The Connected Company

Dave Gray: What's been happening is probably since around 2000 or so, when things like Twitter and then maybe a few years later Facebook and some of these other things came on the scene, this social software. Things like Yelp that allow people to do ratings and reviews, Foursquare, where people start checking in and sharing their location, these social technologies, social software, started to become just a part of everyday life, and that's really on just the everyday consumer/customer perspective, so we were adopting these things. What happens, or what has happened, is that this actually changes the world for business in a very, very profound way, because it's not that word of mouth is anything new, but customers always talk to each other about this or that, if they had a bad experience with the provider they would tell their friends, but there's a difference between the way that happened in the old world and the way that's happening now, because now if you have a bad experience you don't just tell five or 10 friends, you can tell 10,000 friends, you know, these networks of friends and friends of friends. So word of mouth has been amplified to really an exponential degree, and this creates some problems for companies, and it can also create some opportunities for companies that have positive word of mouth. If I have a great experience with a product or a service I'm likely to tell friends about that as well, and now, if I have a complaint, let's say a service isn't working or something's problematic, it used to be I'd just have to pick up the phone and call that company and go through their voicemail system and press the buttons and try to wait, and I might be venting, but I probably wasn't venting to the entire world and all of my social networks. Now if I'm frustrated and I'm on hold I'm on Twitter tweeting to my 10,000 followers: "I'm on hold and I'm frustrated, I'll try to reach out on Twitter to find that," so you have also now more different kinds of channels by which you can reach a company. So if you reach out on Twitter and you don't get a response and then you're frustrated and then you start Tweeting that you didn't get a response, and that goes out on Facebook, all these experiences, positive and negative, small and big, get up getting amplified across the internet. What happens is companies are not organized to be able to respond in any way to these things. So if you have a complaint and you Tweet it out and the company immediately responds, that's very impressive to a customer, from a customer's perspective, but actually most companies are not organized to do this today.

Rachel Salaman: And we'll talk about that in more depth a bit later, but in general what do you mean by "a connected company" then? "The Connected Company" is the name of your book.

Dave Gray: Yes. Well I would contrast it to a divided company. We have this idea of division of labor that comes down to us from Adam Smith and maybe even earlier, where the idea is that if you divide the work into components and pieces and parts, that you can have specialists doing different parts of the work and you can do the work more efficiently, which is absolutely true. Now what happens though is you divide the work, and in a larger organization you've divided the work into hundreds of thousands of little pieces, and as we divide the work though there's a by-product of that, we tend to disconnect the people from the purpose of the work. So when you're doing a small, very specialized task it's harder to stay connected to the overall purpose of the job that you're doing for the customer; if you're only in charge of taking phone calls related to fraud you have a very specialized set of tasks that you are doing. It may be much more difficult for you as a call center representative who's only handling fraud to see the bigger picture and understand perhaps the value of a customer.

The other thing that happens if the work is divided is that people become subject to very narrow boundaries and rules within which they can operate. Even if someone does understand the customer and makes a connection and has an idea of what the right thing is to do, often the company has rules, policies or even software that does not allow that person to do it. So I'm describing a divided company here. Now a connected company, and you think about it, most companies, you probably work in a department or a division and you have a role, and all of these things are kind of ways of dividing up a company. Now a connected company operates by a very different principle, and the idea is that rather than having processes and technology that are primarily aimed at dividing the work, they're aimed at connecting people with the tools and processes. So in a connected company, I guess maybe the ideal template of a connected company, every individual can represent the company as a whole.

Take that example of a fraud specialist, it just happens to be something that I've dealt with as a customer not too long ago; the typical way this would operate is you have a problem and it's related to fraud. You dial into a voice message system, you might have to go through menus and there may not be a menu option that's exactly the problem but you're trying to approximate, and eventually you reach a person and that person either can help you or they can't. If they can't help you they might have to transfer you to another person, at which point, and I'm sure we've all had this experience, the call drops or the other person doesn't pick up and you have to come back, and you have to go through the whole voice menu system again trying to reach the right person. What's happening there is as a customer you're connecting with a divided company because they've basically divided up all the work.

