Saturday, April 27, 2013

The Technology Putsch

I've recently read Heller's The CIO Paradox, a collection of stories, quotes, and random bits of advice for technology executives who are seeking to seize power within their organizations.  It's an interesting perspective on an ongoing problem of internal conflict between business units that wish to leverage the benefits of technology to improve their operations and a technology department that wishes to leverage this desire to exert control over those they are meant to serve.   On that level, there's quite some food for thought when struggling with an IT department to get the support you need to accomplish organizational goals - but when you consider it as a metaphor for customer service (the IT department being a service provider within an organization), it provides some keen insight as to the motives that lead firms to constantly do the wrong things.

The Literal Level: IT versus Everyone

On the literal level, what we see in the information technology profession, across various firms and industries, is an attempt of a supporting actor to take center stage.   One need only look to the nature and evolution of IT departments to recognize this.

The nature of information systems is that they are equipment, much as any other equipment operated by a business.  In fact, the IT department was seeded in the purchasing and facilities departments of most firms, such that the clerk who once ordered pencils and ledgers expanded his purchasing to telephones and photocopiers, and later expanded it to desktop computers.   In that sense, the technology executives' putsch seems as irrational as i
f the clerk who ordered telephones sought to tell anyone who used a telephone whom they were allowed to call and what they were allowed to say.

However, the evolution of technology is much more insidious.  The computer was initially a glorified calculator, but has since evolved to become more integrated with operations, such that the technology no longer supports operations but controls them - a clerk cannot process an invoice outside of the computer systems, and must accept the awkwardness and limitations of the processes that the systems require in order to be used.   The relationship between the departments seems to be following quite the same pattern, in which the technology department is no longer supporting business operations, but dictating how the business will operate.

Naturally, this has led to quite a lot of politics, infighting, and utter counterproductivity. This parasitic mode of "collaboration" has been mutually dissatisfactory, and the present state of affairs is for the IT department to seek full control, no longer bothered by the needs of the rest of the business - who, meanwhile, are concerned with accomplishing organizational goals for which they are held accountable.

A Broader View for Customer Service

The intentional topic of the book is interesting, in the manner of getting a glimpse of an opponent's playbook, but taken in a broader sense, it has significant implications for customer service.   That is, the IT department is an internal supplier who supports and provides service to the organization, much in the way the organization itself is a supplier who supports and provides service to its customers.  The dysfunction and failure of the former relationship is in many ways similar to that of the latter.

Consider the fundamental perspective of the technology executive who wishes to exert control because he feels that his colleagues' lack of technical expertise leads them to fail to fully exploit the capabilities of technology.   This seems little different from the firm that wishes to "educate" its customers as to the uses of its product, because they are not aware of the full range of capabilities of their product.

That's not to say that customers would not benefit from greater awareness of the benefits and features of a given product - but that there is a line to be drawn between giving advice and suggestions and attempting to control.    It is entirely possible that, with the best of intentions, a firm can cross that line.   It seems far more likely that these "good intentions" are a convenient whitewash for a more self-serving agenda.

The relationship becomes clearly dysfunctional when it is no longer consensual.   That is, a service provider should only seek to provide service to those that want it, should be similarly cautious of being overbearing in providing advice and guidance, and should be constantly concerned as to whether their ultimate motive is to deliver greater benefit to the customer, or achieve more power (and income) for themselves.

The signs are fairly obvious as to when that line has been crossed: there is tension.   A customer who feels beset will attempt to escape or minimize the damage done to them by an overbearing vendor, and will withdraw their trust when they feel that they are being taken advantage of.   Whatever the ostensible motives of their assailant, they are still compelled to defend.

Back to the Book

Since this meditation started with Heller's book, it's likely necessary to state that the thoughts above are in reaction to only one facet.  The author does suggest at technology executives should be more transparent, work on supportive relationships, and otherwise act as a reliable service provider to promote the general welfare of the organization - but given that the main thrust of the work is in aggregating authority, power, and control to the top technology executive, the more positive passages seem a bit disingenuous, to leverage trust so it can be subverted to a more insidious agenda.

