Every leader wants to avoid major strategic mistakes, but, in a complex world, it’s hard to anticipate all the forces that might impact your goal. It’s vital to find weaknesses in your strategies before you implement them — and developing a rigorous process to do so.
The ability to poke holes in one’s own strategies is something the U.S. military has practiced and refined over centuries. Rick served in the U.S. Army for 35 years, retiring as a Lieutenant General, and has seen this firsthand. In the heat of battle, strategic planning that’s incomplete or simply wrong causes leaders to revert to on-the-spot decision making. While sometimes necessary, making it up as you go is more often associated with failure — and loss of life — and is often a symptom of ineffective or inaccurate anticipation of competitive moves or environmental shifts.
The same is true in business, and the techniques the military has honed can help executives anticipate problems and change course when necessary.
Build situational awareness
Simply put, situational awareness (SA) is achieved after a soldier has deliberately assessed an environment from various vantage points and has ensured that all potential perspectives have been captured.
In the business world, things are fuzzier — there are no landscapes, buildings, or troop movements to scan. But it’s still crucial to make sense of the environments in which we operate and foresee how different factors will affect our decisions.
One way to build one’s situational awareness is to talk through alternate realities. Although this sounds like science fiction, alternative realities are basically hypotheticals. We think X will happen, but what if Y or Z happens?
At Merck, where Jay served as Chief Strategy and Business Development Officer and President of Emerging Businesses, “alternate realities” were used to prevent “team think,” which frequently occurs when organizations believe the conventional view of a situation is the correct one.
To develop better situational awareness, start by forming teams and tasking them to develop alternatives based on different views of the same situation. For example, what if a new competitor enters the market earlier than expected? What could they do that would surprise and/or outmaneuver us? What if they are delayed; what types of things might they do to try to recover and penetrate the market more quickly? Could any of their actions be extreme or desperate? What actions could and should our team consider mitigating or blunting the risk in these alternate scenarios?
The next step is to compare these hypotheticals collectively and then determine what counter measures will have the most impact.
Most importantly, make sure to consider specific “triggers” that would indicate one or more of the alternative scenarios is unfolding. Agreeing on these triggers up front is useful because they prospectively define specific thresholds for change in action or direction. Once identified, you should track these triggers regularly on a dashboard that all senior team members see. This eliminates or greatly reduces debate when course changes become necessary and urgent. Then, make sure that group leaders complete an SA assessment regularly and discuss the alternate scenarios and triggers during each business review.
Small investments of time can result in new insights about your organization’s readiness, and your leaders’ acumen, that would have gone unnoticed until crisis.
Develop an outside-in perspective
This is another technique that’s routine in the military and can highlight unique but under-leveraged capabilities or untapped sources of competitive advantage. Think of aircraft. For a long time, the military used planes primarily to increase visibility of topography and troop movements, but starting in the early 1900s, the military began using planes to delivery ordinance and to conduct warfare. What are your organization’s aircraft?
Frequently, these are ancillary assets or capabilities that are often considered to be a “cost of doing business.” These could include a controlled global supply chain, unique abilities to test compounds, proprietary communication channels with key constituents, unique manufacturing machinery, etc. Think to yourself: In future scenarios, could any of these become new lines of business? If your environment changes unexpectedly could any of them help you to adapt?
In companies, an outside-in perspective can help shape an honest view of your organization’s strengths (and weaknesses). Customers can be a great source for this and forming a strategic advisory council is another option.
Game it out
Another practice is war-gaming, and there is often no substitute for putting real people into the mix to see how they react. Even complex AI simulation, while helpful, can lack the variability and ingenuity of human creativity. The US Military has become an expert in preparing for combat operations using war games. Most notable is the establishment of the National Training Center in the Mohave Desert in California where the US Army conducts live, force-on-force battles to refine its capabilities.
At Merck, war-gaming exercises around critical decisions were used frequently. The best way to do this is to assign high performing managers to lead “opposing” teams, which should be made up of individuals with expertise across relevant functional areas. Before the exercise, make sure to prepare a background that outlines the general challenge and provides specific information and data. A best practice is to task the line area most responsible for the situation with organizing and leading the overall exercise — and to make sure that each group presents their findings at the end. Incentivizing “opposing” teams for success will help ensure a robust simulation. For example, consider inviting a senior leader to judge the readout, and offering a cash bonus or team recognition for the winning team, or both.
