Flying the Ship

When your product is a service there are many thing that must be handled differently than they would be if your product was a thing. I am going to touch on a few of them here, but I welcome any comments from the readers as to any experience they may have had and would like to share.

1. Your service is someones job. A service is odd in that although it is meant to be a means to help people be better at what they do, or to free up time so they can focus on other things, or to help them implement something, services are often looked at as an intrusion into someones area of expertise. Your potential client or customer most likely has someone in their shop who believes they can do whatever it is your service provides. Because they know the company better than you do, they believe they can do it better. This person(s) is your target. If you can figure out what benefits your service provides that this person can get behind and believe in, then the account is yours. No one else will be as hard to convince as this person. It is important to understand that you may never encounter this person in the sales process and this person may or may not play a role in determining if your service is needed, but she/he is a key customer profile that is often overlooked.

2. Customer service is your cuddle-ware. When your product is a service one of the biggest risks you face is renewal of your service after the first term expires. People that purchase products have something, or made some investment in something that isn't easy to get rid of. They can look over at that object and apply some real value to it which makes them feel that the value they assigned exists in a very tangible way. With a service, your product is a line item in accounting. Cutting costs often starts in accounting and things with abstract value are often the first to go. Great customer service can play the role of cuddle-ware by making the abstract value real. There is a value in the relationships developed and the support given to customers that can be assigned a value by those making decisions. Through great customer service, your service product can become a partner in the daily operations of the customer.

3. Your service should add value to your customer's customers. If you are able to provide a service that is truly valuable, your customer's customers will feel your presence and your absence. There is no better voice to trumpet your value. No one in the back room or the board room has as much say as your customer's customers. If your service is so valuable that its absence will be felt by the the people who your customer is responsible to, then the odds of your service being renewed year over year, not to mention your ability to raise prices when needed, becomes much greater. But remember, your customer's customers can be fickle, so know their market as well as you know your own so that your service will continue to be relevant and continue to add value.

Services play an important role in most companies today. At IBM services accounted for over 50% of revenue this year. Services have low overhead, have a great ROI, and add value to your other product lines. Don't ignore the roll services can or should be playing in your company.

This latest round of infusion of money into the banks is sure to help, short term. It does not however address the real problem; (which was pointed out in this blog last week) the credit market. The first thing that should enter your mind when you hear about this latest round of investments into failing banks is why. What you will be told is that it will help to ease the debt from the bad mortgages that set this whole thing off and that it allows the banks to loosen up their lending restrictions. And that would be a correct answer if you were looking to end up back in this place at some point in the future.

It is actually very simple. In order to make money, banks have to loan money. Obviously this is a fundamental structure we all understand and on the surface, it seems like a very good model, and it is. Over the history of the united states, banks had a reputation of being very conservative and stuffy places to work. There was very little excitement and very little cause for concern. Mostly due to the low risk model described above. Over time however, as interest rates began to tumble the banks, now being publicly traded cooperate giants, needed a way to increase their ever shrinking margins. So, having a continuous inflow of cash due to the low interest rates (more people able to afford things and borrowing to do so and loser lending restrictions witch attempted to make up the margins with volume) the banks started looking for better returns on their investments. At first, it appears as though the major players were still conservative in their investment style, but as time went by, the risk management got more and more relaxed as did the lending requirements. So now you have risky investments along with risky loans. How long did anyone think that was going to last. It certainly isn't a long term business model and there is no way for that model to end good.

So what we have now are solutions which are trying to revive that model. Lend more at low rates so that more people will buy things, which again seems like a great plan. However, as you may have figured out by now, the banks are still faced with the same dilemma, "how do we make more money while lending at these low rates?". There is only one answer and we just got done witnessing where that leads. Read this post on bootstrapping by Guy Kawasaki and the importance of cash flow.

The solution isn't what people want to hear, but every economist knows that in order for banking to be stabilized we need to reduce the risk of their investments and the risk of loan defaults. They also know there is only one way to do that and that is to raise interest rates. Before all of you with adjustable rate mortgages freak out, there would have to be some grandfathering of existing ARMs and a chance to lock in, but all new loans would be affected. Now the naysayers will tell you that this will have a negative affect on the market, because fewer people will be able to purchase things and that will affect all areas of business, causing companies to fail and people to loose jobs. What those people are leaving out is that higher interest rates deters people not from buying, but from buying things they can not afford. When you look at the root cause, people defaulting on loans, I think the answer becomes very clear. As proof, I would ask you to visit any locally owned bank in any small to midsized town or city. What you will find is a stark contrast to what you read in the paper. These banks are doing fine, although revenue is down, because people are not borrowing as much, but because they have managed their risk by not making risky loans and by not making risky investments, they are able to weather the storm without any fear of failing. Sure, due to low borrowing and low interest rates, they are not making as much as they did in the boom, but they also didn't make as much in the boom as they could have, because they chose to be wise lenders and investors. It is no different than all of the people you know who lost a large portion of their retirement money because they didn't diversify their 401K portfolio.
It has been said before, we are a fast food society and we want a quick fix for everything. There is no quick fix, that has any long term viability, available. The greatest economic minds in the world know this to be true. No one wants to tell us this because it is political suicide, just like raising taxes. The reality is that we as a country have been living someplace far out of reality for quite some time and as my mom used to say, coming back down can sting, but in the end, you know it is the right place to be.

Demand honesty from your political representatives. Make sure they are doing the things, both locally and nationally, that you put them there to do.

-mike