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Moments of truth

How to turn the organisational pyramid upside down to improve customer service by giving frontline employees greater responsibility for decision-making.

Bookcover

by Jan Carlzon, HarperCollins, 1987.

Abstract

A management classic in which the former CEO of Scandinavian Airlines tells how he turned the organisational pyramid upside down to improve customer service by giving more responsibility for decision-making to frontline employees in contact with the customers. "Moments of truth" are the critical moments (perhaps thousands a day) when customers come into contact with the company and when their enduring impressions of the company are formed.

(Reviewed by Kevin Barham in March 2006)

(These book reviews offer a commentary on some aspects of the contribution the authors are making to management thinking. Neither Ashridge nor the reviewers necessarily agree with the authors’ views and the authors of the books are not responsible for any errors that may have crept in.

We aim to give enough information to enable readers to decide whether a book fits their particular concerns and, if so, to buy it. There is no substitute for reading the whole book and our reviews are no replacement for this. They can give only a broad indication of the value of a book and inevitably miss much of its richness and depth of argument. Nevertheless, we aim to open a window on to some of the benefits awaiting readers of management literature.)

Introduction

Jan Carlzon was considered one of the most remarkable business leaders of his generation. He took over Scandinavian Airlines (SAS), the consortium of the national airlines of Denmark, Norway and Sweden, in 1981 when it was on the verge of losing $20 million. Within a year, the airline was making $54 million. He did it by capitalising on 50,000 "moments of truth" every day – the critical moments (sometimes also called "customer touchpoints") when customers come into contact with the company and when their enduring impressions of the company are formed.

In his book, now a management classic, Carlzon proposed a model for making a company customer-driven by mentally turning the organisation upside down, inverting the traditional pyramid of authority, and showing managers how to serve as well as lead. He showed how to restructure an organisation so that customer needs take priority, how to motivate and communicate with frontline employees who deal most closely with customers, and how to increase employee motivation.

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The moment of truth

Carlzon describes how SAS reoriented itself to become a customer-driven company. Under his direction, it recognised that its only true assets were satisfied customers, all of whom expected to be treated as individuals and who would not have selected SAS as their airline unless it did just that.

Before Carlzon arrived, SAS thought of itself as the sum total of its aircraft, its maintenance bases, its offices and its administrative procedures. But if you asked customers about SAS, these were not the things they talked about. They talked about their experiences with the people at SAS.

In other words, says Carlzon, SAS was not just a collection of material assets. More important was the quality of the contact between an individual customer and the SAS employees who served the customer directly. At the time Carlzon was writing, SAS had ten million customers who came into contact with approximately five SAS employees, each contact lasting an average of 15 seconds a time. Thus, he says, SAS was "created" in the minds of its customers 50 million times a year, 15 seconds at a time. These 50 million "moments of truth" were the moments that ultimately determined whether the firm would succeed or fail. They were the moments when SAS must prove to its customers that it was their best alternative. [SAS today carries 35 million passengers a year so presumably the airline is now managing 175 million moments of truth.]

If a firm is truly dedicated to orienting itself toward each customer’s individual needs, then it cannot rely on rule books. It has to place responsibility for ideas, decisions and actions with the people who actually are the company during those 15 seconds – the frontline employees (in the case of SAS, these were the ticket agents, flight attendants, baggage handlers, and so on). If the frontline people have to go up the organisational chain of command for a decision, those 15 "golden seconds" will elapse without a response and the firm will have lost an opportunity to earn a loyal customer.

Such an approach, as Carlzon points out, necessarily turns the traditional corporation upside down. The traditional corporate structure resembles a layered pyramid with top management at the apex, several intermediate levels, and a base connected with the market. At the top of the company sits the CEO and a number of highly qualified top managers – specialists in finance, production, marketing, etc. The task of this top management group is to control operations by making all the decisions necessary to run the company.

The sheer number of decisions that must be made keeps top managers occupied with the decision-making process, so intermediaries have to convey their decisions throughout the company. A large group of middle managers converts top management’s decisions into instructions, rules, policies, and orders for the workers at the bottom level to follow. At the bottom of the pyramid are the people who have daily contact with the customers and who know most about the company’s frontline operations. Ironically, they are typically powerless to respond to the individual situations that constantly arise.

