Many of my friends and colleagues know I am a huge proponent of Wal-Mart’s and their Every Day Low Prices.  I frequently have lively discussions about my love for Wal-Mart and their low prices.  In mid December, I came across an article that discussed Chicagoland’s grocery chains and their battle for shoppers.  The article got me thinking about how powerful Wal-Mart’s “Every Day Low Price” strategy is.  Two lessons can be learned from the Every Day Low Price strategy: consumers don’t shop where they are unhappy, and innovative companies are profitable.

Pricing Strategies

Grocery stores primarily use one of two different pricing strategies: High-Low, or Every Day Low Prices (EDLPs).

Stores with “high-low” pricing strategies price some products at low prices, while having other products at higher prices.   These stores use promotional sales to lure shoppers into the store in order to persuade them to buy other high priced high margin items by utilizing other marketing techniques.

The competing grocery pricing strategy is “Every Day Low Prices”, or what I like to call, EDLPs.  Wal-Mart popularized this strategy and uses it to this day.  Prices are set low, and stay low.  The only time a price changes is when supply or demand changes, or when the retailer forces the supplier to innovate.  Furthermore, if prices do change, they usually go down.  Remember Wal-Mart’s “falling prices” marketing campaign? EDLPs have helped Wal-Mart become the world’s largest retailer.

The Grocery Store Game

Lesson one: Consumers don’t like to shop where they feel unhappy.

I don’t know about other shoppers, but I don’t like to play games when I shop. I like to know I am getting a fair price for everything I buy.  If I wanted to play games with my money, I would gamble.

Every time I shop at stores like Jewel and Dominick’s, stores that use the “high-low” pricing model, I feel like I am loosing a game of pricing. With the “high-low” pricing model, prices don’t change because of supply or demand; they change to trick the customer.  I always leave the store feeling like I lost the game, which makes me very unhappy.

The “high-low” pricing model is about as close as it can get to a “bait and switch” technique without actually being it.  Actually, when an item is out of stock, it does become a “bait and switch” technique.  Does anyone actually go through the hassle of getting a rain check on a bag of peas?

Let’s look at the shopping game in the eyes of an offensive or defensive player.

Defensive shoppers, like my self, usually go to the store when they need something.  And when they buy a product, they are at the store’s pricing mercy.

As stated in the fore mentioned article, stores who use the “high-low” pricing strategy have higher total transaction values; on average, 13% higher.

My defensive shopping habits cause me much frustration when I see the price I am paying.  As a price conscious consumer, I tend to remember what prices are good, and what prices are bad.  To this day, I know when I shop at Wal-Mart I can buy a cake mix for roughly $0.87 , no matter which store I am at or what day of the year it is.  At Jewel or Dominick’s, that price can range from a rare $1.00, to the usual $3.00.  Prices of many items at Jewel or Dominick’s fluctuate to this extreme, and it really makes me unhappy.

On the other hand, shoppers that buy offensively at these “high-low” stores, only buying products when they are on sale, usually do pay a decent price.  But that comes at a cost, shopping offensively is not only inconvenient; it requires a tremendous amount of planning and researching.  As explained in the story She’s crazy for coupons by the Star Tribune:

If you want to learn to save as much as the pros, check out their websites or attend one of the classes. Before long you’ll be buying 10 or more Sunday papers a week just for the coupons, going online for additional coupons and tips, devoting an entire room to food storage, and slashing grocery costs by 75 percent.

The Star Tribune is not alone, local and national news segments frequently feature customers that play the game so well, they can save nearly 85%.

I have tried this offensive technique, but living in downtown Chicago without a car, it is very difficult.  I am lacking both storage and transportation capacity.  It would cost me tens of thousands of dollars to devote a whole room to this strategy; eliminating any possibility to save money.

Efficiency

Lesson two: Companies that innovate are profitable.

As Jim Hertel points out in Food fight: Grocery chains, discounters in battle for shoppers, operating “high-low” pricing strategies actually creates inefficiencies, which translates into higher inventory costs.   I could not agree more with Jim.  Stocking and tracking inventory for temporary specials is extremely expensive. I recently discussed this along with many other inefficient practices associated with “high-low” pricing strategies in my recent post The Costs of Promotional Sales.

Jim also discussed the high amount of variety at stores like Jewel and Dominick’s.  Jewel and Dominick’s defend their vast variety, almost twice that of discounters such as SuperTarget, as adding to their level of service.  Stating,

Price comparison between conventional retailers like Dominick’s and low-cost discounters like Wal-Mart, SuperTarget and Food 4 Less is fundamentally unfair.

They continued,

We have different business models, and our format, offerings and overall selection and pricing strategy are not the same.

The last time I went to Jewel, there was half an isle of Jelly, Jam, and Peanut Butter.  How many varieties does the consumer need? I see the benefit of different brands and flavors, but there are countless sizes and varieties of each! Imagine the cost associated with stocking and tracking five different sizes/containers of each brand and type of jelly! This practice is not service, it is gross inefficiency that brings higher prices across the board.

One store has this “few varieties” concept down so well, I believe it has lead to their prices being lower than Wal-Mart’s prices.  Yes you heard me right; there is a retailer with lower prices than Wal-Mart. Aldi, well known in Europe for decades, has been expanding the number of their United States locations rapidly in recent years.  Aldi sells one size and one brand of grape Jelly. They only stock two peanut butter types: creamy and chunky, with one size fits all containers. Prices at Aldi are unbelievably low.

I can go on and on about Aldi, but I will save that for another day.  I will say, however, their business model is not only admirable, it’s brilliant and innovative.

Innovation is not unique to Aldi.  In order for Wal-Mart to have Every Day Low Prices, prices that are consistently lower than the competition, they need to lower costs.  Lowering costs is a religion at Wal-Mart.  The company is constantly innovating their supply chain and retail operations.

