Customer As Strategic Asset

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


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



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



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.



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



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.



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.’



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.



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



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



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



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 these
solutions@teletech.com tasks, as championed by Selden, Seybold, Rigby and Vishwanath, and others, is beginning to
1.800.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 the
www.teletech.com
‘final frontier’ of competitive differentiation in the marketplace. Is your organization ready?


Customer As Strategic Asset

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