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Organizing and Managing the Profitable Customer-Strategy Enterprise: Part 2

The human mind treats a new idea the way the body treats a strange protein; it rejects it.

—P. B. Medawar

During the transition to a customer-centric model, enterprises frequently underestimate the degree to which all facets of the business will be affected by the changes and the ongoing efforts that will be required to achieve full business benefits. The organizational and cultural transition to customer management represents a genuine revolution for the enterprise, but it is more likely to be successful when it can be treated as an evolution within the organization. Here we discuss three ways to speed this evolution process, any or all of which can be adopted by an enterprise:

Pilot Projects and Incremental Change

Most companies launch their customer initiatives in a series of pilot projects. There are so many things to do, if a customer-specific perspective is to be adopted, that usually it is a relatively simple process for a company to “cut and paste” various self-contained customer initiatives into the enterprise’s current method of operating. The objective, over the longer term, is to accumulate a large number of small improvements.

It is not necessary to resolve the customer-governance problem, in order to launch a pilot project or to make an incremental change. Instead, the IDIC (Identify-Differentiate-Interact-Customize—see Chapters 3 to 10) implementation process itself is an ideal vehicle for conceiving and executing incremental changes. A small change might involve, for instance, obtaining, linking, and cataloging more customer identities, using a sweep of existing databases containing customer information. Or it could involve setting up a prioritized service level for customers now identified as having higher long-term value to the enterprise, or higher growth potential. Many incremental change initiatives are also likely to involve streamlining the customer interaction processes, so as to cut duplicative efforts or resolve conflicting communications.

Particularly for large and complex organizations, often the most direct and immediate route to a broad transition for the overall enterprise is to implement a series of incremental changes, one small step at a time. Hewlett-Packard (HP), for instance, began trying to wean its corporate culture away from the simple worship of products in the 1990s, launching an effort to create a better balance for the enterprise, in which both customer growth and product excellence would be prized.

According to Lane Michel, at that time a marketing manager at HP (and later a partner at Peppers & Rogers Group), staying focused on incremental gains helped HP win acceptance for its overall program. “We try to avoid boiling the ocean,” says Michel. “Then again, it’s important to show immediate results. Those early successes earn you the right to take bigger steps.”1

One example of such an incremental step was the customer-interaction program engineered by the Barcelona Division of HP’s Consumer Products Group, which produced, among other things, the DesignJet high-end printer. In order to make it possible to have a continuing dialogue with its customers, the division developed a Web site, HP DesignJet Online, to serve as a user-friendly channel for interactive customer communication. The password-protected site offers self-diagnostic tools to DesignJet customers as well as a quarterly newsletter, a user feedback section, new product notifications, and an upgrade program. The division is counting on the site to increase market share, reinforce customer loyalty, and provide a steady stream of timely market knowledge.2

Another incremental but important step taken by HP was the development of a central and global electronic customer registration system, along with a master set of questions and a master customer database to store the information. The initiative was born from ideas and feedback generated across several of the company’s groups and geographies. The new system replaced paper registration, which had proved a poor method for collecting usable customer data.

Over time, baby steps like these can add up to great strides. By 1999, HP had roughly 100 such incremental initiatives under way at various locations around the world, which it called “one-to-one campfires.” Each was being tracked and monitored centrally, with information made available throughout the HP enterprise on the firm’s intranet at a special relationship marketing section. Nearly every one of these initiatives, also, could be categorized easily in terms of which aspect of the IDIC implementation process it represented. Some of these early initiatives blossomed into major programs causing the reformulation of product designs, operational retooling, customer interactions, and management roles accountable for returns on investments made.

Keeping the process going required champions and leaders of change. At HP, these leaders initially had titles such as relationship marketing manager, customer advocacy manager, and installed base loyalty manager.3 Over time, vice presidents and marketing managers across HP took leadership of the company’s drive into customer experience, measureable results, and segment-wide changes.

A large number of incremental changes can add up to big change. In addition, an incremental change project itself could serve as a pilot for rolling out a particular idea or strategy across an entire division or enterprise. Pilot projects are a common method many companies use to make the kinds of changes required in the transition to a customer-strategy enterprise. But a pilot project differs, slightly anyway, from other forms of incremental change. A pilot project is, in essence, a feasibility study. It usually represents a test bed for trying out a new policy or strategy that, if successful, will be rolled out in a broader application. Therefore, the success metrics of the individual pilot project will have less to do with the actual profitability or business success of the pilot itself and more to do with an assessment of whether the idea represented by the pilot project would be beneficial, if it were rolled out to the broader organization. And pilots have a built-in advantage when it comes to metrics. Because, by their nature, they usually involve only a selected portion of the enterprise, it is easier to measure the pilot’s performance against a “control group”—meaning, in essence, the rest of the enterprise, doing business as usual.

Incremental change projects are rarely undertaken to resolve the problem of relationship governance for the enterprise. One of the key benefits, in fact, of concentrating on the IDIC process implementation methodology is the fact that significant progress can still be made without having to come to grips with this very thorny problem. At some point, however, any enterprise that wants to begin engaging customers in actual relationships, individually, will have to deal with the issue of relationship governance, and there are at least two methods for dealing with it on an incremental or transitional basis.

Picket Fence Strategy

The right way to transform a company gradually into a customer management organization is not to do it product by product or division by division but customer by customer. And one way to begin such a transition is by placing just a few customers “under management,” then adding a few more, and a few more (see Exhibits 14.1 and 14.2). In order to make this type of transition successful, it must be recognized that the enterprise will be operating under different rules with respect to the customers under management than it will be with respect to all other customers. In essence, the customers under management will be fenced off and treated differently from the remainder of the customer base. As the transition progresses, the number of customers behind this “picket fence” will increase. As the portion of the customer base behind the picket fence continues to grow larger, the enterprise will be effecting a gradual transition to a customer management organization.