Now in a connected company, and I can give you examples of this; there's one called Vanguard Mutual Funds, which is a mutual fund company, financial services, if you call they have no voicemail service. In fact, if the phone's ringing a human being has to answer it at Vanguard, and in fact even the CEO and all the executives have periods of time where they man the phones; they call it Swiss Army because the same principle applies in the Swiss Army, everyone in Switzerland has to join the army for a period of time. So they call it Swiss Army, everyone in the company has to man the phones at one time or another. When you call you get an individual and that individual talks to you about whatever your problem is, and if they are unable to solve it themselves they have a network that allows them to connect other people, other experts and other systems to that call. So if they need to pull in another person, they don't transfer you, they connect that person to the call and they stay with you, so the first person you call is with you until your problem is resolved. So you can see, there's a very, very different philosophy and approach there; that person who first answers the call is basically representative of the entire company, they're not a specialist representing one particular piece of functionality in the company, they are a representative for the entire company, they're responsible for making sure that you're taken care of and you're helped.

Rachel Salaman: How practical is that though for most companies?

Dave Gray: I think that there is a lot of background I could get into, but the short version would be: in the industrial age, where this word of mouth issue was more contained, efficiency is not a bad thing. Let's take that service call; there's a cost to that service call, there's a cost both on the customer side and on the company side of time and energy. Now in the industrial age we've been focused primarily on the cost to the company, you know, what's the cost to the company of managing a call center and a series of voicemail systems and so forth. They believe they're reducing the costs by having fewer people on the call. Now the fact is that these voicemail systems rarely actually solve a problem. When you're calling a company it's rare that you have a routine problem that's easily solved with a voicemail or a voice prompted system, you know, get your balance or whatever, and that's what those kinds of systems are good at, but usually when you're calling you're calling with a problem.

Now the companies haven't really reduced the cost in a systems sense, they've only reduced their own cost, so the cost to the customer isn't really accounted on their balance sheet, it's only accounted when that customer leaves and goes to another company. Now if you take the Vanguard system, there might be a higher, I'm not even sure that there is, but there might be a higher cost to resolving a problem with real people as opposed to a voice prompted system. However, there's also the value of a customer that stays with your company for 20-30 years. If you had a choice between two companies and you knew that one was going to treat you like a cog in a wheel and the other one was going to treat you like a human being, which one would you go to?

Rachel Salaman: Yes, of course, you'd go to the first one.

Dave Gray: That's right, and you may or may not be willing to pay more money, but my money would bet that a call that is resolved in one call, a customer problem that's resolved in one call by maybe connecting with two or three different people, a human being and two or three different people, is probably cheaper than solving that problem in a series of three or four calls where you're dropped or you're getting kicked around and increasingly frustrated at every turn. Now the company might count those as four separate calls, but they're really four separate calls that are resolving a single problem that could easily perhaps be solved with one call.

Now if a company, if a large global company is looking at that and they go "Well, we're spending X amount of dollars to resolve a call," a big question is how they're accounting for those costs, and are they accounting for the cost to the customer and the cost of an angry customer, the cost of a lost customer or a negative word of mouth? The problem is, because these companies have divided up their work they've also divided up their accounting, so they really have no way to account for the value of a customer, retaining, or the cost of a lost customer, it doesn't show up in their accounting systems.

Rachel Salaman: Along these lines, in the book you say, interestingly, that profits can destroy companies. Can you just talk a bit more about that idea?

Dave Gray: Yes. There's a guy named Fred Reichheld, who's basically the inventor or initiator of something called The Net Promoter Score, which is a way, a method for tracking some of the things that I was just saying are very difficult to track; what's the value of a customer whose going to recommend you to others, what's the cost of a customer that's going to detract you and say negative things about you in the social sphere. The Net Promoter Score is a way to measure this, and Fred Reichheld distinguishes between good profits and bad profits. Good profits come because customers are happy, they're recommending your product or your service to their friends, they are loyal and you're building a relationship with them that's sustainable over time. Bad profits come from things that you can do that actually in the short-term might look good for you financially, but in the long-term are destroying your relationships with customers. For example, you're a bank and you decide that you're going to charge people to speak to a teller. That might generate some profits in the short-term but what's it going to do to your relationship with your customers, and suddenly you're telling them "Well if they don't want to pay to talk to a teller, which used to be free, they can go and use the ATM or the web," what message is that sending to them? What's going to happen over the long-term is those people are going to abandon you the first chance they get and go find another bank, or they're going to say negative things about you, which will cause fewer people to come into your bank in the first place.