The most profitable companies are the ones that innovate: Wal-Mart, Apple, Google.  These companies are companies that I, along with most of the business community, admire to a great extent.

Innovation is, if anything, my religion.  Innovation should be never-ending.

In order for Wal-Mart to continue their goal of having EDLPs, they require their suppliers innovate and increase productivity. Many people see Wal-Mart as the goliath who forces suppliers to reduce wholesale prices, which, on occasion, puts the supplier out of business.

One of the most predominant examples of a supplier that Wal-Mart ruined was Rubbermaid.  Rubbermaid insisted on raising prices due to higher material costs.  Wal-Mart stopped selling Rubbermaid’s products.  A different supplier, Sterilite, quickly took advantage of the situation by innovating and became a significant supplier to Wal-Mart.  If Sterilite was able to supply Wal-Mart profitably, Rubbermaid should have been able to do so as well.  It was Rubbermaid’s failure to innovate which led to their failure, not Wal-Mart’s strength.

In fact, as mentioned in Wal-Mart’s Influence Grows, published in USA Today, Wal-Mart accounted for 25% of the late 1990s’ productivity gains. In the article, McKinsey & Co also explained that profit gains in the late 90s were primarily due to Wal-Mart.

The costliest thing a company can do is “do it like is has always been done” and languish in gross inefficiencies.

The Power of Every Day Low Prices

Looking at national, public grocer chains, and their financial data**, it is easy to see how powerful EDLPs can be. Stores that use the EDLP pricing model tend to be more profitable than those that do not.  Both Target and Wal-Mart have a healthy 4% average Net Margin for the last four fiscal years.  Kmart also utilized the EDLP strategy, but they stand out from the crowd.  Kmart’s refusal to innovate was, in large part, the reason for their demise.  As mentioned before, innovation is essential to the EDLP strategy.  Without innovation, the strategy will fail.

Now, let’s look at the stores that use the High-Low pricing model. SUPERVALU lost $2.9 Billion last fiscal year, a -6% Net Margin.  Over the three prior years, SUPERVALU had a 1% average Net Margin. Safeway and Kroger did slightly better, both having an average of 2% Net Margin the last four fiscal years. None of these stores had a fiscal year better than that of an EDLP store.

Every Day Low Prices make customers happy.  People like to shop where they feel happy. Shoppers know prices are consistently low at stores with Every Day Low Prices. And because shoppers know prices will be consistently low, they will continue to shop at those stores.  It is literally a free marketing campaign. Furthermore, both efficiency and innovation are functions of Every Day Low Prices.  In order to keep prices low, retailers must constantly monitor and reduce costs.  Cost reduction is a never-ending process requiring companies to be lean and innovate every day.

**National Grocer Chains Fiscal Data.  In Millions of USD.

* Fiscal years are estimates; company fiscal years deviate slightly from normal Gregorian calendar years.
* Fiscal data gathered from Google Finance on February 23^rd 2010.

Grocery retailers frequently use promotional sales to lure customers into stores.  Retailers hope customers will purchase higher margin products while they shop for the promoted items.  Chicago grocers Jewel-Osco, subsidiary of SUPERVALU, and Dominick’s, subsidiary of Safeway, both follow use this marketing strategy, changing promotions twice a week.  The promotional sales may increase customer traffic, but they may also lead to the demise of the store.  I suspect, retailers that use promotional sales, on every day products sold year round, increase the cost of doing business and decrease supply chain efficiency.

Used by many grocers, promotional sales are the activities, materials, devices, and techniques used in the advertising and marketing of products.  I separated their cost into two different categories; direct costs and indirect costs.  I see the money spent on the processes and material to implement the promotional sale as direct costs, and the money lost due of the effects of the promotional sales are considered indirect costs.  From my point of view, both of these costs are significantly high, high enough to possibly outweigh any benefit of the promotional sales.  If I were managing a retail grocery operation, these are the items I would consider when deciding whether or not to continue utilizing promotional sales.

Direct Costs

Promotional sales have many components, each having a cost associated with it. Planning, marketing, inventory builds, and store preparations all take time to complete and consume valuable company resources.

Planning

Planning a promotional sale must be time consuming and costly.  Stores need to decide what products to put on sale, when to put them on sale, and at which price to sell them during the sale.  They must also decide how they will market the promotion, design the promotion, and distribute the promotion. It takes time for the retailer to manage, and it takes time for suppliers to manage.  That being said, it is possible that retailers who promote frequently can manage this process relatively efficiently.  However, managing a promotional sales still requires resources; resources that do nothing other than manage and execute promotions. The planning process is only the beginning.

Marketing

Promotions need to be communicated to the public, using any number of methods, all of which cost money.  From my experience, grocers seem to prefer some form of print media, like news papers or local ad circulars. Designing, printing, and delivering these advertisements must add significantly to a retailers cost. Some grocers even compliment the print media with radio and TV commercials, all of which take additional resources to produce and distribute.

Inventory Builds

Before the promotional sale starts, retailers must increase inventory of the items being promoted. Vendors, transporters, distribution centers, and storefronts all need to take special measures to guarantee extra inventory is delivered, on time.  Not only on time, but just in time; fresh produce spoils quickly and it’s vital the delivery process be planned and executed without error.  Early or late delivery can lead to costly spoiled inventory. In addition to any spoiled inventory losses; inventory builds take significant amounts of working capital.

Store Preparations

At the start of the promotional sale, costly store preparations must occur.  I have witnessed employees rearranging store shelving to accommodate shifts in inventory in anticipation of an increase in demand for some products, and decrease in demand for others.  Price tags throughout the store need to be updated, reprinted, and reapplied.  Finally, if displays are being used, they must be built and placed.

Each activity and consumable is temporary.  As promotions end and new ones begin, I expect these four processes repeat endlessly, adding cost during each cycle.

