How Stonewall Sullivan Gums Up the Money Machine

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You have
dealt with Stonewall Sullivan. He may not have called himself
that, but you have dealt with him. Stonewall is everywhere. He
establishes the rules of how we spend large chunks of our lives:
on hold, listening to Muzak, or worse.

Stonewall
Sullivan sets the pace for the government-regulated American economy.
He also sets the place. The pace is slow, and the place is the
phone tree.

Capitalism
is a vast money machine, producing great wealth. But it suffers
from sand. Stonewall Sullivan and his peers provide the sand.

I will describe
a recent experience of mine. Then I will offer suggestions as
to how you can protect yourself and maybe even make a few bucks.

This is
the story of a money machine, and how one corporation’s management
has created a system that steadily injects sand into the gears.

IDENTIFYING
A MONEY MACHINE

Contrary
to business opportunity magazines, there are not many automatic
money machines in this world. When you find one, buy it outright
if you can. If not, invest in it. But before you put your money
on the line, ask four key questions.

  1. What is the main barrier to entry for potential competitors?

  2. Is the U.S. government deeply involved?

  3. Are you stuck longer in the phone tree to get to customer service
    than to a salesman?

  4. Does the money flow in by automatic monthly billing of customers’
    credit cards?

I will illustrate
these points by a consideration of a potential money machine,
DirecPC.

INTERNET
SERVICE IN THE BOONDOCKS

I live in
what may be the largest small town in America. Technically, I’m
in Winslow, Arkansas. I have been in the town of Winslow maybe
twice in the last five years. The town was barely functioning
even before they put in the interstate that bypassed it by 10
miles in 1999. Then the local market burned down. But to drive
from my place to beautiful downtown Winslow takes at least 20
minutes. The geographical extension of the town is huge.

We have
phone service here, in a manner of speaking. I can connect to
the Internet at 44k once in a while, 28.8k most of the time, and
14k sometimes. DSL? Up here, that stands for Darned Slow Lines,
or words to that effect. How about cable? Only behind tractors.
Surfing the Net is more like wading.

Four years
ago, I subscribed to DirecPC, which allowed fast downloading from
the Web, but it required uplinking by modem. It was pretty good,
but when I moved my office, I did not sign up again. I had to
pay for satellite TV, which I rarely watched. The installation
costs were high, and the phone lines were not getting better.

Recently,
I heard about two-way satellite access. You can uplink faster
than standard modem, though not at extreme speeds, and download
faster than DSL. The price is within reason: $60/month.

I went for
it. I bought the required satellite dish and software for about
$120. But I waited a few months to install it. Stupid me. The
Federal government then got into the act. Federal law now requires
licensed installers.

In Arkansas,
you are lucky to find licensed drivers in some counties.

So, I went
on-line to DirecPC to see
if I could get my dish installed. There was nothing on its Web
site about this. The site offers you various options for paying
for an entire package: equipment and installation.

The site’s
home page tells you to contact called DirecWay, which, like DirecPC,
is a subsidiary of Hughes. Because DirecPC instructs the visitor
to contact DirecWay, I will refer to the people I dealt with as
employees of DirecPC.

The site
offered a way to apply for printed information. After filling
out every box on the form, I read the instructions: “Click SUBMIT.”
The form was so long that the SUBMIT button was below the bottom
of my screen. So much for getting any information mailed to me.
(Lesson: “Read the instructions before filling out any form.”)

I then called
a toll-free number. The salesman had no idea of how to handle
my order: installation without paying for equipment. He passed
me off to customer service.

Unfortunately,
I had not prepared myself in advance by getting “War and Peace”
off my bookshelf. When I finally reached a live person at customer
service, I was directed to another toll-free number. When I got
through to that number — where was “War and Peace” when I
needed it? — I spoke with a charming lady with a lilting
Indian accent. After some time, she directed me to a third number.
There, amazingly, I did get the phone numbers of three installers
in my area. By “area,” they apparently meant “time zone.” One
was in Branson, Missouri. One was outside of Neosho, Missouri.
And one — a miracle — was 10 miles away.

What I did
not know was that installer was in fact a local dairy farmer who
had gone into the dish-installation business last spring.
He still has over a hundred head of milk cows, he told me.

He turned
out to be a real expert in milking.

He demanded
payment by check in advance: $300. I paid. He then took along
parts of my dish. He never told me his name. He had promised to
arrive the following Monday. It was Friday. He cashed the check
that day, but he never came back.

He had said
that on the day he installed it, I would have the service at $60/month.
Days later, I saw the light: he made his money only from the installation.
DirecPC makes its money on the monthly fees. If he never signed
me up, DirecPC would lose the money, but would never know about
it. He, however, got his $300. No muss, no fuss. “Later, gator.”

I then knew
where I would be spending my days: in phone trees.

THE
MILK COW BLUES

I called
the toll-free sales number again. I spoke with a salesman. I explained
my situation. “Well, what can I do about it?” he eventually replied.
A good question, indeed. Then he had an answer. “I’ll transfer
you to customer service.” It was Tolstoi time again.

