Gervais Williams and Martin Turner
Why we believe outstanding customer service is a vital aspect of investment selection
This update should not be taken as advice. If you are unsure about any of the content, please contact your financial adviser. Please remember that the value of stock market investments will fluctuate and investors may not get back the original amount invested.
During globalisation – which saw the increasing integration of economies around the world – global economic growth was reasonably strong, corporate profitability was relatively consistent and as a result, businesses succeeded. We are seeing this background reflected in the presentations used by company management in meetings with shareholders, which tend to focus on their current trading conditions and the strength of their balance sheets. In our view, it is interesting that some of the more intangible aspects of the business are rarely detailed, perhaps because management teams rarely get questions on some of the more nuanced aspects of running a business.
Unfortunately, with both inflation and interest rates now rising, future trading conditions are likely to become more testing. When choosing investments for Miton UK MicroCap Trust’s investment portfolio, meeting company management is fundamental to the selection process, as it provides us with the opportunity to question a company’s strategy, understand the particular challenges and opportunities of the markets in which it is operating, and examine its financial position. However, our meetings typically extend well beyond this. Access to a company’s management offers a vital opportunity to comprehend their underlying motivation, and the risks that they may need to take in order to succeed.
Outstanding customer service
In our view, those organisations that have high customer service ambitions embedded in their DNA should have a greater chance of maintaining profit margins as economic conditions start to get tougher. Yet since most management teams claim they place a high priority on customer service if asked, how can we really gauge those with a genuine motivation versus others that are less assiduous?
A good question in our view, is to ask the leadership teams what percentage of their boardroom reports focus on customer service data. Generalised answers lead on to additional questions: What percentage of deliveries/service calls were addressed in full and on time last month, how does the data compare with the same month last year, and how much does the data vary across different divisions of the business? Quite quickly, executive management teams that aren’t wholly knowledgeable about their customer service data come unstuck.
If leadership teams genuinely live and breathe a desire to deliver outstanding customer service, then they really need to care about how they help their front-line staff to succeed. So we follow up with questions identifying whether the business has recently carried out a staff survey – a ‘pulse’ survey about how many staff are happy to return to the office isn’t sufficient. We take particular note of staff Net Promotor Scores for example, which measure the degree to which individual employees would recommend to their friends that they should consider joining a business.
In short, we believe that questions over areas of nuance like this help us to identify which businesses are genuinely well placed to maintain their profit margins and generate surplus cash even during an economic downturn. Although a level of customer service doesn’t automatically imply a business can withstand pressure on its profit margin, it can put it in a better position than one that is less diligent in this respect. Surprisingly often, our questions highlight that the senior management teams operate in a bubble remote from their businesses. Since customer service and profit margins are so closely related in our view, we believe that many businesses that do not pay close attention to how they handle their customers may turn out to be more vulnerable than they expect during an economic downturn. Holdings in companies such as these are largely excluded from the Miton UK Microcap Trust’s portfolio by our investment selection process as a result.