Carlzon was one of the first top managers to understand that the business environment on which this hierarchical structure was based had changed. Increasingly unable to compete from a product-oriented advantage, Western economies were being transformed into "service" economies. The point of departure had to be the customer – not the product or technology itself – and this meant that companies must organise themselves differently to survive.

In a customer-driven company, the distribution of roles is radically different. The organisation is decentralised with responsibility delegated to those who until then had comprised the "order-obeying" bottom level of the pyramid. In other words, the traditional, hierarchical corporate structure was beginning to give way to a flattened, more horizontal structure.

In order to become a customer-oriented company, big changes are required on the part of frontline employees. It is up to the CEO to become a true leader, devoted to creating an environment in which employees can accept and execute their responsibility with confidence and skill. The leader must communicate with his or her employees, imparting the company’s vision and listening to what they need to make that vision a reality. "To succeed he can no longer be an isolated and autocratic decision-maker. Instead, he must be a visionary, a strategist, an informer, a teacher and an inspirer."

To middle managers the leader must delegate responsibility for analysing problems, managing resources and, most importantly, supporting the needs of the frontline employees. To frontline employees, the leader must give the authority to respond to the needs and problems of individual customers. Frontline employees must be trained properly so they become empowered to respond to customers’ unique needs with speed and courtesy.

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The SAS turnaround

Before Carlzon took over the top job at SAS, he managed two of the airline’s subsidiary companies. This experience taught him, he says, that the job of the CEO was not to make all the decisions. Rather, the role of the CEO was to create the right atmosphere and conditions for others to do their jobs better. It was about setting the tone and keeping the big picture in mind. It taught him to rely more on the frontline people who dealt with the customers, and less on his own edicts. "In other words," he says, "once I had learned how to be a leader rather than a manager, I was able to open up each company to new market-oriented possibilities and to the creative energy of its employees." [We may want to argue with the stark distinction between manager and leader suggested here.]

Carlzon applied these lessons when he took over as president of SAS in 1980. His aim was to make the firm profitable even in the zero growth market then prevailing. To do this, he chose to make SAS "the best airline in the world for the frequent business traveller" – a highly ambitious target for a Scandinavian airline. While other airlines were also targeting the more lucrative business travel market, SAS adopted a "unique" policy that was the the opposite of what Carlzon calls the "cheese slicer" approach used at the time by other airlines. The slicer ignored market demands and cut costs equally from all departments. In so doing, it often eliminated many of the services customers wanted, slicing away the firm’s competitive strengths and sapping the initiative of employees. In the end, no one felt responsible for controlling costs.

Carlzon saw that they had to stop regarding expenses as an evil to be eliminated and to look at them as resources for improving competitiveness. His new approach was to scrutinise every expense and to ask whether it was needed in order to serve the frequent business traveller. If the answer was no, it was phased out. If the answer was yes, he was prepared to spend more money to develop it further and make SAS more competitive. If something was missing, he was ready to add it.

The result was a strategic plan that, far from cutting costs, proposed investing additional funds and increasing operating expenses to improve customer services. Once the clear goal of serving business travellers had been identified, it was easy to identify the cuts that would not hurt the firm.

It was a high risk strategy but Carzlon says it came together, not just because of the vision of top management, but because people throughout the company were able to see the vision and take the initiative to do the things necessary to implement it. People sometimes made mistakes but that was OK: "Mistakes can usually be corrected later; the time lost in not making a decision can never be retrieved."

The change in employee attitudes was one of the most significant results of the SAS turnaround strategy. By stating that the firm would make a profit by becoming a service-oriented airline ignited a radical change in the firm’s culture. Instead of service being of secondary importance as in the past, the entire company from top to bottom was now focused on service.

The frontline employees’ efforts suddenly had greater value within the company. Before they had frequently gone unappreciated. Now they were in the limelight. Diffusing responsibility and communicating the vision to all employees certainly made more demands on them. One of Carlzon’s favourite maxims is: "Anyone who is not given information cannot assume responsibility. But anyone who is given information cannot avoid assuming it."

