Friday, May 04, 2007

Anatomy Of A Death Spiral (Part 2)

I was recruited to my current company in 1999 at the height of the tech bubble. This wasn't just any tech company, it was one of the original tech companies. Its history was legendary. Our customers were leaders in their own industries. The name was recognizable to everyone over the age of three. It was prestigious, it was exciting, and I felt good about the work. The company's stock was soaring. Our CEO was worshipped by Wall Street. I counted myself among the extremely fortunate. My local office was something of a bastard group, having been only recently acquired, but we were still highly profitable, the team was tight, and the management was competent. It stayed like that for precisely one year.

After the tech bubble burst, my company seemed like a safe harbor against the storm. Our business model was solid and our revenue was real. My division was a solid money maker with long term, profitable contracts. Unfortunately, the financial market was shaken to the core and people with money to invest were afraid to go back to tech (this mindset eventually gave birth to the real estate bubble, but I digress...). Panic set in among the officers of my company and they began their obsession with recapturing the interest of the investing class. At first this manifested in an unlikely pairing of delivery centers as our executives lustily eyed the Canadian labor rate differential. We were joined with our brothers in Canadialand and the favored buzzwords became "synergy" and "leverage". We later understood these terms to be euphemisms for "move work to Canada." A good portion of work did move but it wasn't easy and it wasn't as financially rewarding as our hyperventilating executives had hoped. Canada has its own set of labor laws, and where Americans can work an endless number of hours ("there are 24 hours in a day, feel free to use them all" was a favorite saying of one manager), Canadians have certain restrictions. And, as we discovered, a fabulous array of holidays. And issues with their bi-lingual nature. Canadialand was not the panacea of cost savings that everyone had hoped for.

This disappointment set the stage for our first round of cost cutting, aka Cost Take Out, aka CTO. It was an upsetting concept at first, as we delivery managers were given CTO targets and advised to document what work we'd stop doing for our customers. Stop doing work for our customers? We prided ourselves in our ability to deliver customer service... to put those customer relationships at risk was a bizarre consideration. We made it through that first round of CTO, but with the next quarter came another round. And then another round. In fact, every quarter brought with it a new "cost challenge." Every three months we did less for our customers.

This was my first real awareness that there was something horribly wrong with the way big business did business. It was not enough to make a profit. It was not enough to be highly profitable. It was not enough to have a good product and happy customers. All that mattered now was Wall Street's perception of your numbers, and whether or not their rating was enough to send investors into a stampede.

Outsourcing of IT services is an interesting business. Our customers sign on because they trust that we'll bring more expertise to the table than they can develop in-house, and they trust that we can deliver it more cheaply since we're doing it on a larger scale. In the case of my company, customers also assume we can do it more cheaply because, hell... we are in the business of hardware and software! So for these reasons, a company agrees to give up a certain amount of control in how their IT services are managed. Some companies are only partially able to divorce themselves from the IT management concept and still remain deeply involved in all of our day to day activities. Other companies want a turn-key service and happily distance themselves from all the details. But in the end, every single customer wants to know they've received the best value for their money. Regardless of how much or how little they've paid, if they don't feel like there's value in our service, they're not going to be happy. And when they're not happy with our service, they don't buy more services. Those are the customers who leave. And since exiting customers tend not to leave you with a fabulous reference, new customers become more scarce.

Now to be fair, the technology market has changed dramatically over the past 10 years or so. The complex, sophisticated machines that used to drive technology are still available but now there are alternatives that include machines no bigger or difficult to manage than your laptop. There's also more competition for our customers, and customers are more fickle. Fortunately, my company is an innovator... its success is rooted in R&D. We develop products that people need and then provide them with first rate support for those products. Right?

Not exactly. R&D is a long term investment and it's not risk free so, while we haven't abandoned it entirely, we no longer rely on it. It's easier to buy the product of someone else's R&D. And, while our reputation was built on delivering first rate service, service delivery is now merely a cost lever. Need to save a few bucks to make the quarterly numbers look more appealing? Take it out of service delivery.

The problem with perpetual, mindless CTO, as any delivery grunt can tell you, is that eventually you're going to break your service. It may not happen right away, and maybe you can cover up the impacts for a while, but eventually the breakage is going to be noticed. The decrease in service will be exposed to the customer or, worse, the service impact will disrupt your customer's business. And that's about the worst possible customer relationship scenario I can think of: When he's paid for $10 service and realizes he's only getting $6 service.

To be continued...

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