Tuesday, April 23, 2013

Relationship Portfolios: B2B, B2C, and C2B

I was reading an article about managing a relationship with difficult suppliers, and stumbled across a bit of advice that I think applies to many relationships, and particularly the convoluted mess that has been made of social media by the commercial sector.

The advice to business was that most organizations have hundreds of suppliers and it is clearly not possible to develop close relationships with each and every one of them.  As such, a business should attempt to classify its suppliers to identify a "manageable portfolio" of key business relationships based on two criteria:

  1. What is their value to you?   You have many suppliers, but some are more critical than others.  You do not need to develop a close relationship with your office supplies vendor, but you should seek to closely collaborate with the firm that provides components of your own product.
  2. What is your value to them?   Not all suppliers will want to invest the time and effort into developing a relationship to your firm.   They may be a critically important vendor to you, buy you might be a small account to them, and they will not have sufficient interest in sustaining a relationship.  Chasing after them is not a productive use of your time.

Based on those outcomes, it should be possible to spend your time interacting with vendors more wisely and productively, and to reevaluate your relationship with certain vendors: namely, if a vendor is more important to you than you are to them, find a different vendor (and in this sense, dealing with a smaller firm for whom you are a prized client may be more productive than dealing with a large firm who considers you to be far less important than their major accounts).

This advice is immediately applicable to the common consumer, who purchases many things and many brands, and doesn't wish to involve a great deal of time and effort maintaining a relationship with every single vendor.   Particularly in the present age of social media, brands are eager to become more intimately connected to their customers, and some customers seem to be indiscriminate in accepting and nurturing relationships with brands that do not matter much to them (which in turn gives the brands themselves a false indication of their importance).

It occurred to me immediately that businesses would be well served by taking the same approach to their own customers: recognize that some customers are more valuable to you than others, in that they provide the greatest profit, but that your most valuable customers may not consider you to be a significant supplier in terms of their total purchasing budget, and pursuing a relationship with them would be a waste of resources.

My sense is that this is one of the primary causes of social media clutter we see today: brands are indiscriminate in chasing after customers, and make unfocused and general efforts to connect with as many people as possible, instead of focusing on their most valuable customers (and those who want to connect), and the result of trying to appeal to everyone ends up in a sloppy and inconsistent message that appeals to no-one.

I don't have the sense that customers have quite so much of a problem: people who indiscriminately "like" brands are deluged with promotions and image marketing clips that are of no interest, and generally learn to trim their list of friends to the brands that matter most.   The problem became so prevalent that Facebook relegated business to a separate feed, which I strongly expect few people ever check.

So perhaps the question becomes, is it too late to even consider a more moderate and focused approach to interacting with customers via social media - or has the well already been poisoned?

Friday, April 19, 2013

Supply Creates its Own Demand

One sign that the overall economy is improving is that completely asinine business proposals are starting to bubble up again.  It's not as prevalent as it was during the dot-com boom of the late 1990s, but it does seem to be resurging, and I'm getting nibbles for "exciting ground-floor opportunities" that are very bad ideas for untenable services, particularly in the mobile channel.   In one such instance, a recruiter responded to my disinterest by insisting "Somebody's going to buy this.  It's a basic economic principle that supply creates its own demand."

The problem is, I've read a bit of economics, and am familiar with that phrase: "supply creates its own demand" is a attributed to Jean-Baptiste Say, an eighteenth-century French economist - and while the phrase is entirely pertinent to the situation of a firm with an untenable proposal, it's not meaningful in quite the way that people who misuse the phrase seem to think.

Say used this phrase in defense of laissez-faire capitalism, arguing against the proposition that a regulatory agency should prevent entrepreneurs from pursuing frivolous ideas that are wasteful of financial resources.   His counterpoint was not that any product that is manufactured can be sold, but that the process of manufacturing a product created economic activity equal to its value -  the producer pays his workers and his suppliers (who in turn pay their workers and suppliers) - such that even if the product is completely unsellable, the producer has still generated valid economic activity (particularly the employment of labor) that has provided income to others who will spend it less frivolously.

