It's Only An Advantage If Your Customer Benefits

By Avi Deitcher

I recently had a conversation with the CEO of a company going through significant change. We discussed certain alternatives - some dramatic - to their business model.

During our conversation, we focused on what it is that would make this company so much better, rather than "just another one." He pointed out certain key operational and back-office processes we could implement - many of which were already underway - that would make the newer competitor faster, nimbler, more modern.

This brought up a key point that should be highlighted: your internal processes don't matter. A faster back-office, online invoicing, email receipts, snappier HR... none of it matters to your business. Sure, they can give you higher margins, therefore higher return on equity, which can lead to more investment. But your business lives and dies by the customer.

Your internal processes only matter insofar as they give a better customer experience. Let me share 2 examples.

WalMart

WalMart has 2 key strategies.

  1. Location: The first is to locate outside of dense city centres, in locations where driving access is easy and real estate is cheaper. These may be less desirable locations, but the fixed cost of each store - real estate, power and taxes - is significantly lower than in more dense urban locations. A lower fixed cost per store allows WalMart to operate at lower gross margins and still have the same operating margins. Lower gross margins for the same variable cost means lower prices for the customer.
  2. IT: WalMart has been one of the most aggressive adopters of IT in retail. They were among the first to drive IT into every corner, to keep real-time or near-real-time track of inventory, of what is selling, of the value of each location in the store. Aggressive IT meant better supply chain management, better inventory management, less waste space and fewer write-downs. This lowers the variable cost of each item, allowing WalMart to sell for a lower price for the same gross margins. Lower price for the same gross margins means lower prices for the customer.

Location reduces the need for margin reduces the consumer price; IT reduces the variable cost increases margin while reducing the consumer price. Overall, the consumer pays less. And eventually, consumers know: go to WalMart for the best prices.

Morgan Stanley

I have always been proud of my 4 years working at Morgan Stanley in the mid-1990s. We did some amazing stuff, and it was a great place to work. The team was diverse and mostly a meritocracy.

Here is one simple IT statistic: most of our competitors had one systems administrator to every 10 servers; we had one administrator to 100.  How did that happen? And why did it matter?

  • How did it happen? We made a conscious decision to invest aggressively in engineering. Anything that was done manually or repetitively that we could eliminate or automate, we did. If it wasn't available off the shelf, we built it. If the vendors didn't offer it, we partnered with them and helped them get there. We didn't care that it helped them be better; we liked it that way. The results showed for themselves. The only other shop that had the same mindset and therefore the same level of results was Goldman Sachs.
  • Why did it matter? We could have just said, "well, we saved 90% of administrator cost, let's just pocket the money." And to some extent, we did. As a financial company, our financial results mattered greatly. But we took a big chunk of those savings and reinvested them in more engineering. We created better execution. We provided better reliability. We made it easier for the people in finance to do their job, which made it a great place to work. And that meant better results for the customer.

Summary

Profit is great, and higher profit is even better. Better internal processes create lower costs and a more pleasant work environment, all of which attract the best people. But in the end, all that matters is how it benefits the customer. Leverage those internal processes to better serve your customer.