Indirect Costs

Along with any direct costs mentioned above, I predict promotional sales also have indirect costs aswell. Indirect costs caused by poor forecast accuracy, inadequate supply chain communication, and large inventory swings.

Forecast Accuracy

As part the planning and execution phases, I suspect most vendors and retailers use Enterprise Resource Planning systems, or ERP systems, to manage the supply chain.  ERP systems use a multitude of variables, including, but not limited to forecasts, past orders, current orders, and current inventory levels, to track, plan, and manage inventory.  Recommendations to create purchase orders or manufacturing requirements are created on a regular basis. Recommendations may be edited manually and released by planners, or  they may be released automatically as purchase orders to suppliers.

Because forecasts are the foundation of ERP system demand calculations, I know the data must be clean and accurate for the systems to operate efficiently.  But, from my point of view, promotional sales cause forecast data to be dirty or inaccurate for two reasons: lack of predictability, and manual data entry.

I assume it is nearly impossible to precisely predict how inventory will move during and after a promotional sale.  The incredibly high quantity of variables makes it close to impossible to accurately forecast purchasing. Even the most nimble and elaborate forecasting software will likely have difficulty analyzing uneven sales data, not knowing what impact each dip or spike had, or if the dip or spike will happen again. During a promotion, inventory could be wiped out completely or may not be sold at all.  After the promotion, purchasing may likely decrease but it may, instead, increase.  The dip or spike in demand will last an unknown period of time.  I suspect competitors may possibly have a promotion on the same or competing products.  The promotion price may or may not impact purchasing.  Finally, it is also likely a naturally occurring or unpredicted event may also affect demand.

Even if all the variables are correct and accounted for, and the company has perfect knowledge of consumers’ thoughts and competitors’ marketing, forecasts may still be entered or edited incorrectly.  The manual data entry processes is far from six-sigma levels of accuracy and, from my experience in analyzing forecast data, will most likely have errors.  Incorrectly entered or edited data points could flow automatically from the retailer’s ERP system to the vendor’s ERP system without notice.  It is likely systems would be in place to detect erroneous data, but because the data nature of highly volatile forecasts, I would expect the detection systems would miss many errors.

Supply Chain Communications

The ramifications of incorrectly generated and/or entered forecasts could be huge and expensive.  Data often trickles down from retailers to distributors and from distributors to suppliers; Most likely traveling automatically by way of automatic releases of ERP generated purchase order recommendations.  An invalid forecast could be transfered from the retailer to distributor to vendor without anyone knowing its inaccuracy.

Correct, but changed forecasts, could also cause problems.  I expect promotion plans change all the time.  They may get canceled, dates may move, or anticipated purchasing may change.   Regardless of the change, corrections or non-standard changes could get lost, miss communicated, or miss translated when being sent from retailers to vendors.  In some cases, they may not be communicated at all.

The farther away in the supply chain a company is from the retailer, the more difficult planning and communication becomes.  At the front of the chain, retailers have direct knowledge of a promotion, and have the ability to add or edit the details in their ERP system.  As promotions are developed, retailers communicate information to suppliers.  But, as mentioned before, if a promotion changes, it may not be fully communicated to all suppliers.  To add to the confusion, suppliers have suppliers, and those suppliers also have suppliers.  The farther down the chain, the less promotion visibility is seen.

The entire chain is only as good as the weakest link.  If not handled quickly and efficiently, at all levels of the supply chain, one invalid or missed forecast entry, or forecast change, has the ability to trigger massive product spoilage.

Inventory Swings

From my experience at a manufacturing company, huge swings in inventory are nightmares for suppliers.  Inventory builds require increased production, which may require overtime pay and/or auxiliary temporary warehouse space; both impacting the supplier’s profitability.  On the other hand, purchasing reductions that occur after a promotion ends may lead to vast amounts of unused warehouse space, non-moving inventory, or unutilized resources or personnel.  These swings are not only problems for suppliers, they are disruptive to transporters as well.

Trucking is the predominant type of food transportation in the United States.  Trucking is a tough business; just like empty planes, empty or unused trucks are not profitable. To be profitable, trucking companies need to haul loads to and from sources and destinations.  And inventory swings spurred by promotion sales create irregular shipments and increase the possibility of empty trailers for flatbed trucks.  Fortunately, third party logistics companies have become a popular way to mitigate the cost of empty trucks, but I still don’t believe they are still not a perfect solution, nor do they provide free services.

The least tangible costs of inventory swings are their affect on data mining and forecast generation.  As previously discussed, forecast accuracy is crucial.  From my experience as a Supply Planner, large swings in inventory make it very difficult to produce an accurate forecast. Standard deviations for products that regularly go on sale are extremely high, and systematically generated forecasts can be incredibly inaccurate.

Any losses or costs incurred at any point in the supply chain will be passed on to the retailer by way of higher wholesale prices, regardless who is at fault.  The retailer will then pass that cost increase to the consumer via higher retail prices throughout the store, not necessarily on the product being promoted.   Keep in mind, all of these additional costs are being incurred to sell an item at a reduced price, likely a price below wholesale cost.

I believe retailers that use promotional sales as part of their marketing strategy are pregnant with cost saving opportunities.  It only requires retailers to realize how many costs are likely associated with their promotional sales in order for them to analyze their promotional sales strategy.  In a retail world ruled by everyday low prices, the analysis will hopefully come soon.  If not, retailers selling everyday products will likely fail because their promotional sales have a high probability of increasing their cost of doing business and decreasing their supply chain efficiency.

One of my client’s computers recently got infected by several viruses.  She attempted to solve the problem by installing Norton Antivirus 2010.  After the instillation, her computer would not allow her to logon, so she gave me a call.  After doing some research, being unable to solve the problem, which was likely caused by the instillation of Norton Antivirus, I called Norton to receive the “Free Support” that came with the software.   The phone support reminded me of my recent post on foreign call centers; Norton’s support was unbelievable and unacceptable.  Explaining my interactions with Norton’s support team will illustrate how Norton’s “low cost” foreign call centers destroy consumer trust, damage Norton’s brand, and ultimately reduced the company’s profitability.