If an enterprise has ranked its customers by value, it can prioritize its transition in such a way as to place the more valuable customers behind the picket fence first. When customers go under management, the implication is that a customer manager in the enterprise will be setting objectives and strategies for each of them individually. The objective and strategy set for any particular customer should reflect the entire enterprise’s relationship with that customer. For this reason, at least with respect to the customers behind the picket fence, the customer managers must have not only an integrated view of the enterprise’s offering to and interactions with those customers, but they also must have authority to make policy and implement programs, on behalf of the enterprise.

The picket fence transition strategy is especially compelling for companies that already identify their customers individually, during the natural course of their business, and differentiate them by value. This would include banks and financial services firms, telecommunications companies, personal services businesses, some retailers, and most business-to-business (B2B) companies with internal sales organizations. The highest-value customers at many companies like these are already being singled out for attention. If a retailer, for instance, has identified any customers who merit special treatment, it is likely they are the store’s very high-volume, repeat spenders; the “special treatment” might include assigning personal shoppers or relationship managers to watch over the individual interests of such customers. Because the picket fence strategy is already in place at such a firm, the enterprise’s goal should be to extend the idea and automate it, by codifying the business rules that are being applied and ensuring that proper metrics are in place.

Remember that the customer manager should own the business rules for determining all of the communications that her customers receive. This means that the enterprise’s general direct-mail pieces would not go to customers behind the picket fence without the initiation or approval of the customer manager responsible for them. For each customer behind the picket fence, there should be a particular objective and a strategy for achieving that objective, set by the customer manager. In fact, the customer manager will herself be rewarded and compensated based on her ability to meet the objectives set for each of her customers, one customer at a time. Over time, as technology makes it better and more cost-efficient to process customer information, and the enterprise gains more knowledge and confidence in the process, it can expand the picket fence and put more people behind it.

Although the transition involves expanding the area behind the picket fence (i.e., placing more and more customers under management), the enterprise most likely will never actually place all of its customers behind the fence. Some customers, for instance, may not be willing to participate in a relationship of any kind. Moreover, no matter how cost efficiently the enterprise has automated the process, there will always be customers who are not financially worth engaging in relationships.

Segment Management

Another way to begin the transition to a customer management organization is with segment managers. The picket fence transition is a customer-specific process that places an increasing number of individual customers under management; the segment management transition is a function-specific process that gives segment managers an increasing number of roles and capabilities with respect to their segments.

Remember that we chose the term portfolio rather than segment with deliberation, when we introduced the concept of customer management. The primary reason for this choice was to convey the thought that, in a customer portfolio, the customers themselves are uniquely identified and unduplicated: no customer would be in more than one portfolio at a time. And just as you manage each stock in your stock portfolio individually, you would manage each customer in your customer portfolio individually.

But even if an enterprise has not identified its customers uniquely, it still can differentiate them approximately, using survey-based consumer research and other tools. Even though the enterprise might not be able to classify any specific customer into a particular segment with certainty, the segments themselves represent different types of customers who have needs and values that are different from the customers populating other segments.

Segment management is particularly appropriate for the types of businesses that have greater difficulty identifying and tracking customers individually. The picket fence transition works best for companies that either identify customers in the natural course of their business or can easily do so, whereas the segment manager transition works for all other companies. A consumer packaged-goods company, for instance, might have a highly developed customer management organization already in place to ensure that its relationships with its retailer customers are managed profitably, but the company is unlikely even to have the identities of more than a microscopic fraction of its consumer-customers. Such a firm might establish an organization of consumer segment managers who are responsible for shaping the firm’s advertising and promotion efforts with respect to particular segments of consumers, across a variety of different products and brands.

A segment management organization, therefore, can be thought of as a transition state somewhere between product management and customer management. The most critical missing ingredient in a segment management operation is likely to be the capability to identify individual customers and track their interactions with—and individual values to—the enterprise over time. Until the enterprise is able to add this capability, it will not be able to move from segment management to true customer portfolio management. But even in the absence of customer-specific capabilities, a segment management organization still can be a useful tool for an enterprise to begin treating different customers differently and for creating the value proposition for the relationships that eventually could come.

Customer Portfolio Management

At the heart of the customer management idea is the concept of placing customer managers in charge of portfolios of separate and individually identifiable customers who have been differentiated by their value to the enterprise and grouped by their needs. It is these customer managers who are charged with managing customer profitability. This is the core structure of the customer management organization, one in which each individual customer’s value and retention is the direct responsibility of one individual in the enterprise. Managers may each be in charge of a large number of customers or portfolios, but the responsibility for any single customer is assigned to one customer manager (or, in a B2B setting, often to a customer management team). That manager is responsible for building the enterprise’s share of customer (SOC) for each of the customers in his portfolio and for increasing each customer’s lifetime value (LTV) and potential value to the enterprise (see Chapter 5).

The responsibility for customer management may spring from the marketing department, or sales management, or product development, or even, occasionally, from the information-technology department, where the customer data are housed. Wherever in the organization customer management resides, however, it must have a clear voice in the enterprise and have enough power to make decisions and influence other areas of the enterprise. One difficulty for this group is that the enterprise might try to hold it accountable for increasing the value of customers but fail to give it the authority to take the appropriate actions with respect to those customers. In the customer-value-building enterprise, the customer strategies should become the unifying theme for the organization; other areas of the enterprise should be made to understand how their own departmental goals relate to the customer strategies developed by the customer management group, and these other departments should be held accountable for executing the strategies ultimately designed to increase customer equity.

Transition across the Enterprise

Many companies believe that the biggest hurdle to becoming a successful customer-strategy enterprise is choosing and installing the right software. This unfortunate outlook has led to poor results on customer initiatives. Many organizations learn the hard way that customer relationships cannot be installed; they must be adopted. The biggest hurdles to successful customer management have little to do with technology. The greatest obstacles are a firm’s traditional organization, culture, processes, metrics, and methods of compensation. The transition needed will affect not just the whole enterprise but each of its parts as well. Let’s take a look at the changes that the enterprise will face.

