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Making Customer Relationships Work, Part 4
The economy may be in a recession and the NASDAQ in the doldrums, but some segments of the computer software industry seem prepared to prosper. Foremost among them is the customer relationship management (CRM) sector. A new study from Aberdeen Group, the Boston-based research firm, projects that the worldwide market for CRM solutions will resume strong growth in 2002, with revenues expected to increase at an annual rate of nearly 20% over the next five years. “At present, the CRM market is being negatively affected by economic conditions,” conceded report co-author Hugh Bishop upon releasing the forecast. “However, thanks to the clear return on investment and rapidly increasing adoption in overseas markets, the global CRM market will rebound strongly” in the coming months.
The impending explosion of interest in CRM shouldn’t be surprising. As a new report from the British technology consulting firm Logical Applications Integration (LAI), released at about the same time as the Aberdeen study, notes that “customer relationship management is one of those business practices that sensible companies have been implementing to some extent for many years… In effect, it is a combination of good business practices, common sense, and courtesy.” The LAI researchers go on to explain that “it’s a well-known fact that it costs a company dramatically less to retain existing customers than it does to court new ones, and this proposition underpins the argument that CRM is one of the most effective and valuable business tools available.”
Quite a glowing description, and for the most part warranted-theoretically at least. Unfortunately, the practice of customer relationship management is still striving to catch up with the theory. As mentioned in the previous two columns on this subject, I had the privilege a few months ago to conduct an in-depth survey of the lessons learned from the early years of implementing CRM solutions. In the process, I discovered a great deal of hope and optimism, but a much more limited inventory of concrete and measurable successes. While some companies had accomplished a considerable amount with their CRM programs, many others were still struggling to meet their programs’ goals-or, worse, were stalled at the starting gate, not yet able to get their programs up and running. The potential for great achievements was certainly there, but in most instances had not yet been realized.
The conclusion that this evidence supported, in my view, was neither one of failure nor futility. Rather, it was that customer relationship management-like most other e-business technologies-is no panacea for the customer-related challenges facing corporations throughout the world. CRM, rather, can be a powerful tool for promoting both customer loyalty and bottom-line profitability, but only if well-understood, well-implemented, and well-maintained. And it is one that ultimately can generate the desired, concrete successes if companies now undertaking CRM programs apply the very instructive “lessons learned” from the early efforts of their corporate counterparts.
In the previous two columns, I examined the first seven of these lessons. They were:
Lesson 1: Think Strategically
Lesson 2: Put the Customer First
Lesson 3. Build Internal Support
Lesson 4: Manage the Implementation Effectively
Lesson 5. Break Down Technical Barriers
Lesson 6. Break Down Organizational Barriers
Lesson 7. Capture the Right Customer Data
In this column, I’ll review three final lessons-technical issues aimed at ensuring that CRM initiatives actually fulfill their business objectives. As before, I hope, at the end of this discussion, that readers will have a much better idea not just of the possibilities of customer relationship management programs, but of the difficult but nonetheless necessary steps that must be undertaken if these initiatives are to truly be the success that their proponents rightly believe they can be.
Lesson 8. Measure Customers’ Value
In the face of intensified competition and shrinking margins, companies in all consumer-facing industries are constantly looking for new ways to generate more profits and to capture a greater share of customers’ wallets. The promises of customer relationship management and related innovations are therefore understandably enticing. As BusinessWeek notes in an October 2000 cover story, “technology is creating a radical new business model that alters the whole dynamic of customer service. For the first time, companies can truly measure exactly what such service costs on an individual level and assess the return on each dollar. They can know exactly how much business someone generates, what he is likely to buy, and how much it costs to answer the phone. That allows them to deliver a level of service based on each person’s potential to produce a profit-and not a single phone call more.”
