Strategy Dynamics Briefing 74: Intangibles concerning ‘state-of-mind’

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Intangibles reflecting the state of mind of key groups showed up in the case of a firm providing computer support to small and medium enterprises (SMEs). Two years before the time in question, the company had some 90 clients who each needed about 75 hours per month of support. Its founder/CEO was signing up just under two new clients per month, and none were leaving. Each new client needed about 200 hours of initial work to set them up. The company was giving good service to its clients, and had a solid reputation that helped win more new clients.

Back then, the company employed 70 technical staff, of whom 15 were relatively new. It was taking on two or three new people per month, and losing only about one person per month. Staff were busy, but not overloaded, working at about 95 % of their top rate to ensure good service. Morale was high, reflecting the company’s stable situation and the interesting work.

6 months later, the CEO was spending too much time managing the growing business to continue his selling efforts, so brought in a business development executive, who was soon bringing in about five new clients per month instead of two. Work and sales streamed in, and all seemed well until about nine months later. Staff were increasingly busy – payroll information showed they were putting in 15 % more time than normal – and clients were complaining about service quality.

Figure 1: Growth and decline at a computer support company (dashed lines indicate incomplete structure) (Click image to view larger)

Growth and decline at a computer support company (dashed lines indicate incomplete structure)

After a further three months, things really fell apart. Staff pressure got still worse, in spite of higher numbers, and complaints from clients escalated sharply. For the first time, some clients were actually lost to other providers, and the business development executive was having less success in winning new clients to replace them. Still worse, staff were leaving more quickly than ever before, apparently due to the pressure they were under.

Figure 2 pulls apart one of the mechanisms in this case. Starting from the bottom, the staff are just able to sustain good service quality until the pressure gets too high (the ratio between the amount of work to be done and the capacity of staff to do it). Service quality then falls. This is not easily observed or measured, consisting as it does of various issues, from delays in answering the phone, to incorrect advice to users, to faulty installations. But one measure is the number of problems reported by customers. This is not a nice smooth data series, but fluctuates from month to month. Nevertheless, there was clearly an increase in the problem rate during the time of high staff pressure.

Figure 2: Staff pressure hits service quality, annoys clients and causes some to leave. (Click image to view larger)

Staff pressure hits service quality, annoys clients and causes some to leave

The key intangible here, though, is ‘client annoyance’ – how angry is the average client with the quality of service. This is raised by each new problem they get, but is ‘forgiven and forgotten’ if no new problems arise. In the middle of this story, new problems are arriving so fast, that anger builds up until it reaches a trigger level at which clients decide to leave. By the end, client numbers had fallen to only 79, staff had fallen to just 75, and too few new clients were being won to replace the continuing departures. The only good news was that complaints were down and staff were less overloaded.

Probing deeper, some puzzles emerged. Staff were overloaded from month minus-15, so why was it not until month minus-9 that customers started complaining? Then why was it a further few months before clients actually left? And why did staff losses only pick up some three months after the overload started, and grow only slowly over the next few months? Next, if the worst point reached was an overload of about 20 %, how come the firm subsequently lost nearly half of its clients? This number clearly matters a great deal, not only because it implies that revenue nearly halved, threatening to hit profitability badly, but also because management needs to know what their staffing plans should be.

To answer these questions requires the addition of two further intangibles – staff morale and the company’s reputation, which are beyond the scope of this short Briefing.

Until next time…

 

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The importance of estimation

Like most companies, this company did not have all the data shown in these figures, nor solid information on the other intangibles – so do we give up? No, we estimate what we think might have been happening, and the values that might explain events, seeking evidence to support those estimates. Then we start measuring what will be important to make sure things continue to go well in future.

Some items were not too hard – staff workload could be estimated from overtime records and time billed to clients, and service quality was indicated by the number of customer support tickets on the same issue. And (in spite of the warnings about using proxies in Briefing 73!) there was no choice but to use the number of complaint emails to indicate customer annoyance. Going forward, though, we could start to track better indicators – simple online surveys of customer satisfaction or staff morale, for example.

Strategic Management Dynamics book coverThe key with tracking information on intangibles, though, is to specify carefully a small number of key measures and track them frequently – not measure ‘everything’ once a year. That way you find out there’s a problem coming towards you in time to fix it!

This briefing summarises material from chapter 9 of Strategic Management Dynamics, pages 584-590.

Read more about the book on our website

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