Transition Process for the Sales Department

The sales force plays a critical role in the customer-strategy enterprise. As the “eyes and ears” of the organization, salespeople often interact with the customer at the customer’s place of business. It is during these visits that salespeople develop an information-rich point of view of the customer. Using sales force automation (SFA) software, sales reps now can easily share customer learning with their firms.

Some of the sales force is focused on driving transactions for lower-volume customers, and the skill sets of these salespeople are well suited for these activities. Other salespeople have different skills, working with customers across all levels of the customer organization and focusing on maximizing share of customer. Once considered the “lone wolf” of the organization, these salespeople effectively divide their time among sales calls, analysis of customer information, and participation in internal customer-strategy development. Regardless of position, however, salespeople understand how to develop customer insights and to provide customer information to the enterprise in an actionable way. Some information is entered into the SFA tool, and other information is shared during customer review meetings or via communications with the research and development department, customer service, or other departments.

The transition to a customer-strategy enterprise will be easy for some salespeople, whereas it will challenge the skill sets of some of the top sales performers. These principles will make a great deal of sense for salespeople who have already been practicing visionary selling, consultative selling, or strategic selling, and they probably will embrace these ideals readily. But the salesperson who relies, for example, on retailer business customers to “buy forward” in order to make quarterly product sales quotas may find the transition more difficult. Applying customer management principles requires taking a long-term view of the customer, a view that conflicts directly with the short-term focus that prevails in many sales organizations.

The sales team can help confirm that those selected as most valuable customers (MVCs) are indeed the best customers. The sales team can also find most growable customers (MGCs) that have been missed. It will be important for the organization to provide the sales team with information across other touchpoints in the organization, such as the Web and the customer service center. Real-time information is required to coordinate all interactions with a customer, and feeding in this information can be a significant change for many salespeople. The trade-off is that the enterprise can handle a lot of the most tedious record keeping and servicing very efficiently, freeing up the salesperson for real relationship building and customer growth.

One of the most significant changes for a newly automated sales force is that the daily life of salespeople will wind up on-screen for all to see. In addition, fewer salespeople will have greater responsibility,4 putting pressure on all sales personnel to conform and adopt new policies and procedures. During this transition period, therefore, it is important to negotiate some key agreements when implementing new policies and programs:

• Prioritize key information that is needed about customers. Salespeople should not be spending their time typing. They should be interacting with customers and learning more about customer needs.
• Address ways that salespeople can save time and earn higher commissions.
• Integrate customer information wherever possible. Some salespeople spend significant amounts of time typing the same information into applications that have different purposes (order entry system, billing system, forecasting reports, etc.).
• Negotiate which information is for enterprise use and which information is “for their eyes only.” It is important for the salesperson to remember key customer information, such as family member names, spouse’s birthday, and so on, to create a personal bond; but this may be interesting to others in the enterprise only if someone has to substitute for the sales rep in a personal meeting.

MULTIDIVISION CUSTOMERS

Knowledge-based selling traditionally has occurred in B2B scenarios but has not always been applied across divisions of a company. One reason a customer-centered approach to doing business is so compelling is precisely because it enables an enterprise to leverage a single customer relationship into a variety of additional profit streams, cross-selling many different products and services to a customer in a coordinated way. The sales function plays a critical role in this relationship but is not alone in executing it.

Customer-strategy enterprises rarely isolate their customer initiatives within a single division. In a multidivisional enterprise, the divisions sell to overlapping customer bases, doing business with a single customer in several different divisions. Enterprise-wide cross-selling is not possible if the pilot project is limited to a single division and if the division databases are not integrated to facilitate a one-customer view.

In many cases, a B2B enterprise that sets out to transform itself into a more customer-oriented firm will end up restructuring the sales force entirely, in order to ensure that the sales of different products to the same customers will be better coordinated, and appear more rational to the customer.

COMPENSATING THE SALES FORCE

Sales force compensation is often one of the most important drivers of change, partly because the salesperson’s salary and bonus usually depend on product sales results. One challenge facing the enterprise is deciding how to compensate salespeople and others for encouraging and ensuring customer loyalty and growing the long-term value of a customer, even when there may be no short-term product sale involved. The fact is that many salespeople are compensated in ways that make them indifferent to customer loyalty. In some cases, new-customer incentive programs actually benefit the salespeople when customer churn increases, enabling them to resell a product or service to a relatively educated customer. If customer loyalty and profitability are the objectives, then the enterprise needs to explore compensation systems that reward sales reps on the basis of each individual customer’s long-term profitability (or LTV). There are at least two ways an enterprise can accomplish this:

Transition Process for Marketing

The marketing group is responsible for traditional marketing activities, including creating brand image and awareness, communicating with the customer, utilizing the Internet and other old and new channels, and, often, creating communications within the enterprise (e.g., an intranet, company newsletters, and project communications).

In the customer-strategy enterprise, the marketing department will perform these traditional roles for customers who remain outside of the picket fence. It also may help to prepare communication messages or even business rules for customer managers who are building relationships for customers under management. In addition to deploying the traditional instruments of marketing, such as advertising and promotion, a number of other functions for the marketing department to perform are unique to a customer-specific approach, including:

• Customer analytics (see Chapter 12), a specialized skill set that involves building customer LTV models, gathering and manipulating data, and programming. The customer analytics group also may be responsible for tracking and reporting the internal metrics needed to measure the effectiveness of customer programs.
• Establishment of test cells and control groups.
• Campaign development and management, including dialogue planning.
• Offer specification, designed to appeal especially to higher-value customers and prospects.
• Customer management, as a line-management function, which has been described previously.
• Insight into short-term profitability and long-term customer equity and TSR (total shareholder return).

Transition Process for Customer Service

A service organization might be the appliance repair personnel, the hotel staff, operators answering the 800-telephone number, or the delivery crew. Every product manufactured and sold has a service organization associated with it in some way, whether customers obtain the product directly from the enterprise or through a channel organization. In the customer-strategy enterprise, the service organization has access to more customer information than in other traditional enterprises, and uses this information to deliver a valuable experience or to collect information (or both). For example, in a customer-strategy enterprise, the delivery driver might be asked to survey a customer’s warehouse informally and take note of the number of competitors’ cartons that are stacked within view of the delivery door. This information can help an enterprise begin to understand its share of customer.