Before I elaborate on Norton’s phone support, I want to point you to how I solved the problem.  You can see the solution on how to fix a logon logoff loop on a previous post of mine.

I would also like to give a brief history of Norton Antivirus. Historically, Norton Antivirus has received extremely poor reviews because of its intense PC resource consumption, and inability to be completely removed from a user’s computer system.  Recently, Norton has been making great strides in reducing the products resource requirements and marketing it as such.  It has been quite some time since I have personally used Symantec’s Norton software; before the following fiasco, I perceived the Norton and Symantec brands as mostly neutral.  Let’s see how Norton’s call center impacted my perception of Norton’s brand.

When I arrived at my client’s location, she was completely beside herself.  My client was about to go on vacation, and her POS (Point of Sale) system was out of commission.  I tried for about an hour to solve the problem on my own to no avail. The box the antivirus software came in mentioned that it came with “Free 24/7 chat, E-Mail, and phone support”, so I figured I would give that a shot.

When I called, I was first connected to a Norton call center in the Philippines.  Before getting to the actual support, I had to give the Norton agent some personal information so she could create a customer profile for me.  I usually find it quite easy to tell someone my name and phone number.  This was not the case with Norton; I was barely able to communicate with the Norton representative I was on the phone with.  I spent five minutes spelling my name and giving her my phone number.  I am not an exaggerating.  If it was difficult to give my phone number, I could only imagine the quality of support I was about to receive.

After describing the problem, and going through some basic trouble shooting steps, the representative said she was unable to solve the problem.  I asked for their second level of support, the support based in the United States. As she began her response, I came to realize they were attempting to up-sell me.

I was embarrassed for the Norton representative as she began her sales pitch; I could tell she was reading from a script.  She told me that the second tier of support was based in the United States and normally cost $170.  But since I was a “valued customer,” they would give me a $30 discount.  So much for the “Free” support claims on their packaging.  I agreed to pay the $140, as I knew this was the only way I could reach someone that understood English.  I also knew that could get a refund, or if not, dispute the charge with the credit card issuer.

Prior to connecting with the second level of support I was asked to go to “Norton.com/link” in my browser.  Early in the support call, I told the agent I was using a second computer that had access to the internet, and it was not the computer I needed the support on.  With that understood, I figured this page would be used for some purpose other than remotely controlling my computer.

I spent another five minutes communicating my E-Mail address.  I was laughing in my head the whole time.  I assumed Norton’s support would be poor, not painful.  Norton’s support was painful.

The Norton representative then spent more time then necessary explaining how I would be entering my credit card information into an automated phone system.  When she finally transferred me to the automated system, I looked at my phone, and realized I had spent 30 minutes talking to her; 10 minutes of which was communicating my name, phone number, and E-Mail address.   I entered the requested information into the automated system with relative ease and was transferred to tier two support.

I got to the second level of support after a brief time on hold.  As the conversation started, I noticed the second representative had a stronger accent than the initial agent I spoke with. I inquired about her location, and she said she was in India.  I distinctly remember being told I would be talking to the second level of support, in the United States.

As I was talking to the second female agent, I was asked to confirm the information in my customer profile.  It turns out my E-mail address was incorrect.  I guess the five minutes I spent giving it to the first agent was not enough.  I had to go through the process once more; add five more minutes to the phone call for simple data entry.

After verifying my information, I was asked to go to the “Norton.com/link” page I had open in my browser.  The Norton representative said she was going to remotely control my computer.  I expressed, again, this was not the computer with the problem.

We discussed the problem once again. She reviewed a few pages of her resources with me; all of which I had already tried with no success.  Once her resources were exhausted, she said she was unable to assist any further and that she would refund what I had paid for the support.

After the interactions with Norton, I did some more research on the internet.  And, as I mentioned in the beginning, I did finally fix the Windows XP Logon Logoff loop.  Not only is it likely Norton Antivirus caused the problem in the first place, their support provided zero assistance solving the problem.  What Norton did do, however, was impact their brand quite negatively.  Norton’s “low cost” foreign call centers damaged the trust I had in Norton, damaged Norton’s brand, and ultimately cost the company money.  Let me elaborate a bit on each of these claims

Trust

My trust in Norton’s brand has now been damaged.  Norton’s packaging says “Free Phone Support” and I did not get that.  Instead, Norton required I purchase their advanced support to get any relevant help.   If one portion of the packaging was untrue, were other parts untrue?  Is Norton Antivirus actually effective at preventing infections? It is hard to trust one claim on a package if a second claim is proven false.

Second, I was told I would reach American based technical support if I paid their advanced support fee.  When I was transferred to that second level of support, I reached someone in India.

Impact on Brand

Besides losing consumer’s trust, Norton also proved they can’t effectively communicate. Either Norton’s foreign call centers are staffed with employees that can’t understand English well, or the call centers are built using poor quality telephony equipment. Why would anyone do business with a company that can’t spell “Ed” or understand a 10 digit number?  Statistically, from my interactions with two of Norton’s employees, in two different countries, 100% of Norton’s employees can’t communicate.  I realize that that is quite a poor population size, but it is all I have to go by; it is the only point of contact I have with Norton.

The Numbers

A few months ago my interactions with RCN inspired me to write an essay on how low cost call centers are inherently expensive.  My experiences with Norton prove my theory once again.  I spent roughly an hour and a half on the phone with Norton Support.  The call accomplished no positive outcome.  However, many resources were used during the conversation.

• Norton authorized a $140 credit card purchase, which likely cost Norton $3.
• I talked to two different support agents, at $10 an hour, that cost Norton $15.
• Norton consumed 90 toll-free minutes.

