Complexity kills good customer service. We can use the rule of 50/5 to cut through this complexity and transform the customer experience.
I once worked for a multi-national technology company with a turnover of tens of billion of pounds. The organisation’s processes and systems were so complicated and intertwined that any improvement efforts were doomed, if not to failure, then to mediocrity.
Any new customer fix – a system, a process, a metric or a behaviour change – was just another complication in an already complicated environment. Sooner or later, those in the customer front line would make mistakes because complexity introduced by the new fix made errors more likely. Their normal tasks might often take longer, as the new fix might need new skills or new thinking. It might increase complaints, perhaps through teething problems, or because expectations for improved performance were too high.
In short, because corporate sclerosis was gumming up the customer experience veins, ‘improvements’ were likely to make things more error-prone, slower, less easy, and, almost certainly, substantially more expensive.
This is because of one of the infallible laws of business, something I was fortunate to learn early in my career, courtesy of George Elliott: complexity ALWAYS increases costs, and by much more than we think.
Paradoxically, however, how complexity drives costs offers a powerful way to enable customer transformation. This is because (again as George explained in my youth) these costs always appear in the same way: they follow the rule of 50/5.
50% of your costs are associated with 5% of your activity, and vice versa.
In the almost one hundred companies with which I have worked, while some the precise numbers have varied a little, I have never seen this rule to be wrong. It is a cast iron law of business.
What’s brilliant about this principle is that it applies in so many ways. Here are some I have found useful:
- 5% of customers account for 50% of service costs
- 5% of customers account for 50% of revenues
- 5% of our customer enquiries yield 50% of our sales
- 50% of our people’s time is spent working on issues raised by 5% of our customers
- 50% of escalations come from 5% of customers
For each one of these, the complementary statement is also true: as well as 5% of customers causing 50% of service costs, so 50% of customers cause only 5% of service costs.
Why is this important? Because it means we have a practical way to focus our improvement efforts to deliver effective transformation, reduce complexity and make things genuinely better.
So for one tech company for which I worked, we found that 3% of escalations were consuming 38% of engineer time. We identified and eliminated the causes of almost all these escalations. This enabled the organisation to free up a quarter of their engineers to work on proactive services, adding value to their customers. At the same time they kept some engineer capacity in reserve to handle the many fewer new escalations which inevitably would still arise.
For another company, recognising that 4.5% of their customers yielded 53% of their revenues drove them to offer premium services to these customers – increasing revenues and retention.
At the same time, they reduced services to the 48% of customers who contributed only 4.9% of revenues, but offered them the chance to upgrade. Result? Some of these unprofitable customers left, some stayed, but cost less to serve – but enough upgraded to make this customer segment twice as profitable.
This thinking works.
But beware. Standard accounting cost models don’t give you a true picture of these costs (because they assign overhead costs uniformly across the board as opposed to how the costs are actually being consumed) .
So let’s begin using the rule of 50/5, but not by looking at budgets and costs on a spreadsheet. Let’s get out from behind our desks to see what is really happening. Let’s look, not at the cost numbers, but where our people are putting in the work with our customers. We’ll soon see where the rule of 50/5 works in our business, and how we can use it to cut through complexity to make things better for our customers.