Should the Orchestra Prioritize Cost Savings or Quality? The Cautionary Tale of Howard Johnson’s

One of the recurring refrains of the ongoing Minnesota Orchestra dispute has been the need for the organization to cut costs. It’s easy to see why—the Great Recession has forced nearly every business, organization and individual to economize and to make do with less. The imperative to save money—Save Money!—is widely regarded as self-evident, obvious and somehow immune to challenge. So when the Orchestra ran into financial trouble, there was a natural reaction among many in the community, and many from the Orchestra leadership, to instinctively reach for the budget scissors as the first and only solution.

But although that’s a natural reaction, it may not be the best reaction. Why so? Just look at the instructive example of Howard Johnson’s. Lewis Carbone, a respected business consultant who was on hand during the HoJo’s tumultuous last days, has documented the fall of this once-mighty company and the lessons it provides about the dangers of prioritizing cost savings over a customer’s experience and satisfaction.

I suspect that Howard Johnson is a name—and a brand—you have not thought about for some time. But back the Mad Men world of the 1960s, HoJo was a juggernaut of the corporate world. It was a forward-thinking company, a first-adopter of many innovations that have become standard in the food service and hospitality industries. It recognized the business opportunities provided by the new interstate highway system, and developed a plan to strategically link restaurants and easy-access hotels at key points across the new travel grid. Along the way, HoJo became a pioneering force in such concepts as franchise development, “motels,” theme restaurants and commissary food distribution. It also emerged as an industry leader in the area of customer service, with Howard Johnson personally insisting on legendary, unified standards of customer care that ensured guests felt at home in any orange-roofed HoJo around the country. It was phenomenally successful—in the mid 1960s the chain’s profits exceeded McDonald’s, Burger King, and Kentucky Fried Chicken combined.

So what happened? Why did such a successful company go by the wayside?

Well, there was a change in leadership. The eponymous founder, with his devotion to customer service, exceptional quality, and the highest standards, gave way to a new generation of leadership under his son Howard B. Johnson that adopted a new cost-savings strategy as the guiding principal of the company. The new management also embraced a new way of thinking that suggested the customer wouldn’t be able to discern the difference between a great product and a pretty good product.

At a talk I attended a few years back, Carbone (who worked briefly with HoJo in the 1970s) recalled what happened next. He suggested that one specific change the new regime instituted—the change from a signature 4-ply napkin to a much more modest 2-ply napkin—encapsulated both the thinking behind the new strategy and its unfortunate consequences.

The idea behind this change seemed fairly straightforward: since the napkins were hardly central to the customers’ experiences, they offered a harmless way to save money by cutting corners where no one would notice.

This change, unfortunately, represented the tip of the iceberg. Satisfied at the money saved, the management fully embraced this new culture of cost-cutting, hunting down savings wherever possible. The length of drinking straws was shortened. The number of ice cream flavors was reduced. Cheaper ingredients were used in the restaurants and smaller portion were mandated. Cleaning schedules were reduced, employee training reduced, and building maintenance was reduced.

In short, the company instituted a drive to cut costs in an attempt to improve the bottom line for investors at the expense of the customer.

It is important to note that all of these changes—at first—were slight, and on an individual basis might not have made much of a difference. But as these “minor” cuts continued and pervaded the organization, the customers did notice the overall change in quality and reacted badly. Not openly at first, or with specific calls to, say, bring back the thicker napkin. It was clear, however, that customer perceptions of HoJo began a fundamental shift downwards. Guests felt like they were no longer at a restaurant, per se, but at an increasingly dingy, inexpensive fast food joint… while still being asked to pay the higher prices associated with a restaurant. Eating at HoJo no longer felt “special,” which impacted long-term customer identification and brand identity.

For a while, brand loyalty held firm, but there came a tipping point where loyalty fell away and people took their business to a competitor. Once that tipping point happened, the company entered a death spiral it could not escape. As more and more people abandoned the chain with its dirty facilities, indifferent service and mediocre food, the company redoubled its cuts in order to maintain its bottom line.  By the 1970s the former industry leader was a sad, decrepit mess. Carbone, who witnessed the destruction first hand, writes:

In my observations there was seldom a mention of what was happening to the organization’s most valuable asset as a result of this whittling-away process. The trust Howard Johnson had build up in the minds of its loyal customer over so many years was still significant, even bankable. But as financial difficulties mounted and the organization turned defensive, it didn’t figure into management discussion in any meaningful way.

Lewis P. Carbone, Clued in: How to Keep Customers Coming Back Again and Again. Upper Saddle River: Pearson Education, Inc., 2004.

Sound at all familiar?

