Sun, Aug 12, 2007 - Page 9 News List

Why honesty is also the most profitable policy

If the credibility gap between a firm and its customers gets too wide, then the firm's business will inevitably decline

By Simon Caulkin  /  THE OBSERVER

The French philosopher Jean Baudrillard, you may remember, declared that the Gulf War (the first one) took place only on television. He would not be mystified by today's broadcasting fakes, in which the reality as constituted on TV is the mirror opposite of that experienced by everyone else -- as different as life is from death, in fact. Far from being just an aberration at the BBC, faking is now revealed to be endemic: it's the way TV works.

We should hardly be surprised. Faking it -- hiding one version of reality with another -- is increasingly what management is about; profit is the product of an arbitrage between the company's image of reality and yours. Consider Penelope Cruz's eyelashes, or any number of airbrushed model images. Almost all advertising and much media production is faked in some sense.

We're not talking about honest mistakes here, but the more insidious practice of cutting corners and stretching reality. Articles that don't live up to sensational headlines or stories that are bulked up to justify front-page billing dispel any illusion that the print media are immune to the "embellishing" temptations that broadcasting colleagues have succumbed to.

Many companies practice deception as a part of their business model -- sometimes without even knowing it. In the June issue of Harvard Business Review, Gail McGovern and Youngme Moon describe how companies in a range of industries, from banking and hotels to mobile phones and travel, use a variety of tricks to make you pay more than the service warrants.

EXTRACTING VALUE

All service companies compete in advertising superior customer service. Yet many profit as much by extracting value as creating it. A substantial proportion of retail banking profits, for example, comes from penalizing customers for breaking arbitrary, complicated rules about minimum balances, credit limits and payment deadlines. Mobile phone companies make much of their money out of the minutes we don't use. Hotels and travel operators make it hard to find out about discounts or upgrades; some airlines have computer algorithms that run so often that it is impossible to identify what the "normal" price of a flight ought to be.

Why do companies persist with such pretenses?

First, because they can. In the Photoshop era, any image -- any digital entity -- can be manipulated by the most junior computer user in the company. Which it often is, because, second, there are financial pressures to do so.

Technology and financial pressures have propelled the wave of outsourcing and freelancing, by means of which much of what used to be a company's core work is now performed by contractors and sub-contractors.

This cuts direct costs (although not by as much as managers think), but carries heavy hidden costs. One is that freelancers and outsourcers also work for competitors, reducing differentiation and making it more likely that customers will switch. Another, as the broadcasters have found, is that if the gap between competing realities becomes too large to bridge, cheap is actually dear as trust evaporates and customers turn elsewhere.

VULNERABLE

The BBC, as a public-service broadcaster dependent on a license fee, is particularly vulnerable to charges of trust abuse, and foolhardy for perpetrating it. But the danger for non-publicly supported organizations is just as great. In financial services and mobile phones, churn is so great that a substantial part of company resources is deployed on expensive recruitment of new customers to replace those who leave.

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