Always ask: does this work for the customer?

Here’s a simple business model that we may have missed on our rush to incentivise. LOUIS COUTTS

By Louis Coutts

I came across a story the other day. In fact it was an article published in the June issue of the Harvard Business Review written by Vikram Akula, who is the CEO and founder of a company called SKS. He started the business in 1998 and today has a turnover of $250,000 million and two million customers.

One common characteristic of all of the firm’s customers is that they have no money. Despite this the company is able to secure multi-million dollar credit lines from the likes of Citibank, ABN Amro etc.

Akula started the business with almost no money and his first customer was a woman in a village in India who wanted to buy a buffalo for $200. She had no money and she and her husband were working for $1 per day. She repaid the loan within a year and now has three buffalos, a cow, two acres of land and a bull. She was able to do this by fronting up each time she repaid a loan and borrowing fresh capital.

SKS is in fact a microfinance bank which issues uncollateralised loans. They are pretty simple. “We lend you $50 to help you buy such and such so that you can have a small business, and you repay us at $x per week”.

No high fangled devices such as geared derivates or bundled securities. Just the old fashioned idea of a bank lending money and having it repaid with interest. Akula wrote his article to explain what he was doing and he described the business model he adopted with such success and customer satisfaction. The details might be worthwhile visiting another day. However, there was one throwaway line that attracted me.

Because Akula’s company has to work closely with the people in the multitude of villages who take out loans, he has a team (including himself) of visiting loan officers who get to understand what he calls the “rhythm” of the people and their environment.

Now, the traditional way of banks building their businesses is to enter into financial arrangements with loan offices that are incentive driven whereby the remuneration of the loan officer is related to the amount of loans made.

Akula describes the remuneration policy: “The salaries of loan officers, for example, are not tied to repayment rates or the size of their loan portfolios… We don’t want our loan officers, because of pressure to make their numbers, to collect from a borrower who’s in a difficult situation or to try to lend her more than she needs… In everything we do we ask ‘does this work for the borrower?’”

My goodness! The preoccupation of so many businesses in Western society today with “growth through incentives” resulting so often in growth founded on people achieving their numbers without asking “does this work for the customer?” followed by catastrophes of which we are reminded daily.

The evidence is so compelling that businesses that pursue growth through incentives come to grief at some point in time. Sometimes the grief is mortal, on other occasions managers live to fight another day. What we know and what western business models refuse to recognise is that the moment an incentive is offered, people will do what is necessary to achieve that incentive and neglect other responsibilities that are critical to sustainable growth.

Not long ago I was consulting to a health institution which couldn’t understand why the cost of radiology was so high. I discovered that the Accident and Emergency section was paid an incentive based upon the number of patients who could be treated without being admitted. In fact, it was insisted that in certain cases people could not be discharged without X-ray.

Out of hours X-ray is extraordinarily expensive. Nevertheless, Accident and Emergency was a demanding and very heavy user of out of hours radiology. Radiology would complain that most of the procedures could wait until the clinic opened. However, that meant that the patient would have to be admitted and Accident and Emergency would lose its incentive!

It doesn’t matter where you go, be it the foreign exchange trading desk of NAB or the sub-prime heroes of Wall St; once you introduce incentives, people tend to avoid asking the question “does this work for the customer?”.

SKS is obviously making a profit in lending to people, most of whom have no money. They have razor thin margins and a network of peasant customers in manifold villages across India. Their default rate is minimal and certainly much lower than the default rate of traditional banks (I wonder why!).

“What works for the customer and to hell with incentives” is the key to sustainable success, and while the SKS adheres faithfully to this business model it will continue to grow at its rapid rate with the virtuous integration of happy customers, happy employees and happy shareholders.

The next time you are thinking of inserting an incentive into a remuneration package, ask the question “Why am I doing this? Is it to ensure that what we are doing works for the customer?’ It is as simple as that, and as old as the hills in the history of successful businesses.

Louis Coutts left law and became a successful entrepreneur. His blog examines the mistakes, follies and strokes of genius that create bigger, better businesses. Click here to find out more.

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