by Real Business - Thursday, 30th August 2007

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So, nine years ago you set up a company. With an £8,000 bank loan and £80 per week from the enterprise allowance scheme, two of you begin work from a ten-foot-square room above a post office. All you know is that this computer dealership business that you are entering is bound to grow in the years to come. Now (and be truthful), how many of us would have got from there to £65m today? And without giving up control?

You don't call it the head office. That is too old-fashioned a term. Officially, it is the National Distribution Centre, or NDC. For the outside world, it is a gleaming new £3m statement of success, in strong contrast to the neighbouring yet-to-be-redeveloped wasteland. Meet the Software Warehouse.

What hits you first is the buzz. It says that some serious selling is going on. The reception area - just two seats and a small pile of Software Warehouse catalogues - clearly wasn't designed for hanging around. Across the open-plan expanse, young men and women chatter into their telephone headsets. Large sheets of paper have been stuck onto pillars, doors and desking units; on them are scribbled three words "Up-sell, up-sell, up-sell" and a signature "SteveB".

This is the nerve centre of one of Britain's stellar-performing companies. Over the past four years, it has racked up an annual growth rate of nearly 128 per cent, making it the fifth fastest-growing private company in the UK according to our latest "Hot 100" (see March 1998 Real Business).

Sure, you might say, but anyone in this business - selling personal computers, software and peripherals to the general public - is bound to have experienced a powerful uplift in their sales. This is the decade in which home use of personal computers took off.

But Software Warehouse has done more than surf a tidal wave. For one thing, these market conditions mean that any number of competitors have been able to exist for years without making a profit. When you are in mail order, you can go on as long as your loss is less than your turnover; you pay your suppliers on 30 days and charge it all out on credit cards, which normally ensures a healthy sum of money in the bank. The cash-generative nature of the business can disguise a lot of strugglers, all of which are capable of, in Bennett's words, "trashing everything to cost." Competition, of course, is unforgiving and fierce. At its current size, Software Warehouse is not yet in the top ten in its sector. But the bottom line is that this company has grown at over 120 per cent while the industry average is seven per cent.

So, when almost anybody can flog the next version of Microsoft Windows, just what has Steve Bennett got right? The answer is customer service. He is obsessed about it. He measures it every which way he can. He's written a book for the benefit of staff and suppliers, in which most of the content is about customer service, including anecdotes about why he won't be buying his next car from a particular garage and why he loves Marks & Spencer's pick-up service.

But before that hobby-horse, some early history.

The origins
The entrepreneurial adventure began in March 1989, when Bennett set up Elite Computer Solutions with Neil Gandhi in that tiny room above the post office. The original partnership with Gandhi dissolved within a few months, and Bennett struggled to build a laptop computer importing business.

In August 1990, says Bennett, "we were based on top of a clothes-making sweatshop in the worst possible area of Coventry. The offices cost only £2 per square foot, which was all we could afford. You could not imagine a poorer working environment. We had hassle after hassle, theft after theft, and constantly had to work with the drone of sewing machines in the background. The laptops were proving unreliable; I was spending days selling them and evenings fixing them. At one stage we were £30,000 overdrawn and my father was called in to remortgage his house."

That was the nadir. A year later, Bennett went on honeymoon to the US. With two hours to spare at the airport before returning home, he looked for something to read. "I had a load of small change in my pocket and bought a magazine. I flicked through it and there wasn't much in it. I still had a mass of small cent pieces, so I got another one. I was five cents short. The clerk said 'take it, anyway'." In that second magazine was an advertisement that changed his life.

It was for a product called SuperStor, a piece of software that claimed to double the capacity of a hard disk drive. Bennett saw that it could make his laptops infinitely more competitive, which indeed it did. "But the interest was not so much in the laptops but in the software."

Bennett flew back to the US to negotiate a deal with the manufacturers of SuperStor. Holding firm, he agreed a UK landed price of £18 and that he would market it for £99, provided that he hit certain sales targets and did all his own marketing. The new strategy was to dispose of the hardware and become a software-only business. Two trade ads confirmed their suspicion; this was a hot product. "By the end of the first week we were shipping 30 copies a day. Without realising it, we had got into mail order." It also opened countless doors into software and hardware manufacturers.

"It was a new product and we had the majority of the market," recalls Paul Aspinall, who had joined as a corporate salesman. Fired by "sod-all basic pay but good commission", Aspinall landed some juicy corporate deals. "The margins were immense. Those 18 months of market ownership gave us the cash generator we needed."

Of course, the market changed. New competitive products were coming out (notably from a nascent Microsoft) and Bennett was overly dependent on SuperStor. He flew back to the US for fresh ideas. He didn't find a new product but he discovered a new form of marketing - the co-op - whereby mail order companies were persuading software publishers to share the costs of advertising. The result was that the mail order houses could afford to run ten or 12 pages of advertising - far beyond their normal budgetary reach. And it was while sitting on a beach in San Francisco, contemplating this idea, that Software Warehouse was born.