Form diverse, strategic groups
Finally, form strategic initiatives groups, and populate them with people who can analyze problems from various perspectives.
At Merck, the strategic initiative group often came up with alternate decisions and actions on key business issues. In one case, the choice to position a new product as second line treatment versus trying to displace a well-accepted initial therapy turned out to be uniquely advantageous, helping achieve a launch that far exceeded expectations.
Arthur Nielsen, market research pioneer and founder of the Nielsen Corporation, once said, “The price of light is less than the cost of darkness.” As data proliferates across the enterprise, this observation by Nielsen is rendered even more relevant, because data represents the unlit fuel that has the potential to light the darkness, but which often lacks the spark of analytics that enables us to see.
The mission of enabling data analytics in today’s enterprise is hobbled by the lack of the requisite skills in the marketplace, including: advanced statistics/mathematics, new analytics methodologies, advanced systems analysis, business fundamentals, regulatory and legal understanding, and general IT technical and data architecture skills.
To cope with the shortfall in market supply, companies need to better leverage their existing talent. Having founded a data management company and worked with hundreds of organizations over the past 20 years to execute their information management and analytics initiatives, I’ve found the groups that are able to successfully utilize their company’s analytics technologies often take the following approaches:
Build a team. One strategy is to take the team approach to cross-pollinate and commingle the required skillsets; bringing together a diversity of skills and backgrounds from within your organization to achieve a common goal is a highly effective method.
Start by identifying the characteristics and needs of your organization’s environment. For example, highly complex product and service environments will require domain experts or subject matter experts. Simpler product environments will require experts in operations, logistics, and supply chain. Formulate teams that reflect your particular needs, and consciously design your team’s framework and composition to transfer skills across functional or organizational boundaries.
Find the supporting players. I suggest going outside your department in order to lay the foundation for functional analytics initiatives. It will be productive to search across your organization for a few relevant skillsets that will enable your team to make use of the data available:
Data analytics experts: They understand the basics of analytics and can navigate between what’s possible and what’s relevant, using the latest methodologies and technologies available.
Data experts: They understand the data formats, the layout and content, especially the data schema and interrelationships.
Data architects: They know how data is stored and architected, including the plumbing that connects them. The perfect theoretical analytical approach can crash ignominiously when it takes an impossible amount of time to simply access the data. Particularly in these days of heady cloud adoption, one should be sensitive to latencies involved in moving data to and from the cloud.
IT technology and process experts: They understand the nature of the data flow and operational processes. They play an important role in leveraging available IT tools to access data while being aware of key issues.
Records managers: They are the curators of business records, both physical and digital. They know the locations of important documents and how they are categorized and catalogued.
Seek creativity and curiosity. The foregoing is a good start at convening a team of diverse skill sets in order to enable, if you will, “analytics for the rest of us.” However, there is one set of essential traits to be found in your team that will drive the initiative. Seek individuals who are innovative, frugal, and creative, who produce maximum results with minimal resources. In data analytics, such combinations of creativity and flexible thinking can make a huge difference in producing actionable results, while reducing time, effort, and costs.
For example, I spoke with one data analyst at a payments processor who claimed to predict riots with a high level of accuracy in the wake of the Ferguson unrest. One would have thought it was from comprehensive analyses of complex demographics and collections of red-flag news indicators of social discontent. It wasn’t. He simply tracked the sales of riot-related components such as crowbars and flammable fluids from major hardware outlets and looked for spikes in purchases that exceeded a certain threshold.
This combination of creativity and curiosity is difficult to teach but essential to effective analytics. Finding team members with such characteristics can make all the difference.
Make the data usable. Given that you’re unlikely to find an abundance of individuals with exceptional data management skills, it’s necessary to employ methodologies and technologies that present data in an accessible, visual, and intuitive fashion.
This has been demonstrated in our first-hand experience using internal enterprise data already under management for compliance and legal purposes to identify the “go-to” people in an organization. Rather than conducting complex analyses of high performance metrics, dictated by the type of role or function, and customized for each department or region, we used graphical analysis to discover a much easier proxy to get to the same approximate result: We analyzed individuals’ inbound communications to assess the frequency of questions and from how high up the organization they came, and then analyzed the outbound communications to assess the frequency of answers and to how high up the organization they went. The go-to people lit up like a fireworks display.
