The world is not flat. Competitive advantage thrives in customer relationships, despite the leveling effect of the Internet and technology. For long-term capitalism, strategy ought to be focused on the ultimate collaboration--relationship development.
In a technologically flat world, the last bastion of true competitive advantage may be as simple, and as difficult, as paying attention to customers, developing trust, and delivering what’s promised. Most important, the resulting customer relationship advantage is sustainable and unique.
To compete on relationships, measure relationship development with CRI (Customer Relationship Intelligence) and the revolutionary metric Relationship Value.
It is really difficult to align an organization to execute on its strategy.
That only a small percentage of companies are able to successfully execute even well formulated strategies, has been bantered around for decades. When Walter Kiechel III wrote about it in Fortune magazine in 1982 and in Planning Review in 1984, he put the number at 10 percent. In a 1999 Fortune article about CEO failures of the period, authors Ram Charan and Geoffrey Colvin estimated the number at 30 percent. There are a number of reasons why:
- Often executives find it difficult to explain how they achieved success. That makes it hard for many executives to give good direction in order to help their teams repeat success. Jim Collins, the author of Good to Great, says the most dangerous position for a company is not to know why it’s successful. Yet executives typically have to rely on the opinion of people close to them or on anecdotal information rather than quantitative measures. Even valuable anecdotal information loses potency and reliability as it is passed up the chain of command. But it hasn’t been practical for it to be any other way until now. As a result, executives have been isolated from the very people who could give a first-hand account of what happened—the customers and the people who relate to them in sales and marketing and customer service. And even the people in those functions haven’t been able to look at success in any sort of context. They don’t have an actionable framework to know: Do this, this and that. In this order, at this time. In that pattern.
- Less than 60 percent of companies tie incentive compensation to achieving their strategic plans, while 97 percent tie compensation to their financial plan results, according to a 1999 Strategy & Leadership journal article by David Axson. Axson also pointed out that the typical company gives access to the strategic plan to only 42 percent of managers and 27 percent of employees.
- Only 43 percent of companies have a strong link between long-range strategies and their annual budget, according to a 1996 study by Renaissance Solutions, Inc. and CFO magazine. Only 50 percent of executives, 20 percent of managers, and less than 10 percent of frontline employees have goals and compensation linked to strategy.
- Budgeting, planning, and forecasting are broken; ergo, so is execution. Top-down numbers drive what the budget will be in many companies. Will there be across- the-board cuts, or increases based on last year’s numbers, or a percentage increase over what the competition is spending, or will a best practices number be used? Is that any way to manage to an objective? It is, if a company can’t articulate its strategy effectively throughout the organization and know what it needs to do to execute. Knowing what to do—at the individual customer level—is key. Too often, managers get a budget number and then do their best to plan their tactics to it without knowing what the overall directional strategy is.
- The current system is set up to be reactive instead of proactive. Most strategic plans don’t easily roll into execution, into action. So they are put on a shelf, dusted off once a year to react to end-state numbers, and then recast for another year.
There is a glimmer of hope here with new collaborative solutions that pioneering executives are using. According to “The Social Side of Strategy” in the May 2012 edition of McKinsey Quarterly “executives at organizations that are experimenting with more participatory modes of strategy development cite two major benefits.
- One is improving the quality of strategy by pulling in diverse and detailed frontline perspectives that are typically overlooked but can make the resulting plans more insightful and actionable.
- The second is building enthusiasm and alignment behind a company’s strategic direction—a critical component of long-term organizational health, effective execution, and strong financial performance that is all too rare.”
A sidebar in the article, cautions “the wise leader will look for steps in the strategic planning process that can be tackled in unconventional ways, without pretending that taking those steps implies wholesale replacement of the process or that it will magically transform their strategy.”
When an organization is aligned, people work together toward a common goal, behind a common strategy, across functions, with an integrated budget built from the ground up to be successful.
But instead of alignment, too often strategy is the purview of executives, while everyone else does their best to figure out a reasonable course of action within their functional area. They fight over resources with other functional areas, or work at cross-purposes. There are no clear handoffs or consequences.
