What makes some
companies so much better at managing customer relationships
than their competitors?
Put a different
way, how are companies like Enterprise Rent-A-Car, Pioneer
Hi-bred Seeds, Fidelity Investments, Lexus, Intuit, and
Capital One able to stay more closely connected to customers
than their rivals, in ways that significantly
influence these companies’ profitability?
It’s a question
that formed the basis of a survey that Wharton marketing
professor George
Day sent to senior managers in 342 medium- to large-sized
businesses from the manufacturing, transportation, public
utilities, wholesale and retail trade, finance, insurance and
real estate sectors. Day also conducted in-depth interviews
with managers at 14 companies within the 342-firm sample,
including Dow Chemical, Verizon Information Systems, GE
Aircraft Engines and Ford.
The results of
these surveys and interviews appear in Day’s latest research
paper entitled, “Winning the Competition for Customer
Relationships”,
which will appear in the Sloan Management
Review’s spring issue. The paper, among other things,
suggests three distinct approaches to customer relationship
management (CRM), each with dramatically different results.
The first
approach, Day says, is the market-driven one,
which makes CRM a core element of a strategy that focuses on
delivering superior customer value through such elements as
exceptional service and a willingness to cater to individual
requirements.
Day cites
Fidelity Investments’ decision to invest in understanding and
segmenting its customers as an example. In 1997, he says, the
company switched from a “product-centered orientation, which
meant pushing only their own funds and treating all customers
the same way,” toward a relational orientation “based on
tailored education and investment recommendations.” This
included such things as expanding their offerings to include
non-Fidelity funds and presenting investment recommendations
tailored to each investor’s needs.
What made the
strategy “come alive,” says Day, was Fidelity’s ability to
“vary the value proposition in systematic ways within each of
17 customer segments,” which in turn were based on four larger
customer groupings. These included the high value segment
(with large complex portfolios that needed “hand-holding”);
core customers (interested in investing but not actively
involved in it); active traders (interested in “top-notch
execution” of their trades), and institutions and small
businesses offering retirement plans for employees.
The second
approach identified by Day’s survey is based on inner-directed
initiatives aimed at better organizing internal data to cut
service costs, help sales staff close deals faster and better
target marketing activities – tasks that are usually assigned
to the information technology group and have little connection
to competitive strategy.
CRM technology
is frequently a focus of this approach, and indeed, CRM
software programs remain the fastest growing area in customer
management. But Day contends that CRM technology has been
oversold, noting recent studies suggesting that close to 20%
of CRM initiatives “actually make things worse … Suppose you
have a system (for handling customer service) that has grown
up over many years and that everybody understands. If you
migrate over to a sophisticated CRM system that is hard to
install, contains numerous software glitches, relies on people
who aren’t properly trained for the program, and lacks the
necessary data to operate, then the level of service is going
to go down.”
According to
Day, the odds of disappointment with the inner-directed
approach “are high, because the primary motivation is to solve
the company’s problems, not to offer better value to
customers.”
The third
approach Day identifies uses defensive actions –
such as loyalty programs based on redeeming points in a
frequent-flyer or frequent-buyer program – designed to deny an
advantage to a competitor. While “there is little chance of
gaining an advantage, this type of approach at least maintains
the status quo,” Day says.
One Size Doesn’t
Fit All
Day’s research
led him to conclude that superior performance comes from
integrating three components of the customer-relating
capability: an organizational orientation that
makes “customer retention a priority and gives employees wide
latitude to satisfy customers,” information about
relationships, including the quality of relevant customer data
and the systems for sharing this information across the firm;
and configuration
– the alignment of the organization toward building customer
relationships, achieved through incentives, metrics,
organization structure and
accountabilities.
In looking at
the whole sample of 342 firms, Day says he was surprised to
find that what most separates the good firms from the bad is
their configuration. “Going into this study, I would not have
expected configuration to have made such a huge difference,”
he notes.
Yet in looking
at the 18% of the sample that are the relationship leaders,
what sets them apart is their orientation, says Day. The
emphasis all throughout these companies is on “customer
retention. Everybody is concerned about it, not just the
marketing group or the sales group. Everybody makes it a
priority. Closely allied to that is an openness to sharing
information about customers – rather than an ‘I own the
customer and won’t share information about him or her’
attitude – and an organization-wide willingness to treat
different customers differently, rather than a
one-size-fits-all approach.”