Some banks have tried things like this, you know, there are nuisance fees and other things that they've put in to charge you and make money, which actually does increase their profits in the short-term but at the cost of long-term relationships. A company with angry customers who feel trapped and abused is not long-term a very sustainable company.

Rachel Salaman: So your advice to companies would be "put your purpose above your profits," would it, or what would it be?

Dave Gray: I think you want to not only be measuring your profits in a financial sense, you want to be measuring your relationships with customers and how positive or negative they are. There are lots of ways to do it. At my company, The Dachis Group, we have social software that is analytical and will actually look at what customers are saying about you and how you can impact that. There's also this thing that Fred Reichheld came up with called The Net Promoter Score, which is a way to measure how positive your customers feel about you. The Net Promoter Score is a very simple tool, it's a survey that you ask your customers which is on a scale of 0-10, "How likely are you to recommend us to a friend or a colleague?" There's another question that is part of that Net Promoter survey, which is, "Tell us what's the primary reason for your score?" That's how you actually get the feedback that helps you get better. So someone that gives you a nine or a 10 and you ask them why and they say "Well it was because I talked to a real person and it wasn't a voicemail system" or whatever, where if they give you a three and you ask them why and they say, "Well I went to your voicemail system and none of the actual choices had anything to do with my problem." So you have this feedback loop that you're building in, and this is something that many companies today do not have, a way to actually understand what their customers really want and improve, because they're not built to improve, they're built to be efficient.

It's back to your earlier question about "Is this really realistic?" The fact is that being a connected company is probably more expensive, at least initially, than being a divided company, if you look at things in a very static way, but if you want a company that's able to learn and evolve and improve along with customers, and if you want to have long-term sustainable relationships, the connected company is the only way to do that.

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Rachel Salaman: Well you've talked a little bit about what a connected company looks like or sounds like. In the book you go into quite a bit of detail and call them "podular," consisting of semi-autonomous pods. Can you define what you mean by "pod" in this context?

Dave Gray: Yes. So if you think about what I said about individuals being able to represent a company, if you think about a typical industrial age company, you could almost call it "monolithic." You can think of a giant pyramid, you think of the organizational chart as a giant diagram that looks like a tree with a single person at the top and tentacles moving down, and all the work as its divided into these specialties and sub-specialties and micro-specialties and how they're organized, you can have a picture of a company that maybe looks like a giant pyramid. Now let's say you have a problem that needs to be resolved and you're a customer, or even, let's say, you're an employee and you are in the customer service call center in India somewhere and you are taking a phone call, and you identify a problem with the thing that your company is selling; where do you go to fix that problem? You've got a customer, you've got a complaint, you realize that it's not the customer's fault, it's something about the thing that you're selling and you want to go and fix that. Well, chances are that person who's going to be a person or people who can help you fix that problem are in another country, miles and miles away, different time zone, different priorities, measured on different things. Maybe you're measured on how fast you get that customer off the phone and they're measured on profits of the product or something else; often those connections just never get made. Now this is partly because of the way the company is designed, this monolithic structure of specialization which, as I said earlier, divides the work but it also disconnects people from the purpose of the work.

Now, in contrast, a podular organization is designed so that every person or unit or team is actually authorized to represent the company as a whole. I can give you an example of how that would work; if you're a salesperson at Nordstrom, who I would consider a very well designed, connected company. The salesperson at Nordstrom, which is a US department store, is actually authorized as a representative of the entire company, so you can return anything to them, they are not, like most department store people, tied to any one piece of the store. So if you're a salesperson in the men's department you can go over to the shoes and you can walk around with your customer throughout the store and help them pick out things, you can interact with them on Twitter, you can take returns. Anything that the company can do you can do. Now there are some things that go into making a podular company work, people have to be highly allied about the purpose of the work, they can't be heavily bound by rules and boundaries. They have some boundaries, but the Employee Handbook at Nordstrom fits on an index card and it basically says "Use your best judgment in all situations," there are no other rules. If you have a question, talk to your boss. So the boss is there to help you think through and handle exceptions, but what the company is saying is, "We trust your judgment, we're a customer service company, we are interested in helping our customers."

