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At the latest Insight seminar, titled “The Other 2/3 of the CRM Story,” a series of speakers explained how executives can get the most bang for their buck—or, more likely, the tens of millions of bucks they are spending on CRM technology—by first focusing on some key issues. Getting CRM right is crucial both because companies are competing heavily to see which can develop a better relationship with customers and because the dollars at risk are so large. Gartner Inc. (www.gartner.com) says spending on such services increased more than 10% to $22 billion in 2001, yet, according to Meta Group Inc. (www.metagroup.com), executives say that between 55% and 75% of their CRM initiatives have failed to meet objectives. Speaking at the seminar, held May 15 and 16 at the Ritz-Carlton Hotel in Chicago, John Sviokla said executives first have to avoid the “myth of CRM.” That is hard, because the myth is seductive. It is that, in a single stroke, executives can use technology to gain control over their business—for instance, by letting them know exactly what their sales pipeline is at any moment. Sviokla, vice chairman of DiamondCluster International Inc. (www.diamondcluster.com), said the myth has repeatedly attached itself to different technologies since the 1960s, when computers, then known as “electronic brains,” were touted as the way to make business rational and predictable. But, he said, control never fully comes, in part because employees find ways around the technology—when a system measures how many sales calls employees make, employees find ingenious ways to make the system think they have met quota. Instead of seeking control, Sviokla said, businesses need to use CRM to let employees do their jobs better and to help customers. That may mean giving employees more information about customers, together with more power to decide how to keep customers happy. That may mean inviting customers to help design how the organization will interact with them, so they can deal with a single person or at least a single phone number rather than having to become expert in the organization’s inner workings just to get a question answered. Once the myth of control is dispelled, Sviokla said, companies must do three things before focusing on the technology. First, they must find an exposed nerve—an acute, existing need—their customers have. Second, they must think about how they can use their CRM technology to look at customers in a new way. Third, they must revamp their organizations, their internal processes, and their incentive structures to support that new view of customers and satisfy their acute needs. Fidelity Investments (www.fidelity.com) shows how important it is to understand the exposed nerve. In the early 1990s, the Boston fund manager had some incredibly popular mutual funds, but it saw that investors increasingly wanted to be able to diversify among funds and to move money easily from one fund to another. Fidelity, which had been organized as a series of autonomous funds, reconceived itself as a “supermarket of funds.” It then stopped looking at customers as individuals and started focusing on the needs of whole households. Fidelity also changed its internal organization to fit the new focus. While it used technology to support its new approach, it didn’t start there. By understanding customers’ needs, Fidelity not only fended off a challenge from discount broker Charles Schwab & Co. (www.schwab.com) but actually expanded its dominance in mutual funds. Similarly, when Harrah’s Entertainment Inc. (www.harrahs.com) decided to narrow its customer base and focus on frequent gamblers, it began thinking about technology by first understanding the psychology of the frequent gambler and figuring out how to offer that customer top-notch service, benefits, and recognition. Rather than compete head-on with casinos that were building ever-more-luxurious properties, Harrah’s came up with a sophisticated new model for identifying good customers. In the past, casinos often waited until a gambler visited enough times to build a clear profile, then began offering incentives for him to return. By contrast, Harrah’s makes guesses on the first visit about how good a customer someone might become. It does this based on a customer’s level of skill, speed of play, typical length of stay, the size of his bets—even how rapidly he operates a slot machine. Harrah’s offers incentives for the person to use a loyalty card so Harrah’s can track his activity. As Harrah’s learns more, it continually adjusts how it treats the customer. Like Fidelity, Harrah’s generated stellar results. In every market, the company has grown faster than its competitors. Since 1998, its stock price has tripled while the market value of the industry as a whole has decreased 20%. Harrah’s Chief Operating Officer Gary Loveman decided what he wanted to do, then looked for the technology and people to do it. “Most people look at the technology and people they have and work backward,” said Matt Gersper, a vice president at PRG-Schultz International Inc. (www.prgx.com), which audits companies’ expenses and receivables to make sure they receive all the money they are entitled to and don’t pay out more than they should. Gersper added: “We need to decide what kind of business model we want first.”
Once a customer need is identified, detailed economic analysis is required to help a company understand how to fill that need as fully and profitably as possible. Jonathan Harrison, a DiamondCluster partner, recommended a process called “customer value management,” which essentially is an extensive series of small tests that offer varying packages and prices so companies can learn how to get the most value out of existing customers and attract new customers, too. Sprint PCS Group (www.sprint.com) used the process to evaluate which customers were most profitable and how it might keep them around. Sprint also used customer value management to find other ways to increase revenue, while cutting costs. For instance, the wireless operator used customer value management to evaluate whether it should charge a fee when customers switched to a new cellphone. Sprint had been charging a “reprogramming” fee of $35 and had built a nice revenue stream, but the company learned through testing that the fee wasn’t worth it. The charge was inducing some customers to go off and find another carrier. When Sprint eliminated the fee, it improved its bottom line by $83 million a year, according to Dena Swackhammer, vice president of customer solutions strategy and activations at Sprint. In all, she says, customer value management has improved the carrier’s financial results by nearly $250 million a year because Sprint has a better sense of what customers truly value.