Carlzon’s strategy led to significant improvements in the financial performance of SAS. Earnings in the first year increased beyond expectations – and at a time when other airlines were suffering severe losses in a slumping market. Carlzon had transformed a troubled airline with a morale problem, a slipping market share and lots of red ink into what Fortune magazine in 1983 called the best airline for business travellers in the world. Over the next five years, up to the time that Carlzon was writing his book, passenger growth continued to outpace overall market growth.

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The profession of leader

Carlzon has very clear beliefs about the sort of leadership required to achieve this kind of turnaround. He believes that responsibility should be delegated so that individual decisions are made at the point of responsibility, not far up the organisational chart. The best evidence that the system was working at SAS, he says, was when he took a holiday. If the telephone from the office didn’t ring, that was proof he had succeeded. If the phone rang with someone asking for instructions, then he knew he had failed – either in getting his message across or in recruiting managers who could accept responsibility. Not that every decision made in his absence pleased him, but the significant thing was decisions had been made. Other people were taking responsibility based on accurate, up-to-date information.

This, for Carlzon, is the difference between a "traditional" leader and the "true leader in a customer-driven company". A leader is not appointed because he or she knows everything and can make very decision. They are appointed to bring together the knowledge that is available and then create the prerequisites for the work to be done. They create the systems that enable them to delegate responsibility for day-to-day operations.

As leader, says Carlzon, you have to use your view of the big picture to formulate a strategy tailored to your goal and you have to call on a wide range of skills to achieve a series of objectives. You have to communicate the goal and strategy to the board of directors, the employees and other interested parties such as the unions. You have to give greater responsibility to people at the front line and then create a secure atmosphere where they will dare to use their new authority. You must build an organisation that can work to achieve the goal and establish measures that indicate whether you are moving in the right direction. In other words, you have to create the perquisites for making the vision a reality.

You should not try to make decisions from the top of the pyramid about aspects of the business that are not familiar to you. If you make the decision yourself rather than creating an atmosphere in which the ideas of those closest to the action can flourish, you are taking the easy way out. Too many managers believe they cannot be good managers unless they know – or pretend to know – everything.

A business executive need not have detailed, specialised knowledge. As Carlzon points out, he was president of an airline but he couldn’t fly a plane or repair one. A leader today must have much more general qualities: good business sense and a broad understanding of how things fit together – the relationships among individuals and groups inside and outside the company and the interplay among the various elements of the company’s operations.

It requires strategic thinking or "helicopter sense" – a talent for rising above the details to see the lay of the land. By defining clear goals and strategies and then communicating them to his or her employees and training them to take responsibility for reaching those goals, the leader can create a secure working environment that fosters flexibility and innovation. The "new leader" is therefore a listener, communicator and educator, – "an emotionally expressive and inspiring person" who can create the right atmosphere rather than make all the decisions him or herself.

Carlzon believes the leader has to be an "enlightened dictator", someone who is willing to disseminate the vision and goals throughout the organisation but who will not brook active dissent to the underlying ideas. [Carlzon, remember, is describing his experience of crisis management. Again, we might want to debate this as a general principle.] The leader must be able to present his views convincingly so that the goals and strategies feel right to everyone in the company. The leader must resist the urge to dismiss those people who don’t fully understand the vision and goals at the beginning. He must work with them and give them additional information and try again to make them understand. From those who refuse to be persuaded he must demand loyalty to the goals or they should be asked to leave.

Carlzon says that his belief in the need to collapse the hierarchical organisational structure in service-oriented businesses is not a call for corporate democracy. Everyone must be given the opportunity to air their views but they cannot all be involved in making the final decision.

Only after the leader has fully developed the strategy and communicated it to everyone else can they begin delegating responsibility. In changing a business environment, you can’t wield total control from the top of the pyramid. You must give people authority far out on the line where the action is. They are the ones who can sense the changes in the market. By giving them security, authority and the right to make decisions based on current market conditions you will gain competitive edge.