Note that this approach identified the top performers regardless of function or role, and took a fraction of the effort required in more traditional approaches. It is the technology that can make analytics tasks more intuitive and visual, thereby reducing the need for deep technical or statistical skills.
Consult legal and compliance stakeholders. Finally, in order to ensure that your analytics initiatives are in compliance with legal requirements and new privacy regulations such as GDPR and the California Consumer Privacy Act, it’s advisable to consult the right legal and compliance stakeholders:
Legal and Compliance Managers: They understand at a high level what data can be stored, and how they can be used, while minimizing the risk of running afoul of legal and regulatory guidelines.
Regulatory Data Managers: They understand which data is retained or deleted due to regulatory obligations, which can increase or reduce capabilities, and possibilities in data analytics projects.
Data Protection Officers: A new and timely role, these privacy experts can help analytics stay on the right path and avoid triggering penalties from incoming and expanding privacy regulations.
Lighting the Path Ahead
Data analytics is a powerful and promising source of competitive advantage. To enable such a strategy in the face of a difficult shortfall of the requisite talent in the marketplace, one must fall back on developing existing employees through cross-training and cross-pollination of team members and experts.
To embark on this strategy, we shouldn’t wait for that singular blazing torch-bearer to light the darkness. It is more pragmatic to help the rank-and-file member to become a candle, and from the collective light, illuminate the darkness.
Every day there are news stories about the so-called gig economy where workers contribute part or full-time labor — not as employees with benefits, but as independent contractors. Dara Khosrowshahi, the CEO of Uber, the ride-sharing giant, proudly declared on September 10 that “very few brands become verbs”. The same week Upwork, a platform for hiring freelancers, filed for an IPO, as did Fiverr, which boasts that it offers a “freelance services marketplace for the lean entrepreneur.” Indeed, the gig economy has not only turned millions of Americans into contractors, but it’s given the more successful entrepreneurs the tools to grow even faster. A fast-moving startup can secure talent as it needs it, outsource more quotidian tasks like payroll, and stay lean and mean; indeed, I see entrepreneurs employ this approach through my work at EY supporting creative, successful startups.
But there are lots of myths about gig work, whether full-time or part time. It’s growing, but not as much as you think, and in ways that may be very different than you imagine. It might even be better for older executives than recent grads. Here are a few myths worth dispelling.
Myth No. 1: Millennials love to gig. There is a common perception that somehow the millennial generation just loves part-time, gig employment. But a recent study by EY found a more complicated picture: Sixty percent of millennials — those born between 1981 and 1996 — were not involved in the gig economy at all, and only 24% report earning money from the gig economy. In fact, the percentage of millennials with full-time careers is rising at a brisk clip from 45% in 2016 to 66% in 2018, according to the data we collected. That reflects a growing economy that’s offering more full-time employment, but it also shows a generation that may want the same thing as their parents: Steady jobs with a clear advancement track and benefits such as health insurance and paid time off.
Myth No. 2: We’re all going to be giggers. The size of the gig economy and how fast it’s growing also seem to be over-imagined at times. The measurements can vary a lot and so can the predictions for how much it’s likely to expand. Back in 2013, a much-touted survey suggested that by 2020 — just over a year from now — a whopping 40% of the workforce would be so-called contingent workers, a number that would include contractors, temps and the self-employed. But here are the facts: the best estimates according to the Gig Economy Data Hub, a joint project of Cornell University’s Institute of Labor Relations and the Aspen Institute, put the percentage at around 30%. That’s a lot and it’s growing. But don’t think the world as you know it is completely disappearing. Only about 10% of workers rely on gig arrangements for their full-time jobs. And on-demand services where you get your next gig from an app like Lyft or Task Rabbit represent an even smaller percentage of gig workers. In fact … less than 1% of workers have used online platforms to arrange work in the past month. Most workers are still grabbing extra hours the old-fashioned way — tending bar or temp work on the side — not by being digitally summoned.