Analysts call the process of matching service levels to profitability “tiering,” and it’s easy to appreciate the practice’s appeal. In the financial services sector, for instance, Market Line Associates, an Atlanta financial consultancy, estimates that the top 20% of customers at a typical commercial bank generate up to six times as much revenue as they cost, while the bottom fifth cost three to four times more than they produce in profits. And the costs of different channels of service delivery can vary enormously. According to e-business consultants Forrester Research, the cost of an in-person customer contact can average eight times that of call-center support and up to 100 times that of Web-based service.
In the face of such figures, some customer-facing firms feel that they have little choice but to segment, or tier, their customers. BusinessWeek cites the example of Fidelity Investments, which, 10 years ago, received 97,000 calls per day. Now it gets about 550,000 Web site visits per day and some 700,000 telephone calls. More than three-quarters of these calls are channeled to an automated system, where the handling cost is less than $1 each (compared to the $13 it costs for live-person calls). The magazine quotes a Fidelity spokesperson as saying: “If all our customers chose to go through live reps, it would be cost-prohibitive.”
Acting out of similarly cost-saving necessity, BusinessWeek notes, First Union Bank “codes its credit-card customers with tiny colored squares that flash when service reps call up an account on their computer screens. Green means the person is a profitable customer and should be granted waivers or otherwise given white-glove treatment. Reds are the money losers who have almost no negotiating power, and yellow is a more discretionary category in between.” Such practices are so widespread that Gartner Group found that, among banks with deposits of more than $4 billion in deposits, 68% were channeling customers into profitability tiers, and many more were planning to do so in the future.
Attempting to gauge and act upon individual customers’ value is one of the key goals of customer relationship management efforts, and so profitability segmentation and related practices should be viewed as a positive development-especially for customers and shareholders of companies who have a stake in their institutions’ continued profitability. However, a great many dangers lurk beneath the surface of such tactics, and customer-facing companies need to take these factors into account if their customer relationship management efforts are to be truly successful-not just on paper, but in the practical terms of enhancing customer loyalty and activity.
A review of the early years of CRM initiatives, however, suggests that practices like customer segmentation have not always been well-implemented, potentially endangering rather than enhancing customer relationships at many CRM-focused firms. Perhaps the most basic shortcoming is a failure to adequately measure the behaviors that companies wish to promote. “What you can’t measure, you can’t manage,” counsels Professor Merlin Stone, IBM Professor of Relationship Marketing at the Bristol Business School in the United Kingdom and a co-author of the IBM/QCi Scorecard, an in-depth 51-company survey that is one of the most exhaustive investigations of CRM program implementations ever undertaken. Regrettably, says Dr. Stone, while many customer-facing companies diligently attempt to assess their customers’ value, they often wind up measuring or acting upon the wrong things. He lists several potential pitfalls:
Many call center units focus almost solely on call length as an organizational metric. While clearly a key determinant of the cost of handling a call, an excessive emphasis on call length can detract from broader, potentially more important matters like the quality of service rendered and the long-term development of the customer relationship.
Many sales organizations concentrate unduly on reaching numerical customer acquisition targets, a practice that can produce large numbers of new customers but that can also result in inadequate attention to what happens to those customers once they are acquired.
And many marketing organizations, driven by budgetary concerns, focus almost single-mindedly on reducing customer acquisition costs, an orientation that can result in the acquisition of less expensive but ultimately less valuable customers.
Beyond measuring the wrong things, a great many companies often fail to measure the right things-or anything at all. The IBM/QCi study concluded that, “if senior managers understood the net value and potential value of individual customers, they would probably ensure that certain customer groups were managed well to maximize customer value.” Unfortunately, “customer value, behaviors, and the costs to… serve them is usually unknown.” The survey discovered, for example, that:
Only 17% of companies could determine the worth of individual customers with any accuracy, combining sales margin, sales and marketing cost, management cost, logistics, and service.
Just 14% of companies understood the relative costs of servicing customers through various channels.
While 53% of firms had clearly articulated performance standards in place for handling customer inquiries, fully 40% neither published such standards nor measured performance against them.
And fully 62% of firms failed to measure customer retention in any practical form.
