Service: The New Profit Factor

Introduction:

Ogden Nash said "Bankers are just like everyone else except they're richer."

The Royal Bank, chartered in 1869, is Canada's largest bank with assets at the end of fiscal 1986 of $99.6 billion. Two fundamental goals are paramount: excellence in financial service across Canada and vigorous participation in selected international financial markets. John Cleghorn is here to discuss Service - the New Profit Factor.

Service is an extremely important and real issue for today. I spent 10 years in the investment business in the 70s and one wouldn't recognize the new changing face on the street -a new face for the 90s. We are seeing the retirement of several seasoned veterans and their replacement with new management. The banks and investment banks have merged. Service has become critical as we see the need to become more streamlined and efficient in our business.

But it is easy to talk this way because it really does sound like motherhood. However, just so we aren't accused of talking in generalities, let me tell you a story.

In 1974,I was in a pickle. I was President of the Personnel Association of Toronto and we were opening a Training Centre for our members on Bloor Street. The opening was to take place on March 17 and we had invited 50 presidents of major Canadian firms to the opening which was to take the form of a seminar with Peter Drucker entitled "The 80s - will they be turbulent times?"

As luck would have it there was a construction strike and our new facility would not be ready. I called three large institutions to see if they would allow us to use their quarters for the seminar. The first two turned us down flat. The Royal in the person of Jack Bankes, senior VicePresident, said "Come and look at our facilities to see if they are good enough." Doug Gardner said anytime they could get 50 presidents in their building they would turn the place upside down.

They donated their board room, their dining room, a car for Mr. Drucker and they paid for the lunch - never once, however, pushing us aside or grabbing the limelight. And at the end of it - they thanked me.

Born in Montreal on July 7, 1941, Mr. Cleghorn graduated from McGill University in 1962 with a Bachelor of Commerce degree. He joined Clarkson, Gordon in Montreal, becoming a CA. in 1964. He then joined St. Lawrence Sugar Ltd. as a futures trader in Montreal and in 1966 joined the Mercantile Bank of Canada (an affiliate of Citibank) with assignments in New York and Montreal. He became manager of the Winnipeg branch in 1969 and Vice-President of the Western Division in Vancouver from 1970 to 1974.

John McMillan, V.P. Personnel, told Rowly Frazee that he should interview Cleghorn and make him an executive officer of the Bank. Frazee said: "I'll interview him but we don't make hirees executive officers of the bank."

Mr. Cleghorn joined the Royal Bank in October 1974 at its Head Office in Montreal, becoming Assistant General Manager for Project Finance in 1975; Deputy General Manager, Corporate Lending in 1976; Vice-President, National Accounts in 1978; Senior Vice-President, Planning and Marketing in 1979; Senior V.P. and General Manager, British Columbia in 1980; Executive V. P International Banking based in Toronto in 1983. He became President in 1986 and a Director in 1987.

Mr. Cleghorn is Chairman of the Capital Campaign for Bishop's University and he is to be granted an honorary degree later this year. He is a Vice-President and Council Member of the Montreal Board of Trade. He is Chairman of the Montreal YWCA Foundation and a Director of the Canadian Club of Montreal, the MacDonald Stewart Foundation, McDonald's Restaurants of Canada Ltd., the Montreal Board of Trade, Heritage Foundation and the Montreal General Hospital Research Institute. He is a member of the Board of Governors of the Olympic Trust of Canada; the Advisory Council of the Faculty of Commerce and Business Administration for the University of British Columbia; the Montreal Committee of the Ludwig Institute for Cancer Research; and the Canadian Intitute of Chartered Accountants.

John Cleghorn enjoys tennis and sailing. He is married to Pattie Eleanor Hart and has three children - Charles, Ian and Andrea.

John Cleghorn:

In the new competitive world Canadians are entering, we're going to have to restore our tradition of good quality service. If we don't we risk losing our customer base and with it our standard of living.

I'm referring not only to free trade with the United States, but to a whole new worldwide trading environment in which the competitive heat keeps rising. In the near future, no trading nation - and certainly no business in a trading nation - is going to be exempt from serious challenges from imports, whether in goods or services. The winners in this competition will be those who offer the best value for money. So it's very much in our national interest to make the words "Canadian business" synonymous with "top quality."