That is to say that an entreprenuer who pursues a ridiculous and fruitless scheme ultimately wastes only his own fortune in doing so, and brings the loss upon himself for his own foolishness.   In the sense of the economic efficiency of a market, I can't find reason to disagree with that assertion - but in the sense of reputation, it is not entirely correct.

Anyone involved with an ill-conceived venture takes damage to his reputation for having chosen to be involved in it.   A candidate whose experience reflects a string of misguided failures (Flooz, WebVan, eToys, Kozmo,, Friendster, and the like) is likely to have a hard time finding employment with a reputable firm, and rightly so: he has clearly made very poor career choices, to the degree that his intelligence and judgment are not to be relied upon.

So in the economic sense, the money that was spent chasing bad ideas is still in circulation and found its way into the pockets of people who would spend it with better discretion, bankrupting only those who were less that circumspect in investing in it.    But the time, effort, and expertise that went into realizing a foolish plan are gone forever - and it's incumbent upon prospective employees, as the owners of that time and expertise, to make better judgments about how it is applied.

Granted, there are ulterior motives to signing on with a doomed company - an unemployed person who must tend to the needs of his family can't be too choosy about where he gets a paycheck.  It's also fair to say that even a good company has a shocking number of very foolish projects, and if an employee were to flee every time he's called in to lend a hand to giving birth to an executive's deformed brain-child (or even, in some instances, even to remark that the idea is ill conceived), he would likely change jobs several times a year.  Such are the trade-offs we must make in this life. But at the same time, I don't expect that the worst-case scenario applies to every case, and it is more often the case that career decisions are not made in a desperate situation.

But to the original point, "supply creates its own demand" does not mean that any product that anyone cares to produce will find a customer base to return his investment and generate a profit.   It means that the act of creating something (even if it be useless) generates demand for labor and supplies and does negligible damage to the economy.   However, individual fortunes will be lost and individual reputations will be damaged  - and while to former may be restored with some difficulty, the latter is often an irrevocable loss.   This should not be blithely ignored.

Monday, April 15, 2013

The One True Moment of Truth

I try not to get too crotchety about the way people carelessly bandy about language, but sometimes I can’t help myself.  In particular, there’s a discussion I’ve chosen not to participate in because participants are referring to various brand touchpoints as “moments of truth” – that strikes me as a very sloppy use of language and, more importantly, distracts from the real Moment of Truth on which brands should be focused.

I recall having the very same conniption in a retail management course in which the moment in which a customer regards several different brands on a retailer’s shelf and chooses the one to purchase is called “the moment of truth.”   That is a very significant moment in the buying process, and one that merits a great deal of attention – but it’s still not the real moment of truth in the relationship between brand and customer.

To cut to the chase: the Moment of Truth occurs when a customer recognizes that a brand has met or failed to meet his expectations.   There is no more significant moment in the relationship between brand and customer, and no other moment in which the most important promise of the brand is tested and assessed.   Succeeding in this moment is the most critical factor in determining whether the customer will be satisfied or disappointed, and in the customer deciding to give his loyalty to a brand or try something else next time.  There is no other moment that leaves as strong or indelible an impression on the customer.

The only instance in which Moment of Truth should be used in the plural is when a product is used repeatedly: a customer buys a good he uses multiple times or returns to use a service multiple times.   Each of those instances involves the same assessment.   It seems to me the first Moment of Truth carries a special weight, because it is the first impression – such that if the second Moment is less satisfactory, the customer will give the brand the benefit of the doubt and buy it a third time, and it takes a string of failures (or a single spectacular failure) to change that initial impression.   The same is likely true the other way around - i.e., a good second experience mitigates the dissatisfaction of bad first experience - but chances are if the first experience was bad, there likely won't be a second.

The act of taking a product off of a shelf and dropping it in the basket is nowhere near as important as the moment in which expectations are compared to results.   The customer can take it right back out, or abandon their cart before purchasing.  Or even if the customer does purchase, it doesn’t impact their decision to enter into a relationship with the brand.  It’s a prerequisite to the real Moment of Truth for the customer to select an item, buy it, and take it home, but it is not an indicator of the start of an ongoing relationship.