Ironically, as pressures mount for enterprises to cut costs and improve efficiency, the customer service area may be squeezed in the process. In the customer-strategy enterprise, the customer service area plays a key role in executing customer strategies while servicing the customer. Customer calls are routed based on value and need, and the most appropriate customer service representative is assigned the call based on the skills of the rep. During the call, customer-defined business rules are applied to maximize the impact of the interaction with the customer, and the reps have been trained in how to interact most effectively with various customers. Also, the individual needs, talent, and experience of the reps are considered in the routing decisions. Reps are encouraged to enhance the skills needed to serve each customer efficiently and effectively. As customer needs change, the skills of the reps also must evolve.

What follows are two views—deep insights—about the role of service in customer relationships.

At many firms, the “customer service” function is thought of as a cost of doing business rather than as an integral part of the products or services actually being sold to customers. It is easy to spot an enterprise with this attitude. This is the company that hides its toll-free number on the Web site and that has an impenetrable Interactive Voice Response (IVR) system (see Chapter 7).

Increasingly, customer transactions are moving to an e-commerce model, and transactions normally handled with a phone call are now being done electronically, via the Web site. In many customer service areas, this has changed the mix of calls that are handled by the customer service rep. “Easy” transaction (order-taking) calls are now being replaced with more difficult customer situation calls (complaints, inquiries, billing and invoicing questions, etc.). This can increase the level of stress experienced by the customer service reps.

Traditional measures for customer interaction centers have focused on “talk time” and “one and done” measures. (See a more complete discussion about the customer interaction center in Chapter 7.) As we dig deeper into customer metrics, we start measuring average talk time for valuable customers versus customers who call into the customer interaction center frequently and yet do not generate enough revenue to warrant high levels of service. We begin to understand which customers are buying a wide range of products and services offered by an enterprise and which customers should be but aren’t. Many customer interaction center managers are left to fight a battle to increase talk time for the customers who warrant more attention, but they lack the analytics and resulting insights (“the facts”) to be able to justify that decision. This is where partnering with the customer manager is key: The justification for these measures should be in the customer strategies.

The fact is, however, that a customer-strategy company often can keep its costs down by centering on customer needs. Calls are more often resolved in one session and in less total time. Customer service reps do not “chase down” information or transfer customers from department to department. Voice response unit options are reordered to present the most likely option desired by that customer as soon as the customer is identified. This process can significantly decrease phone costs for an enterprise maintaining a toll-free phone line. And it requires that people within the enterprise start thinking like customers, or taking the customer’s point of view during key interactions (such as a sales call or customer care call), and combine this point of view with the customer strategy and business rules that have been identified for this customer. Change often demands new skill sets. As the enterprise begins to define specific roles and responsibilities (or job descriptions) for various customer care representatives, it also will need to develop training and development plans and recruitment and staffing plans. These descriptions include competencies and behaviors that will be required of all employees—things like customer empathy—and skills associated with different roles. Employees might determine how they “touch” the customer directly or indirectly by supporting another department.

An often-neglected step in this process is planning around the way customer care representatives are supported, measured, and compensated to reinforce the new behaviors, which should incorporate the customer-centered metrics described earlier. Unfortunately, the reporting capabilities in many enterprises are not up to the task, and some great customer-oriented efforts have gone awry because this last step was not implemented. Employees often want to “do the right thing” but are not supported or measured adequately or correctly. More important, many companies equate customer relationship management with “customer service,” when in fact customer service—important as it is—is not the same as relationships, customer experience management, or customer equity building. The heart of a Learning Relationship is a memory of a customer’s expressed needs so that this customer can be treated in a way that works for him without his having to be asked again. Customer service, in contrast, is often more like random acts of kindness masquerading as customer relationship management.

When you do need customer service, high-quality customer service is one of the beneficial outcomes of adopting customer strategies. Enterprises must keep in mind the cost of not providing sufficient service, thereby risking the loss of customers, the cost of lost long-term customer equity, and the expensive task of acquiring new customers. General wisdom places the estimate for customer defections due to a poor sales or service interaction between the customer and the enterprise at about 70 percent. It isn’t necessary for a company to make formal Return on Customer (ROC) calculations to understand the short-term losses in revenue and long-term customer equity cost to shareholders of poor service far outweighs the current perceived “savings” of reducing service quality.

Moreover, an enterprise must balance the cost of providing customer service with the needs and desires of the customer in such a way that the customer will find sufficient value in the enterprise to remain a customer. At a minimum, certain standards of accuracy, timeliness, and convenience must be in place to placate most customers. The right technology and processes must first be deployed, followed by the training and adoption of service practices by customer-facing representatives.

But what is the “right amount” of customer service? What do customers actually need and want? Are we doing the same expensive things for everybody when our MVCs would be even happier with less expensive service (think automated teller machines or Web banking versus service counter at the bank branch)? Taking different customer needs into consideration, what is the least expensive amount for the enterprise to spend on service that works for the customer? Which channel do customers want to use? Can they be easily moved to one that costs less—especially customers with low actual and potential value? And should different levels of service be offered to different kinds of customers? Might customer service mean different things to different customers? When is self-service appropriate? Certainly these and other questions should be addressed if an enterprise is to find the balance of service that serves both the customer and the budget. According to customer relationship management (CRM) experts Seth Shulman and Stanley Brown, “It is . . . essential to ensure that the balance between unassisted/self-serve (including e-mail), agent-assisted, and wholly voice calls (where the customer can dictate instructions) is carefully planned to provide self-serve maximum value to the customer, and not just to reduce costs.”5

Is “good” customer service in the eyes of the beholder? Some criteria an enterprise could consider from the customer’s perspective include:

• Saving time or money
• Accuracy of a transaction
• Speed of service
• Ease of doing business
• Providing better (not just more) information
• Recording and remembering relevant data
• Convenience
• Allowing a choice of ways to do business
• Treating customers as individuals
• Acknowledging and remembering the relationship
• Fixing problems quickly
• Thanking the customer

Not all of these elements are equally important to all customers. Any one of these criteria could be a deal breaker to one customer and of no consequence to another. Adding or upgrading customer services uniformly for everyone is an expensive way to raise the bar. Better to know what’s important to an individual customer and then to make sure that customer gets the services most important to him.