For people who think beyond themselves and care about the company’s success, it is frustrating. If any of these frustrations exist, the company performance is sub-optimal and possibly dysfunctional:
Frustrating for Marketing: When marketing develops leads that sales ignores, or generates interest, only to have the phone ring off the hook and not be answered, it’s frustrating. But marketing is measured on the number of leads they generate and what they cost—not on the follow-up, or if they are the right leads to execute the strategy.
Frustrating for Sales: When sales knows what customers want but is never asked for an opinion as marketing campaigns are being developed, it’s frustrating. But sales is rewarded on making the sale by whatever means necessary, with whomever they can get to buy, not if they made the sale using marketing’s leads or spouting the company message. It’s frustrating for sales to book an order and be told it can’t be delivered. Actually, it is downright maddening for salespeople, since they are compensated on completing the sale.
Frustrating for Operations: But to be fair, it is equally maddening for operations to try to deliver on unrealistic promises made by sales.
Frustrating for Customer Service: It’s frustrating for customer service people to be told to get customers off the phone fast or they will be penalized—knowing that those customers will have to call back and go through the dance again.
Frustrating for Customers: Often customer service people just do not have enough information: How many times has a prospective customer responded to an offer, but customer service knows nothing about it? How many times are customers sent from one department to another until they finally reach the right contact? How many times does the customer know more than the help desk person about how to solve the problem? It is actually worse than this if you count all the times a customer might give feedback only to see nothing happen. The stats here make you cry. According to a study referenced by Gartner Group, 95% of companies collected customer feedback. But few did anything with it. Only 50% alerted their staffs. Only 30% used the insight gained, only 10% made improvements, and a mere 5% told their customers of the change they made.
It is really frustrating for the professionals in these functions to know that no one really knows or appreciates what they do, to see their efforts wasted, or not know if what they are doing is strategic or not. They do the best they can, knowing that all this “not knowing” makes them vulnerable. Clearly, they are not in control.
What’s worse, the most important thing these professionals do is often not even recognized: they are the ones who establish and build relationships with customers, but that isn’t measured.
Granted, some progress is being made by leading companies embracing marketing automation to integrate Marketing and Sales efforts. But here the focus is on Acquisition, not on Retention, where the money is.
What’s Needed is a Cohesive Framework to Align Executives with Managers and with Frontline Staff who work with customers and take strategy down to the customer relationship level. This framework could lessen the risk to people in sales and marketing and in customer service, and to their companies in general.
Just Imagine…what it would be like for innovation and productivity if the creativity of those involved in sales and marketing, and management, could flow smoothly, without these frustrations? How much better people would be treated, and how much more profitable and more sustainable business would be!
With Relationship Value and the CRI Framework, management can
#1 Unlock the unique, sustainable competitive advantage found in customer relationships.
#2 Align the organization in a cohesive framework to earn high-profit revenue.
#3 Operationalize strategy to manage strategy execution in real time.
Sustainable competitive advantage comes from understanding and acting on your customer behavior and profit patterns better than your competitors understand and act on theirs. Though multiple competitors might have relationships with the same customer, each is different. The relationship itself is exclusive.
Unlike the purveyors of competitive advantage in the past--control of resources, economies of scale, and technology--which have become givens in a “flat” world, competitive advantage derived from exclusive customer relationships can’t be copied by competitors.
Different sets of interactions took place to develop each relationship. Yet, relationships become a competitive advantage only to the extent that you have a strategy to focus on them explicitly.
As a Rainmaker from a major firm, when asked about his success in business development, commented, “It doesn’t really matter what your business strategy is; it all comes down to the relationship.”
EXECUTE "DIRECTIONAL" STRATEGY...BY EXECUTING CUSTOMER RELATIONSHIP STRATEGIES
Competitive advantage guru Michael Porter of Harvard laid the groundwork when he wrote, “The essence of strategy is in the activities—choosing to perform activities differently or to perform different activities than rivals.” We call the strategy he described a directional strategy.
A “directional” strategy makes explicit what business you are in, what your brand stands for, what your promise is to customers, what you are offering, how you are creating it, and how you are promoting and delivering it to customers. Some may call it brand strategy instead of directional strategy. Whatever the name, the strategy is for the company as whole or a business unit and is set by executives to achieve the company’s goals.