If these challenges were not enough, there exist two other potential impediments to measuring customers’ value that customer-facing companies must address if they are to implement an effective CRM program. One is recognizing customers’ value across the enterprise. Paul DeVriendt, Senior Director of Institutional Finance Products for Siebel Systems, related to me earlier this year the example of a major Wall Street investment firm that took an aggressive approach to measuring the value of each customer, but did so within the context of individual lines of business. While some customers were very valuable in one line of business, they weren’t doing much in other areas. As a result, a particular customer would be assigned a different valuation depending upon which line-of-business manager was doing the measuring. When valuation metrics are segregated into line-of-business silos in this way, DeVriendt warned, managers “can’t possibly understand the value of the customer to the entire organization.”
A second serious impediment to customer value measurement lies in the inability to assess a customer’s future (and not just current) value. As BusinessWeek’s October 20, 2000, issue reports, “most [tiering] programs fail to measure the potential value of a customer. Most companies can still measure only past transactions…” The problem, note the reporters, “is that what someone spends today is not always a good predictor of what they’ll spend tomorrow. Life situations and spending habits can change. In some cases, low activity may be a direct result of the consumer’s dissatisfaction with current offerings.”
The bottom line: customer value needs to be measured, not just accurately, but intelligently. A wise evaluation of each customer’s value can lead to stronger customer relationships, improved profitability, and more rational allocation of organizational resources. Excessively rigid and mechanical valuation attempts, however, may not only fail to produce the desired benefits, but may deprive a company of the continued loyalty of customers who, while perhaps not as profitable now, could well be so in the years to come.
Lesson 9. Enhance the Customer Experience
Capturing data on customers is one thing; translating that data into significant business value can be another matter entirely. “The real work of knowing the customer requires intense analysis, because what the organization really wants to understand is the customer’s life cycle process-and this can only be derived from studying the data,” contended Thomas M. Siebel, chairman and CEO of Siebel Systems, Inc., the market leader in customer relationship management software, in a speech earlier this year. The customer life cycle process describes how the customer actually proceeds through the entire cycle of events that lead the customer from awareness and interest in a product or service, through search and evaluation of options, to purchase and post-purchase usage, and then to re-purchase. “Only by understanding the triggers and drivers of these events-the root sources of demand-can an organization truly develop a rich knowledge of its customers. And only with this information can the organization uniquely configure and price products and services to meet the customer’s exact requirements.”
This need to properly interpret data has led to a whole sub-industry of data analytics tools that are now an essential part of almost every customer relationship implementation. It’s not hard to see the motivation behind the acquisition of such tools. Consider the case of Farmer’s Insurance Group. Headquartered in Los Angeles, Farmers operates in 41 states, providing home, auto, business, and life insurance to more than 8 million households through 15,000 agents and district managers. With this rich customer base, Farmers collects a lot of data-in 80 distinct categories, to be exact. Making sense of that data proved to be almost impossible, according to Deb Mukherjee, Farmers Vice President and Chief Technology Officer-until the company implemented a sophisticated data analytics suite recommended by IBM, the company’s e-business partner. More generally, an International Data Corporation study of 65 companies determined that the mean return on a business intelligence (data analytics) investment was more than 400% over just 2.3 years.
The ultimate goal of improved data analytics, of course, is a relationship management approach commonly termed “personalization.” Personalization, says Thomas M. Siebel, “is an essential tool for improving customer satisfaction. Most individuals appreciate being recognized as a unique customer. Even more, well-implemented personalization makes it easier, more efficient, and more pleasant for customers to interact with an organization.” In fact, a wide-ranging survey of customer management initiatives by Andersen Consulting (now Accenture) determined that “shaping and delivering a satisfying interaction with customers” is likely to be “the single most value-adding CRM capability.”
Personalization can benefit financial services companies in a number of ways:
Developing a more intimate relationship with customers. Merrill Lynch created a corporate portal that provided its customers with personalized activity summaries, research, events listings, and market analysis. By “owning” and branding its customers’ Web experience in this way, the company was able to better identify customers’ needs, cross-sell into new product lines, and provide more personalized, live-agent follow-ups.
