Customer As Strategic Asset

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Customer As Strategic Asset

  1. 1. White Paper the Customer as a strategic asset What is a customer? If you asked the CEOs of every Fortune 500 company, you might receive five hundred different answers. Some would focus on the importance of the customer’s profitability to the company; others would focus on the importance of maintaining the customer base over the long term. Winning firms are Many—as we will see later in this white paper—would go so far as to call the customer the most choosing partners with important single element involved in their business. But boiling down all those descriptions, we deep experience in would very likely find that they all have five aspects in common.customer management, First, customers are vital to the operation of the business. Second, customers should ideally consulting, and be retained over a long period of time, as replacing them can be quite expensive (unless they technology to help should be replaced, as we will see in a moment). Third, customers require continuous contact and evaluation—‘inspection and maintenance’—to produce optimal results. Fourth, customers them identify, acquire, occasionally outlive their usefulness to the organization as it changes direction—perhaps a and retain customers particular customer group is no longer profitable because of a new product, or a change in over time. company priorities makes another segment less valuable—and should be replaced. Finally, customer acquisition strategy can make a key difference in the operational efficiency—and competitive positioning - of a firm. Interestingly, all five of those descriptive elements—vital to business operations, retained for a long period of time, requiring frequent inspection and maintenance, eventually meriting consideration for replacement, and relied on to provide a competitive advantage—are also used to describe capital assets, the long-term strategic assets of an organization that form the bedrock of the organization’s operations. Yet for many Fortune 1000 firms, customers are not considered assets, let alone strategic assets; they float in a nether region all their own, unmanaged to the same degree even a lowly forklift or warehouse might be in terms of operational metrics, yet expected to contribute the very lifeblood of the business itself. Customers are often not even considered as a ‘prime mover’ in an organization’s good fortune— or bad. Larry Selden and Geoffrey Colvin, coauthors of the groundbreaking “Angel Customers & Demon Customers”, describe a very typical business response when share prices fall: “…the typical executive looks for troubles in the company’s products or business units or territories, which sounds sensible…[but] if a company’s return on capital isn’t much better than its cost of capital, then…by definition, the company must have a boatload of unprofitable customers.” Comprehensive Customer and enterprise solutions ©2010 teletech holdings, inc. - all rights reserved. 1
  2. 2. White Paper the Customer as a strategic asset Looking for answers to those troubles is very much in vogue. Top organizational priorities for large multinational firms often center on improving and enhancing performance from the company’s own perspective. But as more and more organizations consolidate and identify the same relatively small group of priorities—innovation, process improvement, global expansion, etc.—those factors ‘blur together’ across organizational lines and serve to cancel one another out. A famous UPS advertisement uses the progression “you’ve got overseas suppliers… they’ve got overseas suppliers…you’ve got low-cost manufacturing…they’ve got low-cost manufacturing…” The obvious point that UPS is making, of course, is that often the playing field in modern business re-levels itself with alarming quickness; what can firms do to achieve a sustainable competitive advantage? In this white paper, we discuss some of the initiatives that Fortune 1000 firms are undertaking, discuss some of the gains—and losses—that can result from each, and analyze the emerging trend toward considering the customer as the ultimate strategic asset—the final watershed that will divide the winners and losers in global business in the 21st century. First, let’s examine the current ‘waves of change’ taking place in top corporations. Innovation—is a top buzzword among Fortune 1000 executives of late, but the “how” of new and innovative thinking is just as important as—if not more important than—the “what” of the ideas themselves. BusinessWeek ran an article in April of 2006 entitled “Dawn of the Idea Czar” that was host to an all-star slate of blue-chip companies, from Citigroup to AMD to Coca-Cola to Humana, that have elevated innovation to the top priority of their organizations. Just a few weeks later, BusinessWeek’s splashy front cover read “Blue Chip Blues—why America’s biggest stocks have lost their sizzle.” Coincidence? Not really. There can be no mistaking the need for innovation in global business during the 21st century; consumers have become increasingly accustomed