What’s been implicit is the underlying customer relationship strategy. It is inherent, intrinsic, and intuitive, yet rarely articulated or orchestrated across the customer relationship. Critically, the customer relationship strategy should also be explicit. It is through a customer relationship strategy that a directional strategy can be tied to profit. Profit is earned by the orchestration of functions across the company to deliver a product or service to a customer.
The customer relationship strategy ties everything together; it unifies the functions. It is through the customer relationship strategy that the directional strategy aligns with the customer point of view and how it is executed. With operational control and a cohesive framework for the customer relationship strategy, operational control is then achieved for the directional strategy.
Just as in the directional strategy, the essence of the customer relationship strategy is in the activities. But the essence of customer relationship strategy execution is in the Interactions with customers, which is how the activities are carried out. Interactions develop relationships.
FOCUS ON TOP PRIORITY, PROFITABLE CUSTOMERS.
It is practical to focus first on top priority customers. Top priority means different things for each company. It could be those who make large purchases or regular purchases, those who pay quickly, prestigious customers whom others will copy, key customers in a new industry or geographic location. Or it could be customer segments with profit improvement potential. Here are some approaches that are described in our Thought Leadership Paper on Profitability Segmentation:
- Customer Satisfaction
- Net Promoter Score (NPS)
- Recency, Frequency, Monetary (RFM) Transactional Analysis
- Customer Lifetime Value (CLV)
- CLV to Contribution to Profit to Date Matrix
- Profitable Customers to Profitable Products Matrix Analysis
- Activity-Based Costing (ABC) to Balanced Scorecard Matrix Analysis
Within the customer segments, the focus is on channel/product group combinations, because that is the smallest unit for effective action. It is at this level that relationships are made and the people who make them are managed. There is a customer relationship strategy for each channel/product group. Given that most companies are using at least three sales channels, there will most likely be several customer relationship strategies for every directional strategy—the strategy set by executives to achieve the company’s goals.
With CRI and the Customer Relationship Strategy, strategy is made relevant and actionable throughout the organization—from the executive suite to the people working directly with customers. Managers form the bridge from Executives and their directional strategy to these Frontline Staff. To be meaningful to the Frontline Staff, there needs to be a Customer Relationship Process that makes it clear what they are supposed to do, what creates value for the customer, and how what they do in their functional areas contributes to strategy execution. The focus on channel/product groups ensures that.
Customer Relationship Wings™
Instead of working in isolated silos, the people on the frontline with customers collaborate across the functional silos in a seamless Customer Relationship Process. Each function does what it does best. Acquisition, Closing, and Retention stages in the customer lifecycle are managed as a continuum. Marketing keeps Acquisition; Sales has Closing; a new elevated function Customer Retention, either shared among Marketing, Sales, and Operations or in a new group formed to coordinate the activities, has Retention.
Managers and a cross-functional action learning team of their group leaders from marketing, sales, and the new customer retention as well as the staff who support them—business analysts, IT and HR professionals--define a customer relationship process and tactics for what they do now to execute strategy and create value with their customers at a base level. They evaluate preparedness to deal with the marketplace and customers with the CRI Alignment Readiness Reality Check assessment. The process provokes discussion and stimulates ideas for change from the current situation to a scenarios where they’d like to be as soon as practical, while helping to build consensus on how to do it. What used to take days, now takes a few hours.
Managers and the action learning team define when a customer has moved from one stage to another in the Customer Relationship Wings in the CRI Framework. These definitions are critical for better handoffs between functions.
The framework makes it easy to see what tactics and critical interaction processes are missing in the continuum to move contacts through the stages, as well as what needs to be added or changed. See our HACK, “Measure Value Creation with CRI for Long-Term Success,” for more on critical interaction processes. The exercise also stimulates ideas for new alternative strategies and their supporting tactics and processes.
Potential new tactics to support strategy alternatives are chosen not only for their traditional promotional value, but for their value in developing the customer relationship to support the strategy. What the tactics should be in each of the stages is not developed in isolation, but by team collaboration. The customer relationship development process is dynamic, with prospects and customers moving among the stages—sometimes forward, sometimes backward. So attention is paid to what the handoffs need to be as well.
