Friday, September 30, 2011

Long Term Digital Transformation – What Can We Learn From Amazon? - by Brian Crounse

I’ve been thinking about Amazon recently. There hasn’t exactly been a shortage of ink spilled or bits flipped by people writing about Amazon. But I’m not writing about the Kindle Fire. Or how Amazon’s 2012 Kindle-related sales may exceed $6 billion. Or about Zappos. Or the Elastic Compute Cloud. All of those topics are interesting, but that’s not what I want to talk about.

I want to talk about OEM motor vehicle aftersales.

While Amazon and this industry have their differences (e.g. Amazon doesn’t have to ship mining truck axles to the middle of Chile, but they ship to millions of customers, and have seasonality issues that make even harvest-time at an agricultural OEM look tame), they have some basic commonalities: they both exist in a time of digital transformation, they both have awesome supply chain challenges, they both sell service parts, and they both want more market share. In this post, I want to talk about digital transformation. I’ll discuss the other topics in future posts.

Digital Transformation

At Carlisle & Company, we are spending a lot of time collaborating with our clients on digital aftersales strategies. Sometimes, the skeptic in me wonders why. Though we think we understand how future behavior by emerging digital service customers (EDSCs—a horrid consulting acronym if there ever was one) will shape the market, early returns are ambiguous. While our surveys and focus groups tell us that these customers are substantial in number even today, and currently have their opinions of service options shaped by online resources like reviews, it’s still hard to see where the dollars are, or how the money we invest will reap returns.

We at Carlisle haven’t earned much money in this domain yet, despite substantial investments of thought and time, and our clients, who are busy building and enhancing owner centers, online appointment capabilities, and mobile apps, haven’t hit the ball out of the park yet either. Are we doing this because we’re smart and thinking long term, or because it’s trendy and fun? While I personally schedule my car service appointments online, and have a few parts and service-related applications on my phone, I’m not exactly a representative sample. I think way more about vehicle aftersales than normal people. I also wear those weird Vibram toe shoes around the office—I’m kind of an outlier.

But then I am reminded of Amazon. Its 1997 letter to shareholders (a letter that Jeff Bezos is obviously proud of; it’s helpfully reprinted in each year’s 10-K) emphasizes that “It’s All About the Long Term.” And it was. And is. Amazon had a net loss in 1997. And 1998. And 1999. It had a net loss of $1.4B on $2.7B in net sales (yes, a net of -51%) in 2000. By 2001 (another year with a net loss), Amazon’s market cap was 80% off its peak, driven down in part by the dot-com bubble burst, in part by these mounting losses and negative free cash flow. In 2001, it was reasonable to be nervous about Amazon’s future.

Meanwhile, in 2001, the Borders Group reported $87M in earnings on $3.3B in sales, the 6th consecutive year of steady profits.

We all know what happened since then. Amazon bet on online commerce, executed brilliantly, and won. Borders lost. They weren’t direct competitors, but they sold enough of the same stuff, so they provide a useful contrast. It’s amazing to me not just that Amazon survived, not that they “won”, but that they won big.

Here’s their sales trend since 1997. I used a log scale to highlight how steady the growth has been on a percentage basis for the past decade:


Here’s a chart of their net income by year, and a simple (no discounting) cumulative sum of their net income/loss. Amazon would argue that free cash flow is a better measure of performance, and I’d usually agree, but I went with net income because the free cash flow calculations that I could track down were incomplete and a little dodgy.


I find these curves remarkable, because of both the size of the annual and cumulative losses, and the current positive trajectory. Amazon’s cumulative income, even before any consideration of a discount rate, was negative from its founding through 2009. It’s now throwing off $1B+ a year in income, supposedly more in free cash flow, and has a market cap of over $100B (at the time of this writing). Talk about focusing on the long term. And, eventually, succeeding. Big.

So how does Amazon’s current success, which has many factors, apply to OEM vehicle aftersales businesses?

Here’s my point: Even if we can’t see the money yet with digital service customers, maybe we need to take the long view and be confident in our efforts. We know that the web, social media, and mobile devices are profoundly changing how consumers select and purchase goods and services. We believe that we need to engage in these areas, at the very least as a defensive action, as our research indicates that digital consumers tend to move away from genuine OEM parts and service. Beyond that, we believe that we can use digital media to strengthen our relationships with our customers. The hard benefit NPV of our efforts may not be apparent yet.

But, I am reminded again of Borders and Amazon. One company seemed intent on preserving its established, profitable business, with some online enhancements, all the way to Chapter 11. The other bet big on its digital strategy, executed brilliantly, and is worth $100 billion.