to being delighted by devices and services they had no idea they wanted or needed, but now cannot do without—and are eagerly looking forward to the next. But how American businesses are approaching innovation, thus far, is actually costing Fortune 1000 firms money—and for one simple reason: the customer is not involved in the innovation process, with the exception of participation in an occasional focus group or roundtable. That sort of ‘isolated innovation’ leads to a slow industry ‘crawl of ideas,’ rather than the intended competitive ‘leap forward’ that firms are hoping for. Process improvement—is important for the success of any organization, and every company— without exception—can streamline its operations and improve its expense line. Where this approach runs aground, however, is when it is executed in isolation, or in blind comparison to other firms. In the ‘race to the bottom’ in areas like SG&A, companies can become so firmly committed to beating a competitor’s efficiency number or achieving a specific metric that, without a solid grounding in the needs of the customer, competitive advantage can actually be lost in the process. The real objective of process improvement, at companies that are beating the competition, is optimizing the process to precisely meet customer needs at the lowest possible cost. Sounds simple—but doing so requires taking into account the total cost to serve the customer, through each channel, in each customer segment, at each point on the seasonal or cyclical curve, and with the right customer development agenda in mind. Instead, many companies simply orbit a standardized SG&A figure for their industry, attempting to better that Comprehensive Customer and enterprise solutions ©2010 teletech holdings, inc. - all rights reserved. 2
  3. 3. White Paper the Customer as a strategic asset number—or a competitor’s number - by a few hundred basis points, without taking into account the customer development potential lost in the process. In the end, each company’s attempts to create a more efficient business engine strengthens the short-term numbers, but weakens the firm’s long-term positioning. Globalization—is another common organizational initiative that has been ‘held back’ from producing its full value by a failure to focus on the customer as the center of the process. Darrell Rigby and Vijay Vishwanath, in an article in the April 2006 Harvard Business Review, remarked that “we’re in the early stages of a quiet revolution…the era of standardization is ending [as] consumer communities are growing more diverse…in response, smart retailers and consumer goods companies are…moving from standardization to localization.” The revolution may be quiet, but it is gaining momentum as more and more companies realize that the point of globalization is to open new markets and gain access to a greater proportion of the buying public. Standardized policies and procedures from the ‘home office’ can provide tremendous cost efficiencies in a new market, but only when correctly balanced with the right degree of localization—a balance difficult to achieve without deep experience in each geographical and vertical market. Localized globalization—“LoGlo”—is transforming the B2C market abroad, and the Localization Industry Standards Association (LISA) estimates that the LoGlo industry may be as large as $5 billion annually, and growing fast. But for every leader in LoGlo, there are ten ‘trailers’ that are still employing a word-for-word Web site translation with no cultural relevance to the new market, a rigid set of inventory stocking and rotation procedures, and in-language—but not in-culture— customer care. By failing to commit to the customer, companies are gaining little more than an increasing number of flag icons on their Web sites –and, in parallel, an increasing number of headaches from managing underperforming regions. At this point, it is becoming clear to an increasing number of Fortune 1000 executives that none of these initiatives work unless the customer is at the center of the process. Innovation costs money; innovation without customer connection is simply the expensive demonstration of organizational capability, not the creation of a competitive advantage. Process streamlining without a clear sense of customer need—on a segmented basis—can easily cut past fat into organizational muscle and even bone. Globalization that fails to capitalize on economies of scale to capture the mind and wallet of the local customer only makes previously challenging problems unmanageably large. Until an organization establishes the idea that control of the customer as a strategic asset is its primary goal, it cannot develop sustainable competitive advantage and steady improvement in shareholder value. How can companies do so? Organizations can establish control of the customer as a strategic asset through one of three primary strategies, and while the names of these strategies belong to the era of ‘classic marketing,’ their definitions have changed dramatically—so it is well worth the time to revisit them. Product leadership—is a problematic solution; there is generally only one such niche available in each market, if at all, and ownership of it is both expensive and speculative. Product leadership is an ephemeral concept that can pass swiftly from party to party as the market’s needs change. Sony was, by all accounts, the product leader in personal audio during the 1980s and much of the 1990s; but with the massive wave of consumer acceptance of MP3 (and the iPod as the Comprehensive Customer and enterprise solutions ©2010 teletech holdings, inc. - all rights reserved. 3
