Putting People Before Profit

At a recent event, one of the attendees stood up and proudly shared a very dubious success story:  he had been listening in on a phone call in which one of his company’s service representatives was dealing with a customer who was closing an account, and the rep spent about fifteen minutes with the customer to talk them into keeping the account open with a one-dollar balance in case it would be needed again.   In the speaker’s opinion, the rep had done a wonderful job of saving the account.

Not everyone applauded at the end of his story – maybe three-quarters of the audience – though there is no telling how many of them thought the story truly represented a laudable success or were just clapping to be polite.   It is to be hoped that most of them recognize that what this fellow was praising as a success story was not at all a good thing, and a sign that the company is paying attention to the wrong numbers.

In case it isn’t obvious, the value of a one-dollar account is negligible.  At current rates, a dollar of capital might earn five cents worth of revenue while incurring about three cents in expenses, leaving the company with a two-cent gross profit every year the account remains open.   If the account remains open for fifty years, it will earn one dollar and, after G&A expenses, add a couple of dimes to the company’s bottom line.  Meanwhile, the fifteen minutes of CSR time likely had a fully-loaded cost of around 15 dollars.   Net loss, fourteen dollars, even if you don’t discount the value of future revenues for inflation.

The reason the speaker thought this incident to be a success is because he’s thinking of one statistic: the number of customers the firm has.  It’s likely because he’s being managed to do so – incentivized to grow and retain the number of customers without paying attention to whether the accounts he’s getting and keeping are at all profitable.   The more such accounts he creates and saves, the more his company loses rather than gains on the bottom line.   It's counterproductive performance, and the sign of a siloed and blindfolded culture in which each department thinks of its own goals regardless of their impact on the organization as a whole.  

The firm likely has enough good customers to keep it afloat – it can afford to take some losses.  But this is also a myopic perspective.  Every dollar in expenses incurred to retain unprofitable accounts is a dollar in interest that should be spent on retaining the profitable ones (or a quarter in interest, if the firm keeps the rest for itself).   I checked his company’s interest rates , and they are far below the market leaders – so much lower that it doesn’t make financial sense to do business with his firm.    Chances are, the cost of maintaining unprofitable accounts is at least part of the reason.

How many good and profitable customers are leaving his firm, which cannot pay to retain them because of the losses taken to retain unprofitable ones?  One can only speculate.   The truth is kept well away from the public, and perhaps is even unknown to decision-makers at the company, who continue to watch and press upon their employees to chase a growing head-count without consideration of whether the “heads” are worth having or how long the firm can sustain itself in this manner.