I recently read this article, Don’t Hang Up on Your Customers | Inc.com by Carey Smith, founder of Big Ass Fans. In it he talks about the danger of cheaping out on customer service. As the financial leader of several companies throughout my career, I’ve often led exercises about cutting costs. Typically, these exercises were started and then the plans implemented because an existing (not anticipated) recession was happening and the ability of the company to meet its obligations and survive were at stake.
I’ve also led the efforts to streamline costs upon the merger of two competitors–synergistic savings (from eliminating the duplication of efforts and costs in each separate company into one set of costs for both.)
In both cases, we continually talked about cutting the fat and avoiding cutting muscle. Outside of the merger situation, cutting fat would likely slow our growth but it avoided cutting the muscle needed to continue to support our customers and maintain our revenue—in both the short term and in the long term. Cutting beyond the fat, into the muscle, was reserved for situations where the financial situation didn’t give us any other option, i.e. we had to cut some muscle in order to survive.
When Carey Smith writes about going cheap on customer service, I think about those companies that make decisions that they believe will cut expenses and make them more profitable while potentially ignoring the likelihood that the decision will leave many of their customers unhappy and more willing to consider switching to a competitor and therefore open the door to revenues and profits going down.
From a financial management perspective, I think this always should be considered even though the financial manager can more easily develop an updated forecast with smaller outlays for customer service and greater amounts of profit and cash flow—thus making the cutting of expenses look like a great decision. And because practically no one will admit that a decision to reduce spending on customer service (at least the muscle part of it) will have a negative impact on revenues, you will likely never see a financial model or forecast that says that retention and/or revenue will go down with decreased spending on customer service. Again, if the company is talking about cutting into the muscle of customer service (and not just reducing fat), they should pause and honestly answer the question: how will this impact customer loyalty, attrition and ultimately revenue in the long term?
Further, while a company can probably honestly answer that a reduced spend on customer service will not impact those things in the short run, are they thinking about the long term? 1 year out? 2 years out?
Finally, if these cuts are a financial necessity, that is, to keep the business afloat, then the muscle probably does need to be cut. It’s a better financial and managerial decision than running out of money, but if you’re thinking about deep cuts to make more money, then I urge you to consider the true cost of those cuts in the long run.