Gaming and Cheating in Business – Why Companies Always Lose When They Cut Corners

The Short Term or the Long Term

I’m often asked by young managers whether a given decision should be made for the short-term or the long-term well-being of a company; and I always give the same answer: both. No matter what the issue is, the ultimate decision should weigh the pros, cons and consequences over both the long and short terms.

That is not to say that I think that both are equally important – on the contrary – there is no doubt that the long-term health of a company is always more important than the company’s short-term health. Always. Always. Always. And, before you argue that without short-term strength a company will not have a long term; I’ll concede that you are right… and that you just proved my point.

Short-Term Health v. Long-Term Health

While the argument for short-term health versus long-term health may rage in your office, the truth is that no decisions ever really come down to an either/or – it is not a simple dichotomy. Sound company decisions always weigh long-term health against some potential short-term gain or loss. For example: do we take the gain today knowing that we will lose something (but not everything) in the future?

A decision made in favor of a company’s short-term viability so that this same company can be around in the future is indeed a decision made for both the short and long term. I would argue, in fact, that the company’s long-term health was likely the primary deciding factor in choosing the short-term strategy. You simply cannot make short-term decisions that disregard the company’s long-term well-being and expect to be in business in the future.

Short-Term Health v. Short-Term Wealth

Is it short-term health or short-term wealth you seek? Before you tell me that the two are never mutually exclusive, let’s ask the former executives of Lehman Brothers.

Because nearly all of us are paid more on the short-term outcomes we drive for our companies rather than what we provide over the long term, it is easy to see why some companies will game and cheat to maximize short-term revenue at the sake of long-term viability.

“It is difficult to get a man to understand something, when his salary depends upon his not understanding it.”

We’ve previously shared this Upton Sinclair quote and it is as fitting in this context as it was in earlier posts. Why would middle managers even begin to try and understand the importance of a company’s long-term viability when 99% of their compensation is related to the short term? We should not be surprised, then, that many companies – and even whole industries – routinely mortgage their futures for the sake of a few dollars today. (Mortgage indeed.)

Gamers and Cheaters – Hall of Shame

While there are a number of industries that routinely cut corners to drive a few short-term dollars to their bottom lines (the banking and casual dining industries come to mind immediately), we decided to focus the remainder of this article on two specific industries that habitually game and cheat, and still don’t get it.

The first industry is known in the automotive business as “Third Party Lead Aggregators.” Basically, these companies acquire contact information from consumers who are reportedly in the market for a car, then sell these as leads to automotive dealers.

Because the aggregators sell leads at a fixed price to car dealers, though purchase the leads from their affiliates and the open market at variable prices, the push to achieve a suitable margin (in the short term) means that the aggregators must purchase a significant number of lower priced, lower quality leads to mix in with a few higher priced, higher quality leads. While this behavior results in greater short-term profits, it comes with an increase in customer churn and a reduction of long-term loyalty.

Think of it as watering down the lobster bisque. In the short term you make more money, though over the long run people stop coming to your restaurant.

What About Watering Down the Herbicide?

There’s actually an acceptable practice in business for cheating and gaming one’s customers known as the Least Noticeable Difference (LND). This is a product strategy that involves improving gross margin via minute degradations to the size or ingredient quality of a product. The key is to ensure that the quality or size is reduced just enough so that most consumers will never notice.

The other cheating industry we wish to highlight is one that seems to thrive on making LND changes (on a weekly basis). Welcome to the lawn service business. This industry is dominated by national players like TruGreen ChemLawn, Scott’s and ServiceMagic; but also populated by countless local players with such creative and fun names as Grasshopper Lawn Service and Bizzy Bee Lawn Care.

You can’t blame this group for cheating. All of their customers live in nice homes and hire someone else to cut their lawns and kill their weeds – i.e., they’re not really paying attention. Additionally, much of the work in this industry involves spraying a clear liquid on grass; the results of which are not realized for weeks. Who wouldn’t be tempted to cheat and water down the herbicide?

Over the last few weeks the crab grass began to spread (again) in our yard. As we seem to have to do every few months, we called our lawn service to complain. What did they do? The same thing they always do: They apologized profusely, blamed it on the “increase in rain” and promised to come out “tomorrow and treat the lawn again, for free.”

“Not good enough,” I replied. “You’re fired.”

While most of their customers are probably fooled by their reactionary customer service and gladly allow them to continue, we simply could not reward this gaming and cheating behavior any longer. The truth is they simply don’t use enough herbicide during their weekly treatments to be effective, and they know it. They’ve watered it down to maximize their margins and they’re crossing their fingers that you’ll never notice. If you do, they simply apologize and “give” you an immediate treatment for “free.” What they’re actually giving you in this one-time treatment is something they should have been giving you all along: Quality.

LNDs: No One Can Eat Just One

Used once, an LND strategy can be an effective way to make a nice short term improvement to profits. Unfortunately we generally assume (incorrectly) that we will make these changes only when most customers will likely never notice. Like crack cocaine or Lay’s Potato Chips, we sometimes become so addicted to making these LNDs that we can’t stop until it’s too late. Our customers have left us and they’re not coming back.

Make no mistake, we’re not naïve. We understand that there are plenty of business gamers and cheaters who are successfully pulling the wool over the eyes of their gullible customers every day – and have done so for years. Whether it’s from collusion or a lack of competition in their industry, these businesses have (so far) been able to operate in a vacuum; living high on the hog via a long series of short-term decisions.

Odds are that this cannot last; that the customers will revolt or a new competitor will enter the fray offering real value. Whatever happens, rest assured that it will indeed happen, and that by the time the gamers and cheaters realize it, it will likely be too late. (At least that’s what we hope.)