Many enterprises have learned that the integration of the contact center with all other communication vehicles may be the first step toward successful completion of the customer’s mission. For example, live online customer service, text-based chat, and Web callbacks are some of the vehicles that can elevate good, basic customer service to excellent and highly satisfactory service, the latter of which translates into customer retention, growth, loyalty, and profitability.

Transition Process for Other Key Enterprise Areas

Finance, research and development (R&D), information technology/information services (IT/IS), and human resources (HR) also need to make the transition to a customer-strategy organization, but these changes are not as readily apparent as those required by the marketing, sales, and customer service organizations. All four areas are directly responsible for capabilities building—or how well the organization is able to adapt and change to the new processes. For now, let’s look at how the transition affects these other areas of the enterprise in more detail.

Finance

As the organization moves to customer centricity, the finance function takes on new roles within the enterprise, and these are required to help implement a smooth transition:

• Many accounting systems are not set up to measure customer profitability and LTV easily, and the enterprise will need the support of the financial area to help define these metrics.
• Having measured customer value and the rate of customer value, the company will be able to use these measures to determine ROC, which will support TSR. These measures will also provide a stronger level of accountability from the marketers than basic Return on Marketing Investment (ROMI) or Return on Marketing Resources (RMR) or Marketing Resources Management (MRM).
• Having defined and learned to report these metrics, the finance leadership will work with line and staff managers and HR to develop appropriate customer-based compensation and reward systems for employees whose responsibility is to build customer equity and manage customer relationships and retention.

Building a strong customer-centric organization requires financial support to implement new programs and technology, and it requires accounting and management support to ensure costs and results are properly tracked and understood. The finance department will play a critical role in developing and evaluating the business case for implementing customer-centric initiatives.

One of the most important transitions at a customer-centric enterprise has to do with how the firm tracks, understands, and deals with the very concept of value creation. The customer-centric firm is one that understands that it is customers who create all value. But, as we learned in Chapter 11, customers create both short-term value, when they buy things and incur costs today, and they create long-term value, when they change (today) their likelihood of buying in the future—that is, when their lifetime values go up or down. In earlier chapters we also introduced the concept of “customer equity,” which represents the sum total of all the lifetime values of a firm’s current and future customers, and we showed that because this number actually should be the same as a firm’s “enterprise value,” the ROC metric, at the enterprise level, could be shown to equal a firm’s “total shareholder return.” At the enterprise level, the mathematical equations for both these quantities are identified.

So one very important role for the finance department at a customer-centric enterprise is to embrace the idea that the firm’s customer equity is an important intangible asset, somewhat like capital. Through the budgeting and planning process, a finance department already monitors the enterprise’s financial capital in order to avoid destroying value unintentionally (or using it up too fast). The same kind of discipline should be applied to monitoring the firm’s customer equity. Unlike financial capital, however, with the right actions, a firm’s customer equity actually can be replenished and increased, even as it is employed to generate current cash flow from customers.

If a finance department could track ROC at the enterprise level, it could help the firm avoid eroding its value as a business over time. Any firm that doesn’t track ROC might easily adopt programs that lead to unintended value destruction—programs that may generate better current-period profits at the expense of “using up” even more value from the customer base.

Because customers can be thought of as a productive asset for a business, and customer equity is similar to capital, the ROC metric can be compared to another financial metric already familiar to many large enterprise financial managers, Economic Value Added. “EVA™,” as it is known, is a measure used to account for the cost of the capital required by a business, in order to give companies a more accurate picture of the value they actually create with their operations. Two businesses with identical cash flows are not identically valuable, if one firm requires more capital than the other to produce those cash flows.6 Even if a firm measures its success in terms of return on assets, its financial results still can be deceiving unless it factors in its cost of capital. According to one EVA proponent, IBM’s corporate return on assets was over 11 percent when it was at its most profitable, but at the same time it faced a realistic cost of capital of nearly 13 percent. So even though it seemed “profitable,” one could argue that IBM was not actually creating value for its shareholders. A company may be unaware that it is diluting its financial capital unless it tracks EVA. In the same way, a customer-centric enterprise may be unaware it is diluting its customer equity unless it tracks its overall ROC.

Thus, the finance department’s role in transitioning to customer centricity is absolutely critical. The department’s basic function at any company is to track and understand how the company creates value for its shareholders and then to report the information to those who need to know—including internal managers and the shareholders themselves. To compare the likely economic impact of alternative actions, a company must always know how much capital each action will require, but it should also know how much customer equity will be consumed.

Research and Development

Research and development is another key area in many customer-strategy enterprises. R&D is responsible for creating innovative customer solutions and, therefore, works closely with marketing or sales (as it has done traditionally in the past). However, in the customer-strategy enterprise, it is the depth and quality of customer information that makes the difference. The customer manager group works within its own department to understand common customer needs, and these common needs drive some of the R&D group’s work. For some customers, there are needs driving the R&D efforts that will not be seen by other customers for a long time because the most valuable or most growable customers are intimately involved in the R&D work. This work will give these customers a competitive advantage in the marketplace. For example, an MGC (most growable customer) might be a service organization working with a technology supplier to create a wireless network for the sales force and service workers that will enable them to react to their customer needs instantaneously. This capability to respond dynamically will have a competitive advantage.

