Thursday, November 16, 2006

Business: The Problem with Making the Numbers

Jeff Matthews is Not Making This Up

Jeff nails a business concept that I've always had problems with, but could never put my finger on describing: Management by Numbers.


I’ve walked stores with Bernie Marcus, and it’s an experience.

If you don’t know who Bernie Marcus is, he’s one of the two geniuses (the other being Arthur Blank) who invented The Home Depot.

Bernie was a whirlwind: loud, brash, and eager to help any potential customer who walked in the door, even if it meant turning his back on whatever number of Wall Street's Finest were getting the store tour at that moment.

Just to help the guy find what he was looking for.

Bernie seemed to know every sales associate who ever walked the floor—and for good reason, because he'd hired them and trained them. And it was within the sales associates that he'd also imparted his passion for helping the customer so well that it made his company what it became: a place where people who don’t necessarily know how to use a hammer could come in and get help and advice so that they could actually install a door or fix a faucet or add a deck—meanwhile spending oodles of dollars in the process.

Not for nothing the motto was “You Can Do It, We Can Help.”

Now, it is ancient history to point out that the Home Depot under Bernie and Art developed growing pains, and that the founders stepped aside for a new breed of operations-based management under ex-GE big Bob Nardelli.

And it is old news that today's customers may have less free time and be less inclined to do it themselves, and are, therefore, more apt to want somebody to do-it-for-me, requiring an updating to the original Home Depot motto.

And in any event it may soon be ancient history to talk about the Home Depot as a public company, what with rumors sweeping Wall Street that Sears Holding’s Eddie Lampert has been looking at adding Home Depot to his real-estate rich retailing empire, plus all the private equity money desperate to buy anything with cash flow, which Home Depot has in spades.

But it is, nonetheless, worth keeping up with how Home Depot has been doing under the Nardelli regime, and if this week’s earnings call proves anything, it proves that Nardelli is masterful at spinning his story to Wall Street’s Finest.

He begins right away, in his opening remarks:

Thanks, Diane. In August, we predicted that the third quarter was going to be soft, and it was actually more challenging than we anticipated. We felt the impact of the U.S. retail home improvement market slowing significantly.

Note how Nardelli manages to paint himself and his company as both prescient (“we predicted”) and a victim (“we felt the impact…”). This is masterful spin-doctoring: it’s as if nothing bad happening at Home Depot is the fault of management.

But that’s not the whopper.

The whopper comes in the very next sentence:

However, during the quarter, we did stay on strategy by accelerating our investment in our core retail business and growing our supply businesses.

Right now I’ll bet there’s a would-be customer—I’m one myself, so I know how this works—trying to figure out which size floodlight to buy for his stupid kitchen ceiling lights, who is walking around the cement floor of a huge cavernous Home Depot looking for anybody wearing an orange apron with a “You Can Do It, We Can Help” button that isn't already being trailed through the store by four or five desperate fellow potential-customers with hollow eyes looking like those émigrés in “Casablanca” following around somebody who has their visa papers.

And I seriously doubt that would-be customer is thinking,

“Well, I may not be able to find somebody in an orange apron who can help me figure out which size floodlight to buy for my stupid kitchen ceiling because apparently this is a store run by self-service checkout robots, but at least they’re staying on strategy.”

Yet even Nardelli could not spin away the fact that staying “on strategy” didn’t prevent Home Depot from earning less money this year than last:

In the third quarter, consolidated sales were $23 billion. That is up 11% from last year, and our diluted earnings per share were $0.73. That is up 1%, while consolidated net income earnings were $1.5 billion, down 3%.

Now, it is a fact that Bob Nardelli runs a company called The Home Depot.

And it is a fact that the home-building industry has, of late, smacked head-first into a brick wall after several years of increasingly testosterone-charged home-building CEOs telling doubters on Wall Street that, like the Internet skeptics of the late 1990s, “you just don’t get it” when it came to understanding why the Housing Bubble wasn’t a Bubble.

And it is a fact that recent results at vendors such as Masco (faucets and kitchen cabinets) and Mohawk (carpets and tiles) demonstrate the difficulty facing anybody selling anything that goes into one of those D.H. Horton or Toll Brothers or Ryland spec homes now sitting empty out in the scorching Las Vegas desert (sales brochure slogan: “It’s the desert so why would you need a yard?”).

So the fact that numbers at The Home Depot are a bit light is not reason alone to pick nits with the sort of spin-doctoring conference call you’d expect from a guy who very nearly made it to the top of one of America’s most ferociously management-by-numbers companies, GE.

(True story: I was at the Greek diner one morning recently when two GE-ers, who clearly worked together several job assignments ago but hadn’t seen each other in some time, began talking, and I am not making this up:

“So how are things?”
“Good. We made our numbers.”
“Good! You made your numbers?”
“Yep, we made our numbers—how about you?”
“Oh, yeah. We made our numbers.”

It wasn't until then that they got into family, kids and other apparently less important stuff. That is the DNA of the guy in charge of Home Depot.)

And while Home Depot had outgrown its systems and needed serious work behind the scenes to support what Bernie Marcus and Art Blank had created from not much more than a passion for their customer, it is not necessarily the kind of culture that’s going to keep the customers happy.

So it should be no surprise that, unless all the former Home Depot store managers I run into are making up stories about reduced money for staffing labor at stores—what they call “earn hours”—as well as a Sears-like bureaucracy taking over the Atlanta headquarters (which, as far as Marcus and Blank were concerned, took its orders from the stores, not vice-versa), there’s no arguing the Home Depot has changed, for the worse, from a customer-driven operation to a numbers-driven operation.

But don’t take my word for it. Ask anybody who used to shop there. Anybody. I’ll bet we come up with more horror stores than Dell (see “Dell Screws Up a Good Thing” from this site).

Nevertheless, the numbers-agile crew now in charge at Home Depot didn’t get to where they are by not having whatever data could support the upbeat “message” handy in their PowerPoint presentation, and Nardelli did indeed offer up customer satisfaction numbers that seem completely at odds with every anecdote I’ve heard recently:

I want to thank our associates for their hard work and focus on taking care of our customers. Every week, we hear from 250,000 customers through our voice of customer survey. We have seen significant improvements in our survey results. Key customer service attributes, including customer engagement, waiting to check out, find and buy, likelihood to recommend, and associate availability were up over last year and showed sequential improvement this quarter. Overall satisfaction with our company, as measured by scores of 9s and 10s, is up over 2004 and 2005 levels.

Lest anyone think this “voice of customer” might be something he is hearing inside his own head, Nardelli delved into these numbers later in the Q&A with just enough color to make you wonder about how much they reflect reality, or not:

Mark, I think two points, just to be real clear. What we talked about is that overall customer satisfaction, or voice of customer, as we call it, is up across the entire network of stores, and that is the 250,000 customer shopping experiences, that they go online and call and score us on associate availability, ability to find and buy, et cetera. We have seen a sequential improvement month over month in the third quarter for sure, and we would expect the same thing to continue in the fourth quarter. In other words, the customers that are scoring us 9s and 10s.

I may be wrong, but customer surveys—especially online customer surveys—might not be the best way to find the customer who went into a store, couldn’t find anybody to help who wasn't already under siege from four or five other desperate individuals, picked up the wrong-sized floodlights for his stupid kitchen ceiling, spent ten minutes in line because there weren’t enough live human beings at the registers…and then vowed never to come back again.

Still, Nardelli appears to have great faith in management-by-numbers.

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