Nor do any of the other so-called “moments of truth” have the level of impact as the real Moment of Truth.   Deciding to trust in an advertising claim, deciding to trust in a salesman’s recommendation, deciding the product is worth its price, and other moments that occur along the way are lesser decisions that must be handled well to get to a one-time purchase.   And the decision to purchase is itself another checkpoint on the way to using the brand and, at long last, getting to the real Moment of Truth.

The power of the real Moment of Truth can be seen in the way that firms who totally pooch many of the other interactions have fiercely loyal customers.   Customers will drive to an inconvenient location, pay a higher price, suffer the offensiveness of rude and arrogant clerks, submit to bizarre store policies, and soldier through an inconvenient sales process if they are convinced (by their own experience or otherwise) that the product will ultimately succeed in the Moment of Truth.

Simply stated – if you get the Moment of Truth right, you can get a lot of other things wrong, and you will still have flocks of loyal customers who will buy from you repeatedly and refer others to you.  They will readily admit your flaws, but state that in the end that your brand is “worth it.”     I’m not advocating that firms whose products pass the test in the Moment of Truth should slack off in every other regard, but I don’t think it can be denied that they are able to do so, and that many who get that moment right are intentionally inattentive to the other elements of customer experience as unnecessary perks for customers who would have purchased anyway.

I do think that is the chief reason customers abide bad service in other regards.   It is likely also the reason that brands that fail in the real Moment of Truth feel compelled to focus so much attention on less significant factors, hoping that they will collectively mitigate the inevitable failure in the real Moment of Truth.    I can't count the number of occasions when I've been called in to assist a client who has a serious problem with their product or service and either fails to recognize it or refuses to fix it - but who instead wants me to help make the purchasing process less difficult or address some other minor glitch as if it's the magic bullet.   They just don't get it, and will continue to fail until they recognize, acknowledge, and attend to the real problem with their brand.

That also brings to mind the need to be very careful when imitating a service leader: it’s generally very easy to copy product qualities and service practices, but the ones you choose to imitate likely have nothing to do with the reason that their customers are deliriously happy and fiercely loyal.  You can dress your cashiers in the same color as the service leader, but that’s not going to make a whit of difference – granted, that’s a silly little example, but copying more important-sounding elements of another brand (the store layout,  advertising messages, product features, pricing, and so on) are no less silly and no more likely to lead to success.

It's clear to me I'm beginning to unravel - these are ancillary topics and there are many more to be considered.  At the start of it all, and at the heart of it all, is that there is only one Moment of Truth.   All the other brand touchpoints are of lesser importance. And the more you focus on things that do not matter as much, the less attention you give to the one moment that is most important – and this is the source of my cantankerousness about tossing around that phrase without much consideration.

Thursday, April 11, 2013

Cost-Based Pricing

In a previous post I glossed over the costs of production, taking for granted that they are familiar to most people.  I've since come to realize that production cost is not so obvious a topic, so it merits some delineation.  So be warned that what follows is going to be very tedious and entirely unnecessary to anyone who's taken an accounting course, but possibly enlightening (though no less tedious) to anyone who hasn't.

Cost-Based Pricing Model

When a producer sets a price in the market, he must consider the cost of production in order to remain financially viable, which includes more than the obvious cost of fashioning raw materials into finished goods.   The total cost includes variable costs, overhead, and cost of capital.   A few other items, required return and risk, are also considered - though not strictly necessary for the sustenance of his operation, it is generally necessary for him to sustain his interest in sustaining his operation, and thus merits consideration.

Variable Costs

The variable costs of a product are mostly straightforward, and can largely be derived from considering the components that are assembled to create the final product, as well as to the labor involved in its creation.

A simple example is the bread produced by a baker: each loaf requires a certain amount of flour, yeast, salt, and water an the amount depends on output - you need twice as much material to make two loaves as one, and a thousand times as much material to make a thousand loaves.

Waste and spoilage are costs related to risk, which will be considered later, but they are strongly related to variable cost because waste often occurs per-unit and spoilage results from purchasing more materials than are needed.