  4. 4. White Paper the Customer as a strategic asset MP3 player of choice), and Sony’s stubborn commitment to MiniDisc and its own proprietary digital format (ATRAC), it lost the position in the blink of an eye. Now, Apple is so established as the leader in portable MP3 players that the firm can essentially ‘freeze’ demand for a period of time simply by pre-announcing a new product. With the launch of the PSP, the pendulum may be swinging back in Sony’s favor—unless Apple ‘changes the game’ again with a new product that trumps Sony’s, which would send Sony back to the drawing board…and on and on the game unfolds. The point here is that product/service leadership is won and lost frequently at great cost at both ends of the spectrum, simply because the market changes so quickly. Attempting to ‘hold’ it, as an enduring plan for leadership, is a costly and risky commitment. Price leadership—is another problematic solution. Again, there is only one price leader (the popular notion of value leadership as a synthesis of price and product leadership has many of the worst aspects of both) and establishing price leadership leaves firms nowhere to go in the future—no ‘runway’ for upmarket customer development. An excellent example is the failure of Volkswagen’s Phaeton product to take hold with consumers; although the Phaeton was a fine automobile—essentially a rebranded Audi luxury vehicle - the fact that Volkswagen had spent decades establishing price leadership caused its upmarket initiative to fail. Low-cost computer manufacturer Packard Bell learned the same painful lesson in the mid-1990s; after establishing a successful, if low-margin, franchise in selling entry-level, bargain-basement personal computers, the firm wasted millions of dollars attempting to move upmarket into the business computing segment, only to fail utterly. Packard Bell was eventually purchased outright by NEC, and while the firm still ekes out an existence as a subsidiary of that firm, it is a shadow of its former self. The rare examples where price leadership can succeed are areas in which a company can establish a sustainable and profitable competitive advantage based on business process and competition in a commoditizing environment; Dell and Wal-Mart are both good examples, and have done well for themselves—but they have also done so by aggressively managing their customer portfolios and choosing who they design themselves to serve. Service leadership—The old definition of service leadership was an expensive and often wasteful proposition that involved ‘service to excess’ across the board in order to establish near-mythical status as a customer-friendly company—the old Nordstrom service stories and other aging ‘above-and-beyond-for-everyone’ tales. The new definition is an ultra-fine, surgical segmentation of the customer portfolio by persona and the precise design of customer care in such a way as to exceed the expectations of—and hence delight—the desired high-value customer group while actively driving unprofitable, ‘problem’ customers toward competitors. Thus, based on an account’s history, forecasted potential, and profitability, that customer might be rocketed to the front of a live service queue or even provided a ‘backline’ number—or dropped into an IVR nearly guaranteed to send the account packing to a competitor. Service leadership in the 21st century involves actively working to deliver unprofitable customers to your competitors, quickly, and in volume, while carefully assessing the potential of—and working upstream wherever possible— your “in-between” customers, and defending your top-value customers at all costs. But it is the rare company that does so, and part of the problem is the failure to target customers as the strategic asset in the company’s total portfolio of assets. Comprehensive Customer and enterprise solutions ©2010 teletech holdings, inc. - all rights reserved. 4