A leader is therefore more concerned with results than power or social relationships. Nor should the leader claim successes as his or her own. Carlzon believes that his great triumph at SAS was unleashing employees’ creativity through decentralisation. Good ideas flowed freely from every division of the company and were all channelled toward the same company-wide vision. "It made no difference who came up with good ideas – all that mattered was that the ideas worked."

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Flattening the pyramid

Carlzon maintains that any business seeking to establish a customer orientation and create a good impression during its "moments of truth" must flatten the pyramid. It must eliminate the hierarchical tiers of responsibility in order to respond directly and quickly to customers’ needs.

"Managing" is thus shifted from the top of the organisation to the operational level where everyone is now a manager of his or her own situation. When problems arise, each employee has the authority to analyse the situation, determine the appropriate action, and see to it that the action is carried out, either alone or with the help of others.

Calling everyone a "manager" communicates the fact that their roles have undergone a fundamental change. If the top executives who were once the managers must learn to be leaders, the people out in the front lines must make all the operational decisions. They are the ones who directly influence the customer’s impression of the company during those "moments of truth". Problems are solved on the spot as they arise. Frontline employees don’t have to wait for a supervisor’s permission.

Carlzon admits that in their haste to flatten the pyramid at SAS, they ignored the middle managers who were understandably confused by their new role and who became hostile and counterproductive. These managers were not accustomed to thinking of themselves as a support function, especially not supporting people they previously considered subordinates. Support and service had always been relegated to a low status and promotions moved people away from the customer and toward administration.

Now, when people on the front lines "broke the rules" to help the customers, the middle managers responded by trying to rein them in. This in turn angered the front line. Looking back, Carlzon realised he had let the middle managers down. He had given the front line the right to accept responsibility but he had not given middle managers viable alternatives to their old role as "rule interpreters". To them the new situation looked like a demotion.

The middle manager or supervisor’s role changes significantly in the new setup. In the past they issued instructions to their staff. Now their job is to serve them by ensuring they understand their department’s objectives and giving them the information required to meet those objectives.

No one should have the authority to interfere during a moment of truth. The front line has the responsibility of seizing these golden opportunities to serve the customer. Enabling them to do so is the responsibility of the middle managers. The latters’ role is to take the overall objectives given to them by top management and break them down into a set of smaller objectives that the frontline people will be able to accomplish. At that point their role is transformed from administration to support.

To motivate the front line and support their efforts requires skilled and knowledgeable middle managers who are proficient at coaching, informing, criticising, praising, and educating. They have to translate the overall strategies into practical guidelines that the front line can follow and then mobilise the necessary resources for the front line to achieve its objectives. This requires a mixture of "hard-nosed" business planning and creativity and resourcefulness.

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Taking risks

Carlzon notes that you have to take risks in business. Choosing the safest path will not get you across the "chasm". Analytical thinking is necessary but to succeed in executing an idea that no one else has dared to try, you usually have to take a big leap.

It is not only top management who must learn to leap the chasm. Risk-taking must "ripple" through the entire organisation. All levels of employees must be encouraged to take risks. But, if they are to make decisions that entail some risk, they must have security. Only when they know they are allowed to make mistakes will they dare to use their new authority.

As Carlzon describes it, security has two sources: internal and external. Top and middle managers can nurture both.

Internal security comes from a heightened sense of self-worth that greater responsibility encourages. Authority and responsibility are not about having a fancy title or a big office. They are linked to the individual and his or her wisdom, knowledge and way of dealing with people. Ideally, frontline employees should draw their sense of security from within.

External security must be assured by those in the higher organisational levels. Leaders and managers must give guidance, not punishment, to employees who take risks – and who occasionally make mistakes. Wrong decisions should be used as the basis for training; right decisions should be used as the basis for praise and positive examples.

The right to make mistakes is not the same as the right to be incompetent, though. A manager cannot be allowed to keep his position if he does not accept his company’s overall strategy or if he is incapable of meeting his or her objectives.