I did reach
a lady who looked up the name of the installer, located in Prairie
Grove. She gave me a phone number. I asked for his address. She
gave me that, too.

I hung up.
I dialed the phone number. Out of service. A week before it had
been live. I got in my car and drove to Prairie Grove. There was
a building. A small building. A small, locked, empty building.
“For Rent.”

One word
flashed through my mind: “Moo!”

I called
the number on the “For Rent” sign. No answer. I called hours later.
A lady then gave me the man’s name and two phone numbers. He had
departed some time ago. I called the toll-free number. It did
not work. I called the other number. I got an answering machine,
but with someone else’s name. I asked that the man call me back.
So far, no call.

I decided
to go back to customer service at DirecPC. There, I got through
to Stonewall Sullivan.

THERE
SITS SULLIVAN, LIKE A STONE WALL!

He told
me his name was Sullivan. I could barely understand what he had
said. He repeated his name for me.

He wanted
to be helpful. But he was sorry. Really sorry. Since I had not
bought anything from DirecPC, I was on my own. He would give me
the number of another company that was in charge of the installers
nationally.

All I wanted
was the number of the dairyman-installer. He could not give that
to me. OK, then could I have the mailing address of DirecPC? I
wanted to explain my situation. He repeated that he would give
me the phone number of the installers’ recruiting company. I asked:
“Are you saying that you will not give me the address of the company?”
He said, “It’s in the toll-free phone book. Call it.” I asked
again. And again. Finally, he said, “I’ll give you what you want.”
He put me on hold. I held. And held. Finally, he came back. “Here’s
the number of the company that hires installers.” In short, he
absolutely refused to give me the address of DirecPC.

If he did
this on his own, he ought to be fired. But I don’t believe he
did it on his own. He put me on hold, as if to consult with someone.
Then he came back on and still refused to give me the mailing
address.

In my opinion,
middle management at DirecPC has deliberately set up a system
to see to it that complaints don’t get to their desks. Sullivan
& Co. have a task: to keep middle management’s desks free of complaint
letters.

I suggest
that DirecPC senior managers consider this: the flow of funds
into a service company like theirs is potentially gigantic, but
it is not automatic. Unless there is a barrier to entry, rival
technologists will come up with an alternative that is cheaper.
This is the genius of capitalism: open entry, price competition,
and consumer sovereignty.

Any company
that allows middle managers to achieve their goal of keeping their
desks free of customer complaints has not understood the nature
of the money machine: signing up clients who never go away. So,
middle managers hire Sullivan to keep their desks free of clutter.
They create barriers to entry — not barriers to innovative
competitors, but barriers to dissatisfied customers. The archetype
of such a company is AOL. Don’t take my word for it. Ask Ted Turner.

Nobody at
DirecPC designed the complaint system with this principle in mind:

“If
we don’t sign them up, we can’t get at their credit cards.”

Middle managers
need a constant representative sample of complaints in order to
design effective measures to solve them. The goal is to keep reducing
the complaints that are causing buyers to quit or shoppers to
go elsewhere.

I conclude
that the primary goal of DirecPC is to sign up buyers of packages,
not to keep customers happy. In my estimation, the waiting time
on the two branches of its phone tree — sales vs. service
— reflects the primary goal. The focus is on sales. For a
company that makes its money on the back end, this focus is loss-generating.
Management should use Gillette as the model: give away the razor;
get rich on the blades. Instead, management seems to have imitated
AOL.

Sullivan’s
job is to stonewall complainers. In the corporate division of
labor, this is his specialty. The problem with America’s Sullivans
is that management has not provided ombudsmen — facilitators
who take over when Sullivan & Co. get beyond page 3 of their 3-page
solutions manual.

Pareto’s
rule says that 80% of the problems will come from 20% of the customers.
A profit-seeking company should hire and train people to deal
with these 20% with extreme competence, and hand off the other
80% to supervisors who have the authority to make decisions. These
supervisors should be paid well because they must deal with so
many different kinds of odd-ball issues. They must be creative
problem-solvers.

Very few
companies understand this. They turn over everything to Sullivan
& Co., and when these people reach their limits, they don’t know
what to do, so they stonewall.

There are
many problems with this strategy, but the main one is this: people
will take their credit cards and go away. Sullivans, in frustration
at having been pushed beyond their limits, react by cutting off
the heads of geese that lay the golden eggs. They think: “You
aren’t going to get a mailing address from me, you slime-ball!
Nobody upstairs is going to put the finger on me.” So, the caller
gets the finger.

BUT
WHAT IF IT’S “60 MINUTES” CALLING?

The law
of averages being what it is, eventually the stonewaller stonewalls
someone who can get through to middle managers and even senior
managers, though initially indirectly. This is the “60 Minutes”
scenario.

