News Release
Welcome to HARD TIMES
Incentive Magazine, May 2001
SO IT SEEMS THAT THE LONG-DREADED DAY IS HERE. THE ECONOMY HAS FINALLY HIT A SNAG THAT ALAN GREENSPAN CAN'T UNTANGLE. BUT IT'S NOT THE END OF THE WORLD. IT'S JUST TIME TO GET SERIOUS ABOUT MOTIVATION-AND INCENTIVES - By Vincent Alonzo
The U.S. economy has ground to a halt. Or has it? The sheer screeching rapidity of the slowdown from 5.6 percent GDP growth in the second quarter of 2000 to 1.4 percent growth in the fourth quarter has put an end to the rising stock market that made for giddiness all around.
But are things as bad as everyone thinks? Federal Reserve Chairman Alan Greenspan gave an optimistic assessment to Congress in February. He stated that while December was a month of contraction, the economy actually grew in January. At the time, he concluded that the economy was struggling, but still growing.
A month later, Greenspan was more cautious. In his statement to Congress on March 21, the day he lowered interest rates, he said: "Although current developments do not appear to have materially diminished the prospects for long-term growth in productivity, excess productive capacity has emerged recently. The possibility that this excess could continue for some time, and the potential for weakness in global economic conditions, suggest substantial risks that demand and production could remain soft."
Translation: Consumers have stopped buying so salespeople can't sell. This leaves warehouses filled with unsold inventory, which causes factories to slow down production. Here are the grim facts:
The University of Michigan index, a noted consumer confidence poll, has fallen 15.8 points since November.
According to the Census Bureau's Bureau of Economic Analysis (BEA), the value of manufacturers inventories rose from $460 billion in January of '99 to $493 billion in December.
Finally, Federal Reserve statistics show manufacturing growth contracted from a rate of .6 percent in August of 2000 to negative .9 percent in December.
On the up side, these are all areas where incentives can be used to improve performance and influence behavior.
Here's a look at how incentives can be used to help companies stay competitive this now struggling economy.
Where have all the consumers gone?
Consumer confidence-and how it affects spending-is the single biggest factor standing between a mere downturn and a full-blown recession. The Conference Board index, another closely watched survey of consumer confidence, is unnerving. The Conference Board index sank to 106.8 in February from a peak of 145 last May, the lowest level since 1996. The plunging stock market has frightened almost everyone, especially those consumers who know they spent too freely when times were good. Now they're haunted by what could happen if things go bad. If confidence continues to decline and spending contracts sharply, the first recession of the 21st century seems inevitable.
What's the best way to keep consumers spending? John Farrell, the senior director of channel marketing for the Carlson Marketing Group, says forging a strong relationship with the consumer is an important part of the equation. "Consumers can become very unpredictable and more price sensitive when they are financially squeezed," says the Dayton, Ohio-based Farrell. "At the same time, research indicates that consumers who have a loyalty connection to a company are less likely to abandon that company during tough times. Defection rates are lowest among active loyal customers and highest among customers with out affinity. A loyalty program is a proven strategy to curb churn, maintain market share and build a brand. From rewards to communication to special offers, it is paramount to keep loyalty programs fresh and visible."
But how can a company that doesn't have a customer loyalty program already in place keep its brand in the minds of consumers? Frank Fennell, president of Fennell Promotions Inc., an Atlanta-based incentive firm specializing in loyalty programs, has seen many of his clients in this situation opting for sweepstakes programs. "It's an inexpensive way to quickly connect with the public, and that's what companies that don't have an established loyalty strategy have to do right now," says Fennell.
Slumping sales
It's simple cause and effect: If customers, both on the consumer end and on the business-to-business side, are not buying, that means salespeople are not selling. Everyone is alarmed by the sudden dip in sales. Even the best projections for 2001 are calling for a soft first half. That's leading some companies to reorganize to control costs. "On the sales and marketing side, some companies are reducing their dependence on field sales forces," says Joan Milczarski, group practice leader of the seminar division for the American Management Association (AMA), who specializes in manufacturing, sales and marketing issues. "The sales rep channels are remaining in place for high-end sales, but lower-end sales are being shifted to telemarketing, the Web and other less expensive kinds of media. This is a trend that pre-dates the current economic slowdown, but it has been exacerbated by it."
This reorganization has led some companies to increase the level of training of their sales force to compensate for the increased reliance on technology. "In a recession environment there is a greater need to respond to changing conditions," says Carolyn Adier, senior vice president of Global Learning Systems, a McLean, Va.-based e-learning and training company. "E-learning solutions are a cost-effective and time-efficient way to retool a sales force."