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Clear and simple communication

In a decentralised, customer-driven company, a good leader spends more time communicating than doing anything else. He or she must communicate with the employees to keep them all working toward the same goals. The leader must also communicate with customers to keep them informed of the company’s new activities and services.

In his first year at SAS, Carlzon spent half his working hours out in the field talking to people. The joke went round the company that any time three employees gathered, the CEO would probably show up and begin talking with them.

Carlzon realised that, having done away with the old hierarchical structure, he couldn’t just order employees to do things differently. Instead, he had to convey his vision of the company and convince them that they could and should take responsibility for carrying out that vision. One of his communication tools was the "little red book" which was distributed to every employee. This had just a few words in big type on each page and was filled with cartoon-like drawings to convey the message about the overall vision and strategy and the firm’s expectations of employees.

In a decentralised firm, the leader communicates the strategy to large numbers of decentralised decision-makers who must then apply it to specific situations. The leader must be certain every employee has truly understood and absorbed it. This requires considering the words that the receiver can best absorb and making them your own. In other words, use plain, straightforward language. It is better to be too clear or simple than to risk the possibility that one employee will misunderstand your message.

The most powerful messages are simple and direct and act as a battle cry for people across all organisational levels. The message does not need to be lofty or even original. Don’t clutter it with words that people may not understand. The goal is to persuade people, not to show them that you know more than everyone else.

It calls for some showmanship. If you want to be an effective leader, you can’t be shy or reticent. Knowing how to appear before large audiences and persuade them to "buy" your message is a crucial attribute. You may have to turn yourself "inside" out a little to communicate the message and to give something of yourself if you want to reach the audience.

The same principles apply outside the company. Unless you can communicate your business strategy clearly to your customers, you might as well have not developed it at all. It involves more than just words and advertising images. It also includes symbols. Everything about a leader has symbolic value – from lifestyle and dress to behaviour. A leader’s ways are watched carefully and adopted by others in the organisation. Through their behaviour the leader’s personality starts to permeate the entire organisation.

Non-verbal communication can also be powerful in illustrating the style that others in the organisation should follow. And this helps to create the image that the organisation presents to its customers. (When travelling on a plane, for example, Carlzon would wait until all the other passengers had boarded and would wait to be given a newspaper until everybody else had got what they wanted. It demonstrated to cabin crew that even top management was helping to give the passengers good service.) Setting a good example is the most effective means of communication – and setting a poor one is disastrous.

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Measuring results

A decentralised company is much more in need of good measurement methods than a hierarchical, centralised organisation. In a decentralised organisation, employees at all levels must understand exactly what the target is and how best to achieve it. They need an accurate feedback system for determining whether the decisions they are making are really the ones that will achieve the company’s overall goals. In a customer-driven organisation, measurements are derived from how well they are focusing their energy on the areas vital to the paying customers.

One of Carlzon’s major concerns is that the system should measure the right indicators. One of the most basic mistakes a service-oriented business can make, he says, is to promise customers one thing and measure another. In the case of SAS, it was promising prompt and precise cargo delivery but was measuring performance on the volume of cargo carried. When it discovered its mistake it asked its cargo people to devise a new system. This measured primarily the precision of service: How quickly did they answer the telephone? Did they meet the promised deadlines? How long did it take from the time the plane landed until it was ready to be collected by the customer?

SAS published its cargo performance results every month comparing the various cargo terminals with each other. It received a lot of criticism at first for issuing the report because Scandinavians traditionally refrain from criticising one another in public. Despite that, SAS employees responded well and prompt delivery of shipments increased significantly. It was not that fast delivery had been unimportant before. The difference was that everyone at SAS cargo now knew why precision was important (because that is what the customer pays for) and they knew exactly what the components of precision were. It meant that cargo workers no longer had to wait for their supervisors to tell them what to do. It also gave them renewed energy and commitment to doing things right.

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Rewarding employees

In 1982, as evidence that top management appreciated their efforts, Carlzon gave every employee a gold watch and an invitation to a company party, along with a letter thanking them for the great job they had done during the past year in which SAS had jumped from its worst loss to its biggest ever profit.