Another
unexpected result, Day says, was that his broad conclusions
held up in all types of markets, whether B2B or B2C. “The
argument has always been that in a B2B firm you have fewer
customers, you know them better, they are more valuable, and
so forth. But at the competitive level, it seems factors such
as orientation and configuration transcend some of the
industry differences.”
The ‘Red Queen’
Syndrome
Day’s research
allows him to weave company examples throughout his paper in
order to illustrate the different elements of a good customer
relationship strategy. Under a section on orientation, for
example, he writes that many companies only give “lip service
to the notion that different customers should be treated
differently, based on their long-run value.” He credits IBM
under CEO Lou Gerstner for insisting the company take on only
the best customers – and then “doing everything possible to
cater to their needs,” adding that this approach saved IBM
from “the worst of the problems that H-P, Cisco and Compaq
encountered by chasing every Internet start-up without regard
to their long-run ability to pay.”
In discussing
configuration, Day points out that “relatively few businesses
[in his survey] emphasized customer satisfaction and retention
in their incentives. Over half gave them no emphasis at all.”
Siebel Systems, the leader in CRM software, however, “is
obsessively focused on customer satisfaction,” tying 50% of
management’s incentive compensation and 25% of salespeople’s
compensation to measures of customer satisfaction. This
compensation, Day adds, is “only paid a year after the sales
contract has been signed and the level of satisfaction with
their performance is known.”
Superior
configurations also have organization structures “that ensure
the customer has a seamless interaction with the company,
rather than ‘seeing’ several companies because different
functional groups do not know about their other interactions,”
Day writes.
The real payoff,
he suggests, is when all the elements of a configuration –
metrics, incentives and structures – are properly aligned, as
occurred in the General Electric Aircraft Engine Business
Group’s attempts to improve service for their jet engine
customers. The company studied in depth what customers wanted
in terms of responsiveness, reliability, value added and help
in improving their productivity. Their findings led to such
changes as assigning a corporate vice president to each of the
top 50 customers in order to build the relationship, putting
leaders of the company’s Six-Sigma quality program on site
with customers, using the Internet to personalize the delivery
of parts, and incorporating customer service metrics into
employee evaluation criteria.
The third
component of the customer-relating capability – information –
is less important than orientation and configuration in
distinguishing leaders from followers, Day notes. “Yet when we
asked [companies] how their time and money were being
allocated for building the capability, almost everything was
being spent on databases, software and data mining. The
rationales were ‘this is the easiest area to compare to
competitors … we have to match what our competitors are doing
… software vendors keep bringing us new solutions to our
database management problems,” etc.
In short, Day
concludes, “big investments in CRM technology are yielding
negligible competitive advantages. It is the classic ‘Red
Queen’ syndrome; although they are going faster and faster,
they stay in the same place.”
Customer
Defection Rate
One of the
reasons many CRM failures occur is because companies
concentrate on the customer contact processes without making
corresponding changes in internal structures and systems, says
Day, who cautions firms to “change the configuration before
installing CRM.”
For example,
while creating incentives that emphasize customer retention is
smart strategy, a company should first establish the customer
defection rate and how that compares with competitors’ rates.
Also, it’s important to know why customers are defecting: Is
it because of
service, quality issues or delivery problems? Are the
defectors attracted by a competitor or consciously polygamous,
i.e. used to shopping around. Companies need a portfolio of
metrics that “collectively reveal the long-term profitability
of the customers,” which suggests looking at such measures as
cost to acquire and serve or share of wallet, and at such
areas as employee retention and number of customer complaints.
In addition,
when considering organization structures, companies with a
superior customer-relating capability were more likely than
others to be organized by customer group or segment. Indeed,
“49% of those saying there was clear accountability for
customers’ welfare were organized by customer groups and
processes versus 2% for functional.” An example, says Day, is
Nokia’s decision to “split its $21 billion mobile-phone unit
into nine customer units, each with its own product R&D,
marketing and P&L responsibility. One unit will serve
business users, while another will focus on barebones handsets
for users in developing countries.”
Day suggests,
however, that this model is not always appropriate. It works
best, for example, when there are distinct segments or when
customers want a bundle of products and services. Microsoft,
he writes in his paper, tried to organize around different
types of customers to get product-development groups closer to
customers, but the effort “came undone because decisions about
wide-utility products such as Windows were spread across too
many of the new divisions.”