My brother was at Nordstrom and he told me this story as I was writing the book, he was at Nordstrom buying a diamond ring and he said as he bought it, and I think it was quite expensive, he said, "Well, so how long do I have to return this if it ends up that I want to return it?" and they said, "Forever, any time." Imagine how that feels to a customer. Now customers are probably going to pay a little bit more for that kind of service, but you can promise service but you have to be also organized as a company to deliver it.

Rachel Salaman: Yes, and you talked about the old-style structure of a company which looked like a pyramid, just to help people understand the idea of a podular company, what would that look like? Not like a pyramid, presumably?

Dave Gray: Well you might have a small pyramid in the center because there are things that you do want to do consistently and efficiently in any company, maybe financial, the billing and invoicing. There are things that don't change that often and there are things that there's certainly not a problem doing efficiently, so you could imagine a small pyramid in the center, but surrounding that pyramid is a network, a connected network, much like the internet where people are able to connect with each other. Now, to go back to the Nordstrom example, these individuals are free to do their job and a salesperson at Nordstrom is really an entrepreneur, they have essentially a business within the business, they do work on commission; a Nordstrom retail salesperson can make six figures a year by making their customers happy.

Rachel Salaman: And what about other types of companies, let's say a logistics firm or a construction company, do the same ideas apply to them?

Dave Gray: Absolutely. So, for example, a friend of mine named John Hagel wrote a book called "The Power of Pull," talks about a municipal bus service, that's a pretty traditional kind of company, and their busses are getting older and they break down, so when the busses break down they need to find parts. Since they're old busses and they have warehouses all around and garages all around and it's time to find a part, what do you think they do? They go looking through bins and here and there, and what they did was they introduced a social networking forum, kind of like Twitter, which is, "Hey, I need this part," and everyone basically could kind of look around and see if the part was near where they were. I don't have the exact numbers at my fingertips but they were able to reduce the time it took to fix a bus and increase the amount of time that the busses were on the road by a significant margin, simply by connecting people in a very simple way.

Rachel Salaman: But those kinds of connections, they suggest a different type of connected company from Nordstrom that you described earlier because obviously the people on the sales floor at Nordstrom aren't using social technologies to connect, it's a different kind of connected company, isn't it? Perhaps you can explain the difference?

Dave Gray: The thing about Nordstrom that I like is this is a company that's been around since the Klondike Gold Rush. I mean, this is a very old company. They were basically adopting these principles long before social media came along. A company like Nordstrom is already organized as a connected company, so if suddenly customers start wanting to talk to Nordstrom via Twitter or Facebook or anything else, it's not going to be a problem for Nordstrom, it's already organized that way. If somebody Tweets to Nordstrom, there's a Nordstrom salesperson there that's going to be listening because that's the way they're already oriented. So the technologies come along and the technologies change things, but if you're already organized in a connected way the technology is not going to be a problem. I mean, I don't think that Twitter and Facebook and customer word of mouth is going to have a negative impact on most small restaurants unless they're bad. If you make great sandwiches social media's not going to hurt you, it's only going to help you, it's only going to get more people coming in to buy your sandwiches.

So how is a retail company different than a construction firm and so forth? I think retail and hospitality, because they have been so customer service oriented, are definitely ahead of many other industries when it comes to this stuff. I think metropolitan bus systems, banks, consumer goods companies that are focused on products and delivering products, they have probably a lot farther to go because they've been traditionally organized to be extremely efficient at moving things around, but the fact is that customers are kind of banging at the walls and the cracks are starting to appear, because if you are doing things efficiently but it's at a cost of making customers angry, someone will come along and make those customers happy.

Rachel Salaman: Yes, and in the book you give some advice about how companies can move towards connectedness, that's companies that aren't connected already. Can you share some of those tips now?

