Reputation Risk

In this world of 24-hour news cycles and instant access to information, reputation matters more than ever.

The B2B world has known this explicitly for years. Arthur Andersen wasn’t killed by operational failings; it was killed by a reputation that went from highly respected to highly toxic almost overnight. Proving in very public terms how hard it is to stay in business if no one wants to do business with you.

Over the past few years, threats to reputation have happened faster, and hit harder, than ever. There is no bank, professional services firm or energy company today who isn’t thinking hard about their reputations even as we speak.

Yet managing reputation isn’t actually very easy to do, and one of the most prevalent brand decisions of the past decade actually served to make the job harder rather than easier.

This decision was the overarching brand strategy of consolidation; a time where mergers and acquisitions created a new era of mega-companies trading under singular mega-brands.

There were three very logical reasons for this extreme level of brand consolidation:

  1. That by consolidating the brand under a single identity and a single set of values, that this would bring the disparate cultures of acquired businesses together to form a new, singular culture.
  2. That by creating a single brand under which to trade, you’d be maximizing brand building investments in order to drive superior brand value.
  3. That a single brand is more efficient, more cost effective and easier to manage than multiple smaller brands.

All of these factors do in fact have merit, but the thing they fail to take into account is reputation risk and the potential for negative reputation contagion.

Making this more specific, what this approach doesn’t take into account is the level of potential risk that exists across the disparate activities of the corporation and the potential impact a localized failure may have on the whole.

Take BP for example. It’s highly unlikely that any of the small business operators who’d franchised the BP name for their gas stations took reputation risk into account. For them, BP was a big and reputable brand name, something to take advantage of.

Unfortunately, in the oil industry, reputation risk appears to flow downstream. I’m sure that none of these gas-station owners thought their forecourts would become instant ready-made protest sites primed for 24/7 news-media coverage. (One also wonders how different things may have been had the only available BP location been an anonymous headquarters, hidden among the skyscrapers of a large city)

Equally in the banking space, it appears that reputation risk flows quite freely from the most risky to the most risk averse parts of the business. In this case, the risk-taking investment banking arms of large banks have created significant negative reputation risks for the more risk-averse, and publicity shy, private wealth management arms.

In fact, adding the reputation risk lens on top of the decision-making factors above, and I don’t think so many banks would have consolidated investment banking operations and private wealth management activities. In fact, I wouldn’t be surprised to see banks with large private wealth management businesses looking to undo these brand consolidations in order to create risk-managing separations over the next 2-3 years.

Beyond brand strategy, however, reputation risk also needs a new mindset going forwards.

In the past, reputation has largely been silo’d within the business. On the operational side, risk is a technical discipline where risk/reward decisions are calculated. On the HR side, risk is a behavioral equation to be mitigated by policies and adherence to values. On the communications side (both marketing and corporate communications) reputation risk is something to be mitigated by getting out ahead and projecting an image of success, competence and of admiration.

The challenge is not that these are wrong interpretations, but instead that they have to work much more in sync with each other.

Instead of thinking of reputation in separate ways, I think we need to consider reputation in terms of layers:

  1. The operational layer.
    This sits at the core, because very simply some business areas are inherently more risky than others. Understanding where the operational risk lies is central to considering how to manage reputation, whether or not to use multiple brands to do so, and what to do in the event of a crisis.
  2. The cultural layer.
    In this layer, the key is to set expectations for what is and is not expected, and accept that this may in fact differ depending on the amount of operational risk being taken.
  3. The communications layer.
    In this layer, the key is to focus on the areas of genuine value to be projected, and to create scenario responses to the worst potential impacts on reputation. These need to be developed with representatives of both the operational and cultural layer. While you can do much to mitigate reputation risk and build a strong reputation, it will be the job of the communication layer to deal with the fallout of something catastrophic happening. Successfully navigating this is likely to be much easier if you’ve already practiced your responses using disaster scenarios. In some senses, this will be almost like military exercises for corporations.

In our instant response, 24/7 world, reputation risk is not going away. In fact, it will only become more and more difficult to manage.

Against this, the ability to take reputation risk into account when making big brand decisions, and then push it down to scenarios of the “unthinkable” are going to become increasingly important.