Managers consider the impact on Operations. Will they be able to deliver what is about to be promised? What business rules should be in place? Promises that are kept build relationships. Managers also anticipate the change management techniques they will need to employ in execution in order to align those on the frontline with customers. What kind of training and monitoring will be required? It will be easier, because the action learning team had a part in developing the tactical plan and the customer relationship process.
Intelligence built into the Customer Relationship Process measures how sales and marketing works to create value and how strategy is executed so both can be managed.
The Interaction Process is a joint process you and your customers undertake to build relationships one Interaction at a time. Each Interaction builds value and can be measured. See our HACK, “Measure Management 2.0 with CRI for Real-Time Management/ Operational Control/ Profit,” for how. The Interaction Process across the entire customer relationship is how strategy is brought to life.
Interactions are the “cause” and a new metric Relationship Value is the “effect” in relationship cause-and-effect. To compete on relationships, measure Relationship Value. Relationship Value:
- Is a Key Performance Indicator (KPI) for relationship development and a leading indicator for profit and satisfaction,
- Solves the critical issue of the Relationship Age--distilling insights from the chaotic crush of Interaction data coming from internal systems, the Internet, smart mobile devices, Social Media, and Communities, and
- Operationalizes that intelligence in the context of CRI (Customer Relationship Intelligence) and Social CRI (Community Relationship Intelligence).
The Relationship Value Metric is Elegant. With Relationship Value, Frontline Staff and their Managers monitor Interactions as they occur to gain insight into effectively developing individual relationships and analyze progress against a norm. Relationship Value
- Measures whether an Interaction moves the relationship forward or backward, and
- Expresses the cumulative effect of a series of Interactions in developing a relationship.
It takes a series of Interactions over time to develop a relationship. It is the cumulative effect of the Interactions in developing the relationship that is determinative--not what Interactions were used or even how many--as long as the Interactions execute a cohesive, integrated Tactical Plan, over time. Many alternative Interaction combinations are possible.
Relationship Value makes the Interaction details operationally immaterial for the most part. Relationship Value measures the cumulative effect, essentially becoming a numeric proxy for the underlying Interactions, enabling a strategic overview.
Measuring Interactions measures how strategy is working, how value is created, and how profit is being earned--all in real time. Interactions are the essence of real-time strategy execution.
WHAT OTHERS ARE SAYING ABOUT RELATIONSHIP VALUE AND OUR CRI SOLUTION:
We are still in the early stages of understanding and developing customer relationship metrics. Until now, these metrics have concentrated on measuring our own performance to see how well we are doing. Linda Sharp’s Relationship Value Metric turns this on its head with a new metric that measures our whole relationship with customers.
►Richard Taylor, Senior Software Engineer, SenSage, Inc., Co-Chair and Founder Business Intelligence SIG, SVForum
Customer Relationship Intelligence is powerful! I especially like the prescriptive second half of the book. I believe the remedy to the inescapable challenges Linda Sharp laid out so carefully is very doable. I say this from the perspective of an executive who helped pioneer the use of data warehouses for customer intelligence. You do better in marketing if you know the facts. The CRI Framework is an organized, simple way to build intelligence into process to get unique customer feedback and the key performance indicators you need to run your business in real time. When sales people have to focus on short-term opportunities, they can keep other relationships alive and growing without having to think too much about it. Imagine the advantage of knowing which actions to take and when for a higher payback with each individual customer.
►Boyd Pearce, Former Executive, IBM, Teradata, Truviso
With the Relationship Value Metric, Linda Sharp has found a quantitative way for sales to give feedback to executives without being second-guessed. Her Customer Relationship Intelligence Framework reflects a great respect for and understanding of sales. She has truly made the sales job easier day-to-day.
►Alfred Dipman, Vice President North American Operations, Linkquest LTD
FOR MORE on Strategy Execution, Profitability Segmentation, and Voice of the Customer Research, see our Thought Leadership Papers at www.Religence.com. You will find more in the CRI Reference Section there as well. You can also get helpful files in the Helpful Materials section of this Strategy Execution HACK. Download CRI Profitability Checklist, CRI Alignment Readiness Reality Check, and CRI Why Ask WHY.
