Is the Service Recovery Paradox true for B2B relationships?

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Is the Service Recovery Paradox true for B2B relationships?

The Service Recovery Paradox (SRP)

A couple of years ago, I wrote a blog called The Service Recovery Paradox – Fact or Myth?  Today I’m looking more specifically at whether the Service Recovery Paradox is true for business-to-business (B2B) relationships.

But first, a quick recap on the basics of SRP. 

The Service Recovery Paradox is a concept that was first introduced by service management guru Christopher Hart in the Harvard Business Review way back in 1990. Here’s what he said more than 30 years ago:

“A good recovery following a service failure can turn angry, frustrated customers into loyal ones. It can, in fact, create more goodwill than if things had gone smoothly in the first place.”

Sounds great. But is it true? Or, as some other academics have asked more bluntly, is it a more of a smouldering myth than a justifiable theory?

Like most things in life, the answer is nuanced.

The evidence – and there really is little of it out there as I discussed in that blog – suggests that in most circumstances the Service Recovery Paradox is simply not true.

“A good recovery following a service failure can turn angry, frustrated customers into loyal ones. It can, in fact, create more goodwill than if things had gone smoothly in the first place.”

When a company does a really good job at fixing the service issue, Satisfaction can go back up to – and even beyond – pre-failure levels. But here’s the rub. Even though Satisfaction recovers, Loyalty does not. So, to summarise that earlier blog, the Service Recovery Paradox (SRP) is indeed a smouldering myth, at least in the consumer world.

The basic message in that blog was to get the basics right, rather than trying to recover a bad situation. Do things right, and do them right first time.  Reliable and consistent service delivery is the cornerstone of long-lasting client relationships. And it doesn’t cost anything to ensure consistency of service delivery because Quality is Free.

But what about the B2B world?


Is the Service Recovery Paradox true for B2B relationships?

All the case studies mentioned in that previous research were from the consumer world. Do the same conclusions hold true for B2B companies? Is the Service Recovery Paradox true for B2B relationships? I was curious to find out.

It turns out that there is even less written about B2B service failures than consumer service disasters. That said, three Swiss consultants – Denis Hübner, Stephan Wagner and Stefan Kurpjuweit – did examine B2B service failure and subsequent recovery in the logistics industry. They interviewed senior managers and front line workers in 25 different companies across three continents and came up with some interesting conclusions.


The Service Recovery Paradox in B2B Situations: A Smouldering Myth

In summary, they did find some evidence to support a positive aftermath after a service failure. However, they could only find evidence for the SRP in nine of the 25 cases that they investigated. That means that in nearly two thirds of cases, there was zero evidence of any recovery after a service failure.

And here’s a more interesting finding. In those nine cases, the discussion is around satisfaction. There is no mention of increased loyalty in any of the cases. Yes, in nine cases and under quite specific circumstances, satisfaction did recover to pre-failure levels. But there is no discussion about increased purchases or purchasing intentions. Nothing about deeper relationships or increased levels of trust.

In other words, loyalty appears to be remain compromised even when B2B service providers implement an excellent service recovery.

This suggests that the SRP truly is a “smouldering myth” in both the B2B world as well as the consumer world.

Now let’s look at some of the nuances in their research, because there are some good messages for B2B leaders to take on board.

“Overall, we observed the service recovery paradox (SRP) or service failures resulting in increased customer satisfaction in nine of the 25 cases”


B2B: Critical external failures are easier to recover from

The analysis of those nine cases where satisfaction improved after a successful service recovery led Hübner and his colleagues to a couple of key conclusions:

  • Service failures must exceed a “zone of indifference” before SRP is seen. The reason is simple. It often takes a truly critical service failure to draw sufficient attention – and a corresponding response – from senior management.
  • External failures are easier to recover from than internal failures. Customers are tolerant of events such as events that they perceive as force majeure. For example: a volcano eruption in Iceland or a nation-wide transportation strike. Customers are far less tolerant of perceived internal failures that the service provider should have been able to anticipate and plan for.

The corollary is also true. If the service failure is low-impact and part of an ongoing systemic problem, it’s almost impossible to recover from, because it rarely gets taken seriously by leadership teams.