Myth No. 3: Gig is better. In our 2018 EY Growth Barometer, an annual global survey of middle market company leaders, we found some movement away from part-time and gig hiring. Most companies are still committed to full-time hires for all of the advantages that bestows — loyalty, retained knowledge, institutional memory, stealing top talent from the competition. In many cases, you have jobs in which the worker is integral to a team or needs to be supervised. That’s why so many of the entrepreneurs I know use the gig economy where they can, but they also have a deep and abiding interest in hiring great, full-time talent. A gig-based businesses can’t transmit “a culture” in a traditional sense. “You have individuals doing things you have no supervision of, other than the work itself,” said D. Quinn Mills, a professor of business administration at Harvard Business School, in an interview. Mills noted that while the gig economy can benefit companies and is likely to expand, it’s not for every business.
Myth No. 4: Gig work is unfulfilling. There’s a perception that gig jobs are dead-end jobs. Not true. Consider Jody Greenstone Miller who has had a stunning career from the White House to the Walt Disney Company. The Los Angeles lawyer-turned-entrepreneur is the co-founder and CEO of Business Talent Group (BTG), which pairs high-end talent with high-end expertise in areas such as finance, operations, and mergers and acquisitions at companies such as Pfizer, Kraft, and MasterCard. Miller said in an interview that her that stable of top talent wants “to be able to choose who we work with and what we work on.” This lines up with EY’s recent findings. On a global basis, according to our 2018 Growth Barometer, a lack of skilled talent is a bigger headache for US companies than for those in other countries, with 25% of US survey respondents citing this as a challenge to growth compared to 10% of their counterparts elsewhere. With U.S. unemployment at a historic 40-year low, there just aren’t the numbers of suitably qualified people in the talent pool to hire.
Lisa Hufford, a consultant author of Navigating the Talent Shift, has worked with gig talent for years. She’s seeing first-hand that while the gig economy isn’t the answer to all problems, it can help startups meet their talent needs at lower costs and help mature companies grow. It can also be a surprising boon to baby boomers and Generation Xers. “We were raised at a time when there weren’t a lot of options, and now there are so many choices,” says Hufford, a member of Generation X, in an interview. “For people who didn’t grow up that way, it can feel overwhelming. I like to help people navigate that shift. They realize they have a lot of skills that companies want and a lot of options. It’s kind of cool.”
In tough times, companies hunt for new sources of profitability and growth, frequently ranging far beyond their traditional offerings. Yet in doing so, many of them overlook opportunities for generating sales from services they’re already giving customers for free. Though it sometimes makes sense to stick with a free model, companies too often make that the default option. That’s a costly mistake.
The solution is easy to articulate but, naturally, much harder to implement. Simply put, managers must determine which services they can stop giving away and then start charging for them. We call this the free-to-fee, or F2F, transition. When evaluating any particular service, the challenge can be boiled down to this question: Should you bill it, kill it, or keep it free?
Drawing on insights from our research and consulting with companies across industries, we’ve developed a framework, explained below, for companies that aim to transition services from free to fee. For the past eight years, we’ve studied a variety of manufacturers and professional services companies and conducted workshops with hundreds of managers (see “About the Research.”), and we’ve seen ample opportunities for moving services from free to fee. Our research has focused on B2B companies, but its takeaways also apply to B2C companies seeking to monetize their free services. The challenge is especially acute for B2B companies, though, because their corporate culture is often rooted in selling products, which means that services tend to be treated as afterthoughts.
About the Research
Over the past decade, we have worked with many companies on their free-to-fee transitions. These companies have spanned an array of markets, including construction materials, data security, financial services, logistics, and equipment manufacturing. We started our research in 2010 with the question of how companies could better monetize free services and ended up developing the road map described in this article.
Once we learned that a company’s inventory of free services typically consists of dozens of offerings, we asked managers we worked with to categorize their services with respect to their ability to charge for them. Each company we worked with faced its own challenges, but insights that applied to all of them were retained and formalized. In 2016, we shared the resulting framework with participants to validate our findings.
