Stephen Shu, PhD – Page 72 – Professor of Practice of Behavioral Economics

March 14, 2005

Care Matters In Customer Service

I’m a true believer that there are many ways to skin a cat when it comes to solving business problems. Measurements and metrics for operations, however, are something that I’m borderline on being religious about. I was recently hired by a COO to diagnose the breakdown of a customer service operation for a Series C carve-out/venture deal. For this company, I discovered that a big problem throughout the organization was a lack of metrics, an executive dashboard, and time-series view of data. Had headquarters and regional management been looking at the same picture of the business, it would have been much easier to see the decline in service, turnaround time, etc. as it related to other controllable factors in the business (such as introduction of a new, less efficient IT platform). In addition to making recommendations on implementing a new measurements system, I had made the recommendation for the company to look for a new rock star, good lieutenant, and proactive person for running the customer service show, especially coming off a year of service decline. I suggested that numerous managers be involved in placing such a key position, and I also volunteered to interview people for the slot.

In any case, measurements are close to sacred to me. I’ve blogged about it in the past, and I expect I will continue to do so in the future.

Then Seth Godin shows me that there’s another way to look at things and that one can scrap measurements. I hate that, but he’s right.

Note that Seth has also posted links to his top ten posts in 2005. Worth checking out.

Steve Shu
Managing Director, S4 Management Group

March 13, 2005

Outsourcing Innovation – The Final Frontier or The Last Stand?

I imagine this could be a bit of a controversial article (Business Week). The article covers the outsourcing of innovation. We said we’d never do it, but here we are. Key snips from the article for me (bullet format is mine):

… Underlying this trend is a growing consensus that more innovation is
vital — but that current R&D spending isn’t yielding enough bang
for the buck …
… "It is a slippery
slope," says Boston Consulting Group Senior Vice-President Jim Andrew.
"If the innovation starts residing in the suppliers, you could
incrementalize yourself to the point where there isn’t much left." …
… Still, most companies insist they will continue to do most of the
critical design work — and have no plans to take a meat ax to R&D …
… Who will ultimately
profit most from the outsourcing of innovation isn’t clear. The early
evidence suggests that today’s Western titans can remain leaders by
orchestrating global innovation networks. Yet if they lose their
technology edge and their touch with customers, they could be
tomorrow’s great shrinking conglomerates …

I suppose that at the heart of the question is what part of the R&D chain can be outsourced without threatening a company’s ability to appropriate profits (and under what conditions). The Business Week article hints at looking at R&D more comprehensively and that the last line of defense may be having a competence in orchestrating innovation supply chains.

Steve Shu
Managing Director, S4 Management Group

March 13, 2005

Blogads Survey Results

Steve Rubel points me to results of the recent Blogads survey, which surveyed more than 30,000 readers of blogs. Steve points out some good items that caught his interest. Some different items that jump out at me include:

question #14 regarding why people read blogs … 75.3% responded that it was for "News I can’t find elsewhere",
question #11 indicated that the median number of blogs read daily is five, and
question #12 indicated that in an average week the median hours spent reading a blog was 10 hours per week.

I’m sure there’s some measurement error here, but putting on my propeller head nevertheless, that’s 2 hours per week per blog. On the surface, a lot of eyeball time and a lot of unmet needs being met by some blogs.

Steve Shu
Managing Director, S4 Management Group

March 11, 2005

The Oracle-SAP Bids For Retek and History Review

The following has been cross-posted at The CIO Weblog but is also listed here as it references some core M&A valuation studies done in the management consulting industry. What is only lightly touched upon here is the importance of program management and operations during deal follow-through (operations and execution have been my past bread and butter work [shameless plug]).

Oracle’s latest bid for Retek, a category leader in business management software for large retail chains, could be a windfall for Retek shareholders. Oracle’s bid at $504 million US ($9.00/share) outpaces SAP’s bid Tuesday for $496 million US ($8.50/share).

Where this will ultimately wind up is anybody’s guess, but here are some facts pertaining to what has happened with this deal, and what has happened historically with other companies with respect to both shareholders and customers:

SAP’s bid of $8.50/share represented a 42% premium over Retek’s price of $6.00/share on the close of February 25. Shares of Retek have recently soared 21% to $10.40 (source).
Past McKinsey studies have shown that shareholders of acquired companies have received on average a 20 percent premium on friendly M&A (source).
Many mergers have failed largely because bidders paid too much ("the winners curse") with average takeover premiums in the 40% range (source McKinsey).
Although other studies by consulting firms such as Boston Consulting Group have shown that companies that systematically pursue acquisitive growth outperform competitors that pursue few or no merger deals, the large majority seem to agree that if deals go through post-acquisition integration is *key*.
BusinessWeek investigation in 2002 and 2004 have shown that big M&A deals have left customers dissatisfied half of the time (source).

So deal makers ought to take extra pause and pay attention to operations and the customer, especially since Retek is a prized category leader. On the good news side of things, boards seem to have been getting smarter about M&A all the time.

Steve Shu
Managing Director, S4 Management Group

March 10, 2005

Scoble’s Take on the Technorati Mini-Controversy

Just wanted to post a link to Scoble’s takeaways and reinforcements on the recent Technorati blogging happening. Numbers 8 and 9 from Scoble’s list are noteworthy to me (in the context of crisis response) as the blogging medium is a bit of a different animal as a communications medium:

8) Get into real space as fast as possible. Text is so easily
misunderstood. Why not do an audio or video podcast? That way we can
see just how sorry you are, you can cover a lot more ground, we can
hear your sincerity in your voice.