Information Technology/Information Services

Often, there is a centralized technology function (information technology, or IT) within large enterprises that is responsible for the technology infrastructure (networks, mainframes, routers, etc.). There may be groups (information services, or IS) that are dedicated to functions within the company and that work with the departments to implement applications that help conduct business (HR applications that manage payroll and employee records, other applications that run the order-entry system, logistics and planning, customer interaction center systems, etc.). Both of these functions are directly responsible for enabling the execution of customer strategies.7

Many IT/IS organizations go awry when they sponsor the CRM projects. Sometimes IT specialists overestimate their own skills in business strategy, but more often than not, the IT/IS organization runs the project management office (PMO) of the CRM project. This can work when IT/IS actually understands the importance of aligning technology implementation with the business strategy. If the IT organization cannot align the technology implementation and the business strategy, the customer management effort and the entire PMO should be governed by the business end of the enterprise. That said, business units often lack the project management skills to implement large-scale projects—and this expertise is often in the IT/IS area.

Human Resources

The customer-strategy enterprise requires knowledge workers—people who will recognize and act on relevant customer information. HR can directly influence the changes in several ways:

• Redefining the organization. By taking an active part in defining the new roles and responsibilities, the HR function can map out the transition plans for many key areas of the enterprise. Part of doing this requires that HR help the business define the changes and understand how employees will be affected by those changes.
• Evaluating whether the company has the capability to change as required by the newly developed customer strategies. Some important limiting factors may arise, such as the qualifications of the labor pool available and local salary expectations.
• During the transition plan, addressing all of the key recruiting, training, and ongoing support issues. Is there adequate funding to help employees migrate to these new responsibilities? Often these are “line items” in a project plan but are not incorporated into annual training and development budgets or plans.
• Creating career path opportunities that did not exist before. The responsibilities of customer interaction center reps or salespeople can grow over time as their skill sets can mature. For the more senior-level executives, a well-rounded employee who has worked directly with customers will become more valued in a customer-value-building organization. Customer-focused thinking will affect recruiting, too.
• Demanding and rewarding customer-value-building successes. The HR leaders of a customer-centric company will hold employees accountable not just for activity but for results measured in current net revenue from customers as well as current measures of long-term equity built by customers.
• Actively trying to manage and develop the corporate culture. Technology now enables the lowliest employee to leap tall corporate hierarchies with a single click, subverting the power of organization charts and structured personnel policies. This means that corporate culture is even more important when it comes to determining a company’s ultimate success. And a corporate culture that will give a customer-centric enterprise the best chance to succeed will be one that is centered on earning and keeping customer trust.

This last point, regarding corporate culture, is worth spending some time on, because it is so critical to success. Importantly, as businesses continue to streamline, automate, and outsource, corporate culture is becoming more important than ever before. A number of factors are at work here, including the increased complexity of modern organizations, greater sophistication of the workforce, globalization, and communications technologies that are accelerating the pace of routine business processes.

We should always remember the fact that, as far as an enterprise’s customers are concerned, the ordinary, low-level customer-contact employee they meet at the store, talk to on the phone, or interact with during a service transaction of any kind—that employee is the company. And corporate culture is the most potent tool available for ensuring that everyone at the enterprise is pulling in the same direction.

Culture is an elusive yet critical part of any company’s nature. Everyone talks about it, but no one can really put a finger on it. You could think of a company’s culture as something like the DNA of its business operation. It consists of the shared beliefs and values of managers and employees, usually passed on informally from one to another. A company’s culture consists of the mostly unwritten rules and unspoken understandings about “the way we do things around here.” Culture is what guides employees when there is no policy. It’s what they do when no one’s looking.

As a company matures, shared values and beliefs harden into business practices and processes, until workers and managers find it increasingly difficult to describe their own cultures or to separate cultural issues from organizational structure and process issues. At some organizations, managers take a proactive role in guiding or shaping their own corporate cultures, trying to ensure that the informal beliefs and values of employees and managers support the organization’s broader mission. The five-part Toyota Way, Wal-Mart’s “Three Basic Beliefs,” IKEA’s aversion to bureaucracy, and the egalitarian HP Way have all contributed importantly to the long-term success of those firms, and managers at each of these companies actively encourage an employee culture based on these value statements.

But regardless of whether a company overtly tries to manage it or not, every organization has a culture. Difficult or conflicting cultures tend to be the biggest factors accounting for why mergers and strategic alliances fail, why change management efforts don’t gain traction at a firm, and why major corporate strategy initiatives fizzle. And culture is also one of the biggest single impediments to most customer-centric transitions. In fact, a culture with bad karma will impede virtually every effort a firm could make toward better and more integrated customer-facing processes.

This is because culture is propagated the old-fashioned way—by imitation, that marvelously important survival tool. A new employee comes on board and “learns the ropes” by finding out just how things are done around here. When she encounters a new situation, she’ll ask someone who’s been around for a while. Successful behaviors are those that are rewarded by the organization, so how an enterprise provides recognition and incentives is important, but just as important is how the employees already working within the firm tend to socialize the values, processes, and rules when it comes to teaching newbies how to fit in.

The culture at an enterprise will reflect how it measures success, how it rewards people, what tasks it considers to be important, what processes it follows to accomplish those tasks, how quickly and effectively it makes decisions, and who approves decisions. The culture will reflect how friendly or competitive employees are with each other, how trusting they are, how much disagreement is tolerated, how much consensus is required, what privileges go with rank, what information is available to whom, what customers or suppliers are the most valued, and what actions are considered out of bounds. Although any enterprise can write down the values it aspires to and post those values on the wall, if the values are to become part of the real culture, then all the company’s systems, metrics, processes, rewards, and HR policies must be aligned with them too.8

In terms of ensuring success for a customer-centric transition, the HR department needs to take a proactive approach to the enterprise’s corporate culture, dealing directly with the many values and issues that lie beneath the surface of the firm’s organization chart. Employees view many HR functions unfavorably: HR “polices” the rules and procedures, or it is viewed as a purely administrative function. The transition to customer management can serve as an opportunity for HR to address proactively the many issues that arise in the transition, because the changes are wide and deep. Directly or indirectly, though, they all echo back to the basic relationship issue of trust: Do things right, and do the right thing.

