to overheads before you’ve fully understood what’s going on at gross margin level will often take you in the wrong direction too.

Especially since the process of really getting to grips with how your gross margin works, when done well, only takes a couple of weeks. We’re not talking months or years here.

Unless the liquidator was in the car park, I used to counsel clients to hold their nerve for a couple of weeks to make sure they weren’t going to make decisions they might come to regret, or decisions which would have long term cost implications much greater than any short-term benefit.

Going incremental

The most important question to know the answer to when analysing gross margin is what the frictional gross margin looks like.

That is, for every additional unit sold, what are the incremental costs and revenues of making that sale.

Usually, an incremental sale is highly profitable.

In most companies, overheads remain pretty much the same when you produce one extra unit of product (at least up to a threshold where you need to build a new factory or take another floor in an office building to accommodate all the extra people you’re hiring).

So the incremental costs tend to be low.

When I worked in the printing industry, our incremental costs were the extra sheets of paper we printed onto, plus a small amount of ink.

We were already paying for the printers, the machinery, the warehousing, and all the other costs of production. They didn’t change when we printed one more unit.

I find it’s not uncommon for businesses which might make a 5-10% bottom-line profit to have 70-90% margins on each incremental unit produced.

That being the case, the company’s perceived problem of a lack of bottom-line profits…which was translated into a “we need more sales” mantra…and became a “cash terms gross margin” issue…often morphs into a “how effectively we use productive capacity” problem. Often that’s the real root cause of a company’s bottom line problems.

And by productive capacity here, I’m not just talking about factories with machinery – I’m also talking about the fact that a lawyer, say, only has so many hours in a day to dispense advice they can charge clients for.

Are you charging enough?

Once you understand how that all works, your next thought should generally be “am I charging enough?”

Next to the issue of managing productive capacity well, this is the second most common issue I used to come across on a regular basis,

I’ve been lucky enough to work for some great businesspeople who were smart, knowledgeable, and hardworking, but who, for whatever reason, found it hard to charge an amount which reflected the value their business really brought to its clients and customers.

There is usually no faster way to solve a gross margin problem than to put your prices up. All your other costs remain “as is” – you’re just getting 10%, 20% or more for each unit you currently produce, exactly the way you produce it now, and with no costs of transformation or disruption or training to fund either.

Now, there is an important point to bear in mind before you try this.

You have to understand the value your business brings to its customers, first and foremost.

And, ideally, you have to over-deliver on that value.

For example, if you charge £100 to deliver £100 of value, some people will pay that. But you’ll never get them to pay you £120 unless all your competitors go out of business.

More commonly, I found, companies were charging £100 to deliver £200, £500 or £1,000 of value.

In a situation like that, for a likeable, trustworthy, dependable supplier, not many people are going to refuse to pay £120 instead of £100.

Now there is an art to demonstrating the value you bring in such a way as to get that extra £20, and you might need to do a deal along the way to phase in your increased pricing, but it’s generally do-able, when presented in the right way, if you deliver enough value to your customers.

It’s not sales, it’s margin

I fully accept that, having started this article poo-poohing the idea that you might need more sales, it now looks like we’re now back to where we started, and agreeing that putting more sales through the revenue line of your business would solve your problems.

Except we’re not really putting more sales here, even though the revenue line on your P&L is where that extra £20 will show up.

What we’re really doing is delivering more gross margin.

Your original £100 sale, with a marginal cost of £80, say, has now turned into a sale of £120 with a marginal cost still at £80.

In a business that was losing £10 on the bottom line against a revenue line of £100, you’re now making a profit of £10 on a revenue line of £120.

I don’t know many people who wouldn’t consider that a victory.

And, bear in mind, they haven’t touched anything inside their business yet. All they’ve done is deliver more gross margin.

Which is the important thing here, let’s not forget.

On the other hand, if you were losing £10 on a revenue line of £100, and decided to offer customers a 20% discount in the hope that would increase your sales, the most likely outcome is that you would end up losing £30 against a revenue line of £80.

That, most definitely, is not a victory. And illustrates why just increasing sales isn’t the solution unless you deliver an increased gross margin, in cash terms, by doing do.

All your costs are paid in £s, remember, not %s. So how much cash gross margin you create is the question, not what percentage number do you get to boast about to your mates.

Don’t neglect overheads

Although we haven’t spoken about it much in this article, don’t neglect your overheads. If there’s cost there to be removed, then by all means remove it.

But until you know where you’re going with your pricing strategy and your gross margin strategy, unless there’s anything outrageous in there, you should probably hold off significant cuts.

There is one very good reason for this.

As a sweeping generalisation, organisations which expect higher prices need to deliver higher levels of service. Everything needs to be slicker, better managed, more problem-free, and so on.

That means you can’t just implement some ridiculous AI chatbot (none of which are remotely helpful) to provide customer service. In general, to sustain a higher price you need to over-index on the level of service you provide.

While that might sound counterintuitive, remember that top hotels employ someone decked out in a top hat and a frock coat to open your car door.

That isn’t because you don’t know how to open a car door yourself. It’s an extra touch that makes guests think “Wow, the service around here is really good – that’s well worth another £100 a night”. (All credit to the great Rory Sutherland‘s “doorman fallacy” here, one of the smartest observations on pricing I’ve ever read.)

This is why you have to work out what you’re doing with your gross margins before you take a look at your overheads. Otherwise you might take decisions you come to regret.

Take away the doorman, in this example, and ultimately you haven’t saved a tiny salary in the context of a luxury hotel’s cost base. You’ve lost £100, or more, per room per night for eternity.

Given a choice, the smart thing to do is to keep the doorman employed and just accept that your overheads will be a tiny bit higher than they would be without him – but also acknowledge that your revenues are 100s of times higher than they would be without him.

(If you find that a difficult business decision to make, you might have much bigger problems than just the state of your bottom line…)

It’s a trade-off

Every business decision is a trade-off. Rarely does “painting by numbers” work. Certainly not in anything other than the short-term.

While I applied a consistent framework to get to the heart of what the issues were in my clients’ businesses, I can assure you there isn’t a one-size-fits-all solution here. Every solution for every client was different because the context of each client was different.

Anyone who thinks finance is just a matter of running up a few scenarios in a spreadsheet doesn’t understand what lies at the heart of good financial decision-making.

What always lies at the heart of a good financial decision is always a trade-off.

More cost today in return for less cost tomorrow?

Higher sales revenues, but with a higher fixed cost base to cover as a consequence?

Highly variable cost base, through using consultants and freelancers, but with the downside that they can all down tools tomorrow and go and work for your number one competitor, knackering your business in the process?

None of these decisions are objectively always right or always wrong. You have to understand the context to make the right decision.

And the context you need to understand more than anything else is how your gross margin really works, and what levers you can deploy to bring in more cash gross margin than you do today.

To find the best solution for your business, you have to dig more deeply than just demanding “more sales”.

Sales to the wrong sort of customer, or sales which don’t carry enough cash gross margin to cover your overheads, or sales that are made to hit a sales target without any thought of achieving a profit target, will take your business backwards, not forwards.

Those sorts of sales reduce your bottom line. They won’t increase it. No matter what some people will tell you.

The answer isn’t always “more sales”. But it is always “more gross margin”.

To work out how to do that, though, you need to dig deeper than most organisations do when they’re up against it and are frantically trying to cobble together some strategies to repair a big hole in their bottom line performance.

The good news is, having helped dozens of people fix a range of bottom-line problems, I’ve found that digging deeper is the only way they solve their bottom line problems for good.

It’s always worth the effort.