Increasing revenues from the top customers. As reported last year in BusinessWeek, Centura Banks Inc. of Raleigh, N.C., employs customer profitability segmentation, but in a positive, pro-active way. The bank now rates its 2 million customers on a profitability scale of 1 to 5, with the most profitable customers receiving personal calls from account representatives several times a year. The result: attrition among these top moneymakers has fallen by 50% since 1996, while the percentage of unprofitable customers has dropped from 27% to 21% of the company’s total customer base.
Optimizing channel selection. As one of the first Web-based brokers, Charles Schwab encouraged its customers to choose this less personal but much lower cost channel by significantly discounting commissions for Web-based trades. The strategy has worked for consumers as well as for the company-Schwab has been able to lower its average commission by two-thirds over the past five years thanks to its reduced costs of service delivery while offering a wider range of brokerage products than ever before.
Introducing new products to previously unrecognized market segments. In mining its rich demographic database, Capital Blue Cross in Washington, D.C., noticed a high incidence of sports injuries among its younger male subscribers. And so it introduced one of the industry’s first health care products with special coverage for sports injuries, strengthening loyalty among this important subscriber group.
Improving customers’ profitability. Capital One Financial Corp. in Falls Church, Va., offers its customers more than 6,000 types of credit cards and nearly 20,000 other customized financial products, ranging from phone cards to insurance. “We look at every single customer contact as an opportunity to make an unprofitable customer profitable or make a profitable customer more profitable,” Marge Connelly, Senior Vice President for Domestic Card Operations, told BusinessWeek.
Ultimately, says Tim Angst, Vice President and General Manager of Siebel Retail Finance, the goal of personalization is to offer every customer the experience of having a personal relationship manager-even if that “relationship manager” is no more than a sophisticated set of computer algorithms that insightfully customize service and marketing offers according to customers’ individual needs and preferences. But he cautions that personalization must be more than a mechanical recognition of the customer’s name or an annual “Happy birthday, Tim” email. Personalization “must take into account the unique needs and requirements of each customer, cutting across all product lines and channels, and then deliver an experience that is as close as possible to sitting across the desk from the best relationship manager in the company.”
Lesson 10. Build a Foundation for Success
“How much does it cost a company to put a caller on hold?” asks Claes Fornell, the University of Michigan professor who created the American Consumer Satisfaction Index, a key national measure of consumer attitudes. “How much does it cost… to pass her along to another department, and another, and another? To lose her order information? To delay delivery? How much does it cost a company if she takes her money elsewhere and tells her friends to do the same? The answer: it costs the company its most valuable asset-its customer relationships.”
Fornell concedes that, on an abstract level, every senior executive assumes some correlation between customer satisfaction and the bottom line. But it often proves difficult to translate this assumption into practice. “After all,” says Fornell, “an intangible feel-good asset such as customer satisfaction can’t be captured on the balance sheet. So spending to improve customer service and customer retention is usually treated as a cost rather than an investment,” resulting in an under-investment in customer satisfaction, usually at a time when it matters most.
This problem is compounded because the core benefit of customer relationship programs-the enterprise-wide view of the customer-is even more difficult to measure than a relatively discrete variable like customer satisfaction. “It’s often very easy for companies to justify expenditures when there are obvious, short-term returns on investment,” says Mark Huey, senior research analyst at The Meta Group. “But getting it right in the long-term, getting that 360-degree view of your company and its dealings with customers, is harder.” And when financial pressures intensify, programs like customer relationship management whose benefits are the most difficult to document are usually the first to be cut. In the face of a flagging commitment to customer management, says Merlin Stone, “the customer experience degenerates, and a downward spiral of volumes, margins, and motivation may be perpetuated.”