  5. 5. White Paper the Customer as a strategic asset The Customer’s Current Position in the Corporate Asset Portfolio During April of 2006, an independent third-party consulting firm conducted a study of Fortune 1000 C-level executives focusing on ranking large companies’ perceptions of their most critical strategic asset. The survey was conducted in open-ended form, meaning that respondents could name any particular tangible or intangible asset they liked. The results, for firms focused on the ‘glamour topics’ of process streamlining, innovation, and globalization, might be somewhat surprising; people accounted for nearly 75% of the assets that companies feel are their most strategic. Employees were most often listed as the company’s most strategic asset, followed closely by customers. Financial assets accounted for just 10% of responses; technology -6%, supply chain and logistics - 4%; proprietary processes - 2%, company R&D - 2%, and company management (non-employee) - 2%. The comments that executive respondents provided are even more enlightening. One technology industry executive remarked that she was answering the question “…from the perspective of what is replaceable for us, quickly, and what is not. If tomorrow, we were insolvent, but had our team intact and our customer base intact, we could quickly rebuild our financial infrastructure or borrow to support it. But the relationship between our employees and our customers is irreplaceable; in fact, it’s priceless.” Customers are, by definition, the ‘stem cell’ asset—the only one from which any other asset can be regrown. Take away a server, and customer profitability can repurchase it; lose a warehouse of goods to a fire, and they can be restocked with revenue contributions from a steady customer base. But lose profitable, high-value customers, and all the servers, warehouses and products in the world cannot bring them back. Another executive in the telecommunications industry made the remark that “…customers have the highest cost of capital of any asset, because of the investment we have made in acquiring them and keeping them. Servers and switches and DSLAMs don’t just walk out the door if they decide they don’t like your company’s direction. Securities don’t cash themselves out and leave your account if they aren’t paid attention to. Patents don’t de-file and seek out your competition if they feel neglected. But customers can do all those things—so they require the greatest care of any asset, because the total cost to acquire and keep them is so high.” Earning back the cost of capital is the most basic test of a business’ success or failure. Many companies, it seems, are failing to take into account the higher cost of capital of their strategic customer assets in developing process design. In short, a company’s expense ratios may be significantly higher than the immediately obvious ‘paper costs’ so easy to track in traditional accounting - and the larger the company, the greater the discrepancy. Is it any wonder that BusinessWeek has ended up with the cover ‘Blue Chip Blues?’ Even B2B firms are not exempt. One distribution executive, whose company deals with thousands of small-business accounts, related a story in which he held an informal customer roundtable concerning his customers’ likes and dislikes as well as planned purchases for the coming year—a major issue for channel players, since inventory planning is based on such input. The executive was surprised when the roundtable quickly veered off this intended course Comprehensive Customer and enterprise solutions ©2010 teletech holdings, inc. - all rights reserved. 5
  6. 6. White Paper the Customer as a strategic asset into a discussion of “…sales representative turnover. Our customers were furious with us that sales reps only stayed with an account for a few months to a year before being replaced. We had tried everything—cutting prices, running promotions, changing our line card—but until we spoke directly with our customers about what they wanted, we were essentially driving with the headlights off. One customer told us that we could have cut prices to cost and they still would not have returned to us until their rep was put back on the account.” The traditional tests of customer centricity were roundly failed here: no single individual owned the customer, and no one single individual was accountable for customer profitability. In addition, the company was trying the old familiar solutions to solving its problems—slashing prices, examining processes, looking everywhere except to the customer for solutions. The stories varied, but most centered on a common theme: the most valuable customers in the population are a rare commodity, and one that is under siege daily from not only traditional competitors, but substitute goods and services providers as well. RBOCs now compete not just against CLECs, but against cable companies and IP telephony providers as direct ‘replacement’ competitors and against more subtle competitors like instant-messaging firms and email that ‘soak up’ communication volume. Customers are even more difficult to reach now that television ads are routinely TiVo’ed past and the noise level in the advertising channel has reached a deafening din. The competitive field is wider, and the segmentation of ‘angel’ customers narrower, than at any point in history for most industries, making customers more and more akin to the old canard about real estate: “buy good customers—they’re not making any more of them.” With this in mind, what are successful companies doing about the care and maintenance of some of their most important assets? The survey discussions came down to a simple five-point plan. Maintain a whole view of the customer- up to the minute and even into the future— Organizations that are experiencing success