The call, which cost Norton nearly $20 financially speaking, was not the only cost to Norton.  The damage to Norton’s brand, caused by the poor quality foreign support and false advertising, carries an even larger cost, although it’s tough to say exactly what that cost is.

Even with the sale of the software, it would be tough to conclude Norton made any profit.  Norton only received a fraction of the revenue generated from the purchase of the software, which retailed for $40.  And it is likely that the software will be returned.

Here is the kicker: The foreign call centers may actually impact Best Buy more than Norton.  Best Buy does not allow opened software to be returned; it is against their return policy. It is unfortunate for Best Buy that Norton’s packaging included false advertising.  The customer, my client, did not receive what she had paid for; free phone support.  Therefore, it is safe to assume any credit card disputes would end in favor of my client.

I believe a credit card charge-back, or “dispute”, would cost an estimated $25, regardless if the dispute ends in the retailers favor or not.  Furthermore, credit card charge-backs are an administrative nightmare for any company.

At minimum, if Best Buy accepted the return, Best Buy would incur the cost of processing the initial sale, the refund, and the cost of employing someone to process both transactions. Total minimum cost would be roughly $3.30.  However, if they won’t allow the product to be returned, Best Buy would incur a charge-back fee from the credit card processor, regardless if they were found accountable or not, which would add $25 plus any administrative labor cost.  The total cost would be well over $30 after all is said and done.  That is well above the margin from the initial sale.  Furthermore, if the dispute ended in the customer’s favor, Best Buy would be out the $40 as well; totaling $70.

Norton’s “low cost” call centers have impacted both Norton and Best Buy quite negatively.  Norton has lost consumer trust.  Norton has badly damaged its brand.  And both Norton and Best Buy have incurred, or will incur, significant financial losses.  When will multinational corporations begin to see the damage caused by poor quality and low cost call centers?  It astonishes me that this trend continues.  Even as I was writing this essay, a friend of mine was complaining about HP’s foreign support as he tried to get his printer installed.  Ironically, he recently consulted on a project to outsource a portion of a company’s workforce to the Philippines.

© H3C Technologies Co., Limited

Last month, I spent a significant amount of time talking with representatives at two different RCN call centers; one in the Philippines, and one in the United States.  I was trying to get their new invalid URL request hijacking service, also known as PoxFire, removed from my account.  The situation spurred me to analyze why call centers are located in foreign countries.  I also wanted to review the factors that should be considered when making the decision to export a domestic call center.  After coming up with a structure that can be used to determine if a call center could successfully be exported, I applied my theory to RCN’s business model.  Finally, I determined if my interactions with RCN supported my theory.

Call Centers

Moving call centers to foreign countries has been a tremendously popular trend during the past decade, predominantly as a way to reduce costs.  The trend and momentum of their migration reminds me much of the dot-com internet bubble.  An initial few companies’ relative success spurred businesses in other industries to attempt the same.  Many of the latter businesses’ endeavors were, and are, destine to fail.  I believe call centers, in foreign countries, frequently foster higher overall costs of doing business because of the low wage employees, culture, and complex incoming calls.

Low Cost Labor

Before discussing foreign call center’s unique problems, I need to discuss an inherent problem of low cost labor that is nearly impossible to overcome; turnover.  The low end of the labor force is more apt to move from company to company, if given a better opportunity, because employers are not looking for specific skills or knowledge from their employees. Every time a seasoned employee leaves, and a new employee takes their place, the new employee must go through a training period in which they learn the industry and review policies.  Once they are allowed to act independently, they must also go through a “learning curve” where their work is less productive and less accurate than a more experienced employee.

Both the training and learning curve periods have a cost associated with them; a cost that is incurred each and every time an employee is replaced.  Therefore,  higher turnover, means higher costs.  Unfortunately for the business, it has little impact on how frequent turnover is, other than compensation.  And in this case, the goal is to reduce compensation, so it is unlikely that that a company will raise compensation in order to reduce turnover.

Foreign Countries

External factors have more influence than internal factors when determining turnover rates.  The two most significant external factors, that are pertinent to my argument, are the country in which the labor is located, and one business’s proximity to other similar business.

The culture of the workforce, determined by the country in which it resides, is extremely important; it plays a tremendous roll on how likely workers are to move from one job to another.  As seen from my personal experiences, in some countries, employees are a lot less likely to change employers because of the importance of relationships.  This causes a distinct commitment to their employer.  In other countries, the population would not think twice about changing employers; their personal status and wealth is their only motive, and relationships are broken all the time.  Coincidentally, the countries in which most call centers are located are the countries in which I have come to expect people are likely to switch jobs on a frequent basis.

The concentration of similar businesses, in the same geographic area, is the second most important external factor in determining employee turnover.  Thanks in large part to global trade; generally, many countries specialize in specific industries.  Furthermore, the more recent a country’s industrial revolution was, the more geographically concentrated similar businesses tend to be. When similar businesses are located close to one another, it eliminates one of the barriers of switching employers.  A laborer is much less likely to switch from working on a cotton plantation to an Internet Service Provider’s, or ISP’s, call center, than they would be switching from a bank’s call center to an ISP’s call center.

A mass migration of call centers has occurred over the last decade, a migration to countries with recent industrial revolutions, like India and the Philippians.  This migration has created business parks full of call centers; call centers that are located in close proximity to one another. Many of these countries are also the same countries where there is a cultural tendency to move from one opportunity to another. The combination of these two factors creates the perfect conditions for employees to move between different call centers, with relative ease, and low switching costs.

So, in addition to the inherently high turnover frequency of unskilled labor, foreign call centers, especially in the South Asian region, have many other possible cost disadvantages.  The already high turnover frequency is increased by both cultural tendencies and the close proximity of many call centers.