Friday, September 23, 2011

Survival of the Fittest – Fast-Fits Are Fitter Than You Think - by Stephan Brackertz

Every now and then we take a look at what is going on in Europe. And there is an interesting story unfolding right now we wanted to share… Carlisle recently conducted a major survey of over 5,000 European automotive end-customers in 5 countries. What we found was a mix of “we knew that already”, some “surprises”, as well as some real “bombs”. Bombs are more than surprises… they are things we didn’t know at all or things where our common knowledge is actually wrong. One of the things we learned – and this is a real bomb – is that Fast-Fits are on their way to eating the dealers’ lunch. All indications are that Fast-Fits are stealing dealer customers away and are doing so successfully.

How is this happening you may ask? Here are some survey insights:
  • About one fifth of customers already go online to search for Aftersales related information.
  • Customers that are online are about evenly split between dealer loyalists and aftermarket workshop loyalists (independent workshops and fast-fits).
  • Prompts from the independent aftermarket tempt them to try a different repair provider (25-45% of online customers change repair provider based on what they find on the Internet).
  • The prompts typically come from fast-fits. They are sucking dealer customers and independent workshop customers in to try fast-fit services.
  • A sizeable portion of self-declared “dealer loyalists” are already defecting to Fast-Fits.
  • This issue is big enough to notice in Europe, and huge enough to panic in the United Kingdom.
So what? A typical response to this may be, “we OEMs don’t have to worry because Fast-Fits deliver awful customer satisfaction; our dealers are far better.” Not so. In fact, our survey data shows that ‘dealer defectors’ are satisfied with their service experience at fast-fits. This is a big deal after all.

“Why didn’t I know about this?” may be the next question. That’s mainly because we underestimated Fast-Fits in the past and their ability to evolve and re-invent themselves. This is happening below our radar. And if we look back we can understand how we underestimated Fast-Fits.

Let’s backtrack a bit, to the way it used to be…
Fast-fit chains like ATU, Speedy, Midas, and Mekonomen grew to a significant presence in Europe with many hundreds of outlets. Private equity firms saw a good business model and many fast-fits were bought by private equity investors that loaded up the capital structure with debt. Fast-fits became marketing masters – bombarding consumers with low price messages in print fliers, TV, and radio. They pulled a lot of customers into their workshops and then bungled things up by not delivering service quality. Worse, poor employee compensation plans ensured that up-selling glided into phony repairs and rip-off territory. These plans would have made Amway proud.

As a result, Fast-Fits were like jet engines – they sucked in a lot of customers, squeezed them, burned them up and spewed them out at high
speeds. Most of the customers didn’t “stick” due to the poor service experience – but loyalty didn’t matter in this business model. As long as there were enough fresh, unburned customers around to suck in, the jet engine could keep spinning. Over the years OEMs became less and less worried as enough customers spread the word that service quality is awful and business practices are frivolous. When the recession and the debt crisis hit we thought we could write-off Fast-Fits completely and focus on other threats.

The recession was like a near-death experience to Fast-Fits:
  • Customers clenched up and spent less, delaying service and repairs
  • Older cars were being pulled off the road by cash-for-clunkers programs
  • Rolling over large gobs of private equity debt became tricky
Let’s fast forward back to where we are today and where we will be if we don’t react…

Fast-fits are back and are snapping away at our “dealer loyalists”. The enabler for this is the Internet. A brilliant and comprehensive plan to take advantage of the Internet is helping fast-fits back from the brink of destruction. We underestimated the fast-fits. The experience shows that they are damn good at evolving. If it’s survival of the fittest out there, fast-fits may be fitter than we think.

Let’s compare some of the DNA of fast-fits and OEMs. Two very different animals, but wouldn’t it be nice if we could splice out some of those fast-fit genes and integrate them into our OEM genome? Especially the genes about Internet strategy and speed to evolve?

So fast-fit DNA explains much of what we are seeing. And the natural environment is also changing in their favor (how Darwinian). Customers are moving into the online world. Fast-fits have already adapted to this change quite quickly. To stay fit, OEMs need to be ready to make the next evolutionary step into this space.
There’s lots more interesting aspects to this story – ask us for the details or a look at some of the scary survey data.

P.S.: Oh, and how did fast-fits fix the customer perception problem with workshop quality so quickly? Wouldn’t we love to splice out and implant that gene into our DNA?

Thursday, September 15, 2011

Future Shock – Social Media, Call Centers, Digital Service Customers, and the End of Those Good Old Days - David Carlisle

This week we hosted our third Digital Aftersales Summit for 14 OEMs, where the focus was on social media, digital everything, and our emerging digital service customers (EDSCs). Eight hours, heavy participation, no salesmen, and pretty much no breaks. OK, this marathon session wiped out most of the participants. The leaders want it that way. I, personally, just hate breaks. Waste of time.