"I flew back to the UK and decided that we had to move quickly into mail order. I put together a ten-page presentation folder and went on the road, visiting the UK's software publishers. Although many were sceptical, I managed to persuade enough of them to place six-page advertisements in two publications." That was in December 1992.

Essentially, what Bennett did was to shift his business from being dependent on a single product with high margins to a mail order firm, working with a wide stock range and margins at or around 15 per cent. But it was getting into mail order that was the kick-start to growth. Just look at the figures: in April 1993, there were 15 staff shipping 55 daily orders; in April 1995, it was 53 staff shipping 390 daily orders; now, it's over 300 staff and some 2,000 orders every day.

The business has not just expanded along the original lines.

In 1995, Bennett launched PC Advisor, a magazine "in plain English." Despite the fact that there were hundreds of computer magazines already available, PC Advisor worked. It rapidly became one of the top titles. In February 1996, he sold it to publishing giant IDG. He then did the same thing all over again, launching a trade title called CTO which he subsequently sold.

Sure, you could say this foray into magazines was "non-core." But it allowed Bennett to recoup some money from his work thus far without taking cash out of Software Warehouse. His independent wealth means that he can tell his staff that he has no hidden agenda. He has set three personal goals: to make his company the best place to work in the industry; to be perceived as the best computer company in the industry; and ultimately to be the largest computer reseller in the UK.

Ambitious aims. But how's he going to do it? First of all, he's beefing up his efforts to sell into the corporate sector - any company or organisation that currently owns between 50 and 2,000 personal computers.

The drive to open more retail stores goes on. At present, the 15 stores account for 25 per cent of turnover. Retail director Linda Redmond is planning on another wave of expansion in the second half of this year. "We want secondary sites in city and town centres, of around 1,500 square feet," she explains. "While it's important to have foot traffic, it's just as important that you can drive past our sites."

The retail outlets have been transformed by another relatively new aspect to the business - building own-brand personal computers. Bennett had looked at supplying one of the powerful household names, such as Compaq or IBM, but deemed the margins (at three or four per cent) too tight. "You can sell a box at those margins," he argues, "but not a service."

Under the names of Tashika and Northwood, Software Warehouse now supplies its own range of personal computers and peripherals. (It sells others' laptops). One of the advantages is that the presence of computers in their stores is increasing the average sale, which has been around £150. "If we didn't have Software Warehouse, we would never make computers pay. But to make the shops profitable, you need computers. As soon as you put them in, they become profitable."

There are Internet booths in the newer stores. All of the outlets have "upgrade centres" and technical advisers. Shoppers can also have SWOT, the Software Warehouse Operations Team, call round and install computers for them. "We recognise that there are growing numbers of older, retired people coming in, as well as small businesses. If you attract people who aren't as computer-literate as our mail order shopper, you have to look after them," says Linda Redmond. It's the kind of service that Bennett believes will become the norm as the industry wakes up to customer service.

Online, the company has been adventurous. It was early onto the Internet, at the beginning of 1996. It has become an Internet service provider. And, last year, it launched Download Shop, the first of its type in the world. Order a piece of software and it will be downloaded onto your computer in an encrypted form. As soon as your credit card is approved, the software is decrypted and an invoice automatically comes up on-screen.

Learning to talk
"How do you carry on communicating when you have got 300 or so staff when two years ago you only had 50?" Bennett asks. "How do you learn to communicate? How does everyone share the same vision and pull in the same direction?"

First, you think about it. Then talk to some people. Bennett had dinner with two retailers he admires, Julian Richer of hi-fi retailers Richer Sounds and Charles Dunstone of Carphone Warehouse. Richer's advice was to conduct a staff attitude survey. The more you grow, the less you can rely on talking to people face-to-face if you want to get a straight answer, was their message.

The survey yielded some surprises. "I thought that we were legendary at communicating," Bennett recalls. "We have monthly newsletters, e-mail, annual parties, but people still felt that they didn't know what was going on. And only 23 per cent strongly agreed that I was easy to talk to, but my door is always open. So I learned that no matter how much on the level you are, people are still frightened to talk to you." On the other hand, 99 per cent said that they were proud to work at Software Warehouse.

Bennett's answer has been to write a book. He's had 2,000 copies printed. It's called Serve to Win. And it's not only his way of communicating his values (although it's detailed enough on that count), it's his call to arms for a revolution in the computer reseller business. "This is one of the worst industries for customer service and back-up," he says. "Those that survive the next couple of years will have to get their service right. Damn it, even the banks and the police have woken up to customer service. So our goal is to be perceived as the Richer Sounds, the M&S, the Virgin Atlantic of our industry."