No company should try to turn every free service into a revenue stream. Nor should companies stop providing free services altogether or hand them all off to distributors, who may be able to deliver them more cheaply. Managers often have legitimate justifications for their giveaways. They may, for example, deliberately bundle goods and services to achieve better pricing.1
But many services are given away because of fear, inertia, or a lack of strategic thinking. A printing-machine manufacturer we worked with provided remote monitoring as a service to protect multimillion-dollar equipment. It considered selling that offering as a relatively inexpensive monthly subscription; the fee would have been only several hundred dollars. Fearing pushback from customers, an executive decided not to invoice for the service. Instead, he buried the cost in the overall margin of each machine sold. The problem with that is he may have ended up overcharging customers who didn’t need the service and thus risked losing their business.
Our three-step framework can help your company avoid such shortsightedness and plot its path from free to fee. The first step is to take stock of all the services you give away. Then you build action plans for pricing and selling services you’ve decided shouldn’t be free. And finally, you manage the inevitable resistance to change, whether from inside your company (especially from sales staff) or from customers and distributors.
Shifting to a Paid Model
When executives review their companies’ free services, they’re often surprised by how much potential revenue they’re sacrificing. In a two-day workshop with 12 country managers at a forklift manufacturer, we reviewed more than 80 services the company provided free of charge — and found that 22 of them offered real chances for revenue generation. Over six months, the company pushed 14 of these from free to fee. It started, for example, invoicing for on-site equipment diagnostics, which its technicians provided during customer visits. The individual fees were small, so customers gladly paid. In one test country, 80% assented, resulting in more than 2 million euros in additional revenues in the first year.
Diagnostics work is just one common giveaway; there are a host of others. (See “Services B2B Companies Tend to Provide Free of Charge.”) Companies do often have strategic justifications for their free services. Sometimes they aim to capture value elsewhere by securing customers’ goodwill and long-term business or gaining future product sales. But we’ve also encountered less strategic reasons for failing to charge for services.
Services B2B Companies Tend to Provide Free of Charge
Opportunity lurks here.
Connecting to LAN/Internet/ERP
One that we often hear is that a company must offer a service without charging because competitors do. Another is that customers will balk at paying. Some indeed may. Distributors may resist, too, seeing service provision as their turf.
But giving away services can send the wrong signals to important stakeholders. Among customers, it may contribute to a reputation for providing value for money, which sounds like a boon. But as customers grow accustomed to freebies, charging for any service becomes tougher, and potential revenue can slip away. Or they may assume that because a service is free, its value is limited.
Free services may also send the wrong signal to supply chain partners. A tube maker for the oil and gas industry provided advanced material calculations without invoicing customers. Its distributors offered the same service for a fee. The supplier’s intention — to help customers with their calculations — led to spats with the distributors, who felt they were being undercut.
Among employees, not charging for services can create a vicious cycle. Like customers, they may assume the service isn’t worth much of their time or effort — their attitude can become, “If it’s free, why bother?” Plus, without charging, companies often lack the funds to invest in service that stands out from competitors’ offerings and adds value for customers. But a fee creates an opportunity to differentiate — and an expectation that good enough won’t suffice. Invoicing can help instill a culture of striving for service excellence.
Consider the following example from the tube maker mentioned above. The company had provided free training to customers, an activity considered by many staffers to be an annoying time sink. Its trainers squeezed the development and delivery of classes into already crammed calendars. As should come as no surprise, the quality of the programs was poor, and neither the company’s employees nor its customers were satisfied. The result was a vicious cycle. Trainers didn’t invest enough time, and customers didn’t take advantage of the low-quality classes — which sapped the already low enthusiasm of the staff.
A much better alternative is a virtuous cycle in which a company moves services from free to fee when customers’ needs and the company’s strategic goals call for that approach. This creates a situation in which employees have the necessary incentives and support to deliver great service. Once the tube manufacturer realized the free training was compromising the quality of its educational programs, it developed, with professional assistance, a for-pay program that squarely addressed customers’ needs. The improved training led to the creation of a certification for customers’ employees, stimulating even more demand. (See “The Vicious Free Cycle” and “The Virtuous Fee Cycle.”)
The Vicious Free Cycle
As we’ve seen at companies that provide customer training as a free service, throwing it in as a “bonus” can perpetuate problems with quality and satisfaction.
The Virtuous Fee Cycle
Charging for training can change everyone’s mindset about the offering and improve quality and satisfaction.