Canadians can do it if they try. You only have to look around this city to see some good examples. Think of Roots, the Toronto-based chain which has gone from one store here in 1972 to 35 stores across Canada, and is in the process of expanding into the U.S. market. How did they do it? By putting into practice their motto, Quality and Integrity. If you return an item to Roots, that's it - no argument. A friend's daughter recently took back a Roots sweater she'd worn for a year because it had shrunk in the wash although it was labelled "machine washable." The sales clerk apologized for any inconvenience it had caused and told her to pick out another sweater - at which point my friend's daughter became a customer for life.

Or take the Four Seasons hotel group, which has one overriding objective - to have the finest hotels in any city in which it operates. By consistently pursuing this goal, Four Seasons has become the envy of the hotel business on an international scale. Its occupancy rate is well above the industry average. So is its repeat business rate. But then, so is its ratio of staff to guests - the attention to detail in Four Seasons hotels is legendary. And that's what keeps all those satisfied customers coming back for more, and accounts for their impressive financial success. With returns above 20 per cent for several years running, they have become a classic study of how quality service can be made to pay. I believe their success is a result of attitude and leadership. If you want to know why, consider this story told by quality consultant Peter Zarry. While strolling through a hallway in the Toronto Four Seasons with Chairman Isadore Sharp they came across a room service tray with the remains of a meal on it. Without a pause in the conversation, Sharp picked up the tray and carried it to the kitchen 24 storeys below. He didn't say anything about it - but you can bet that word of his caring for quality spread among the staff instantly. That's the kind of leadership towards quality we need. Four Seasons was singled out for mention in an article in the March 13th edition of Fortune magazine entitled Getting Customers to Love You, which should be required reading for all of us.

I found the article very interesting, because it proclaimed just how much attitudes in North American business have changed. Not so long ago, it seemed that hardly anybody in management frankly gave a damn about whether or not the customer loved them. In fact, the editor of Forbes once commented that a lot of companies regarded the customer as a "bloody nuisance."

Things weren't so different here in Canada. Management thinking in North America was focused on the cost side without developing the other side of the brain sufficiently. The quality or value dimension wasn't something the analysts and accountants could measure. It took a long time for anyone to ask why. The answer could be broadly found in a few words of Japanese, with some German thrown in. Sony, Toyota, Nomura, Mercedes-Benz, Braun, and so on. The simple fact was that overseas competitors were providing better goods and services than North American producers. They were making customers happy, and more and more customers naturally gravitated to them.

By focusing only on the numbers, too many of us became blind to the human or intangible aspects. This wasn't true in all cases, of course, but generally the quality of products and the level of service was not what it used to be. The lesson had to be learned - and learned the hard way - that quality, service and profits are not mutually exclusive - that quality pays! It has certainly paid for the Japanese and West Germans, who have ended up with the strongest economies in the world.

This is not mere rhetoric. The authors of a recent book, The PIMS Principles, have documented a precise relationship between quality and profitability. They write: "Whether the profit measure is return on sales or return on investment, businesses with a superior quality/service offering clearly outperform those with inferior quality."

Of course, it's one thing to say you're delivering quality, and another to actually do it. One company that's making it happen is Ford Canada. Their CEO, Ken Harrington, joins with other senior executives to personally handle the company's toll-free customer service telephone lines twice a month. If Ford is not living up to its slogan, Quality is Job One, Harrington hears about it in detail, and he does something about it. It's the same story at McDonald's, where staff and management live their creed - Quality, Service, Cleanliness and Value. More than anything else, the achievement of quality means putting the customer first - not our own interests, but the customer's interests.

We have to learn how to look at ourselves through the customer's eyes and learn how, as DuPont of Canada says, to create "partnerships with our customers." Now, that's just pure common sense. Every business has something to sell, and there obviously can't be sellers without buyers. Which means that getting new customers and keeping old ones is what keeps us alive and well.