Managing Employees in the Customer-Strategy Enterprise

The road to becoming a customer-value-building enterprise is fraught with speed bumps. We have shown so far how the transition requires a new organizational infrastructure—one that is populated by customer managers and capabilities managers who fully support the migration from day one. The enterprise moving to a customer-strategy business model will likely require new capabilities for relating to customers individually. It will need to assess where the gaps lie in its established capabilities so it can improve its focus on customers, not just products, and build profitable, long-term customer relationships.

Organizations used to be simpler to manage, because most tasks were routine, most problems could be anticipated, and desired outcomes could be spelled out in official policy—the “rules” we just read about in Dov Seidman’s section. An employee’s job was to follow the policy. But with the advent of new information and communications technologies, more and more of these routine tasks have been automated or outsourced, and the resulting organizations are slimmer and more efficiently competitive. What remains at most firms, and will continue to characterize them, are the functions and roles that cannot be automated or outsourced. These are the kinds of jobs that require employees to make decisions that cannot be foreseen or mapped out and therefore aren’t spelled out in the standard operating processes. These jobs require nonroutine decision making. Many of them involve high-concept roles and other functions that simply can’t be covered by a rule book.

In A Whole New Mind, author Dan Pink persuasively describes this new, postautomation, postoutsourcing “Conceptual Age.” It may once have been true that information workers would inherit the world, but today’s information workers can live in Ireland or China, and even doctors and lawyers are finding their jobs increasingly threatened by computers and online substitutes. Indian technology schools turn out some 350,000 new engineers a year, and most of them are willing to work for $15,000 annual salaries. So what type of work can’t be outsourced or automated? Pink says the type of work that will characterize successful executives in the future (at least in the United States and other advanced Western economies) is work that involves creativity and sensitivity and requires skills in design, entertainment, storytelling, and empathy. This idea makes sense. Consider lawyers, for instance: Legal research and paperwork can be outsourced to Ireland or India, but cases have to be argued to juries in the courtroom, in person. Or doctors: X-rays can be evaluated remotely and diagnoses rendered, but bedside manner has to happen, well, bedside.9

This trend is already showing up in employment figures. At least within the U.S. economy, production and transactional jobs, which recently made up about 60 percent of the workforce, are being automated rapidly, while the other 40 percent of jobs, involving nonroutine decision making, have grown two and a half times faster in recent years and pay 55 percent to 70 percent more than routine jobs.10 These nonroutine jobs require workers to deal with ambiguous situations and difficult issues—problems that often have no direct precedent or at least no “correct” solution.

A company can automate the contact report a sales rep has to file, but it can’t get a computer to look into a client’s eye and judge whether to push for the sale right away or ask another question first. Jobs like this require judgment, creativity, and initiative on the part of the employee. As a result, according to one study, many companies are turning their attention to “making their most talented, highly-paid workers more productive,” because this is the surest way to gain competitive advantage.11

Companies have spent the last several decades economizing, streamlining, and automating their more routine, core processes, but the cost and efficiency advantages they secured from these activities were short-lived, as the benefits of automation quickly permeated whole industries and their competitors became equally efficient. Efficiency, cost cutting, running lean and mean—these are just the greens fees required to remain in the game. By contrast, when a company gains an advantage by making its nonroutine decision-making employees more productive and effective, that company is building a competitive advantage described by three authors writing in the McKinsey Quarterly as likely being:

…more enduring, for their rivals will find these improvements much harder to copy. This kind of work is undertaken, for example, by managers, salespeople, and customer service reps, whose tasks are anything but routine. Such employees interact with other employees, customers, and suppliers and make complex decisions based on knowledge, judgment, experience, and instinct.12

If an enterprise can figure out how to manage these “conceptual age” employees better, in other words, it will have an advantage that is hard for a competitor to see or imitate. The secret, however, is not technology and process, because it just can’t be spelled out like that. If it could be documented in advance and defined as a process, then it could be automated, right?

Just as the customer-strategy enterprise strives to keep and grow its customers, so too must it seek to keep and grow its best employees. The truly customer-centric organization will be better able to do this, however, because of its very corporate mission. If the firm’s mission is encapsulated by earning the trust of customers, always acting in the interest of customers, this philosophy itself can provide the underpinnings for a culture of trust to permeate the entire organization. If employees are taught that every problem at the firm needs to be tackled from the standpoint of respecting the interests of the customer involved, then it is only a very short step to suggest that employee problems should be addressed from the standpoint of respecting the interests of the employee.

Jonathan Hornby, visionary and performance management expert at SAS Institute, cites an example of a bank in which Department A believed Department B was a drain on resources (and this attitude was likely a drain on company culture). Their manager used a tool created by Joel Barker called the Implications Wheel®, where employees were prompted to specify the first-order, second-order, and third-order implications of a certain action—in this case, eliminating Department B. By the time both departments completed this exercise, Department A realized that their potential customers came directly from Department B, and they changed their position of their own accord. Strategic managers will come up with similar creative ways to encourage trust and transparency between employees as well as with customers.13

Trustworthiness is not an elastic concept. It doesn’t stretch. No one ever has just “some” integrity.14 You either have integrity or you don’t. You are either trustworthy or you are not trustworthy. And if earning the trust of customers is the central mission at a company—the primary way it creates value and grows—then it is highly likely that this business will also enjoy the trust of its employees. And earning and keeping the trust of employees may be the single most critical step to having a productive and value-creating organization.

