Interview with Hallowell - How Customer Support Puts You Ahead of the E-Commerce Game

by Mallory Stark and Martha Lagace, HBS Working Knowledge

Christmas 1999 should have been the wake-up call for e-commerce companies that support and service really do matter. A number of high-profile e-tailers including eToys, Toys "R" Us, and Amazon.com suffered technical and fulfillment grinches-er, glitches—that resulted in thousands of presents delivered late, if at all. Just as bad, customers complained that they had little warning of problems with their orders. The result: A massive black eye for e-commerce, millions of dollars in lost sales and a serious drop in consumer confidence over online shopping.

But was that lesson learned? Even today, customers are constantly reminded that many Internet companies do not know how to do customer service right, according to HBS professor Roger Hallowell of the School's Entrepreneurial and Service Management unit. The good news: Companies savvy in the ways of customer support and service can leap ahead. "The opportunity to truly distinguish the organization comes through the customer support end," he says.

In a recent interview with HBS Working Knowledge's Mallory Stark and Martha Lagace, Hallowell discussed important lessons for managers who mix service with e-commerce. In particular, he talked about how frameworks he is developing might help managers in e-commerce think about how to improve their overall customer experience as well as look more clearly at their companies' prospects for scalability.

HBS Working Knowledge: One myth fueling the dot-com boom was the idea of infinite scalability: that Internet companies could reduce the need for human intervention in service and support to almost zero. Is the notion of "infinite scalability" a pipe dream for most e-commerce firms?

Hallowell: Yes. And if people had thought about this notion of scalability, and had tied it to valuation, we would not have seen some of the wild stock valuations that we've seen. You can't predict what a stock should be exclusively based on scalability. But you certainly can predict the range it should be in, based on that.

	First of all, I think it's important for a manager to decide whether or not customer support is going to be a capability that they need to excel in. This is the outsourcing question.
	—Roger Hallowell

If you look at successful companies right now—eBay, Monster.com—all of them are extremely scalable. They are information-rich services.

If you look at eBay in contrast to Sothebys.com, and think of a marketplace or a square, eBay is an extremely open square. Anybody can come in, anybody can come out, anybody can do business there. eBay basically just provides a place where people can get together. There are the customer reviews, but quite frankly, if you have a real problem, it's caveat emptor. So it's very easy for eBay to grow enormously.

In contrast, Sotheby's.com is highly policed. Sotheby's protects its buyers by assuring the authenticity of the goods that are on the site. It protects the seller by making sure that the buyers are going to pay. It does all of these things. At a cost to Sotheby's. But that is what Sotheby's is really great at. And by eliminating the physical handling of the goods provided by their associates, they've been able to create a new business model which is highly scalable and enables them to leverage their brand.

Q: How do you use case studies to teach MBA students the concepts of the customer experience cycle in e-commerce and infinite scalability?

A: We build the concepts by teaching several different cases that illustrate different elements of it.

For example, there is a case that I've written on Rosenbluth International [joining forces with] Biztravel.com. Rosenbluth International is the third largest travel agency in the world. They specialize exclusively in corporate travel. For years they had thought about getting into what they call the SOHO— small office, home office-market, because it's actually considerably larger than the corporate market.

But they hadn't been able to do it because they couldn't serve that customer cost effectively—to price and to charge—for those kinds of services. With the advent of the Internet, what they've found is that because there is a high degree of self-service that people engage in, their calls-to-tickets issued ratio is 1:1 at Biztravel, as opposed to 3:1 at Rosenbluth. So now they have a considerably lower cost to deliver the service, and they're able to serve the SOHO market profitably.

Using that case, we talk about what they've done and how some of the different elements in what I call the Customer Experience Cycle of e-commerce are related to one another and how they affect the economics of each other.

Similarly, we use the Sotheby's.com case to teach about the issue of scalability and the effect that customer support and logistics have on it. And the surprise in the Sotheby's.com case is that—although it's true that because of the increase in variable costs with the Internet strategy this is an unbelievably unscalable business initially—when you really look at what Sothebys.com is doing, what they're setting up is an ability to have a network of dealers.

And that is highly scalable because, in effect, Sothebys.com is just providing information about where things are; and they're also providing their guarantee of authenticity.

I don't want to belittle [the elements of] information and navigation at all. They're incredibly important. They're necessary, but not sufficient. They are the cost of entry—the sine quo non to getting into this game. You've got to do it and you've got to do it well. And there are great opportunities by doing it well to lower your cost and increase your service quality.

But those things are so easy to replicate. All you have to do is talk to companies about how often they make changes to their Web sites. They do it all the time. And so those are not the things that people are really going to get their advantage from.

This [framework] is a contingent approach to strategy. I'm not saying it is right for all businesses.

If you look at The Wall Street Journal Interactive Edition, it's phenomenally successful. It's one of the few content providers that is making money on the Internet today. You almost never need to get in touch with them. Once in a while the cookie on your computer gets corrupted, and so you have to call customer service and find out what your password is or something like that. But it rarely happens.

So if your product is truly digitizable, then this [framework] doesn't really apply to you. But for products that are not purely digitizable, for products where there's a physical component—whether it's a service, in which case it's an intangible physical component or whether it's a physical product itself—I think that these frameworks do apply.

Q: What advice can you give to managers about their customer support?

A: First of all, I think it's important for a manager to decide whether or not customer support is going to be a capability that they need to excel in. This is the outsourcing question. A lot of organizations have chosen to outsource this function. For some it makes sense. If this is something that truly is not important to you, if you're a super high-fashion retailer, for example, customer support—as long as it can be okay—may not give you differentiation. Rather, the high-fashion items that you have on your Web site gives you the differentiation.

But if that's not the case, and if customer support is important for your differentiation, then you really cannot consider outsourcing it unless you're so convinced that you can't do it well, that you need to outsource it in order to just achieve a moderate level of quality. Even then, you've got to constantly be asking yourself, 'When am I going to take this in-house in order to be able to distinguish our service?'

And if you're going to be taking it in-house, I think the key for managers is to put themselves into the shoes of people who are answering the phones. How would you want to be treated? What skills do you need to have? What tools do you need to have to make you more capable?

Service management research has found pretty conclusively that employee capability, which is literally an employee's perception of his or her ability to serve the customer, is the single greatest predictor of customer satisfaction. This means confidence; having the training to be able to deliver service that's going to satisfy customers; having the tools; having the information you need.

It's easy to say, and it's hard to do. Which is one of the reasons why it provides such a good source of sustainable competitive advantage-because it's very easy to talk about. Lots of organizations talk about it.

But very few, when push comes to shove, have the discipline to give their employees the capability that they need, to ensure that they have the capability that they need. Those frontline customer service providers need capability and productivity and loyalty. Those are the key things.

And I think that probably goes also in terms of the logistics providers as well: customer support logistics.

There are some nice virtuous cycles within that [trio of] capability, productivity, and loyalty. Employees who are capable and productive are probably happy about their jobs. They feel good about what they're doing because they're doing it well. If they are recognized and rewarded, they're likely to be loyal.

And when they're loyal, they stick around longer. And they remain capable and productive.

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Roger Hallowell is an assistant professor at Harvard Business School where he teaches the second year elective course, Managing Marketspace Businesses.

Books by Roger Hallowell