in managing the customer as strategic assets understand their customers intimately; they know who they are, they have detailed segmentation and persona structures in place to sort and organize them, and—importantly—they are investing in forecasting where they are ‘going’ in terms of demographic change. Technologies like knowledge management, real-time call center analytics, and RFID are at the sharp end of the spear in this area, and are receiving heavy focus from winning companies. Keep customers at the center of every discussion—Patty Seybold, award-winning author of books including Customers.com and The Customer Revolution, has written extensively on the topic of involving customers in every stage of business operational design. Her ideas are taking hold in many top-performing firms, at which no organizational decisions are made without designating someone to serve as the customer’s advocate in all things. (In addition to the chief innovation officer, perhaps a chief intimacy officer would be a good addition to more companies’ management roster.) Product and service design and delivery, channel relations, supply and logistic issues, even accounting and finance initiatives—all need the voice of the customer to be heard in the room before they can be adopted and their full value realized. At a minimum, maintaining an internal awareness of customer needs and wants is critical; but increasingly, more and more companies are co-designing their products, services, and even organizational structure with their customers. Comprehensive Customer and enterprise solutions ©2010 teletech holdings, inc. - all rights reserved. 6
  7. 7. White Paper the Customer as a strategic asset Manage to the persona and the plan, not to the exception—Part of the ‘magic’ of using a high- resolution customer segmentation strategy lies in adopting the strategy and sticking with it. Deciding to segment the available customer base intelligently and address only those customers that are profitable is one task; staying with that philosophy in the midst of a storm of inevitable exceptions is another. Every company has a set of war stories surrounding ‘exceptions’—the angry customer that called a VP to complain, the COO’s chance encounter in an elevator with a dissatisfied customer, the email campaign of a customer who felt slighted by the new service policies. But often, the overwhelming majority of these ‘exceptions’ originate with unprofitable customers—so addressing them would only start the firm back onto the no-win trail of attempting to be all things to all people. Tracking and analyzing exceptions is a must; acting on them is at the discretion of the model as deployed by management. Partner with the right organizations to ensure true customer centricity—Companies that are taking good care of their strategic customer assets are choosing service and technology partners wisely. Just adding more software, or taking on a new consulting partner in isolation, is rarely the route to sieving the customer base for maximum value. Winning firms are choosing partners with deep experience in customer management, consulting, and technology to help them identify, acquire, and retain ‘angels’ for the long term. The three are so intertwined that to engage a software provider without customer management experience, or a customer care outsourcing firm without a leading-edge technology platform, prevents companies from unlocking the complete portfolio of value available to them. Leverage service leadership to enable other leadership options—Leading-edge companies have long acknowledged that neither price nor product leadership is a sustainable option in today’s markets; advances in supply chain technology and sourcing decisions make it difficult to keep hold of the low-price leader slot. Although it can be of strategic importance to own the product or service innovation leadership space for a specific period of time, changing consumer tastes—and expensive internal R&D—make it all too easy for competitors to simply ‘copy the best and discard the rest’ at low cost to them when it comes to product leadership. But service leadership not only never goes out of style, it can be made almost impossible to accurately copy for competitors, and most importantly, it sets up the ability to choose from other leadership options for tactical or strategic advantage—choosing, for example, to set the price standard during the holiday season, or surge ahead of the competition for several years with a wave of innovative products. But those options begin with the steady financial contributions of a stable base of ‘angel customers.’ Comprehensive Customer and enterprise solutions ©2010 teletech holdings, inc. - all rights reserved. 7