Research has shown that in the auto industry, a brand-loyal customer who has his or her car serviced at a company dealership accounts for about $150,000 in revenues over a lifetime. In the supermarket business, a lifetime customer is worth $260,000 in sales. And in my business, the loyal long-term customer is literally the engine that drives our bank. So we'd better make sure we put the customer first. However, we do have room for improvement, for sure. All of you who live and work in the Toronto area are affected by the high turnover rates of bank staff - from front-line counter people to account managers for small business.

Employee turnover in a hot economy is a fact of life - but its consequences for customers shouldn't be. It's a problem all Toronto based businesses face, and we can only solve it by being better employers. In that sense, we have to understand that quality of service goes way beyond a smile at the counter. For us at the Royal, it means:

Hiring people who have a customer service orientation. Helping them develop and refine that orientation through a clear commitment to training and career development. Making sure that from Day One our new staff member knows and is in tune with our value system (and not just on Day One, but on Day Two, Month Ten and Year Five). Communicating our vision consistently with good examples highlighted from top to bottom.

And by demonstrating to our people that our success is really their success - that being a winner on a winning team is a direct result of their individual and personal contributions on every level.

Are we satisfied yet? No, but we're getting there. We've strengthened our staff training with the customer in mind, and given more authority to front-line employees. They in turn have responded enthusiastically to this change. They're inclined to get as frustrated as the customer when they can't deliver the level of service they feel Royal Bank clients deserve.

We've also found that any effort to enhance service quality has to involve people at every level of the organization. Some of our best ideas for service improvements come from a very active staff suggestion program. Open communication and good morale throughout is essential. To ensure that the ultimate customer is well-served, the same commitment to quality applies internally, where employees must treat one another like customers in their everyday working relationships.

We all need to eliminate the procedural barriers left over from an earlier age, when different attitudes prevailed. Thinning out bureaucratic layers and practices is necessary so that we,can hear our customers and constantly improve the level of quality based on their direct feedback. Management's job is to remove obstacles so that staff can deliver the service they know customers want in the way customers expect it to be delivered. And quality of service doesn't just apply to socalled service industries. It's just as important whether it's in snowmobile manufacturing, or telecommunications, for example. There, it may seem harder to spread the feeling of involvement and commitment at every employee level, because to someone working on a shop floor, the actual finished product, or customer, can seem extremely remote. But it's already being done.

Manufacturers, like Northern Telecom and Bombardier, learned the value of a "customer first" attitude throughout their organizations. Plant staff understand the importance of delivering a quality product to their customers. But, equally, if not more important, is management's understanding that quality products can only be consistently produced if they provide quality people management.

People on the "line" need to understand how their work "fits" in the total product, how they're doing in meeting goals and schedules, how they can participate in decisions that affect their jobs, and how they can share in the company's success. The results? Employees develop a sense of ownership and pride in their product and company. Morale climbs - and stays high - and of course high quality production brings satisfied customers and long term profits.

Can Canadians compete with the world in quality? With the right orientation and the right leadership, you bet we can. Roots, Four Seasons, Northern Telecom and Bombardier are just a sample of what inspired Canadian companies can accomplish. This type of quality orientation must be achieved in every corner of Canadian business if this country is to win in the global marketplace. Make no mistake, our friendly rivals in the United States are becoming more and more qualityconscious in their own markets and the spillover effect is already occurring in Canada.

Adding to that, the current round of GATT negotiations will make other markets around the world more competitive. There will be strong opportunities in the liberalization of trade for a country as fundamentally capable of providing quality as ours. We are about to enter into a contest for the hearts, minds and business of customers on a broader scale than ever before. To win we must think, live and breathe quality and service. Heaven help the Canadian company of any description that turns out a shoddy product, neglects service, or is lax in fulfilling after-sale commitments. Competition dictates that we provide the very best in everything we do.

The Canadian work force and Canadian management can secure our future prosperity.

I am confident that investments in quality and service will ultimately yield solid earnings for every stakeholder. The evidence is overwhelming - not only for businesses, but also for the countries they represent. In Canada we have both the opportunity - and I would go even further to say the obligation - to make quality service our No. 1 competitive edge.

The appreciation of the meeting was expressed by Harry Seymour; Managing Partner, Waterston Financial Investments, and a Past President of the Empire Club of Canada.