Trial period promotions
"It's an idea I half-pinched from Julian Richer," Bennett admits. As a management technique, it only kicked in a few months ago, but already it's something that he believes is "one of the best things we have done."

Fast growth and a desire to promote from within can lead to hiccups - none more so than when someone is promoted and subsequently doesn't cut it. So promotion candidates are now put on a three-month trial doing the new job. They are effectively "acting" the role. "It's a 50/50 situation for them," he says. "They are not being promoted today; they are being promoted in three months' time if they are successful in the trial period. If they don't make it, there's not so much egg on either of our faces. There aren't the same problems about going back to the previous job as it is not seen as demotion. But because of the trial element, we find that people really do work at it."

Dual-roling
"This is something I'm getting very keen on at the moment." Here's an example.

"I met this great salesman at our Baker Street store but it's a bit early for him to run a branch of his own at the moment. Obviously, we are opening new stores and that's got to be a long-term aspiration for him. But, in the short-term, what else could he do for the company that would motivate him and keep him happy? He told me that he would love to do some training. So we had a chat with his branch manager afterwards. What we have agreed is that he'll train all the four London stores. On the days when the stores have their full complement of staff, this guy will spend an hour with each sales person on technique and then another hour with them on the sales floor. That's got him motivated. He feels noticed. And it's got me in-house training from one of my best salesmen. The cost? We'll pay him a bonus based on the performance improvement in the following week of the people he has trained."

The ideas scheme
"A part of everyone's job is to think creatively, make suggestions, investigate opportunities and suggest improvements. I would like to receive at least half a dozen or more from each team member every year." That's what Bennett says in his book.

The scheme works thus: suggestion forms come in triplicate. At the top of the form, employees fill in their name, department, date and the "problem/opportunity." At the bottom is a reply area.

"You don't have to use the form," says Bennett. "If they come up with an idea at home and write it on a scrap of paper, or cut out a newspaper article and make notes alongside it, or write it on the back of a restaurant menu, I don't care. What we do demand is that it is submitted stapled to the proper form, so that we can action it in a proper manner."

For every idea submitted, £5 is added to the employee's wage packet.

Once the suggestion form has been submitted, Bennett or one of the other directors evaluates the idea. If it's valid but can't be commercially implemented, they explain this in the reply section of the form and return it. The second copy goes to the accounts department to ensure that the fiver is added to the pay packet and is then lodged in the individual's personnel file. The third copy is put into a central folder which Bennett keeps just outside his office for anyone to have a look at.

Of course, if the idea is a good one that is actionable, it can be put straight into practice, or be considered by one of the company's "focus teams" or go to the next board meeting. An amount is then agreed by way of reward - there is no upper ceiling on what can be paid out. For any ideas that merit more than the standard fiver, Bennett appoints one of his directors (and that could be himself) to see the idea through to completion.

The best ideas feature in the company's monthly newsletter and the top idea of the month receives an additional prize of £100.

Wearing L-plates
"I try to visit three or four stores each month. When I go on a store visit, I don't take the store manager out for lunch. I'll see them once a month here. I will take the assistant manager out for a coffee and the assistants out for coffee and a chat. Of course, it's hard for the first ten minutes as they are asking themselves whether I am really interested. But then they relax and we all really enjoy it. Some really good stuff comes out of these meetings.

"Again, when I wanted to spend some time in, say, customer services or technical support, I found that some of the staff were a bit intimidated. They thought I was just there to watch what was going on. So I put a big L-plate on my back. It shows that I am here to learn, to see if I can come up with ideas that will help them do what they are doing. I spent a day with one of my directors in customer services last month, listening in on the phones, hearing what customers were saying. Both of us wore L-plates. It was great."

Focus teams
Numbering no less than three and no more than 15, the focus teams are volunteer groups that get together monthly at 5.30pm. Their remit? "To search for the truth; be independent and autonomous; be open and flexible; evaluate ideas, not people; have the ability to break rules; have access to any internal information required; and above all to be listened to."

"I stuck an e-mail out and got people coming from all the departments," says general manager Paul Aspinall, who chairs the quality and customer service team. "We had no agenda for the first meeting, but pretty soon they were chucking up ideas like ball boys at Wimbledon. We're still learning. At the moment it's easy for any decisions to get delegated upwards. But they are good fun."

Here's one question that's been resolved by Aspinall's group: how do you make the important but deeply boring manuals on the ISO quality standards relevant and interesting across the organisation? Answer: set it up on an intranet, where use of colour and graphics and keyword search facilities make it much more accessible than the traditional thick flat files.

Contacts
Stuart Rock is editorial director of Real Business.

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