And hopefully, if fundamental brand strategy decisions were made with risk in mind, and strong response mechanisms trained, then reputation risk can become much, much less of a risk to the business.

Image borrowed from here

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Collaboration. It’s like Prozac for corporations

The overwhelming meme of the moment is that collaboration is the new key to value. It will cure us of our sins. It will change the world.

All the challenges of innovation, marketing, brand, agencies and of business in general will be solved if we can all be just be that-little-bit-more-collaborative.

The problem is that it won’t work. Collaboration creates compromise and compromise blunts the edges of the brilliant.

Collaboration is the corporate equivalent of Prozac. By eliminating the extreme lows, you also eliminate the extreme highs. Which is a really big problem if you rely on those highs to cut through and make a difference.

There are two aspects of the idea that collaboration is the answer which are flat out dangerous:

  1. Collaboration will spare us the need for more radical organizational surgery. I’m sorry, but that’s a pretty wrong-headed way to think. A business landscape that has shifted radically doesn’t need collaboration between the now-defunct structures of the past. What it needs are new structures that adequately meet the new needs of the market and correctly align the incentives of all participants.
  2. Collaboration will spare us the need for real expertise. This reinforces today’s dangerously populist view that expertise is no longer necessary. That in a world where everyone can invent and create, that we no longer need experts in invention or creation. Yet look at the fruits of this. Have we seen greater creativity or invention from the explosion in crowdsourced advertising? In a single word, no. Have we seen an amazing product created by a crowdsourced team of consumer advocates. Again, no.

In fact, what we tend to see are pretty basic derivations of existing themes rather than brilliant departures.

While MyStarbucksidea.com might be an interesting example of collaboration, it isn’t because it will change the world. Rather it’s because it gives Starbucks a roadmap for incremental improvement. This fundamentally isn’t invention, it’s a beautiful new form of customer driven TQM.

Of course, this shouldn’t surprise us. After all most of the world’s most amazing inventions and inventors were written off as crazy before they became successful. And let’s not forget that a hell of a lot of them didn’t play well with others.

Call me old fashioned, but I actually think expertise still matters, vision still matters, leadership still matters, risk taking still matters and brilliant individuals and their brilliant ideas fundamentally still matter.

Now, of course collaboration is necessary to get things done. I’m not advocating on behalf of the brilliant asshole here. Instead, what I’m saying is that collaboration alone is not enough, it’s not everything. While collaborating nicely with each other might feel good at the time, like Prozac it won’t fundamentally solve any of the tough problems on it’s own. That still requires vision, guts and brilliant people.

Let’s face it, the iPhone, so ironically beloved of the advocates of collaboration-as-the-answer is patently not the fruit of collaboration. (That would actually be an Android phone. Probably running Cyanogen Mod) No, the iPhone is the fruit of single minded leadership and a highly performing organization clearly focused on an uncompromised end goal.

And that’s what it would be great to see more of out there. More people prepared to get off the corporate Prozac, admit that the benefits of collaboration might in fact be limited, and instead choose to focus their energies on coming up with things that are truly brilliant.

If only I could do it myself. Unfortunately, I’m stuck with trying to be a good collaborator…

 

 

Image borrowed from: https://pworthington.files.wordpress.com/2011/10/collaboration.jpg?w=300

Punishment Fees, Innovation & Disruption

Five Dollar Bill

Bank of America are about to start charging their customers a flat $5 fee per month for using their Debit cards. The bank claims this is necessary because Congress recently capped the fees banks were charging merchants for Debit transactions. Congress claims that a cap was necessary because Visa and Mastercard (and hence the banks) were monopolistically gouging said merchants with fees some 400% higher than the cost to process.

Irrespective of who is right and who is wrong, what this new fee does is to quite starkly highlight the innovation challenge inherent in retail banking.

Retail banking, and in particular the checking product, is a highly inelastic environment. Essentially, this means very few people are in the market for a new checking account at any given time (on average only about 9% of the total population will open a new checking account in any given year, and the number actually switching banks is much lower).