Dave Gray: Sure. The easiest thing is something I would call "network weaving," and that's what most large companies are already starting to do, and that is simply starting to create networks that allow people to talk to each other within the company to solve problems. Like I was describing with the metropolitan bus system: "I have a bus that broke down, here's the part that I need, does anybody see this part?" and be able to broadcast through the company when you have a problem, when you want to access some kind of expertise, when you need help with something, and having a network that allows people to… kind of imagine Facebook inside your company, that's one thing that you can do and that is a very good start, because a lot of the problems that companies have are just primarily related to them being disconnected.

That's only the beginning. I mean, weaving a network will connect people but it won't change people's roles, it won't change the organization structure, it won't change the incentives, the way incentives work and the way they're rewarded. So even when people are connected they could easily be still divided by having different incentives. A salesperson's incentive might be completely focused on selling a high volume of a product or service, and someone in operations, they might have an incentive to make the sale as profitable as possible. So you can imagine these things in conflict; a salesperson is like, "Well I need to sell this so we need to reduce the price," and the operations person is saying, "We can't reduce the price because that'll reduce the profit and I'll take a ding for that." So even if they're networked and they're connected, if their incentives aren't aligned then they're still going to have a problem.

Now imagine in a podular company, and I have some examples of this; one of them was Rational Software, which is now a part of IBM. Rational Software operated very differently, they had the salesperson and the operations person basically working together in a pod, and when the salesperson would talk to a customer and the customer wanted a reduced price they basically operated as a business within the business. So the salesperson and the operations person had to work together to be as profitable as they could, so they had to balance those things. In a divided company the salesperson can just say, "Well I'm going to sell it for less and throw it over the wall and it's the other guy's problem," whereas in a podular company that salesperson, it's going to be his or her problem as well. It's this whole idea of staying with the customer, staying connected to the customer. In a divided company what happens, and you feel this as a customer, you're tossed from person to person to person, you don't have a relationship, you're handed off. In a connected company you're not handed off.

Rachel Salaman: And we should say that in the book you also address some of the risks of connectedness, don't you, you're very realistic about how this can work.

Dave Gray: Yes, well Enron was a connected company! So a connected company is not a panacea that's going to solve any and all problems, a connected company actually can be a little bit of a problem in, let's say, places like the financial industry, because connected companies can operate faster than regulators can keep up. The advantage of a connected company is that it can operate, adapt and learn at an extremely fast pace. That doesn't make it inherently a good thing, any more than the internet is inherently a good thing. However, although Enron was a connected company it was not in the end ultimately successful because it was not making good profits. So basically the company, it appeared successful for a period of time but its success was not sustainable. So one of the risks of a connected company is that people are not focused on the most important thing for any company, which is building relationships with happy customers. For Enron its customers were its investors and I think that's a big mistake, and I think that's actually the mistake a lot of companies make, especially publicly traded companies, is that they focus primarily on what the shareholders and investors want, which is, of course, profits and growth, and they don't focus on what their customers want.

Now profits and growth and the things that shareholders value are not a cause, they're an effect. What causes good profits is positive relationships with customers. You ask an investor, "Well do you want profits and growth?" they're going to say yes, but if you ask them, "Do you want profits and growth if it means the company's going to be out of business in five years?" I think most investors would say no. Now the problem is that investors don't have that kind of visibility, they can't look at a company from the outside. The things that are measured and that are shared publicly, are publicly disclosed of publicly traded companies, are their growth, revenue, profit and so forth. You don't see the Net Promoter Score on there. Now there's no reason you shouldn't and there's no reason that companies shouldn't be tracking this, and I think an intelligent investor does care about how long-term sustainable a company is, how abused or trapped their customers feel or whether their customers are promoters and very happy with the service. I'm of the opinion that investors should and probably will be demanding to see things like a Net Promoter Score and other measures, not just a company's profitability today but really its long-term health, which is directly connected to the way that customers feel about the company.

Rachel Salaman: Dave Gray, thanks very much for joining us.

Dave Gray: Well thank you.

Rachel Salaman: The name of Dave's book again is "The Connected Company." You can find out more about him and his work at www.dachisgroup.com, that's D-A-C-H-I-S group dot com.

I'll be back in a few weeks with another Expert Interview. Until then, goodbye.