To succeed in a fiscally challenging environment, therefore, customer relationship advocates must do more than design and implement an effective program: they also must inoculate the program from the slow financial demise that Professor Stone describes. Three steps have emerged in recent years that appear to imbue programs with the internal protection they need:
Developing a more intimate relationship with customers. Merrill Lynch created a corporate portal that provided its customers with personalized activity summaries, research, events listings, and market analysis. By “owning” and branding its customers’ Web experience in this way, the company was able to better identify customers’ needs, cross-sell into new product lines, and provide more personalized, live-agent follow-ups.
First, do something. The IBM/QCi team found that a key determinant of customer relationship management program success was quite basic-“actually doing something,” particularly implementing sensible, limited-focus customer management practices, such as “targeting high lifetime value customers, managing inquiries well and quickly, welcoming new customers,… handling complaints well, and learning from them…” In other words, carry a program through to implementation-even on a small scale-rather than just continuously planning a program or putting its infrastructure in place.
Second, establish a clear pattern of measurable results. The IBM/QCi researchers discovered that another important determinant of a customer relationship management program’s success was the simple step of documenting results-“regularly measuring actual [program] performance against specific customer behaviors, not just high-level financial targets, and having the policy deployment processes in place to act on the results.”
Third, go broad before deep. The IBM/QCi researchers call this principle “transforming while performing.” IBM has long employed this process to guide the implementation of its own internal customer relationship management programs. The company seeks to first put in place capabilities that will immediately add value to its corporate operations and deploy those capabilities across all customer-facing channels-the Web, call centers, field sales, field service, partners, and marketing-rather than implementing numerous capabilities in only one channel. This approach has enabled IBM to get its customer relationship management programs up-and-running quickly and to ensure that all of the customer-facing channels are using the system as soon as possible. Once the system is fully operational in these limited ways across all channels, IBM then goes back and adds to these capabilities in order to continually enrich the company’s ability to serve its customers.
As sensible as these inoculatory steps are, they will require considerable effort on the part of most customer-facing companies if they are to be implemented effectively. The plain fact is, most such companies are a long way from implementing the measurement and measurement procedures that successful CRM implementations require. Currently, according to the IBM/QCi survey, only 8% of companies maintain a clear top-level set of metrics that define customer management performance in terms of the standard REAP (retention, efficiency, acquisition, and penetration) indicators and their relationship to ROI. Only 13% of companies maintain benefits targets and milestones, supported by their finance departments, against which improvements in customer relationship management can be assessed. And only 22% of companies’ customer plans are actually used to drive, monitor, and review key account management relationships. Clearly, much work remains to be done.
But the good news is: with the proper resources and commitment, a great deal can be accomplished in a short time. The IBM/QCi Customer Management Scorecard concludes that, for those companies that want to improve their customer relationships and are willing to accept and manage the inevitable deficiencies in the CRM implementation process (like those identified throughout this series of articles), “benefits can actually come very quickly. The assessments have identified many customer management programs that can be adjusted or introduced in days (sometimes overnight) to have an immediate impact on the bottom line.” An example of these immediate returns, suggest the researchers, are simple changes in the inquiry-management process, involving the systematic recording, categorization, and follow-up on customer inquiries. “Actually,” the researchers note, “the message here can be taken as very positive for almost every company, because, if there is an appetite for change, improvements can almost certainly be quickly identified and put into action to improve long-term profitability.”
Prospering Through Enhanced Customer Relationships
Customer relationship management initiatives are complex undertakings, but they ultimately rest on a very simple proposition. As Merlin Stone states: “To win the hearts and minds of senior managers and convince them that good customer management is important, especially in tough market conditions,” it is necessary to answer the fundamental question: is business performance related to how well a company manages its customers?”
The evidence clearly suggests that it is. The IBM/QCi study observed that “companies that manage customers well using sensible, observable, well-implemented business practices are very likely to be good business performers. Conversely, companies that do not set up good customer management practices are likely to be poorer business performers.” Overall, the study found a 0.8 correlation between customer management performance and general business performance-a very strong correlation indeed.