B2B: An immediate response coupled with longer term action are ‘must haves’

Even when the service failure is seen to be in the “that was massive and nobody could have predicted it” category, a lot of hard work is required to rebuild satisfaction level afterwards. A few points are worth noting:

  • Compensation is of limited value. Much more important than compensating direct losses is the avoidance of expensive downstream consequences: delayed deliveries, lost production, and so on.
  • Apologies are also of limited value. For the same reason, formal apologies provide less value than a significant and fundamental change in behaviour in the aftermath of a service failure.
  • Response speed is critical. In fact, speed of response is possibly the B2B service provider’s only truly effective weapon. If it can be deployed, it can go a long way to defusing the situation.
  • Prevention is better than cure. In the longer term, even speed of response is of little value if the underlying issues are not resolved. The service provider must implement action plans that ensure the failure won’t re-occur. That means carrying out root cause analysis rather than simply treating the symptoms. ‘Action’ may mean significant investments in technology and re-engineering of processes. It is also likely to include “softer” interventions such as empowered operating-level employees, and improved communication.

B2B Bottom Line – Get it Right First Time

When you read Hübner’s article in detail, it’s hard to come to any other conclusion than the only successful way of ensuring loyal customers is to prevent service failures from happening in the first place. That’s the same conclusion as in my earlier blog.

Easier said than done.

That means going back to the old principles of Total Quality Management (TQM) and “getting it right first time”. Remember that it’s easier and cheaper to build quality in at the start than it is to firefight when things go wrong.

Apologies are not sufficient (but they do matter)

A final thought: even when B2B service providers do everything to prevent service failures, they still happen. When they do, act quickly and learn how to say sorry, even if an apology on its own has limited value. 

Contact us if you want to find out what your clients think of your service. And if you’re not sure how to say sorry, our friends in Corporate Visions may be able to help!

Kainos, Revenue Growth & Net Revenue Retention

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Kainos, Revenue Growth & Net Revenue Retention

Kainos, Revenue Growth and Net Revenue Retention

What Drives Revenue Growth?

For much of 2022, I’ve been discussing the topic of revenue growth with senior executives of B2B companies.

What drives it? What capabilities do companies need for growth? Is Net Revenue Retention (NRR) a good predictor of profitable growth? If not, what is? 

One of the most interesting discussions I had was with Brendan Mooney, CEO of IT services company Kainos. The reason I was keen to have a chat with him should be clear when you look at the table below.

Table 1. Revenues at Kainos, excluding acquired companies (£m, 2015-2022)

Kainos Revenue

NRR Explained

Net Revenue Retention is not yet a commonly-used financial term in business even though it is a well-known term in Software as a Service (SaaS) companies.

Let’s look at Kainos’ revenues from a NRR perspective. Let’s group revenues by the year in which they were acquired.

The graph on the right shows that in 2015, Kainos generated revenues of £61m.

Now suppose Kainos signed up no new clients in 2016. Its revenues would still have grown as the clients that were on its books in 2015 generated revenues of £68m in 2016.

Here’s the NRR calculation:

Kainos’ Net Revenue Retention for 2016 is:

NRR = £68m ÷ £61m = 111%

Kainos NRR net revenue retention


NRR At Kainos

Kainos may not be a household name but since it floated on the London Stock Exchange in 2015, it has been growing revenues organically by 20-30% a year. That’s 20-30% a year every year. Without fail. How many companies can claim revenue growth like this over the past eight years? 

I certainly know of very few companies with such a track record. Some of our own clients at Deep-Insight are struggling to achieve any organic growth at the moment. So that’s why I wanted to talk to Brendan. I was really curious to find out how Kainos achieved such consistent growth. What was their secret sauce?

It turns out that the real secret to Kainos’ phenomenal growth is their great Net Revenue Retention (NRR) rates but, more importantly, those NRR figures are the outcome of consistently excellent service delivery for their clients.

Large B2B companies with NRRs consistently above 100% can be considered ‘very good’. Any company with an NRR above 110% should be considered as ‘excellent’. Brendan Mooney sets the bar higher and believes you need an NRR of 115% to be considered ‘Best in Class’.