As consumers connect more services to their checking accounts – credit cards, savings accounts, recurring payments, mortgages etc, then the pain of switching becomes ever higher and as a result most people don’t bother. No matter how the bank ultimately treats them.

As a result, when facing an enforced revenue decline such as that faced by BofA, the temptation is for the bank to squeeze consumers as hard as possible rather than to innovate, because the most likely scenario is that only a very small number of customers will actually switch.

Why does this matter?

It matters a lot because in an inelastic environment punishment fees like the $5/month debit fee will always be less costly and more profitable than true value-adding innovation could be. In a direct comparison, the potential success of a value-add innovation will always be competed out of the running by an almost guaranteed-return from a punishment fee.

Going further, I believe that the banking prediliction toward punishment fees as a means of generating incremental revenue serves to materially harm their ability to innovate in ways that actually add value to their customers. Like a muscle that never gets used, the customer centric value-add muscle eventually withers and dies.

Importantly this also creates a huge brand conundrum. For what is in the best interests of the bank (to squeeze as much fee income as possible from the consumer) is manifestly not in the best interests of the consumer (who doesn’t want to be squeezed and punished for simple levels of service provision).

Which becomes an even bigger conundrum when you consider that the banking sector overall is facing the worst levels of consumer sentiment ever. Something which is cutting across all brands, and from which none seem able to release themselves.

If BofA stays true to the formula used by banks in the past, it will add this punishment fee with one hand and engage in a significant advertising campaign aimed at bolstering consumer trust with the other.

They’ll then be confused as to why the advertising isn’t cutting through and seperating them from their competition.

The answer, of course, is that the customer is intelligent enough to understand that the brand is actually manifest in the actions of the bank rather than its communications. And when the actions are so manifestly anti-customer (as all punishment fees are) then they speak much louder than words.

The scenario outlined above is very real, and so tempting that almost certainly the other large banks will soon follow BofA’s lead. And considering the recent massive consolidation of retail banking in America, true choice will become seriously limited.

So how could this potentially change?

The only thing that will break the banking addiction to punishment fees and force true value-add innovation will be if the customers were to act en-masse to switch their banking relationships away from the banks with the highest level of punishment fees and toward those with the least.

I believe sheer anger will actually create a significant shift here, moving people away from the big banks into the hands of smaller regional players and credit unions. However, convenience is a powerful force and the hassle factor of switching will be too high for this to become a mass exodus.

For a mass exodus to truly happen, we will need to see technological innovation focused on increasing the convenience of switching. Someone needs to make switching your checking account as simple to do as switching your cellphone provider (in terms of the ease of porting your number rather than the cost of breaking your contract)

I believe there are only two types of actor who could do this, and in the process create the conditions for a large scale re-shuffle of the retail banking landscape:

1. A new intermediary
If you had the technology to make switching any checking relationship from any bank to any other bank, then you have the potential to create a highly valuable new relationship with the customer. You in effect become their banking broker. Aiding their shift from high to low fee charging institutions.

Doing this would mean either a new technology enabled startup focused on taking on this role, or some other trusted, non-bank, technology savvy player stepping into the breach. Amazon perhaps?

2. A medium sized bank
An aggressive, growth focused, medium sized bank could potentially make this play. Unlike an approach focused on moving any banking relationship from any bank to any other bank, this would be designed to create a seamless transfer of the checking relationship from any bank to their bank only.

Doing this would require investment resources and technology capability. The bank in the US which most closely reflects this profile is probably Citi.

In the consolodation of a few years ago, Citi were the manifest losers in US retail banking. In scale terms, Citi have found themselves stuck as a mid-weight regional player.

However, they have the brand, they have the technology and they certainly have the investment resources to make something like this happen. If they were to combine convenient switching with a game-changing low cost, low fee online distribution and service model then the potential for national disruption is absolutely there. Not only this, but the potential to meaningfully and positively improve the reputation of Citi in the process.

Could they do it? Do they have the capabilities and desire to do it? Has their value-add muscle withered too much? These things I don’t know.

It might be nice for all the $5 paying BofA customers to imagine they could though…

image borrowed from: http://www.valdosta.edu/~lomartin/fivedollarbill.jpg