1. Take stock: What’s your service inventory? The first critical step in an F2F transition is to inventory all free services performed by your company. This raises awareness about the sheer number of freebies the company provides, often without much thought beyond trying to please customers. With a comprehensive inventory, you can identify best service practices across business units and territories and eliminate inconsistencies.
Not every service is suitable for shifting from free to fee. A systematic classification helps distinguish which ones are. All free services should be placed into four categories: profit drains, which don’t create value for customers and should be abandoned; distributor delights, which customers do value but third parties would do a better job of delivering; competitive weapons, which need to be offered for free as strategic differentiators; and gold nuggets, which can be delivered in-house and customers are willing to pay for.
2. Make a plan: How will you mine for gold nugget services that can generate revenues? Gold nuggets — as their name suggests — aren’t easy to find. Unearthing them can require prospecting. And before a nugget produces revenues, it often must be refined. You may have to change the service’s design or how you convey the value proposition to customers. To make the case that customers should pay for services, companies must document and clearly communicate the value they are providing. Yet many fail to collect and analyze the necessary data.
You may also need to figure out how to differentiate the service from competitors’ offerings. For example, a supplier of industrial consumables we worked with gave away inventory management services, a common practice in its industry. Customers, for their part, failed to perceive differences across vendors and were reluctant to pay for the service. So the supplier decided that basic inventory management would continue to be free for every customer, and it identified value-added features that could be combined into fee-based options, all the way up to a premium inventory management system. The top-tier service included real-time online access, consumption reports, best-practice benchmark analyses, and individualized alerts sent to the smartphones of customers’ employees.
Some customers stuck with the basic offer. Others wanted the best. A majority opted for an intermediate offering — and paid an intermediate price. Everyone benefited. The supplier improved its margins because the free service was cheaper to provide, thanks to its basic specifications, and the for-pay options generated additional revenue. Customers were more satisfied because they could choose the level of service they needed.
3. Drive the change: Who’s making this happen? The third step is implementation, which will require some new skills. Pricing excellence is a capability that must be nurtured, because pricing for services differs from pricing for products.2 Many companies fail to recognize that. The problem is exacerbated when people don’t embrace the need for change.
In working with B2B companies over many years, we have observed that resistance to charging often originates within the company, rather than with customers (though customers also must be won over). A manager in a cable-manufacturing company explained: “If our people spent half of their energy on turning around those services where it makes sense to introduce a new pricing model, rather than wasting all their time fighting it, we would long have moved to addressing other challenges.” Here are objections we’ve frequently heard:
“We have always provided training for free. Customers won’t like the change.”
“Our competition doesn’t invoice for technical drawings.”
“Charging for services will turn our distributors against us.”
“We have no idea what this service is worth to customers.”
Why are these excuses so common, aside from the fact that it’s human nature to resist change? For one thing, managers don’t want to hold people accountable for service revenues — it’s more work and, in companies focused on products, viewed as a distraction. For another, salespeople want to keep doing business as they always have, and free services help them close deals. What’s more, field technicians often don’t share information about F2F opportunities, because they haven’t been alerted to their potential or given the right incentives. F2F initiatives thus often get stuck in “ceremonial adoption”: Everyone endorses the idea, but no one does enough to make it happen.
But those problems can be addressed.
Address the sales force first — that will help bring managers on board, too. To prevent ceremonial adoption, companies must first overcome resistance from salespeople. Even the savviest F2F initiatives will fail without their buy-in.
We’ve found that salespeople resist charging for services for several reasons. They often believe their companies’ prices are already high, and customers naturally concur. But across industries, research has shown that sales reps overestimate prices; they think their companies’ offerings are more expensive than they are. Likewise, clients understandably object to paying for services they’ve received for free, even when fees are reasonable. Some salespeople also have a self-serving bias, attributing lost deals to pricing rather than to their approach.
To counter these tendencies, managers should provide data on both customers’ value perceptions and competitors’ service offerings. But they should also be honest and acknowledge that closing sales can become tougher when services carry fees, especially in the early days of adoption. At the extreme, longer and more complex negotiations may lower individual reps’ sales volumes, bonuses, and commissions. Managers must address this legitimate concern. In some cases, incentives for the sales force have to be adjusted and greater investments in training have to be made. Managers also must evangelize for the overall goal by stressing the upside potential of F2F — better service delivery, happier customers in the long term, and the potential for higher revenues. Communicating the overall vision and goals will help overcome resistance to change.