Kainos is a high growth, high profit company precisely because its NRR figures are so strong. In its eight years as a publicly-quoted company, its NRR has only once dropped below 100%. In 2019, it hit 139%. Kainos is certainly ‘Best in Class’ and is a role model for any company trying to achieve above-average revenue and profit growth.

NRR is not a difficult concept to grasp but few senior executives truly understand the power of monitoring their company’s NRR performance. The reason for this is that most B2B leadership teams don’t understand how much it costs to land a ‘Net New’ client (brand new logo). If they did, they would become obsessed with retention in general, and NRR in particular as a key metric to monitor.

Which is More Important: Land, Expand or Retain?

Many companies grow revenues by investing heavily in new sales. It works. But it’s expensive – much more expensive than people think. Our analysis at Deep-Insight shows that it typically takes 4-6 years to break even when you sign up a new client. If CFOs and leadership teams measured Customer Lifetime Value (CLV) – and most don’t – they would realise that a significant proportion of their clients never make a profit. The reason? They don’t hang on to those clients long enough for them to pay back the acquisition cost and break even.

In some cases, a company’s ability to Land a large number of ‘Net New’ clients each year can mask a failure to Expand its footprint across those accounts, and/or a failure to Retain those clients over the longer term. 

Companies can grow revenues by investing heavily in new sales but it’s difficult to stay profitable if all you’re doing is replacing existing clients with expensive new logos, many of which never stay around to generate a profit. 

So why is NRR so important? The answer is that you can achieve growth with an NRR performance well below 100% but it’s rarely sustainable. Profitable growth always trumps revenue growth. Expanding and Retaining are far more important activities than Landing.

Who Needs New Clients Anyway?

Here’s another thing: if your NRR is consistently above 100%, you don’t need ANY new clients to grow your business.

Just think about that for a minute. I’ve said that it’s expensive to acquire a new client in the first place. It’s not just the cost of the salespeople who win the bid. You also have to factor all the time and money they spend on bids that they DON’T win. 

We’re not suggesting that companies disband their sales teams. We are suggesting that they become much more discerning in what they bid for, and once they sign up a ‘Net New’ client, they need to organise themselves to retain those clients for, well, pretty much forever. They also need to figure out a good strategy for expansion across that account – finding additional products and value-added services to cross-sell.

And that’s what Kainos does really, really well.

From Campus Company To FTSE 250 Star

Let’s get back to Brendan Mooney and Kainos. Brendan joined the company as a trainee software engineer from Ulster University in 1989. 

At the time, Kainos was a small university campus company with around 25 employees. It was a joint venture between Fujitsu and Queens University, Belfast. Most of its work was for Fujitsu in Great Britain. Brendan was one of two graduates hired from Ulster University that year. Both still work at Kainos, which might give a hint at why the company has been so successful over the years.

Brendan started working in Dublin in 1994 as Kainos started to expand its footprint across the island of Ireland. In 2001, he took over as CEO. Roll forward a few years. In 2015 Kainos floated on the London Stock Exchange. Today it is a constituent on the FTSE 250 Index. 

I asked Brendan why Kainos was not as well-known as other IT service providers, despite its hugely impressive track record. His answer was simple: “We do our best marketing by delivering for our customers”.

In terms of brand awareness, our customers – and those who we want to do business with – know us quite well. We’re also probably well-known inside universities because that’s our heritage and where we target students for recruitment. But yeah, I guess we don't have a particularly high public profile.

The thing is that we do our best work by delivering for our customers. That’s where we put our energy and enthusiasm, and that gives us the results and recognition we’re looking for. For us, it’s all about the ongoing relationship with our customers.


Engage, Deliver, Grow

When I talked to Brendan Mooney about Landing, Expanding and Retaining clients, he said he preferred to use a different phrase: Engage, Deliver, Grow. 

His explanation goes to the heart of the NRR/Growth challenge, and it’s a hard-nosed commercial view. Kainos is very focused on profit margins – particularly where there a likelihood of margin erosion. In Brendan’s view, the best way to hold profit margins and reduce erosion is to manage Engagement Efficiency. Here’s how he defines it:

So you've made promises during the sales campaign. Now you have to deliver against those promises and commitments. And if I think about profit margins in a contract, there are three points of margin erosion in a ‘Net New’ client – three areas where you incur additional costs or give away margin.

