redactedCustomer Service An underappreciated asset One of our teammates recently had a baby. They asked their healthcare broker how long they had to enroll their newborn in the company's healthcare plan. The broker told them 60 days. They submitted the paperwork in 32 days. The carrier denied coverage. Turns out it was a 30-day deadline to enroll new dependents. The broker said, "Yes, we gave you the wrong information, but there's nothing we can do. Sorry, but you don't have healthcare coverage for your baby. Good luck." That's bad customer service. We recently visited a friend and went to the beach with five kids. We had a great time, but it was a record-hot day, and by 5 PM, everybody was hot, hungry, and tired. There was a Mexican restaurant across the street from the beach, where we rolled in looking for a table for seven. The servers asked us to wait a moment while they got the table set up. When we got to the table, it was on the patio, in the shade, and already set with big baskets of tortilla chips, salsa, and glasses of ice-cold water for everyone. That's good customer service. You already know that we'll be going back to that Mexican restaurant the next time we're in the area, and that we're looking at new healthcare options. Bad customer service is clearly bad business. So why do so many businesses fall short? Unfortunately, we have some experience with this. It turns out that growth, profit, IRR, MOIC, and leverage are straightforward to define, satisfying to measure, and easy to put into fancy reporting packages. And afterall, who doesn't want more profit? However, over time, we have realized that focusing exclusively on these generally short term financial metrics misses a big part of the conversation. Turns out a zero-sum attitude toward customers (and employees) leads to short-termism, which, while useful for one's immediate free cash flow, can also absolutely gut a company. Our favorite Yale SOM Senior Lecturer, A.J. Wasserstein, recently wrote a piece titled Customer Service is the Underappreciated Compounding Asset of ETA that outlines this phenomenon: “Since customer service is such a reliable engine of value, it is fair to ask why so many capable operators underinvest in it. The reasons are understandable, which is exactly why the blind spot persists. Most searchers arrive from investment banking, private equity, or consulting, where the customer is an abstraction, a line in an Excel model or a cohort in a chart, rather than a person waiting on a delivery. Service also resists the tools they were trained on—leverage, purchase multiples, or growth rates in a spreadsheet. It is not easy to model the return on answering the phone faster or fixing a problem the first time. Furthermore, the payoff is diffuse and delayed, showing up quarters later as marginally lower churn or slightly firmer pricing, factors that are hard to trace to any single decision, so they lose out to levers with immediate, legible results. The trouble is that a return-on-investment-only lens does not merely underweight service; pursued far enough, it hollows out the business, as each individually rational cost cut chips away at the core until the compounding runs in reverse.” Yikes. It's so obvious. To be truly long-term oriented, we realized we needed to create an environment where we could sustainably deliver value to our customers. At the same time, we still very much care about making money. We have come to understand that the great challenge of business is how to use our creativity, resources, and managerial capacity to produce world class customer outcomes and large amounts of free cash at the same time. The paradox is that relatively modest free cash flow reducing investments in the short term often create the best long term result for both customers and the bottom line. Customer service is not a single period game. It is an investment in a self-reinforcing system. Again from Wasserstein: “Customer service compounds, too, with benefits flowing from good service and accruing into even greater benefits, much like a self-deepening moat. Search fund entrepreneurs systematically overinvest in capital structure and additional acquisitions, while underinvesting in customer service. Yet customer service may be among the highest-return operational levers available in ETA and the most underpriced because it simultaneously reduces customer churn, lowers customer acquisition costs, lowers the cost to serve, increases pricing power, and stabilizes the workforce—a combination that ultimately expands exit values.” If you listen to any successful small business owner, they will talk about the value of customer service incessantly. Going the extra mile isn't remarkable; it's simply what great operators do. Having a culture and an operating approach that consistently reinforce this concept is critical. Competent CEOs will hear of our experiences and know that the broker probably saved a few administrative dollars. The restaurant probably spent less than twenty dollars on chips, salsa, and water. One customer was lost forever. One customer was earned for life. Turns out not that's the kind of math you need an MBA for. Have a great week, Your Chenmark Team Subscribe to Weekly Thoughts Also, we're hiring. redacted