Never forget, also, that employees are not only networked with each other, they’re networked with the rest of the known universe. The same interactive technologies that empower customers to share their experiences electronically with other customers also empower the employees at any firm to share their own experiences with the employees at other firms. The old “command and control” philosophies of management—philosophies that might have worked reasonably well throughout most of the twentieth century, are no longer very effective. In November 2003, for example, Doug Monahan, founder and chairman of tech marketing firm Sunset Direct, sent this charming message to employees:

I expect my computers to be used for work only. Should you receive a personal call, keep it short. Should you receive a personal email, I expect the email either not answered, or a brief note telling whoever is sending you emails at work to stop immediately. Should I go through the machines, which I assure you, I will be doing, and I find anything to the contrary, you will be terminated immediately. For those who think I am kidding, and do not get with this program, I promise you that by Christmas Eve 8:00 you will be gone.15

Not surprisingly, it’s difficult for a company such as Sunset Direct to trust employees. And for good reason. In such a setting, it’s nearly impossible for anyone to feel good about anybody; and, whatever culture develops, it certainly won’t be based on trust. Soon after this ominous threat was issued, however, and in direct violation of the edict, a Sunset Direct employee used one of the company’s computers to post Monahan’s message on InternalMemos.com, where it has now become a legend. Doug Monahan has realized immortality on the Web, as Scrooge.16

Contrast that with the leaders at the companies that have made the lists of “The 100 Best Companies to Work For” and “100 Best Companies for Working Mothers.” Carlson Companies has been on both lists. Marilyn Carlson Nelson was at the helm of Carlson, Inc. as its chief executive officer from 1998 to 2008. Here are her views about it.

Change is important but never easy. Many believe that change can revitalize the enterprise to compete in ways that it never could have before. Resistance to change, however, is inevitable, as many employees who oppose or resist the new infrastructure will step forward. How does an enterprise cope with these changes? How does an executive manage employees in this new business environment?

Summary

We have been reinforcing the idea that a customer-based initiative is not an off-the-shelf solution but rather a business strategy that will imbue an enterprise with an ever-improving capability to know and respond to its customers’ individual needs. Executed through a cyclical process, customer-strategy principles can provide an enterprise with a powerful source of competitive advantage. But doing so requires organizational commitment, careful planning, and, ultimately, a well-orchestrated array of people, culture, processes, metrics, and technology. Successful implementation comes only with an understanding of the nature of this comprehensive business model. The transition team will have to encourage a more integrative, collaborative attitude among all employees, perhaps by establishing a multidepartment task force that can standardize a way for reporting customer information and other related issues. Ultimately, throughout the entire transition, the team will need to revisit each of the steps and refine and revise how it is executing them. After all, the transition to a customer-strategy architecture never really ends.

Food for Thought

NOTE: Because this topic spans two chapters, we have included the Food for Thought questions twice for ease of use.

Glossary

Customer’s point of view Thinking the way the customer thinks, within the context of daily business processes as well as customer interactions. Customer advocacy is the set of actions that results from taking the customer’s point of view, or treating the customer the way you would want to be treated, if you were the customer.
Customer portfolio management The deliberate management of a portfolio of customers to optimize the value of each customer portfolio to the firm. By utilizing the feedback from each customer, a portfolio manager analyzes the differing values and needs of each customer and sets up the best treatment for each customer to realize the largest return on each relationship, often in an automated way using business rules.
Picket fence An imaginary boundary around customers selected for management. Customers outside the picket fence likely will be treated as customers have always been treated, using mass marketing and traditional customer care; each customer behind the picket fence, however, will be the management responsibility of a customer portfolio manager, whose primary responsibility will be to keep and grow each of the customers assigned to her.

1. Don Peppers, Martha Rogers, Ph.D., and Bob Dorf, The One to One Fieldbook: The Complete Toolkit for Implementing a 1to1 Marketing Program (New York: Currency/Doubleday, 1997). Updated by Lane Michel, 2010.

2. Ibid.

3. Ibid.

4. Michael Ahearne, Douglas E. Hughes, and Niels Schillewaert, “Why Sales Reps Should Welcome Information Technology: Measuring the Impact of CRM-Based IT on Sales Effectiveness,” International Journal of Research in Marketing 24, no. 4 (December 2007): 336–349; Richard A. Lee, The Customer Relationship Management Survival Guide (St. Paul, MN: HYM Press, 2000).

5. Seth Shulman and Stanley A. Brown, Customer Relationship Management (New York: John Wiley & Sons, 2000).

6. Economic Value Added® and EVA® are registered trademarks of Stern Stewart & Co.

7. R. J. B. Jean, R. R. Sinkovics, and D. Kim, “Information Technology and Organizational Performance within International Business to Business Relationships: A Review and an Integrated Conceptual Framework,” International Marketing Review 25, no. 5 (2008): 563–583; Barbara H. Wixom and Hugh J. Watson, “An Empirical Investigation of the Factors Affecting Data Warehousing Success,” MIS Quarterly 25, no. 1 (March 2001): 17–41.

8. Don Peppers and Martha Rogers, Ph.D., Rules to Break and Laws to Follow: How Your Business Can Beat the Crisis of Short-Termism (Hoboken, NJ: John Wiley & Sons, 2008), pp. 98–101.

9. Daniel H. Pink, A Whole New Mind: Why Right-Brainers Will Rule the Future (New York: Riverhead, 2005), pp. 36–37.

10. Bradford C. Johnson, James M. Manyike and Lareina A. Yee, “The Next Revolution in Interactions,” McKinsey Quarterly, no. 4 (2005): 21.

11. Ibid.

12. Ibid.

13. Jonathan Hornby, Radical Action for Radical Times: Expert Advice for Creating Business Opportunity in Good or Bad Economic Times, (Cary, NC: SAS Institute, Inc., 2009), 10-13.

14. We are indebted to Lt. Gen. (Ret.) J. W. Kelly, who made comments about the inelasticity of integrity in his commitment dinner speech to USAFA Class of 2007, August 9, 2005, USAFA, Colorado Springs, as reported in the Association of Graduates Magazine.

15. Adam Horowitz, “101 Dumbest Moments in Business,” Business 2.0 (January/February 2004): 81.

16. This section was adapted from Peppers and Rogers, Rules to Break and Laws to Follow, Chapters 6 and 11.

17. Don Peppers, Martha Rogers, Ph.D., and Bob Dorf, The One to One Fieldbook (New York: Doubleday, 1999).