Day also makes
the point that successful relationship managers are always
“calibrating their successes against those of their
competitors. In the sophisticated financial services industry,
for example, Fidelity, Schwab and Merrill are all highly
competent. But Fidelity and Schwab have an edge … because of
their orientation. At Merrill, for example, the sales rep or
account manager owns the customer” which suggests less
openness about sharing information with others in the
organization.
Two Case
Studies
What
differentiates his study from others, according to Day, is
that nobody before has looked at whether being a relationship
leader gives companies a competitive advantage, and by
extension, significantly influences their profitability.
“Companies that make relationship management a central part of
their strategy are going to be the ones that win,” he
says.
Attached to his
paper is a comparison of the strategies of two credit card
companies, Capital One and First USA. Day shows how different
approaches to customer data and customer responsiveness have
led Capital One to “consistently outperform First USA; it
earns 40% more interest income from each customer, with double
the profit margin.”
First
USA, for example,
“gives little consideration to differences between customers
in credit risk or potential profitability,” Day notes. Its
thrust, according to the former chairman, was “to be laser
focused on operating efficiency and pass those savings on to
customers.”
Yet this
“efficiency bias,” Day says, “contributed to a self-centered
orientation that doesn’t see customers as individuals … and
has led to some notably wrong-footed decisions.” In mid-1999,
for example, the company eliminated “the grace period for late
payments while raising late fees ... Customers departed in
droves and the bank was forced to rescind the
move.”
In addition,
because First USA grew by “acquiring customer portfolios from
other credit card companies, or by using third parties to
source potential relationships with associations,” more
distance was put “between them and their customers and
prevented them from building data warehouses to hold the rich
customer information that is the raw material of the
customer-relating capability,” Day says.
The
configuration of First USA “also gets in the way,” Day adds.
The company is hierarchically organized around products or
functions “like operations, collections and systems … No one
has responsibility for customer retention … Front line contact
employees can’t be rewarded for keeping valuable customers.
Instead they try to retain everyone – whether they are bad,
good or indifferent.”
Contrast this to
Capital One where the goal is “to deliver the right product,
at the right price, to the right customer, at the right time.”
Customer responsiveness, Day says, “is deeply embedded in the
organization. Their orientation is fundamentally shaped by the
belief that micro-segmentation of their customers is the only
way to identify and keep those who are most valuable. One
result is that employees at all levels have implicit
permission to act as customer advocates and take initiatives
to solve customer problems.”
Day also
describes the company’s “unsurpassed ability to handle
customer information,” including a system where computers
access the full history of a customer who calls in, cross
references it with data about how millions of customers
behave, and then routes the call – along with about two dozen
pieces of information about the caller – to a company
representative. “Suppose a customer calls to cancel his or her
card. The Intelligent Call Routing system immediately displays
three counter-offers, from 12.9% to 9.9%. The representative
has the power to negotiate the new arrangements and is
eligible for a bonus depending on the outcome of the
negotiation,” Day writes in his paper.
In addition,
“the U.S. card business
within Capital One is structured by market segment groups such
as Prime, Medium Response, Partnerships, Affinity and so
forth, and then further divided at the individual business
manager level where profit responsibility resides.” Instead of
a cumbersome top-down organization, “Capitol One is adroit at
sensing opportunities from the bottom-up, and motivated to
pursue them fast.”
Day also
considers the example of Canadian Pacific Hotels, noting the
hotel chain’s ability to combine “deep customer insights with
configuration changes” designed to increase customer loyalty
in an extremely competitive market. Initially, Day says, the
chain was “not well regarded by business travelers, a
notoriously demanding and diverse group to serve, but also
very lucrative and much coveted by other hotel chains.” Yet
“by investing time and money in learning what would most
satisfy this segment, the company discovered “what [these
customers] mostly wanted was recognition of their
individual
preferences and lots of flexibility on when to arrive
and check out.”
CP Hotels
“mapped each step of the guest experience from check-in … to
check-out, and set a standard of performance for each
activity. Then it looked to what had to be done to meet a
commitment it had made to personalized service.” Even small
additions, such as free local calls or gift shop discounts,
“required significant changes in information systems.” Along
the way, the management structure was revamped so that “each
hotel had a champion with broad, cross-functional ability” to
ensure the hotel lived up to its ambitious goals.
After
implementing these and other changes, Day writes, CP Hotels of
Canadian business travel jumped by 16% in a flat market,
without adding any new properties.
“Firms that
sustain their commitment this way,” he concludes, “send a
signal to both employees and customers that their
customer-relating capability is one of the centerpieces of
their strategy.”