Reports from the field suggest the same. As noted in Harvard Business Review, recent independent surveys of Siebel Systems’ CRM software customers demonstrated average increases in productivity of 20%, increases in customer satisfaction of 21%, and increases in revenues of 15%-all in a period of less than a year. In addition, an independent analysis showed that, between January 1995 and December 1999, the stock prices of Siebel Systems’ customers outperformed leading market indicators such as the Standard and Poor’s 500 by 500%.
IBM’s own customer relationship management initiative, its Gold Service Program, has achieved equally powerful results. Studies show that Gold Service customized communications reach 89% of the intended decision-makers, with more than 63% of recipients recalling the Gold Service correspondence because of specific information related to their particular areas of interest. Customer satisfaction surveys indicate that more than 90% of IBM’s customers are satisfied with their total Gold Service experience. One indication: in recent months, the number of customers who have registered for the Gold Service Program has jumped by 600%, while the number of new customer contacts actually being reached has more than doubled.
Impressive as these accomplishments are, some of the most compelling evidence of the benefits of customer relationship management initiatives comes from individual companies that want nothing more than to deliver an exceptional business experience to their customers. Consider the case of National City. Founded in 1845, National City is an $85 billion diversified financial services company headquartered in Cleveland, Ohio. National City operates banks and other financial service subsidiaries throughout the United States industrial belt, and provides financial services that meet a wide range of customer needs, including commercial and retail banking, trust and investment services, item processing, mortgage servicing, and insurance.
National City has prospered in large part because of its 150-plus year commitment to providing excellent service to its customers, communities, stockholders, and employees. But like many financial services institutions, National City faces declining margins and growing competition, with its customers possessing more options than ever before. And so, to continue delivering the high levels of service that its customers had come to expect, National City knew that it had but one realistic choice: to put in place an aggressive customer relationship management program.
Elizabeth Lewis, National City’s Senior Vice President and Manager of the firm’s Private Investment Resource Center, was charged with increasing client contact and improving customer service and satisfaction, all the while decreasing the costs associated with investor transactions. “As the IT arm of Private Investment Advisors, our business objective was to capture information about our clients and use it to bring additional value-added services to our customers,” Lewis says. “And we needed to provide this service quickly and efficiently.”
Lewis had a mandate to expand National City’s call-center services, become completely paperless, and greatly increase service capacity. Her goal: to obtain a 75% improvement in business process measures. “We knew that, if we were going to serve more accounts with fewer people, we needed information at our fingertips.” To address this challenge, Lewis and her team surveyed the available CRM solutions, and ultimately settled on a package from Siebel Systems called Siebel Service.
Once the implementation began, National City swiftly integrated Siebel Service into the company’s mainframe trust and accounting systems, as well as the Resource Center’s records management systems. The deployment immediately provided agents with all of the information they needed when supporting customers. For instance, the Siebel application’s Web-based interface allowed customer service agents to view image files of paper documents as well as important client contact information, transaction histories for the past six months, account balances, portfolio assets, and all pending transactions.
The payoff? Since the rollout, Lewis says, the business line’s profit margin has more than doubled and the Resource Center is now a paperless office. With Siebel Service, the Resource Center has all of its customer data in one place and can quickly respond to customer inquiries, with most inquiries resolved during the call itself. Explains Lewis: “Now, my teams are creating and sharing best practices, and the Resource Center is well on the way to meeting its goal of 75% improvement.”
Thomas M. Siebel, for one, is not surprised by results like these. “An organization’s transformation into an e-business never ends. It is a constant, evolving process of trial and adjustment.” To be sure, “in tomorrow’s world, even more than today’s, customers will have more choices and more ability to act on those choices-thus driving organizations even more to focus on maintaining the highest levels of customer satisfaction… But the good news,” he insists, “is that e-business technologies and capabilities now make it possible for organizations to know their customers more thoroughly than ever before. Organizations that can capture and make use of that knowledge will survive and prosper in the age of e-business” in the years and decades ahead.
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