Labor is also said to be a variable cost, but it is not as flexible and is more subject to waste: workers generally demand a fixed wage rather than being paid by piece-count and, while it's possible to release a worker on a full-day or half-day basis, maintaining a consistent labor supply often requires paying idle workers.   So while labor can in theory be accounted as a fixed cost, it is usually more in the nature of an overhead cost.

Overhead (fixed costs)

The overhead costs of a product pertain to any cost that does not change regardless of the number of units sold.   This generally involves any expense that involves an item that is not delivered to the customer as part of the product.

Back to the example, the baker's oven and utensils are overhead costs as is the rent of his shop: regardless of whether he bakes one or a thousand loaves, these costs are still accrued.

There is often an attempt to calculate overhead costs as fixed costs - per the previous example, the amount of labor to create a loaf is often considered a fixed cost, but because his employees' wages are based on the number of hours they work rather than the number of loaves they produce, the cost is not truly variable though it can be made to seem so by accounting.

There is likewise an attempt to make the cost of equipment into an fixed cost, figuring that a mixing bowl will wear out and break in a year, during which time a certain number of loaves will be produced, and therefore its cost can be apportioned per loaf.   This, too, is an artificial calculated value that is not strictly accurate in reality.

While overhead costs are not strictly related to the volume of output, volume is a driver.   That is to say that the capacity of an oven is not infinite, and it can produce only so many loaves even if it is operated around the clock, and that if the baker's volume increases beyond that point he will need to purchase a second oven.

There are various ways to flex overhead costs, but for the most part they recommend a long-term commitment: to buy and sell an oven based on whether it is needed on any given day is possible if the equipment can be rented on a per-day basis, but most equipment rental is longer term; and while a purchased item can in theory be sold and repurchased, this is also not a common practice that suppliers will accommodate.

Cost of Capital

Costs of capital pertains to the interest paid on loans, which must be repaid from the profit of any activity that the loan facilitated.  For example, if a baker who needed a second oven took out a loan to obtain it, his cost is not merely the cost of the oven but of the interest owed on the money borrowed to buy it.

It is a common mistake to consider, as a cost of capital, any interest that might have been earned on financial resources that are tied up in the business (such the amount of bank interest that could have been earned on the cash in the register) or the amount of profit that could be made by entering another line of business (a better return on equity by selling off the bakery and operating a butcher shop).

These are both important costs to consider when making an investment decision, such as which kind of business to open or whether to sell off one business and start another, but insofar as the operating costs of a business, they are irrelevant.

Required Return

Required return is the amount of profit that the owner of a business expects to make by operating it.   Strictly speaking, it is also an investment decision that is not germane to the operation of the business, but it does influence the price at which merchandise is sold, and merits consideration.

The required return is the most flexible part of pricing.   The owner must make enough to cover fixed, variable, and capital costs to avoid bankruptcy.  He would very much like to make a profit on his investment, but it is not strictly necessary for him to do so, and a business can run at break-even for an indefinite amount of time, though few would care to invest in such an enterprise.

The opportunity cost of investment elsewhere, as mentioned in the previous section, is generally a driver of required return.   That is to say given an opportunity to buy a second oven out of cash (rather than taking a loan) must consider other uses that could be made of the money.  If it would be more profitable in another investment, the wise decision is not to invest in the business.  Conversely, if the business needs the money to increase its volume, it must offer a return higher than competing alternatives.

Risk Margin

The risks involved in a business also impact the cost of the product, but it's a gangly topic that can make an already tedious meditation completely unbearable, so I will try to keep it short.   However, it's necessary to mention because too many arguments of price and cost suffer from the "perfect world" fallacy in which everything can be known and flawlessly predicted.

Risk in variable cost relates to waste and spoilage: a baker who expects to sell 500 loaves a day purchase enough material to make that many loaves.  If his prediction is too ambitious and he has more flour than he needs, it will eventually rot and his expense will be wasted.  If the baker spills a sack of flour, the cost is likewise wasted in that it will not be recovered by selling bread that might have been made of that loaf.