Pretty soon,
the CEO of the company is chatting in front of the cameras with
Mike Wallace. Mike asks: “Do you understand the rules laid down
by the Federal Trade Commission that say that your company is
responsible for what your agents say and do in your name?” “Why
of course, Mike.” “Would you say that when someone at your company
recommends an installer, and that installer signs up a customer
who will pay your firm $60 a month, that he is an agent for your
company?” “Well, ‘agent’ may be too strong a word, Mike.” “What
would you call him, ‘an unindicted co-conspirator’?” And so on
. . . for 10 of 60 minutes.

Large corporations
should structure their entire management system on this assumption:
“60 Minutes” will call. Make it so they won’t call back.

TELLTALE
SIGNS

When you
are told by any agent of a Web-based company that you aren’t allowed
to pay by credit card, walk away from the deal. He is either trying
to evade responsibility, or else he is too poor a credit risk
for a bank to allow him access to credit card services. I made
that mistake with the dairyman-installer.

When the
guy gives you no receipt with an address on it, beware.

If
it’s a big-ticket order, take five steps before ordering anything:

  1. Call the sales number. Time how long it takes to connect to
    a salesperson. Then ask questions. Ask for a physical address.
    Do not place an order yet.

  2. If the phone tree initially gives a customer support number,
    call back and press that number. Time how long it takes to get
    to a live person.

  3. If it takes more than three times as long to get through, repeat
    the procedure one hour later: call sales, then call service.

  4. If it still takes over three times as long, start thinking carefully
    about the company’s ability to provide service. What if you
    get locked in with a defective unit?

  5. If you get through in less than three times the time, ask the
    person about the repair and return policy. Also ask for a physical
    address.

Any company
that puts you in the phone tree for long stretches in your quest
for access to customer support is a high-risk company. It is compromising
its ability to generate a constant stream of back-end income.
Any company that is blind regarding the back end is either poorly
managed or is selling a one-time-only product, in which case,
you had better be sure that customer service is top-flight. Think
“aluminum siding.”

THE
FREE MARKET

The ideal
company is price competitive in a market that has open entry.
However, it must sacrifice some price for improved service. If
it doesn’t sacrifice price for service, then it had better imitate
Wal-Mart: money back, no matter what.

In a rich
country, service is more important than price because time is
more valuable than money. A man who makes $500 an hour wants no
unexpected set-backs that require him to deviate from his schedule.
A man who makes $6 per hour is more worried about price.

In the early
stages of capitalism, innovators compete in terms of price. They
lower prices as a way to gain access to a huge, poor, and untapped
market. Firms grow through increased volume. Capitalism always
has such companies. Wal-Mart gets the most attention, but Dollar
General and the other Dollar-type stores are growing very fast.

But, as
capitalism makes large numbers of people richer than ever believed
possible, these newly affluent people start looking for reliability,
fast repairs, and personal attention. A company that caters to
the affluent as its primary market had better not imitate Wal-Mart.
It had better allocate a lot of its budget to customer service.

INVESTING

Buy shares
of companies that are known either for service or product quality
that doesn’t require much service.

A company
can be price competitive, as Wal-Mart is, but then its model had
better be “satisfaction guaranteed, or your money back, no questions
asked.”

Have you
noticed how many defect recall campaigns have been initiated,
on threat of government action, by Japanese car companies compared
to American car companies? Not many. Have you ever gone to “Consumer
Reports” and looked at the repair evaluations for used cars? American
car makers have surrendered market share to Japanese car companies
for a generation? Why? Low levels of quality control.

As Americans
have grown richer, they have bought quality. Detroit, hampered
by government-protected compulsory trade unions, whose members
did not have a fierce dedication to quality work, did not perceive
what the future would bring as Americans grew richer. Companies
did not see that government-enforced trade unionism would not
protect them from competition that originated outside the jurisdiction
of the National Labor Relations Board. When Japanese auto companies
finally set up shop here because of cheap land and lower transportation
costs, they did so far from Detroit and the rust belt, where trade
union arrogance had made workers fat and strike-oriented. The
Japanese built in Tennessee and Kentucky: the greenbelt, not the
rust belt.

Invest in
quality. Invest in companies that put service at the top of the
list, and then prove it by answering their customer service lines
as fast as they answer their sales lines.

CONCLUSION

I understand
DirecPC’s problem. The US government gummed up the works by requiring
licensed installers. This requirement has cut the supply of installers.
The company farms out hiring to a third party, which is reduced
to hiring a dairy farmer to service the fastest growing region
in the United States, Northwest Arkansas, where Californians are
streaming in, home sale profits in hand, ready to spend money.

Once again,
we see that government intervention hurts the consumer in the
name of the consumer.

Who knows,
maybe DirecPC will find out where that missing installer is. Or
maybe I will. Maybe I’ll eventually be on-line by satellite. Until
then, I leave you with this thought:

Moo.

September
9, 2003

Gary
North is the author of Mises
on Money
. Visit http://www.freebooks.com.
For a free subscription to Gary North’s newsletter on gold, click
here
.

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