Social media really is very simple; it’s all about a profound role reversal. In the old days you bought a big chunk of air-time, crafted tight 30- and 60-second messages for millions of dollars, then let ‘er rip. Millions of impressions later, people bought your stuff. Never could do much with a ROI on this. So, they bought your stuff and if they didn’t like it they called you on an 800-number. Technology evolved to a point where your 800-number was manned by a computer with a sweet digital voice that would get everything it needed to know after customers spent 10 minutes shouting nouns and verbs and inputting complex alphanumeric strings on the phone dial. This eventually got them to a person they couldn’t understand and who knew nothing. Only the brave and strong ran this gauntlet to finally explode with anger at the customer service representatives. Yeah, those were the good old days.

Now we put up Facebook pages and plot to get “liked”; we do fewer of those
atomic ad blasts, because it’s all highly personalized and targeted now. OEM page content has to look like your Aunt Millie’s so it doesn’t give off an impersonal, corporate vibe. Want to be friendly-like. Agencies don’t do well with this sort of strategic dumbing down. Still have those 800-numbers. But, now when customers buy stuff and don’t like it, they tweet their discontent to what could be millions of connected potential customers … or slam you on Yelp/Google/Dealer Rater … the list goes on and on. So, we’ve got to figure out what to do with all those tweets & slams. In the old days we slapped that unhappy customer around with our call center constipation; now, he/she owns us. Role reversal.

Timeout: Ultimately it is this simple, but the implications are incredibly profound. Earth shaking. All those corporate customer service policies and procedures (and their associated infrastructure) are lined up to service the traditional un-empowered customer. Yesterday, all you needed were a few people to interface with the agency and a large call center that architecturally resembled a Temple Grandin-designed slaughterhouse. You could outsource it. This stuff does not work for digitally savvy customers. They don’t watch TV, don’t read print, skip commercials, avoid paid ads, don’t bother with 800-numbers, and express their feelings both bad and, well bad, using Twitter. None of our policies, procedures, infrastructure, or other junk works for these folks. It’s a corporate Betamax dilemma: (1) most executives think their “Betamax” marketing and customer service infrastructures are working just fine, (2) the “Betamax” owners know that ain’t so. (3) So, do you go out and buy a VHS player or… (4) cobble something together and wait for the equivalent of DVD, Blu-ray, or Netflix to come along. Not clear yet.
Who’s wreaking all this damage to our yesterday solutions? To quote one of our Digital Summit participants, it’s basically anyone with a pulse and access to the internet. Emerging Digital Service Customers (EDSCs) go to the web for information, education, and decision-making. In as few clicks as possible, they know everything they need to know and become empowered:
  1. costs & savings,
  2. locations, and
  3. what others think about the service.
So, when they choose a service provider they can figure out if they are paying more than they would at other close-by alternatives and they can determine if past customers were satisfied.

Dealers are not in the sweet spot of any EDSC target – there’s just a lot fewer of them inside a default 10-mile search radius than there are independent service providers. Yesterday’s rope-a-dope customer
management strategies are just as obsolete as those Betamax strategies I just talked about. Rude behavior, price padding, aggressive up-selling, phony free inspections, and other stuff from the service providers’ rope-a-dope arsenal has shifted from opaque to transparent. All a customer has to do is walk back to their car, grab their iPhone, check costs and prices, read through Yelp, and determine if they’ve been bamboozled. Worse yet, they become ticked off and use Twitter to broadcast their research findings to a couple of million folks searching for this sort of stuff … to write stories and blogs, to make decisions on where to get service, to make decisions on what car to buy. They put the car into drive and move on to another shop. The flim-flam man at the shop won’t even know what hit him and has no idea how to respond.
Timeout: Worse yet, what if he’s really not a flim-flam man? Here’s the real American Tragedy. He could be a dealer service advisor quoting double-netted parts prices for Genuine parts on a 150,000 mile junker, using warranty-driven labor rates that are posted on the wall, following inspection procedures that he heard about at NADA that were endorsed by his/her field rep, and relying on training he got in high school because none’s available from the OEM. DOA.
Bottom Line – It’s 1981, again. That was the year of the first JD Power Survey and represents the backbone of Toyota’s reputation for quality and customer satisfaction. The critical IQS survey came later, representing a nexus for mass customer opinions. This profoundly changed our industry and who was what on the game board. OK, Consumer Reports helped, too. JD Power is another Betamax artifact. They just don’t know it yet. If reputation is still important to this new generation customer – and it is – it is being very differently defined. The rules are different. Winners will understand this sooner. Losers will defend their tight budgets and hold on to their Betamax customer retention strategies until it is too late. The game board is about to change again. It might just be those importers from Detroit that now have the advantage. Again.

