Apr 182008

Patrick Bryne: How I Screwed Up At Overstock And How Our Customers Fixed it

patrick bryne

One of the absolute best presentations I heard at Shop.org Marketing Workshop last week in Scottsdale was the keynote by Patrick Bryne, the CEO of Overstock.com.

In his talk, he described how Overstock "came of the rails" due to growth and tech snafus, and how refocusing on the customer saved the firm and returned them to growth and profitability.

Patrick's key tip:

Take your toughest meanest most uncompromising exec and put her over customer service.

For example, at Overstock, Customer Service has the power to pull SKUs off the website if they deem the item unacceptable from a returns or complaints level -- and this is without checking in first with Merchandising!

Patrick also praised Reicheld's Net Promoter Score. That resonated -- our firm tracks NPS too and places great value in the responses.

Here are my quickly scribbled notes from Patrick's excellent keynote:

Patrick Bryne, Overstock 4/9/08 Scottsdale AZ

'How I screwed up at Overstock and Our Customers Fixed it'

Safe harbor disclaimer

800K skus, 840 EEs, 550 partners

IPO 2002

25th of IR100

89% CAGR 2000 thru 2005 reaching $1B in 5 years

very small capex

squeezing a penny, duct tape, 'running on shoelaces'

grown to $500b (?) on a capex of $2m inception to date

started investing capex in 2004

had to shut down parts of site at xmas in 2004 due to load

accounting team coming in to work at midnight to 6a so as to not tax system

‘then the shoelaces broke’

in 2005, convinced need 'forklift upgrade' in IT

forklift upgrade: buy so much new hardware / software it comes on a forklift

we spent $44 mil in 2005 capex, competing w/ folks who spent $1b/ year in tech

upgrades went disastrously

concerned we couldn't make it thru xmas 05 without 3 big system upgrades

each of 3 upgrades was a 18 month project itself, yet we did all in 6 months total

disaster, ‘came off rails’

growth collapse, we began to shrink, lose top line

when your revenue shrinks like that, need to cut op. ex.

really hard to cut op. ex at same speed as accelerating tailspin

inv turns down

tech expense up -- these investments require additional investment,

you have to keep funding these things, tech expense still up 100%

EBITA went from positive a few million to negative 30 mil

the most important number is net promoter score

reicheld’s ultimate question

average NPS is 8%, overstock at 60% NPS

before tailspin, NPS among folks who talked to us 0%

when after we went into tailspin, NPS across customers who contacted us fell to -37% NPS

the financial problems are disastrous, but NPS problems worse, that is where it starts

OVSTCK not named among top 200 customers in terms of cust service

three envelopes joke

env #1: blame the employees

env #2: blame the market

env #3: prep 3 envelopes

so we considered culture

everything that has gone wrong over the years has been when we didn't put enough into corporate culture

corp culture:

* "saving paperclips" -- it isn't the saving, it is the attitude

* "be - know - do" --> from army -- google the phrase ‘skills of being a soldier’ the most leverage comes from who the person is, the "be" where you get the biggest payback spend time selecting people who wouldn't be political, etc we lived off our fat stores for a while

* customer-centricity

we were too product focused, and not customer focused

there is so much more math you can do on SKUs, customers are more touchy-feely

more and more analytics get developed to non-customer metrics, this is the natural course and must be fought

one principle on how to be customer-centric:

"take your toughest meanest most uncompromising exec and put her over customer service"

she debates with me all the time

you put that person over customer service and the whole company adapts

customer care knows where the bodies are buried

'lets track returns by category, and look into anomalies' --

eg furniture buyer is buying beds and too many lack all the parts

if too many customers call in angry about the missing bed posts, now CS has power to take it off the site

"we've have too many complaints about this line so we took a million dollar line off the site"

more power to the CS department

it has tremendous impact, letting CS take SKUs off the site

it doesn't back on the site until CS signs off as OK

save yourself returns, save angry customers, and buyers get mad -- so be it

we let CS knowledge drive our programs and fix our prcessed

"they know where the bodies are buried"


one year later, OVSTCK was 4th in named as giving great service

bean, zappos, amazon, overstock

we're in the top 4 when you ask 8000 random customers "who gives great service"

this all comes back to putting the right exec over CS

we got tech expense under control, in fact we cut tech spend 30% Q4-2007

revenue finally crossed opex

we'll be announcing our numbers for Q1 soon

inventory turns turns spiked and then dropped and stabilized, after flushing out the ground

EBITA is positive again, though modest now

that valley of EBITA dip on that chart is quite a story, that's 20 years off my life

'How I screwed up at Overstock and Our Customers Fixed it'



3 Responses to "Patrick Bryne: How I Screwed Up At Overstock And How Our Customers Fixed it"
Wes Wilkins says:
I was also at the Shop.Org show, and very much enjoyed Patrick's presentation. It was interesting for several reasons, but the fact that he was open and honest about troubles with the company's performance was a refreshing and humanizing change of pace (a rarity among C-level execs). It's probably because of this approach that the problems were able to be fixed at all. It also brought to light the importance of customers service and a customer-centric approach. It's amazing how easily we become overly subjective in our organizations and forget the fundamental reason our businesses exist.
Jim Novo says:
What's interesting to me about this story is this: it ended up being Customer Service (a.k.a. Chief Customer Officer) that stood up and made things right rather than Marketing / the CMO. Where was Marketing during this whole thing? Where was the customer analysis showing the wheels were falling off? Lack of repeat purchase / dis-engagement, by category, ad source, etc? "MarCom" is not Marketing. Will be interesting to see if this becomes the trend, Marketing reporting to Service rather than Service reporting to Marketing. Somebody has to do this customer advocate job in an Interactive business, the financial stakes are much higher than they are when the business is not Interactive. Markeing is supposed to be the expert on the customer. Will they step up, or will they continue to buy media, make pretty ads, and wave social media banners while Customer Service takes over the Strategic Role?
Patrick was a great and inspiring speaker. They released Q1 results yesterday afternoon and their stock is up 29% as of mid-day today (4/18). Revenue increased 27% and gross profit went up 37%. One other interesting tid bit from his presentation was related to their upcoming international launch. For their international operations, they are running customer service from Utah. Why? Because Latter-day Saints, which make up a big portion of Overstock's workforce, speak multiple languages.

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