COST NUMBER 1 is the cost of a sales team. Good salespeople are well paid. They have a pre-sales team that supports them. They don't win every bid. There's the lost business cost you need to factor in as well. So that's cost number one.

COST NUMBER 2 is competitive pricing. For a ‘Net New’ client, it’s typically a competitive bid. It doesn't matter how disciplined you are as a sales professional, your instinct will be to price more keenly than the competition in order to win. The client will always tell you price is a problem, and you know it’s going to be part of the conversation with a professional procurement team...

But actually, COST NUMBER 3, which relates to ‘Engagement Efficiency’, is the key one. That’s what drives our view about the reciprocal nature of a long term relationship. Because we've had a significant cost in winning that client, we want to see that client retained 15 or 20 years, obviously even longer. Then what do you do? You put a really strong team on that first engagement. When you start any new project, you don't know the client very well. But are they sure about their outcome they're trying to achieve? How competent are they as an organisation to deliver their part of the overall project plan? And if they're using third party suppliers, how responsive will they be in that project? We can't control all those factors but we can control the quality of our people. So we put on a very experienced team for that first engagement to provide us some degree of flex, in case anything happens, which it usually does.

 

In summary, Kainos stacks the initial engagement with very experienced people. That’s precisely because Brendan Mooney knows that if something can go wrong in those initial months, it probably will. Kainos needs experienced people to be able to handle all eventualities and still deliver a really successful Phase 1 of the engagement.

Once that initial phase has been delivered, Kainos can change the mix on the project team. But that initial phase is crucial to build Kainos’ reputation. It will build the trust their clients have in Kainos as an organisation and as a true business partner. 

Get the Engage and Deliver elements right and the Grow piece becomes a lot easier.

Getting The Balance Right

And if it sounds like Kainos is purely a company focused on numbers and profit margins, it’s not. Brendan Mooney was quick to point out that “it’s all about balance”. 

As a business, Kainos sets out three ambitions, all of which are important, but they do have a priority order.  These are, in priority:

  1. Being a great employer
  2. Delivering value to our customers 
  3. Being a growing, profitable and responsible business

The apex of Kainos’ pyramid is its people. It works hard at keeping the talent that it has, as well as attracting more great people.  Unlike its NRR rates, Kainos can’t achieve a people retention figure of greater than 100% but its current figure of 86% compares well against the market.

Growth = Consistently Good Service Delivery

When it comes to that third point about growth, Brendan’s philosophy is simple: “If you want to build your business, keep your current clients. Then you can expand in terms of the other share of their expenditure. That’s our thought process.”

And at the heart of that philosophy is a drive and obsession with delivery excellence. Consistently good service delivery helps build trust and commitment and those elements are the key to any long-term business partnership.

I joined an organisation that was young but had a very mature view about delivery. And it was about the premise that if you delivered to your client and you helped them achieve their business objectives, then they would come to you in the future to place business with you.

For us, it's all about delivery – I can't explain it another way. So it's not a complicated concept at all. But the important thing here is the delivery.

Our sales team will always point out that the reason we won that bid was because of our delivery reputation. The reason we won a DEFRA contract for £54 million was that we did Phase One so well that the client was just blown away.

Or the reason that we had a £92 million contract with the Passport Office in the UK was that for the previous four and a half years we had managed to beat every single deadline they'd set into their plan.

And we're easy to work with – that's important too. But if you don’t have that delivery capability, it’s so much harder for any sales or account manager to win. And again, it's a community that self-references quite quickly.

The UK is a bigger place than Ireland, but it's not an enormous place. People will be able to find out about you quite quickly, if you fail to deliver a project.


Key Takeaway

In my interview with Brendan Mooney, we covered a few other topics as well. We talked about how it wasn’t all plain sailing, particularly during the banking crisis in 2008 when many of Kainos’ clients were financial services companies; how they diversified into international markets and made the strategic move to start supporting Workday clients; and the more recent move into digital transformation and agile software development practices. 

However, the key takeaway from my interview with Brendan Mooney was this: If you want to grow revenues consistently over time, you need to have a really well-structured approach to engaging with the right clients, and then delivering the goods for them time after time after time.

It’s not rocket science. But that doesn’t mean that it’s easy.