Yes, obviously the Orchestra is very different from Howard Johnson’s, and we now live in a different time than the 1970s. But there are many points of similarity—and the Orchestra is much closer to customer service organizations in the hospitality sector than it is to the manufacturing or financial sectors. Both an orchestra and a restaurant are selling an experience. Their “product” is a hard-to-describe, but very real feeling that is woven together from many different elements. And tampering with any one of these elements can lead to disruption of the whole. Much like music itself.

This is not to say that nothing can ever be cut, or that cost savings is inherently a bad idea, but it does serve as a cautionary tale that customers do notice, and do respond to changes in quality. And downgrading quality might buy short-term gains, but lead to long-term problems.  Just think of that the next time you pull into a Howard Johnson’s.

Oh.  Wait….

 

Xochipilli

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8 thoughts on “Should the Orchestra Prioritize Cost Savings or Quality? The Cautionary Tale of Howard Johnson’s

  1. I’m not sure I agree with this analogy. When a company like Howard Johnson’s starts to skimp on things, it’s as you say: to improve the bottom line for the investors and generate more profit. Orchestras are not gleefully cutting expenses to improve anybody’s profit margin. If Howard Johnson’s were at the point some orchestras have recently reached, it would simply have closed its doors. If there is an insurmountable gap between your income and your expenses and you can’t make payroll, you are bankrupt and that’s that, philosophical discussions aside.

    Some orchestras now are at that point. If the musicians of the Oregon Symphony hadn’t just shockingly agreed to give up an entire pay cycle of salary, the Symphony may have had to fold right then and there (although there is always the endowment, whatever you may choose to do with it, which I know is also a controversy.) If anything, orchestras have done the opposite – rather than whittling away at little things to save money, they were profligate in building new halls, taking on big debt, and sometimes agreeing to contracts that guaranteed musicians big pay raises and cadillac health benefits year after year. (Not that people don’t deserve these things, but you can’t bestow them without careful planning and flexibility.) All while ignoring the huge changes to their business model that still seem to baffle a lot of people.

    My point is just that these organizations are far, far beyond the point of putting the scratchy toilet paper in the bathroom just to save money and increase “profits.” Compromising on quality by driving off the best players is terrible, I agree. But so are staff cuts, which compromise the orchestra’s ability to function, sell tickets, and raise money (none of which happen by themselves). So is raiding the endowment. There are no easy solutions, or we would have found them by now. This is a transformational time and the entire industry right now lacks the agility to take advantage of it.

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    • Thanks for writing in and adding to the discussion. Let me share the following thoughts.

      I agree with you that if the Orchestra was truly on the brink of institutional death, minor cuts in quality control would be a non-issue. Management would obviously be legally and morally obligated to take whatever action was necessary to save the institution.

      I think we disagree on whether or not the Orchestra is, in fact, at such a critical moment. The management has certainly tried to make that case. But I believe (and have argued in other posts) that their case is ambiguous at best, and has been sloppily presented. Yes there was an announced $6 million deficit last year… but board documents indicate that the amount of the deficit was artificially selected in consultation with a PR firm specifically to support the idea that a business reset was necessary. Yes 20% of the staff was laid off, but that number included facilities staff that were not needed while Orchestra Hall was under construction. Yes, the musicians continued to get raises even after the market crash in 2008, but they also voluntarily gave money back… and the CEO continued to take similar raises as well. I have no doubt that after 2008 the Orchestra was in a rough situation—every non-profit was. But the points brought up so far have, to my mind, not stood up to scrutiny.

      Plus, there’s the niggling fact that the management launched a multi-million renovation of Orchestra Hall and continued to raise $50 million in the Building the Future capital campaign. I recognize that the money given for these campaigns was restricted, but if the organization was in real danger of dissolving, it was beyond irresponsible to proceed. And if financial catastrophe was looming, why did they not tell donors, or state legislators when applying for bonding money?

      To many, this whole situation feels less like the management has been reluctantly forced to adopt a new business model because of a financial crisis, and more like they’ve created a financial crisis to build a new business model.

      To bring things back to the point at hand (sorry for the long lead-in!), based on this information, I think my analogy still holds. I feel our Minnesota Orchestra closely mirrors the situation Howard Johnson was in around 1970 when it was first starting to adopt its cost cutting program. I’m not convinced we are (yet) at the point where we are staring into the abyss.

      But I fully agree with your point that this is a difficult time and there are no easy solutions going forward. And you’re absolutely right—the organization has to be creative and flexible in dealing with this problem, and this is a difficult transitional time that needs be handled carefully. If the fates allow, I’d like post future blog posts that explore ideas about how to collectively and collaboratively navigate this turbulent time.

      I’m also curious if based on your own background and/or reading of the situation, that there is an analogy that you feel fits the situation better?

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