Friday, September 9, 2011

Carlisle Launches a New “Technician Feedback Survey”

While Carlisle has long been conducting industry-syndicated surveys focused on Parts Managers, Service Managers, and Sales Managers, the Technician has, for too long, been ignored. That came to an end this week, as Carlisle launched the pilot version of its new Technician Feedback Survey.

This survey – while focused predominately on better understanding the factors impacting technician retention – also delves into other issues critical to technician satisfaction. These include such areas as training, rewards/recognition programs, job motivations, career paths, etc.

At just 2.5 days into the launch, this survey is clearly a wild success. With only 6 OEMs participating in the pilot, we have already received over 2,500 responses. Based on comments from the respondents, this survey is long overdue:
  • I really like that you are doing this survey. It gives me a place to give my opinion and insights on how [OEM] is doing.
  • 35 years and this is the first time they ask what I thought
  • It was short/to the point, shows commitment to the technician
  • Thanks for asking the rank and file guys!!
  • Very nice to see the company actually interested in the people making it a great company
  • I think it is great that you are giving us at the dealership level an opportunity to provide input
  • This Survey is a wonderful idea and I’m happy to share my thoughts
  • I’m just happy that someone is even interested in my opinion as a tech - good job [OEM]
  • I really appreciate the opportunity to voice my comments and concerns…
  • It is nice to see [OEM] finally asking the technician for their input.
  • Good survey!! Helps me vent my issues, management won’t listen without firing me.
  • I like the fact I have been given the opportunity to be heard and would like to see more surveys like this one
  • Any time someone cares enough to ask what we think as techs is appreciated.
Initial results from the survey will be reviewed at the upcoming Automotive Roundtable in October. Following that meeting, we will begin discussions regarding a full industry roll-out for 2012.

Friday, September 2, 2011

Emerging Digital Service Customers (EDSCs) – How They Play Outside Auto

EDSCs are very different from typical customers. We’ve talked a lot about this. Most importantly, they differ in (1) using information on the internet to commoditize parts and labor, and (2) relying on social media and the more broadly defined e-community to tell them the truth. This, in fact, is really about the commoditization of product merchandising, marketing, selling, and ultimately, differentiation. Here’s how it plays out. Car’s broke. Use mobile device to find service provider close-by. Sort providers based on customer reviews. Choose provider. Check parts and service quotes based on internet research. Negotiate. Form opinion based on cost benchmarks, results, and trust. Write review. Resistance is futile.

OK, that’s cars. Before we move on to heavy equipment, let’s consider medium duty trucks. Medium duty truck owners are more like car owners than heavy truck. These owner operators don’t have large fleets of trucks. They primarily focus on their bakery, local brewery, or plumbing supply business. They are more sophisticated than car owners, but, unlike heavy truck fleet owners, they do not have fleet managers that focus on uptime and cost.

What about heavy trucks, farm equipment, and construction? Twenty-two year old sales reps typically don’t play in these sandboxes. My caution here is to watch the technology and how it is used; don’t overly fixate on the customer. The patterns of customer loyalty erosion outside auto and medium duty truck will reflect how technology will be used, not the genetics of a brand or a customer.

Ag, heavy truck (HT), and construction dealers have much stronger aftersales customer relationships than their automotive cousins – this is truer of Ag and construction than HT. That is important because these sorts of products typically don’t have tail fins, 20 color choices, tuned exhausts, and fancy fat low-profile wheels and tires. Ultimately, they are commodities that are primarily differentiated by acquisition cost, performance, uptime, and total cost of ownership. Up-time is critical and this is all about fast response to maintenance and repair needs. Now, let’s watch the technology.
Time out: The largest, most sophisticated fleets are using technology to maximize value, not just to find cheaper parts and service. In particular, they want easier parts and service, and will pay more for it; for example, telematics and infrastructure that are integrated with dealers’ DMS and fleets’ purchasing systems that automatically open repair orders, send estimates to fleets, and then send POs from fleets back to dealers. Dealers that can support this will get the aftersales business.
Two things are bound to happen. First, dealer/distributor labor rates and parts costs will become more benchmark-able for the faster moving wear parts that are available through the aftermarket. Second lines will help here, but they might not be able to plumb the depths of competitive pricing. Labor rates will be more transparent from dealer to dealer … and from dealer to non-dealer. Fix-my-own commercial operators will buy more from the internet. They will buy what’s available … and more will become available. That’s the good news.

The bad news is that they will document their experience and write customer reviews – they will do this because they will find these reviews helpful in choosing dealers, and choosing manufacturers. This will serve to further commoditize these segments. Winners will be (1) low cost total providers, (2) with great digital marketing presence, (3) with extraordinary supply chain performance, and (4) who closely watch the technology, how it is used, and get in front of their customer needs … rather than chase after them.