Customer Satisfaction

The most important effect of turnover is poor customer satisfaction. A new worker is generally slower, less accurate, and less likely to find a solution to a problem than a seasoned worker.  All three of these reduce customer satisfaction, especially in a call center.  Even though customer satisfaction does not directly impact the cost of a call center, it has a direct cost to a business’s overall operating costs.

Reduced customer satisfaction is actually one of the highest costs to any business.  Because call centers are frequently the one and only connection a customer has with a business where a discussion between the customer and business takes place, they play a very important roll in customer satisfaction.  For arguments sake, if a foreign call center’s costs were able to stay below a domestic call center’s costs, poor customer satisfaction has the ability to indirectly erode any potential cost savings by dramatically increasing the cost of marketing.  If a customer’s discussion with a call center occurs with negative results, the customer is likely to bring their business elsewhere.  And, as most business owners know, obtaining a new customer costs many times more than retaining a current one.  When customers start to leave, a business has two monumental problems; revenue plummets, and marketing costs skyrocket.  Ask the executives at Sprint, Motorola’s handset division, or Chrysler; they are all well aware of these problems.

Call Complexity

Call complexity can refer to either the depth or breadth of knowledge required to complete the call. Previously, in regards to turnover, we discussed the frequency of training and learning curves.  Call complexity has a different effect; it impacts the length of the training.  The cost associate with training is directly related to the length of the training.  Less complex calls would have a short less costly training period, and highly complex calls would have a long costly training period.  Complex calls also mean longer learning curves; increasing call length and decreasing the quality of and quantity of call solutions during that period.  These all directly impact a call center’s cost.

The indirect impact these call centers have on marketing costs, due to different levels of customer services is also important.  If call complexity was high, the length of calls would most likely be longer, and have more frequent unresolved or poorly resolved calls.  All of which would likely cause a loss of customers, increasing the costs of marketing.

Call Center Decision Making Framework

• Turnover
  • Culture will directly affect turnover
  • Competing call centers will directly affect turnover
• Complexity of Expected Calls
  • Highly technical problems and/or solutions will increase complexity
  • High variety of problems and/or solutions will increase complexity
• Training and Learning curves
  • Increases in turnover will increase the frequency of training and learning curves
  • Increases in complexity will increase length of training and learning curves
• Call Lengths
  • Increases in sophistication will increase call length
  • Increases in learning curves will increase call lengths
• Customer Satisfaction
  • Increased call length will decrease customer satisfaction
  • Increases in unsolved or incorrectly solved calls will decrease customer satisfaction
• Cost Savings
  • Increased Call length will increase direct costs
  • Turnover will increase direct costs
  • Decrease in customer satisfaction will increase indirect cost

Solving the Problem

Potentially, a foreign call center could be successful.  It is possible, if done right, to create a lower cost call center abroad.  It has been done before! If calls were extremely simple and very short, training time for new employees would be short and cheap; the high frequency of low-cost turnover may not be an issue. However, if the call center is expecting complex calls, training time would increase, and the highly frequent low-cost turnover would cascade into highly frequent high-cost turnover.

As logical and elementary as these principles are, it is astonishing companies continue to promote the exportation of call centers. Why do so many companies invest so heavily in foreign call centers, when, on nearly all fronts, they are likely to fail?  Especially if these call centers are expecting complex issue resolution. It is apparent that executives make the strategic decisions to export call centers based solely on the hourly cost of labor.  Many companies, like the ones previously listed, operate primarily in business silos, where each major business operating unit is connected only at the executive level.

To judge the overall success of any cost reduction project, including call center exportation, I believe it is vital that both the cost reduction projects and marketing cost impact be combined.  Business silos must communicate and think of the bigger picture.  Regardless of who is at fault, or for what reason, low wage labor and frequently complex incoming calls many foreign call centers receive, inevitably cause them to fail on both their cost savings and customer satisfaction metrics.

ISP Specific Call Centers

Hypothetically, with the formerly given framework, and the fact ISPs receive many highly complex calls, it is likely an exported ISP call center, where all types of calls were routed abroad, would incur high costs and low customer satisfaction ratings. If I were responsible for making the decision on whether or not to export an entire ISP’s call center, I would make the decision that it is undesirable to export the call center.  The combination of high turnover, location, and extremely complex calls would damage the profitability of the business.

RCN

With hypothetical analysis out of the way, I would like to analyze the direct cost, and impact, my situation had on RCN.  If my interaction with RCN is any indication, the customer satisfaction ratings of calls directed to the Filipino call center are extremely low.  And, from my experience, it is apparent that turnover is quite high as my interactions with each representative gave me the feeling that each was in the midst of their learning curves.  None of the employees I talked with were able to answer simple questions without putting me on hold for several minutes, or even the majority of an hour.

In terms of cost, I spent over three hours on the phone with RCN’s Filipino call center, which accomplished no positive outcome.  In fact, there were numerous times where the representative had to call me back after researching the problem.  I would estimate my inquiries consumed 5 Filipino people hours.  The cost of the connection to the Philippines is likely negligible, and, although the cost for the 800 number could add up to something substantial with three hours of talk time, I would consider that negligible as well.  Irregardless of what costs were incurred, my problem was never resolved during the 5 hours of Filipino support.

The United States based technician was able to resolve my problem in 15 minutes.  It took 1/20th of the time to solve my problem using the US call center/technician as opposed to the Filipino call center.

Now, let’s assume the the Filipino service was 1/5th the cost of the US service on a per hour rate.  The Filipino based support cost at minimum 4x as much as the US based support.  Keep in mind my problem was never even solved with the Filipino support, so in this particular case, the entire cost of Filipino service was a complete loss.