According to Wendy Cohen, director of e-learning for the AMA, e-learning enables organizations to hit larger numbers of employees in a shorter period of time. "For timely information that must be absorbed by a critical number of people in a short period of time, e-learning is the ideal medium for that," says Cohen. "If the economy is shifting, it's a good way to quickly educate a lot of managers on how to do their jobs in a new market."
Apart from training, motivation for salespeople also increases in importance in a tight economy. Farrell says sales-channel partners are a company's most vital link to the marketplace, and in many cases a company is only as strong as its channels. "Channels often look to their corporate partners for added support and leadership during tough times," he says. "Market development funds, lead management systems and sales incentive programs are important components to keep healthy, committed channels. It's important [for an organization] to stay close to [its] channel and help them stay close to the end customer. "
Many companies make the mistake of curtailing or even eliminating sales incentive programs when the economy goes bad. But according to Fennell, the smart companies are the ones who stay aggressive. "There are a few companies that don't understand that now is the time to be accelerating incentive usage," says Fennell. "In a strange way, this can actually be an opportunity. During a downturn in the economy, a company can really make an impact on a loyal customer that will pay huge dividends down the road when the economy turns around and the customer has even more money to spend."
Right now many companies are implementing points-based loyalty programs for their b-to-b channel partners. Fennell created one for an auto finance company at the end of last year when all the auto manufacturers were reporting losses. "We implemented a points-based program and they've submitted more loans in the first two months of the program than they did in the entire last quarter of 2000," says Fennell. "Now is the time to step up and make an impression on your channel partners."
Another common mistake companies make when sales slip is to downgrade the quality of the incentive awards they offer. That kind of a strategy can backfire, especially when dealing with top salespeople who earn a lot in commissions. "Now is not the time to decrease the motivational impact of a travel award," says Sandy Cutrone, president of European Connection/Vista Travel Consultants, a Mineola, N.Y.-based incentive travel company. "Offering incentive participants a travel experience that they could just as easily purchase themselves as a tour package is not the way to motivate someone. The best strategy is to keep the level of the award high and have fewer winners."
Fennell's company is currently in the process of revamping the award structure of programs for several clients. In one merchandise program, the awards start out very low and progress to the top of the high end. "It's important to keep offering top awards for maximum motivation, but lowering the bar on the other end ensures that salespeople who are struggling still have something to shoot for realistically," he says.
If productivity fades, we're toast
Perhaps the most fundamental question facing the economy is whether the resurgence in the growth rate of productivity will hold up.
Back in 1994, when the Federal Reserve last attempted to bring the economy in for a trouble-free soft landing, Greenspan suspected productivity growth was about to take off. As everyone knows, the Fed chief proved right and the New Economy was born.
Now, as Greenspan tries to engineer an unprecedented second soft landing, he's again banking on stronger productivity to save the day. Back in October, he argued that productivity growth was still picking up steam. His optimism was driven by a belief that companies have yet to fully tap the efficiency gains from the huge wave of technology spending during the last several years.
But this time his luck may be running out. The BEA has reported that capital spending-the driving force behind the productivity boom-slowed sharply in the third quarter of last year. Even Greenspan now admits that the situation is serious. During his recent report to Congress, he stated: "Unless we can close the gap between supply and demand by accelerating productivity, the prosperity everyone is experiencing would be put in great jeopardy."
The consequences can be ominous. "Some companies seeing a lot of inventory build up are taking steps to reduce costs in production," says Milczarski of the AMA. "In extreme cases that can result in layoffs."
A quick incentive solution to the bulging inventory problem is the classic double-points technique. "Many of our clients dealing with overstocked inventories right now are offering their sales channel partners double- and triple-points for purchasing back-logged items," says Fennell. "It's having a huge impact in some cases.
If that doesn't work there will be layoffs-followed by reorganization so those who are left behind can still get the job done. Again training is a big part of the solution and e-learning seems the quickest way to get it done. "If you're not sure which way your industry is going, you need your employees to have diverse skills," says Adier.
People come into these situations with a great deal of fear. They see co-workers losing their jobs and then they are being asked by management to take on additional responsibility. "In this case, training can become a real motivator," says Adier. "Ironically, training almost becomes a recognition award. It lets the worker know that the organization values them. You don't train people to let them go. You train people because you want to keep them."
Communication is also important. Understanding the big picture becomes a need for employees of all ranks in the organization. "People need the information that will help them figure out how they can help the company," says Andrea Ladanza practicing leader for general management for the AMA. "Management should increase communication during these difficult periods. Let people know what the goals are. You get more buy in at the lower levels and more creativity through increased communication. When they don't hear anything, fear sets in and that's when they jump ship."
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Fennell Promotions Inc.