Even when companies understand their customers, they often botch things because they set up the wrong incentives for employees, said Peer Munck, also a partner with DiamondCluster. He said companies can manage customer relationships far more profitably if they just “stop doing stupid things.” Munck said he had worked with a food-service-distribution company that rewarded salesmen who arranged contracts to ship goods with the highest possible gross profit margins. That sounded logical—until detailed analysis showed it was a dangerously wrong-headed measure. The sales force was pushing shipments of low-density goods such as napkins, which carried high margins but which required too much space on a truck. Instead, Munck said, the company learned that the right goal was maximizing profit per square foot of cargo space. The company changed its approach and rewarded its sales force for lining up contracts for items such as lobster that, while generating low profit margins, allowed for a lot of weight to be crammed into a small space. The company swung to a profit from a loss almost overnight. The buyout firm that had purchased the food distributor for $700 million sold it a few years later for $2.2 billion. Similarly, Munck said, an insurance company made a mistake when it decided to pay higher commissions to independent agencies that generated the most significant growth. The problem was that not all growth was the same. When the insurer probed its compensation structure, it found that high-growth agencies generated that growth by selling less-profitable, or even unprofitable, products. The insurer was inadvertently paying the biggest rewards to the agencies that were delivering the lowest profits while giving paltry sums to those that had contributed the most. Once the insurer changed its incentive structure to focus on profitability rather than growth, it did much better.
When it does come time to purchase technology, the choice should stem naturally from all the thinking a company has done about what it needs from a CRM system, said Dave Baker, a DiamondCluster partner who specializes in information-system architecture. He said the fast-food chain McDonald’s Corp. (www.mcdonalds.com), for example, would likely need different systems than hotel operator Ritz-Carlton Hotel Co. (www.ritz-carlton.com), because the two are at almost opposite ends of the spectrum when it comes to how customized service is. He added that companies should start learning what customers want by doing a better job of managing the data they already have, rather than attempting something radically new. He advocated that while companies should think big and should be prepared to satisfy those ambitions quickly, they should start small. McDonald’s, for one, began cautiously. David Green, until recently the senior marketing executive at the company, said McDonald’s knows it has the opportunity to learn more about the tens of millions of customers it serves every day. After all, at the moment, McDonald’s knows almost nothing about them as individuals. But the company also knows that it can’t risk violating customers’ expectations of fast, consistently good service or break the emotional attachment that employees—who are said to have ketchup in their veins—and customers have with the company. So, to test the possibilities of a loyalty program, McDonald’s used only slightly more than a dozen restaurants to test whether patrons would go home and type special codes in at a Web site to accumulate points toward rewards such as food, CDs, and movie tickets. The aim was to match up information about purchases with specific customers and increase profitability—without slowing down checkout lines. The technology used in the loyalty test was basically chewing gum and baling wire—no technology was added in the restaurants, and McDonald’s did almost nothing to automate the handling of the codes that were entered at the Web site. Now that McDonald’s has seen a significant jump in revenue at the test sites, however, the company is evaluating whether to roll out the program nationwide. Alan Kay, president of Viewpoints Research Institute Inc. and the father of the personal computer, advised that technologists should “always put people first.” Sometimes, he joked, customers and employees are viewed as “roadkill on the information highway” because they can’t be controlled. In the end, Kay said, technology is really providing another way to collaborate with customers. The possibilities are endless, one audience member suggested. A financial planner and a client, for example, could go through financial expectations and view charts and balance sheets together, without having to be in the same place. Sharing the information in real time would go a long way toward increasing the productivity of that, and many other, interactions.
Not that managing relationships with customers will ever be easy. USAA (www.usaa.com), an insurer that is often held up as a prime example of great customer service, has achieved its success because it has been working on the issue for decades, said Steve Yates, president of USAA’s Information Technology Co. In the 1970s, he said, USAA was a pioneer in 800 numbers, so customers could reach the company more easily. Later, in a decidedly low-tech approach, USAA speeded the handling of customer inquiries by giving all service representatives a card that listed all the key numbers that a customer might need in order to get a query handled. Still later, the company built a single, unified database that provides a single source for all information about all dealings with all customers. The company also has built links to affiliates, so that if a customer has a car accident and calls in a claim a service representative can check available car rentals and help the customer get a replacement vehicle while he still is on the phone. Even as many companies in every industry struggle with confusing, conflicting, incomplete information about customers, USAA posts numbers that others would drool over. Fewer than 4% of its customers leave each year, and each customer household buys, on average, more than four financial products. In the end, creating successful customer-relationship programs comes down to devising an integrated approach. Technology alone won’t do it. “I can assure you,” Munck joked during the session, “nobody at Harrah’s said, ‘I want the gambling version of SAP 3.0.’” In other words, you can’t just buy a piece of off-the-shelf software and expect it to transform your business. If only it were that simple.
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