Salespeople also sometimes fear that, once customers must pay for services, their expectations will increase, which could lead to dissatisfaction. Difficult conversations with customers do arise as a make-or-break point in nearly every transition we’ve observed. Role-playing in realistic sales scenarios with feedback can help prepare reps for those conversations. Sales reps share best practices with one another, and their managers should celebrate their early successes. Be aware, though, that not all salespeople will be able to make the transition. At one company we worked with, the sales force simply couldn’t overcome its reluctance about charging for services. The company had to hire new reps. It brought in people with consulting backgrounds who were used to charging healthy fees for services.
Manage relationships with supply chain partners. An F2F transition can strain partner relationships, too. In markets in which companies rely heavily on distributors, companies risk channel conflicts unless they carefully communicate what they’re doing and how it can benefit everyone.
When a European manufacturer of construction materials faced stagnant product sales, it identified a host of value-added services it could provide for customers. These ranged from subassembly of components to on-site delivery of assemblies. Its distributors already provided many of these services. As a result, when they heard the plans, they were furious, accusing the manufacturer of undermining them and threatening to partner with its competitors. Without a thought-through communication strategy, a worthwhile, even necessary, initiative triggered blowback.
But when companies carefully consider the implications of their F2F moves, they may actually strengthen their channel relationships. A supplier to global logistics companies identified international consulting as a service that intermediaries didn’t provide but customers were willing to pay for. Its international customers wanted to receive the same service level across all country units. Local distributors, unable to work across national borders, couldn’t provide the consistency or quality required. So the company shared with distributors its intentions to do the consulting and explained how they could participate.
Although the distributors could no longer sell some services locally, they gained a new opportunity to contribute to service execution, for which they then invoiced the company, not its customers. In this case, what could have been a conflict ended as a shared victory.
Sustaining the F2F Journey
Applying the F2F framework gets you going in the right direction, but then you must sustain your free-to-fee push. Transitions often start with hard numbers, like cost and price data, contribution margins, and market-share statistics. Managers have been schooled in the idea that you can’t manage what you don’t measure. But as projects progress, the need for cultural change emerges. Soft requirements, like creating price confidence, instilling a sense of urgency, and sticking with the plan, even when the inevitable objections and conflicts arise, become keys for success.
So companies must continually educate managers and employees about why the transition is needed and how they should support it. If they lose sight of that, the company will soon be back where it started, providing too many “free lunches” for customers and missing opportunities to capture revenues and profits.
We look in horror at the unfolding story of journalist Jamal Khashoggi — not just his gruesome murder, finally admitted to by the Saudi government, but also the shameful response by many world leaders. While some politicians, such as German foreign minister Heiko Maas, have openly condemned the situation, others are, at best, more circumspect. The U.K. government has the situation “under review,” while President Trump, the leader of the most powerful country in the world — surely the person most able to stand up for human rights — has abdicated all moral authority as he clings to any semblance of cover for the Saudis and Crown Prince Mohammed bin Salman in order to protect a U.S. trade deal.
No surprise, then, that many business leaders feel they can lie low and, if pressed, assert that business interests trump human rights. “Davos in the Desert” is a case in point. Many companies, including Mastercard, BlackRock, Viacom, and Siemens, dropped out of the Future Investment Initiative, but many others decided to attend the crown prince’s investment conference, including senior representatives of PepsiCo, Baker Hughes, HSBC, and McKinsey.
As business ethicists, we believe it is possible to draw good news for business and human rights from the Khashoggi story. This is not because an absence of moral leadership provides cover for business complicity in human rights abuses; it is because the Khashoggi case is so blatant and so clearly demands moral courage and a principled response from leaders — in business as well as politics. Now is the time for business leaders and company boards to get on the right side of history.
Saudi Arabia is an oil-rich and immensely wealthy country with a huge need for modern technology, and therefore a good market for Western companies. It is also a country run autocratically by an elite that appreciates the best that the rest of the world can offer, often including the fruits of democracy. And it is a country in which human rights remain disregarded — a country that apparently does not shrink from murdering regime-critical journalists. Accounts of this criminality have reached millions across the world and have surely alarmed even the most ignorant and apolitical corporate boards and shareholders. For companies operating in Saudi Arabia, it seems doubtful that “business as usual” will be possible going forward. The Khashoggi case is too big, too perverted, and has been too effectively communicated.