The "reward" plan had two phases. The first was the individual symbol of recognition, the watch. This was followed by a joint symbol, the party. The watch symbolised the aim of SAS to become the world’s most punctual airline. The parties, held all over the world, were intended to highlight the fact that SAS was a group and that it had achieved something collectively.

Carlzon says that in many companies the only thing that gets attention is a mistake. But everyone needs to feel that their contributions are noticed. The work we do and the recognition we receive for it contribute to our self-esteem. In a service-oriented business where employees’ self-esteem and on-the-job morale have an enormous impact on customer satisfaction, a word of well-deserved praise can go a very long way.

For a company that has flattened the pyramid, it becomes particularly important to reinforce the self-worth of individual employees. In the hierarchical company, people are rewarded by "promotion" which often means moving talented people from important jobs to positions of no real substance and increasing their salaries. Carzlon believes that an organisation that rewards its employees with real job satisfaction and a genuine sense of self-worth is more honest to itself and its people. If someone has done a good job, a better reward is to give them well-defined responsibility and trust. This is about helping talented people to blossom and develop.

If you flatten the pyramid and give frontline people new responsibility, you have to change their attitude about what is considered a promotion. People must feel they are being promoted when they are trusted with an assignment that gives them an opportunity to accomplish something important. The richest reward of all is being proud of your work. By understanding what employees want from their jobs, what their aims are, and how they want to develop, leaders can heighten their employees’ sense of self-worth.

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Sustaining change

From 1981-84, the whole of SAS was aligned on recovering profitability and every employee was striving to surpass his or her best efforts. Once the objective was achieved and the immediate crisis was over, however, the absence of new goals started to produce negative effects and employees’ newfound energy began to be redirected toward narrower, more personal objectives.

Carlzon reflects that in retrospect he should at the beginning have set an ultimate, long-term goal and viewed profitability as a short-range sub-goal. Larger goals help us see beyond our daily tasks. People want challenges in their jobs and lives and setting goals contributes to their well-being. You cannot just decentralise, pass responsibility to employees and say "You can make independent decisions now." You have to choose and communicate a goal that every employee can really rally round. Until you do that, the leader never truly divests themself of central control and the employees always need the boss to intervene on matters large and small. They can’t be sure what is right or wrong because they are not privy to the goal or the strategies for reaching it.

Ultimately, Carlzon believes, empowering employees with real responsibility and authority requires a radically different structure – a more "horizontal" model with redefined work roles:

  • The first level is responsible for guiding the company into the future, anticipating threats to the business and scanning for new opportunities. People at this level establish goals and develop strategies for reaching them.
  • The next level is responsible for planning and allocating the resources by investing money or recruiting people, i.e. doing everything necessary to enable the people at the operative level to carry out the strategies established by top management.
  • The third level is the front line or operations where all the specific decisions necessary to run the company in accordance with top management goals and strategies should be made.

As Carlzon reminds us, only the customer will pay our costs and provide our profits. So we have to conduct all business planning from the customers’ point of view. And the people who know best what the customer wants are the people in the front line, closest to the market. These are the people who should have the maximum influence on how we shape our products and the greatest amount of responsibility and authority should be pushed their way.

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Unleashing hidden energy

Carlzon left SAS in 1993 to pursue other business interests. It’s now almost 20 years since his book on moments of truth was first published but his overall message about the importance of creating a customer-orientation is as valid today as it was then. [The wheel turns among business academics, of course, and we now have books asking whether we are spending more on our customers than they are worth. See, for example, the summary of a new book Managing Customers as Investments by Sunil Gupta and Donald Lehmann.]

Carlzon’s example continues to inspire. An example is to be found in the summary of Robert Buckman’s book Building a Knowledge-Driven Organization. Buckman drew on Carlzon’s ideas about giving frontline staff more responsibility when he set out to transform his own firm into a virtual, networked organisation that was close to the customer.

A final quote from Carlzon makes the point. "I urge others to take a close, hard look at their own organisations. If you can flatten your pyramids you will be creating a far more powerful and resilient organisation that not only serves customers better but also unleashes the hidden energy within your employees. The results can be astounding."

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