The impact of my call on RCN customer relations is another matter that must be considered.  My frustration with RCN’s lack of competent support reached a point at which I was frustrated enough to blog about my problems AND tweet my frustration to all of my followers on Twitter, which is number in the hundreds.  The public relations impact I had on RCN is hard to valuate, but it most definitely had a negative impact on RCN’s business.

Prior to calling RCN’s Filipino support center, my opinion on whether or not an ISP should locate a call center in a foreign country would have been no.  Experiencing it first hand only serves to reinforce that opinion.  Locating a call center in a foreign low wage country is not always successful. In this case RCN’s decision to outsource their call center has not only cost them money, it has detrimentally impacted how at least one customer perceives their brand.

Late last week, I was having a problem with RCN hijacking my mistyped URLs.  I was finally able to get them fixed!  This post has two different distinct topics; the situation and how the problem was solved.  In the near future I will post a new entry analyzing RCN’s business practices.

*Update – December 31st 2009*
I added a symptoms section and two guaranteed solutions at the bottom of this post.

The Situation

I spent hours on the phone with RCN (800-RING-RCN) and their representatives in Filipino call center.  I went through six phone calls, over three total hours on the phone, and reset my router and modem at least eight times.

From the discussions I had with the Filipino representatives, I concluded  my technical knowledge likely  surpassed theirs to a great degree. Each representative I talked to took over 30 minutes to fully understand the extent of the problem either through my explanation, their review of their FAQ system, or their review of my call history.

I told each representative I talked to that I was using the Safari browser on a Mac computer.  I also informed them that I was behind a NAT router.

One of my early discussions with the representatives lead to a discovery of an internal e-mail that RCN sent to all of their technicians.  On August 4th, RCN started utilizing a “PaxFire” system that would direct users that mis-typed or typed in an invalid URL to an RCN search page that contained sponsored search results.  I frequently had to refer to this email to subsequent RCN technicians to help them understand the situation.

With or without referring to this document, all of the representatives I talked to wanted me to clear my history and cookies.  This would supposedly solve the problem. It did not; and I knew it wouldn’t.  I was just following their directions.  At different points, they wanted me to go to the “terminal” and type in the following command in order to discover my DNS server settings:

/cat/etc/resolv.conf

That command was actually an invalid command that was listed in their FAQ system.  The correct command to find the current DNS server addresses on a Mac OSX computer, as I found searching the internet, is the following:

more /etc/resolv.conf

Correct command or not, I was still behind a router, therefor my Mac’s DNS server settings would always be my router. This was further proof that the technicians I talked to did not understand the situation.  They did not understand how to discover the problem.  Finally, they did not understand the possible solutions.  RCN’s Filipino technicians were incompetent and/or ignorant of internet technologies.

The problem I was having was simple; my router was receiving RCN’s DNS server address that utilized the “PaxFire” system.  They had already set me as opting out of this “PaxFire” system.   I should have been getting the “non-PaxFire” DNS server address.

Fixing the Problem

After these many hours on the phone with support over the weekend, and with no solution in sight, I wrote the previous blog entry.  I also tweeted my problem on Twitter.  Today, Monday, I received a Twitter response from @RCNConnects asking me to e-mail Help_Me_RCN@RCN.net with my problem.  I sent a quick e-mail and hoped for the best.

An hour later, I received a call from an RCN technician that was based in the United States!  We quickly went through several things and my problem was fixed!  I can’t tell what finally solved the problem.  But we completed the following steps within 15 minutes:

• I restarted my modem and router.  (Did not fix problem)
• I told the representative my IP address, proving it was receiving an IP address on the Non-FoxFire enable router. (Problem Persisted)
• I connected my modem directly to my computer, and restarted the modem.
• I checked my DNS servers using the correct command above. (Problem Solved)
• I reconnected my computer to my router, and reconnected my router to my modem.
• I restarted the router and modem.  (Problem still solved)

I can not verify what, if anything, the RCN technician did on his end.  From my perspective, I essentially reset my router/modem, which I had already done many times unsuccessfully solving my problem.  The solution possibly had something to do with the change in connected devices.  It is also possible the technician did something that I was unaware of.

In either case, my problem was solved during the conversation with a Unites States based technician.  And the only way that a customer can get in touch with one, from what I can tell, is to e-mail Help_Me_RCN@RCN.net.

Symptoms

When a mistyped or invalid URL is entered, an RCN search page is displayed.

Solution 1 – Easy

1. E-mail Help_Me_RCN@RCN.net.
2. When that process is complete, power cycle your equipment.
   1. Unplug the modem and connected device (router or PC/Mac)
   2. Plug in the modem; wait 1 minute
   3. Plug in or start the connected device.
3. The connected device should now pull a different IP address and DNS server.

Solution 2 – Advanced

1. Download the DNS Benchmark program from GRC.com/dns/benchmark.htm
2. Run the program
3. Update your machines DNS addresses to a fast, public, non hijacked DNS server. The address will be provided
4. This will not only fix the RCN hijacking problem, but will also speed up internet browsing since you will not be using the DNS services provided by RCN or your home router.

The problem with health costs is that the majority of consumers do not directly bare any of the financial burden of their health care.

Initially health insurance was designed to be used for HUGE, 1/100, expenses like getting hit by a car. But now it is used for EVERYTHING including Tylenol pills at the hospital. Since the consumer rarely sees the cost o their health care, nor do they pay for it, they have no reason to shop around or even care how much something costs. So hospitals can essentially charge whatever they want, and usually get a way with it. Patients can easily get charged $20 for generic Tylenol, or acetaminophen pill.

The consumer has no reason to think of or care how much something costs, because “they are not paying”. So you get to the point where not only do people make poor decisions on their health care, they make poor lifestyle decisions which impacts their health.

Example: smokers; when they get sick because of their cancerous habits, insurance will be paying more for the smoker’s health care than the smoker ever put into the system. Therefor, that extra money must be paid by other people, usually the “healthy” insurance company customers. So essentially, the healthy are subsidizing the habits of the sick.

