In our last blog post, we discussed how Corporate Core Values Confusion occurs when an original and laudable core value erodes in small increments to the point where it is no longer representing the intent of the original tenet. Corporate Core Values Confusion is extremely complex to solve because in all likelihood, employees still believe they are faithfully following the tenets of the original culture, and will not recognize that, in reality, it has shifted and is no longer what it used to be – in some cases actually serving at counter purpose to the original value. In this detailed case study we’ll show you how Corporate Culture, Operations, and Compensation interact in a real world example to create corporate dysfunction that destroys shareholder value.
Corporate Core Values Confusion Case Study
To provide a more realistic and concrete example of core value erosion and Corporate Core Values Confusion, in the context of operational and compensation issues, let us take as an example a company that has been built on a reputation for great customer service. Corporate education programs have reinforced the “customer first” message over many years so it is deeply engrained in every employee, and this is further reinforced by employee compensation: every employee receives an annual bonus based on the customer satisfaction ratings for the company as determined by an outside customer satisfaction evaluation, on the premise that “everyone contributes to customer satisfaction”.
Unfortunately, for the last few years, support revenue per customer has been steadily decreasing, leading to poor corporate performance and a mandate for change. Detailed analysis shows the financial causes: in recent years, the sales teams have been discounting more heavily while support costs have gone up, and since the price of support has remained flat, support revenue has been eroding, and support gross margins have steadily declined to unacceptable levels. While the financials state the facts, the root cause is a mixture of operational issues and cultural issues, and both must be addressed in order for the turnaround to be successful.
Let’s take a look at the cultural issues. Over time, the original message has slowly morphed from “customer first” to “customer first at any cost as long as the company’s annual customer satisfaction metric remains high” – a typical example of Corporate Core Values Confusion, in this case accelerated because everyone’s bonus is tied to the “corporate scorecard” – which includes no measure of revenue or profitability, merely the “customer sat rating”.
This has resulted in the underlying message morphing to “the annual customer sat ratings are first” versus the original “customer is first” corporate core value. This in turn has resulted in a number of dysfunctional behaviors such as the discounting of support, or additional services not covered under the customer’s care plans that have been given away for free to assuage the customer’s dissatisfaction with product issues. The product issues have further compounded the problem: because the company has historically not had product issues, the typical controls for discounts are not in place because in the past they were never needed. So the approval for these extended discounts doesn’t have to go to a regional sales director, or even the sales manager – individual sales reps can discount support very steeply, and frequently do so. This is not unexpected since not only are they rewarded with commissions for closing the business through discounting, but they get the added incentive of a high customer sat rating resulting in a corporate bonus.
But the most serious problem of all, a leading indicator of even further declines in the business, has been masked by the “blind spot” created by the Corporate Core Values Confusion whereby every employee believes they are serving the tenet “customer is first”, where in reality they are serving “the annual customer sat ratings are first”.
The problem is simply stated: in addition to the customer satisfaction rating, there is another key question on the company’s annual customer sat survey asking about future intent to buy more of the company’s products. This metric reflecting future intent to buy has dropped 20 percentile points in the last two years – but no one has really noticed because that question was not included in scoring the results of the company’s compensation plans, which was only tied to “customer satisfaction”.
This is where the underlying cultural issue makes its impact, and shows the dangerous and subtle nature of Corporate Core Values Confusion. In a true “customer first” culture, an obvious indicator of true customer satisfaction would be future intent to buy. After all, happy customers buy more products and services. The actual culture has morphed into “customer satisfaction ratings first” – causing the very important leading indicator of “are you planning on buying more products from the company” to be relegated to secondary importance, or explained away. Nevertheless, were you to ask any employee, “Are you focused on true customer satisfaction or the ratings?”, every employee would truthfully answer “true customer satisfaction”.
An operational turnaround of this situation is neither easy nor straightforward and requires careful management. In this case, the gross margins for support are now at an unacceptably low level, customers have now been trained to expect discounting at levels not supportable by the business, and a serious negative signal for future product revenue has declined catastrophically. How to tackle the operational issues is discussed in the section on Transforming the Business.
However, the true transformation here must be the cultural transformation. We’ll discuss what it takes to achieve a cultural and operational transformation that significantly improves operating results in our next blog post.