  8. 8. White Paper the Customer as a strategic asset What does this procession from siloed initiative to customer-centric operation look like? FIGure one Fortune 1000 executive survey results. Source: Aristeia, Incorporated. N=50 . In the ‘status quo’ state, (see figure one) most companies are pursuing internal, siloed initiatives surrounding innovation, process optimization, and globalization; they may take a ‘sample’ of the customer base from time to time, but the initiatives themselves are designed, developed, and deployed ‘within the four walls.’ Note that, since each competitor in the market for a specific customer base has roughly the same set of initiatives, not only does competitive differentiation ‘cancel out,’ but the customer is left to evaluate a confusing set of company activities at a distance—and through the ‘customer perception barrier’ that filters and distorts such activities the further they take place from the customer’s core mindset. Comprehensive Customer and enterprise solutions ©2010 teletech holdings, inc. - all rights reserved. 8
  9. 9. White Paper the Customer as a strategic asset In figure two, this ‘evolved’ diagram, Company B has achieved a ‘partial breakout’ by choosing to architect its solutions on a truly customer-facing basis, and has made some progress in reorienting its focus—but in reality, the firm has only transplanted its silos onto the surface of the customer base. The firm has achieved some competitive differentiation by involving the customer closely in each initative - but it is not maximizing the value of the customer base as a strategic asset because its initiatives remain disjointed—its process optimization work is not being executed in concert with its innovation initiatives, while its globalization process is not communicating and synergizing with either. Note, too, that the company has set up its operations in the right general orientation—facing, and involving, the customer—but is still treating the customer base as a homogeneous mass and, by default, is still attempting to be ‘all things to all customers.’ By doing so, Company B still competes for the same group of customers that Companies A, C and D do. FIGure two Comprehensive Customer and enterprise solutions ©2010 teletech holdings, inc. - all rights reserved. 9
  10. 10. White Paper the Customer as a strategic asset In figure three, this final diagram, Company B has changed two critical factors in its organizational focus. First, the company has broken down the barriers between its initiatives, synthesizing process optimization, innovation, and globalization into a single, unified process that keeps the customer at the center of the equation. Note, too, that Company B has performed its ‘angel and demon’ segmentation and is focused only on those customers most valuable to it, creating a shield around those customers with its new organizational focus and leaving its competitors only its ‘demons’ to choose among. Best Buy is an excellent example of a company that has reorganized in this fashion; the company’s new stores utilize innovative concepts developed in cooperation with customers, yet combine the best of standard practices with the need to localize offerings in different markets—and do so cost-efficiently. But most importantly, Best Buy has elected only to market to its ‘angel’ customers; it has left the rest for Circuit City and others to sort among. FIGure three Comprehensive Customer and enterprise solutions ©2010 teletech holdings, inc. - all rights reserved. 10
  11. 11. White Paper the Customer as a strategic asset Placing customers at the center of the business—no matter what industry or segment that business serves—is more than a sound operational decision; study after study has shown that doing so is the key to unlocking enterprise value and driving share price growth. The proportion of corporate profit—and EPS—that high-value customers are contributing is surprisingly high; depending on the company and industry, the figures can be shocking. Selden, in “Angel Customers & Demon Customers”, cites a Canadian bank at which 17% of customers account for 93% of the bank’s profits, as well as a software company that could prove demonstrable profitability from only seven of its 307 customers. One firm in Selden’s book posted the astonishing statistic that 30% of customers accounted for 325% of profits—and a bit of simple math in this case demonstrates that the remaining customers were not only not profitable, but were costing the company dearly to keep. FIGure Four Comprehensive Customer and enterprise solutions ©2010 teletech holdings, inc. - all rights reserved. 11
  12. 12. White Paper the Customer as a strategic asset Now that the waves of process optimization, innovation, and globalization as ‘internal task force’ContaCt teleteCh: initiatives have peaked and begun to fade, the new, customer-facing, integrated versions of thesesolutions@teletech.com tasks, as championed by Selden, Seybold, Rigby and Vishwanath, and others, is beginning to1.800.TELETECH or take hold. Active management of a company’s portfolio of customers as a durable, sustainable+1.303.397.8100 (outside the U.S.) strategic asset is the key to creating shareholder value in the 21st century, and ultimately, is thewww.teletech.com ‘final frontier’ of competitive differentiation in the marketplace. Is your organization ready? Comprehensive Customer and enterprise solutions ©2010 teletech holdings, inc. - all rights reserved. 12

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