The risk in overhead costs is twofold: the gross profit (the difference between the revenue and cost of each unit) may be insufficient to cover overhead due to low sales volume, and things that are included in the overhead may have a shorter lifespan than expected.   The owner must also elevate the price to cover this risk.

The risk of cost of capital is generally mitigated by fixed-interest loans, that assure the borrower he will pay a certain amount of interest.  If the financing is not fixed-rate, such as an expense charged to a credit card with a floating rate or credit obtained by a short-term loans that rolls over upon itself, then there is some risk to be borne by the owner, and passed along to the customers in the price.

And while the required return does not entail any risk, all of the above factors constitute a risk that the required return will not be achieved.   And since the desired return is higher when the risk is higher, it will have an impact on cost.

Finally, there is a species of risk wholly unrelated to cost, such as disaster risk: it can be as devastating as the cart being run over by a bus, the vendor being robbed at gunpoint, or as minor as a wind that blows a stack of napkins into a puddle.

None of this changes the fundamental structure of the costs, but it does factor into the calculation of price.

Putting it All Together

I'm going to refrain from posting a spreadsheet that shows a tabular accounting of all of the costs of production - the excursion has been so tedious that I have bored even myself - the point being that in determining the minimum price at which a producer can offer his goods for sale, all of these factors (and possibly others I have  failed to consider) must be tabulated and broken down to the unit level, based on a projected volume of sales.

Sunday, April 7, 2013

The Trouble with Markets

I've recently read Roger Bootle's book, The Trouble with Markets, which examines the current global financial crisis.  Bootle is decidedly a leftist of the Keynesian camp, which means he must be taken with a grain (or a shaker) of salt.  The left-wing perspective on economics can be as absurd and disingenuous as the right-wing perspective on civil rights - i.e., riddled with half-baked ideas, specious logic, and tenuous and perfunctory conclusions.

That said, there are four basic theses that seem entirely sound and merit some consideration:

Irresponsible Levels of Consumer Debt

The thesis that consumer debt, primarily in the real estate sector, was one of the primary causes of the "bubble" inflating and deflating, is an accepted perspective that has been thoroughly chewed over in the mainstream media: banks were encouraged to extend mortgages to borrowers with no ability to service the debt, then bundled the debt into securities and sold it off to institutional investors, who are now left holding the bag.

There is still, however, some hay to be made over their motivation for doing so - whether it was greed on the part of the banking industry, or whether arm-twisting by regulators to pander to public demand to have things without the responsibility of paying for them will likely remain a topic of much debate, though it seems more along the lines of propaganda and posturing.

Ultimately, the question to consider is how far a firm should go in facilitating the financing of their product - to drive sales while accumulating a significant amount of uncollectable accounts receivable is ultimately unprofitable.   When a single firm does so, it falls into bankruptcy, when multiple firms in an industry, and multiple industries in an economy, engage in this practice, the result is a market-wide catastrophe arising from the dereliction of shared responsibility.

International Trade Imbalances

Bootle is far more detailed in his analysis than any author I have yet encountered on the topic of trade imbalances - chiefly, that manufacturing nations in Asia and oil-producing ones in the Middle East have accumulated huge surpluses in trade and hordes of capital.

That is, there is a general mood of panic about the massive amount of US debt held by China, and the fear is focused on what they might do with that wealth in future - to dump dollars on the market would be devastating to the world economy (not just the US economy, as many or most national currencies are pegged to the dollar, explicitly or implicitly).

Fear of what might happen in future has overshadowed the damage that has already been done. The capital that has been amassed has effectively been removed from circulation - specifically, because it is horded, it is not available to use in production.   The immediate problem is that productivity has been sapped, and the greater future problem is that the infrastructure of production is eroding, such that when the horde is spent out, the market will be unprepared to meet the demand.

Dysfunction in Investment and Financial Services

Oddly enough, Bootle takes a page from classical economics, looking to the original purpose of investment: it provides entrepreneurs who have productive ideas but no means to act upon them access to the capital of investors who have capital but no idea of how to put it to productive use.