These examples and thoughts prove the cost problems of single payer health care systems. Normally only socialized medicine or government run health care systems are thought of as “single payer” heal care systems. But the argument can be made that the current Unites States system is also a single payer system where the majority of the costs are payed by a minority of companies like Blue Cross Blue Shield, Aetna, Humana, and even the Government.

In fact Medicare and Medicaid are both “socialized” or “single payer systems”. Many people support only “private” systems. Those same people will also frequently support Medicare for their retirement. I believe these people are hypocrites. You cannot say you only support private systems while also supporting medicare.

It is all just a mess right now. The ideal solution would be a combination of many things, but the consumer needs to take a larger role in their health care decisions. They need to take more of the financial responsibility so that their habits change.

Then there are people who abuse the system like going into the ER with a fever and no insurance. That is a very expensive visit to treat a fever. Most doctors wouldn’t accept that visit since the patient couldn’t pay, nore would CVS give out medication for the fever. But the ER is required to by law. I don’t know if the government covers that or the hospital eats the costs, but either way, the consumer (you and me) end up paying. Either from the hospital passing on higher prices to insurance companies which cause higher insurance premiums, or the GVT raises taxes.

Medicare Part D is also a huge problem. Seniors expect Medicare to pay for all their fancy drugs. Medicare was never intended to pay for drugs. In fact all these fancy drugs came on the market after the program started, actually, they started to come after Medicare Part D was passed in 2003. Why should I (the tax payer) be paying for their $100+ a day pills? I am not saying they should die, I am saying humans have a life span, with these drugs we are pushing that life span well beyond what it used to be.

The holly grail is the question “do we deserve health care or not”. We all die. Should a wealthy person get better care because they are wealthier? People argue they shouldn’t. But if they really want to argue that, than they also need to agree that the middle and lower class should be entitled to the same lavish housing and food that the higher class has come to enjoy. And they should agree that the taxpayers should pay for that. Food and shelter is just as needed for survival as health care, if not more.

Companies that have effective corporate wellness programs see increased productivity, moral, and company loyalty. They also see decreased absenteeism, sick leave, and healthcare claims. How much money can your company save?

Excel Spreadsheet

I just read an article in the Chicago Tribune about the different types of beeps CTA fare boxes make on buses.  After reading it, I could not stop thinking about the decision making process the CTA used when designing the form and functionality behind the fare boxes, Chicago Card readers, and fare acceptance process.

If I were designing the bus fare system and process I would have done the following:

1. Put the Chicago Card RFID reader closer to the message display.
   1. The RFID reader should have been placed closer to the display, or,
   2. A second display should have been placed closer to the RFID reader
2. Made sure all of the RFID Readers acted the same.
   1. This would reduce confusion
   2. Currently some readers have green/red lights that indicate if a card was read, some have amber ones that indicate a card was present, others have no indicators at all.
3. Increased the effectiveness of audible and visual alerts.
   1. The current audible alerts are confusing and inadequate.
   2. The customer needs three warnings: Accepted, Error/Unreadable, or Denied.
      1. A tri-colored LED could solve this with Green, Amber, and Red.
      2. An audible message combined with the indicator would be more practical and informative than different beep sequences. The current number of beep sequences are unnecessary and confusing.
      3. A single line message display could be utilized, for convenience, to indicate the exact error, fare type/cost, and reason for denial.  But it should be placed AT or NEAR the reader, not far away.  Functionally, this display would be identical to the ones used at CTA rail entrances.
   3. The bus operator should have their own display
      1. The display would have messages applicable to the driver; messages the customer does not need to know, or should not know.
      2. The drivers display would eliminate much of the customer confusion.
4. Allowed the same RFID reader to accept MasterCard or Visa RFID enabled credit cards.
   1. Fares would NOT have to be increased; the administration and authorization of fares would all be handled by a third party, so the cost would be incurred as part of the transaction, instead of ongoing administrative cost of the Chicago Card
   2. This could also be used for adding value to a Chicago Card.
5. Allowed the driver to replace Chicago Cards.
   1. If a Chicago Card is unreadable, the driver should have the ability to replace the card on the spot.
   2. The driver could charge the replacement fee to the Chicago Card account, take cash using the bill acceptor in the fare box, or use the ability to accept credit cards.
6. Added second farebox/RFID reader and display
   1. A second box or read would allow multiple people board at once.
   2. The second box would also allow people to board if another was completing a transaction or communicating with the driver.

Some of these options may be seen as an additional, unnecessary cost, but they would dramatically increase the efficiency of they entire system.  Increased  efficiency would allow the entire system to recognize an overall cost reduction.  Additionally, the increased efficiency would increase customer satisfaction and get riders from point A to B faster, reducing the burden of wasted time in transit to the local economy.

Article:

We’ll give the Cliffs Notes version because the CTA fare structure is a lot more complicated than it needs to be because of a proliferation of card types, which include senior citizen free rides and fare cards for disabled riders, college students and Metra Link-Up passengers.

There are one, three and six beeps for fare cards.

One beep indicates a valid transaction. With a Chicago Card, Regional Transportation Authority reduced-fare permit smart card or student permit smart card, three beeps and the word “Retouch” on the farebox indicate the fare card machine was unable to read the card and the customer should retouch the card, said CTA spokeswoman Sheila Gregory. Three beeps without the “Retouch” prompt indicate the card has been accepted, but it has less than $2 of value remaining.

With a Chicago Card Plus, three beeps mean the fare has been collected. Unlike the regular Chicago Card, the Plus card is automatically replenished by the CTA’s accessing the customer’s credit card or bank account when the value falls below a designated level.

For all cards, six beeps signal the fare has not been paid because of an invalid or expired card, Gregory said. In those cases, the operator will request that the customer pay the fare, using cash or another transit card if available.