9) Overcommunicate. The more you communicate, the less serious these
problems will be. With a lack of communication people start making
things up. Or at minimum they start rattling the cage to see what’s up
behind all the silence.

I cannot emphasize enough that the blogging communications medium is different. There are delays inherent to the system, people don’t always know who the spokesperson is and who’s watching, and one’s never quite sure if everyone is looking at the same picture. Factors like these can create volatile blogosphere systems dynamics.

Steve Shu
Managing Director, S4 Management Group

March 10, 2005

Musings on a Management Consulting Premium Puzzle

This post was motivated by a recent social meeting where my friend and I talked about the management consulting industry. Both of us are University of Chicago MBAs, and as such, I think it is fair to characterize that we believe in the notion of mostly efficient markets, i.e., where buyers and sellers reach fair prices for doing business in aggregate.

Now there are a number of examples in behaviorial finance, economics, and finance areas where puzzles exist and where free market theories do not seem to hold. For example, there is the equity premium puzzle, which tries to address why required rates of return for equity securities is so high relative to risk-free rates of government bonds. There is also the closed end fund puzzle. In this case, it is perplexing why funds comprised of individual stocks trade (when the fund is closed) at a deep discount of the total sum value of the stocks. It seems as there would be close to a riskless opportunity (called an arbitrage opportunity) for someone clever to buy up the entire fund and then sell each of the shares of stock for a profit (even net of transaction costs).

So here’s why I called this post the "Management Consulting Premium Puzzle". My friend basically questioned why management consultants should be able to charge so much money for their services over the cost of using existing employees (to put this in some perspective, average annual billings for the larger consulting firms can go anywhere from $400,000 to over $1 million per year per consultant). Even though I am a management consultant (now freelance), I didn’t take this as a shot at me. I have worked in both camps numerous times, and I can see valid arguments by both operating managers and consultants as to why or why not consultants should have high premiums.

Part of it comes through calibrating the value of management consultants (as I’ve posted before), but there is another way to look at this. Consider some typical questions operating company managers raise:

is there value to having a third-party facilitator (the management consultant) that is apolitical?
is there value to outsourcing this vs. insourcing?
is there value to having a consultant that has seen other businesses?
is there value to having a specialist consultant?
is there value to having extra bandwidth to get over a hump?
is there value to having a high-caliber resource for a temporary period?
is there value to having a well-known brand consulting firm involved (e.g., no one got fired for hiring McKinsey or IBM)?

My gut feel is that the answer to at least five of these questions must be yes for a company to feel very comfortable in using an outside consultant. Therein lies the reason for the premium.

What would be an interesting study, however, would be to run a statistical analysis that regresses the $ cost of using either internal employees or outside consultants against the factors above (although the factors above are not entirely orthogonal). By doing this, one could get a more scientific idea about which factors clients weigh most and how much those factors contribute to the value proposition (in terms of $, how much value is attributed to the brand, etc.).

Steve Shu
Managing Director, S4 Management Group

March 9, 2005

Five Executives and Five Tips to Blogging Prosperity

Phil Windley points me to Information Week’s article. Covered are five tips for executives that are considering or already using blogging as a new communication medium. The tips are:

Use your clout
Don’t mix work and play
Keep it human
Find the time
Don’t be afraid to take stock and eat crow

My prior posts relate to #2 (consider separate blogging platforms for employees at work). For blog readers outside the US, here’s some explanation on the eating crow business … ahh, who am I kidding here? I’ve heard a lot of expressions in the management consulting industry, but for some reason I have not heard of the eating crow thing before. Sheesh. Maybe management consultants are a bunch of laggards after all.

Steve Shu
Managing Director, S4 Management Group

March 9, 2005

Updates on Prior Post

Scott Johnson (Founder of Feedster) indicates that Scott Rafer (CEO of Feedster) notes an inaccuracy in my prior post (it would not be the first time I was wrong!). Scott Rafer elaborates on the timing of Feedster’s blogging policy release. Scott, thanks for pointing out Scott’s post.

Other updates include that Dave Sifry has posted an update regarding Niall Kennedy. I think this is a good release of pressure on all parties. I don’t generally make comments on individuals in cases where I’m many steps removed, but support for Niall Kennedy was something that I was looking for in the communications. Clearly Technorati would not have put Niall Kennedy in the position of Community Manager if they didn’t have faith in him, so Dave’s post is consistent.

All updated posts by Niall, Feedster, and Technorati clearly outline the values of the parties. Plus the posts do a good job mark out the boundaries. All looks to be on track. As alluded to in the same prior post I wrote, I still wonder whether best practices would be to have employees have separate personal and professional blogs if only to put the blogger in an elevated psychological mindset.

Dave indicates that sometimes things get overblown in the blogosphere. The events that have erupted here are probably special in the sense that Technorati and Feedster are market leaders. These two companies watch a lot of blogs. Additionally, there are a lot of blog authors that watch them and utilize their services.

I suppose best practices for posting, measuring volume levels, implementing policy, and communicating are still being developed. To date, the Harvard Business School has only one written case that covers employee-company dynamics in the context of blogging, so I think the case here is very worthwhile to trace through.

Maybe in addition to the best practices of identifying "sponsored posts", the blogosphere needs to identify "satirical posts" as well. Satire has always made me uncomfortable.

Steve Shu
Managing Director, S4 Management Group