In that sense, the original investment is win-win - but when investments are bought with an eye toward reselling them at a higher price, facilitation of productive enterprise is pushed to the sidelines and the financial market takes on the character of a casino in which one party's gain is counterbalanced in equal measure by another party's loss, and the valuation of investments is chiefly according to expectation of profit in the investment market, not the expected profit of the productive enterprise into which the investment was originally made - which itself becomes incidental to the point of irrelevance.

This has always been so: the valuation of any security has consisted of the asset value it represents, the present value of future income from productive activity, and a measure of hype and hope on the part of speculators looking to flip investments for a quick profit.  However, speculation on the future value of investment vehicles had been, until just a few decades ago, a fringe activity rather than the primary business of investment markets.  Arguably, speculation has now become the mainstream and investment the fringe, which creates significant instability.

Mismanagement of Productive Enterprise

Finally, there is the matter of how productive enterprises, themselves, are being managed.   The specific problem is a short-sighted pursuit of profit as a goal, rather than considering profit to be a byproduct of success at the more valid goal of providing value to paying customers.

There's some implication that management has pulled away from ownership, but it's far more likely that ownership is complicit in this change of purpose, especially given that a majority of stock in commercial enterprise is held by other companies - retirement and pensions, mutual funds, managed portfolios, and the like in which the actual owner is often unaware of the securities he owns and exercises no voting privileges.   This feeds back upon the dysfunction in the investment market, as firms are managed to serve their investors first, serving their short-term interest to the detriment of other stakeholder groups (chiefly customers and employees) who have a more long-term interest in the perpetuation and proper functioning of the firm.

This, at least, is a problem that has the potential to be self-healing, though there is considerable inertia and, in some instances, lack of options, but in practice it can readily be seen that firms who have become parasitic are readily abandoned, sometimes in a dramatic shift and others in a slow trickle, as customers and employees transition to firms that better serve their interests.

Wednesday, April 3, 2013

Will you build it if they come?

I find myself a bit annoyed of late at the misuse of the Internet as a testing ground in a manner that seem ethically questionable.     Specifically, I'm reflecting on the "empty playground" practice - not in the sense that a company creates a service that customers have yet to adopt, but in the instances in which a company creates the appearance of a service that it does not intend to create unless and until people start showing up.

That is to say that it is very expensive to provide a service or a product, and sensitivity to risk has led at least one firm I'm aware of to create a fake storefront that offers no value, with the intent of building out the business behind it only if people who are given the impression that it already exists show up for service.

In the brick-and-mortar world, this is somewhat similar to putting up a "coming soon" sign for a restaurant that might be opened, eventually - though it is not quite so superficial or so innocent when the business owner goes to further lengths to deceive customers into believing a restaurant actually exists: a sign is hung that says "now open," the dining room is furnished and there are a staff of waiters - but when you approach the maitre d'is he tells you they are not open for business yet, but if you give him your name and number he'll call you when it is.

In the real world, such a shenanigan would be prohibitively expensive, but online, a site can very easily be faked-up to tally the number of people who show up, assemble a cart full of items, enter their contact information, and only afterward learn that they cannot buy anything yet, because the vendor wants to see how many people come in and what items they assemble before he makes the decision to launch a real site.

It is still wasteful to do so, even though it wastes less money, but it's worse in that it does serious damage to a brand: the people who are tricked into "shopping" the site have had a rather nasty surprise, and are unlikely to return when it's open for business.  They will likely warn their friends to stay away, and as word of the deception spreads online, fewer people will visit or will show much interest when and if it opens for real.

Up to the point that personal information is collected under the premise of making an actual purchase, it's simply a waste of time and money and a betrayal of trust.  At worst, visitors have wasted their time and gone away with a bad taste in their mouths.   At the point personal information is collected, it crosses a very definite ethical line, possibly a legal one.

When a company wishes to do market research, it should do so openly.  Survey customers to see if they would be interested, or inviting them to participate in an ethnographic study that involves them shopping at a prototype that they know is not operational.   Even if the results are tainted by their knowledge that it's an experiment, it's worthwhile to take on that margin of error for the sake of ethics.