For all its tragedy, the murder of Jamal Khashoggi provides a rare opportunity for company senior management and board members to stand up courageously and effectively for the protection of human rights in Saudi Arabia — and elsewhere.
Under normal conditions, it is challenging for businesses to give human rights the place it deserves. Board agendas are too full, board members’ views too heterogeneous, corporate social responsibility and ethics functions struggle for a seat at the table, and, above all, financial interests of shareholders dominate. Board discussion of human rights is difficult enough. A company openly addressing human rights violations in an authoritarian host country is all but inconceivable. What would shareholders say if orders are cancelled? How could a CEO and board justify this at the annual general meeting?
But the situation has changed. If the Turkish account is correct, the circumstances under which Khashoggi died match Hollywood horror movies for monstrosity, even while the response of some political leaders plumbs the depths of Machiavelli’s The Prince for cynicism. This is why businesses must not turn away: Companies that do not act will become complicit in human rights violations if they pursue business as usual. And the bigger and more influential the company, the greater the responsibility. Failure to act will be interpreted as tacit approval. As Edmund Burke wrote, “All that is necessary for the triumph of evil is that good men do nothing.” If we are lacking “good men” in government, perhaps they can be found in business.
Dramatic events can change business practice. In 2013, after 1,100 workers died when the Rana Plaza factory complex collapsed in Bangladesh, Western clothing brands responded quickly and decisively. These companies had tacitly accepted the prevailing inhumane and dangerous working conditions. It took a disaster, but they agreed to coordinate with each other, NGOs, and government officials and take action that now ensures for many workers at least a minimum level of safety and an end to the worst sweatshop abuses. More radically, some retailers, such as H&M, are rethinking their business models — no longer collaborating with suppliers on a solely transactional basis but establishing a more relational foundation that allows for direct engagement on human rights issues. Although working conditions in Bangladesh still do not reach Western standards, they have improved because the Rana Plaza tragedy led businesses to reassess their responsibilities for labor rights in their supply chains.
Our hope is that the Khashoggi case will create a similar dynamic. U.S. polls indicate that many feel President Trump has been too soft on Saudi Arabia. Business leaders can thus emphasize the relevance of human rights with substantially less risk of backlash from boards or shareholders — especially at companies that cite the importance of human rights in their corporate values statements. Khashoggi’s murder provides a window of opportunity for companies to develop a strategy to deal with human rights abuses in host countries going forward. Indeed, boards could initiate the discussion, arguing that the time is right for companies to better align their espoused values with conduct. Under such a directive, risk and corporate social responsibility functions could explore company-specific human rights issues and develop appropriate responses, including populating in-house risk tools with appropriate indices.
There are various ways for companies to protect and to promote human rights in Saudi Arabia and elsewhere. Companies can financially support civil society organizations that help to promote human rights. They can collaborate with NGOs, providing industry-specific know-how, as well as policy analysis, research reports, and position papers. CEOs have spoken up against U.S. government policy in relation to human rights; they could speak up against human rights violations in other countries as well, while staying cognizant of cultural differences and religious sensitivities. Joe Kaeser, CEO of Siemens, chose to withdraw from the Future Investment Initiative and is delaying a $20 billion deal with the Saudis, signaling that the company is taking the case seriously.
As occurred after the Rana Plaza disaster, companies could forge alliances to address human rights issues, developing standards for dealing with violations. Either individually or collectively, they could even decide to not do business with certain countries on a case-by-case basis — ideally with support from both individual country governments and unified bodies such as the European Union.
The room to maneuver on business and human rights has significantly expanded with the exposure of Jamal Khashoggi’s brutal death. If companies do not take advantage of this moment and carry on as before, perhaps hoping the issue will go away, they will not only miss this opportunity for change but also risk undermining other efforts to strengthen attention to ethics, such as reducing environmental harm or addressing corruption. Worse, corporate executives and board members who don’t act will be effectively complicit in human rights violations — and may even fuel them.