For more on Customer Relationship Strategy see Chapter 5 and for more on Relationship Value see Chapter 4 in Linda Sharp’s book Customer Relationship Intelligence: A Breakthrough Way to Measure and Manage Sales and Marketing.
A copy in eBook form is available with our complements. It is included in the Helpful Materials section of our Management 2.0 HACK, “Measure Management 2.0 with CRI for Real-Time Management/ Operational Control/ Profit.” For a link to the HACK, go to the Helpful Materials section of this Strategy Execution HACK or try this one Measure Management 2.0 with CRI.
For more on the book, please go to www.CRIbook.com.
For more on value creation, please see our HACK, “Measure Value Creation with CRI for Long-Term Success.” For a link to the HACK, go to the Helpful Materials section of this Strategy Execution HACK or try this one Measure Value Creation with CRI.
NOW REAL-TIME MANAGEMENT AND INNOVATION IS POSSIBLE.
With CRI (Customer Relationship Intelligence), management can happen on the fly, in the moment. The relevant intelligence is there to support real-time decision making, for immediate course-correction, for Managers and Frontline Staff. What’s happening in the process can be seen. Similarly, profit results are up-to-date with individual customers as well as in the aggregate.
Interactions and responses carry out planned tactics in a joint process with customers, interaction by interaction, response by response, across the functions of Marketing, Sales, and Customer Retention as a continuum. The process includes not just the Interactions carried out by people, but the Interactions that were done automatically by the system as well, for example, an ongoing email campaign. A data stream records the results of each Interaction in a quantitative way—what value was derived from each Interaction in building the individual customer relationship, and what the Interaction Cost.
Instead of using a narrow, incomplete look, function by function—say, at the number of times an ad was run, the number of emails sent, or the number of sales calls made--to judge performance in Sales and Marketing, the impact of the collective Interactions in moving the relationship forward can now be readily seen, including the cost. Are the costs-per-contact in each stage working out as planned? Is it taking more or fewer Interactions than expected to move a customer forward? Are relationships being built as quickly as it was thought they could be?
When accumulated Relationship Values are shown graphically, users can see how deep the relationship is becoming without getting buried in the Interaction details. The user can decide what to do next to effect the outcome in the context of typical behaviors. They use their own judgment on appropriate Interactions with customers factoring in the differences in costs between two Interactions with the same Relationship Value. Choosing options not visually obvious would be facilitated by decision rules where subtle differences in a particular combination of Interactions predicts success and could matter.
If actual performance is not what was expected, then managers can adjust the process, innovating in real time. Tactics can be added or deleted. Interactions can be added to--or deleted from-- the list of Interactions from which to choose. New responses can be identified and captured. These changes in the process can be immediately reflected in the day-to-day operational guidance for each of the staff members on the frontline with customers.
Managers are now armed with structured data to analyze, and have a real-time basis for monitoring alerts, for status reporting, and for timely course corrections. They can have continuous feedback for decisions and up-to-date profit results. See our HACK, “Measure Management 2.0 with CRI for Real-Time Management/ Operational Control/ Profit,” for how.
UNLOCK THE COMPETITIVE ADVANTAGE IN CUSTOMER RELATIONSHIPS
Your best reference point for improving your business model is developing your own analytical CRI Framework based on quantifiable customer interactions and detailed customer profiles for comparison. Despite their popularity, best practices do not lead to competitive advantage; they lead to standardization. They are just a place to start—a place to start to identify your own sustainable best practices. For every business the situation is different, and the tradeoffs are different—as Michael Porter of Harvard has noted.
Now you can take it a step further and add that what happens within the customer base is also different. It is even different within different parts of your own company. Your strategy is more likely to pay off if you leverage those differences rather than trying to copy some other business’s success. Your strategy is more likely to pay off if you have uncovered your own unique formula for developing high-profit contributing relationships and created a business rules-driven learning company. When driven by your rules and your results interacting with your customers, your business model is made better, with every iteration. See our HACK, “Measure Management 2.0 with CRI for Real-Time Management/ Operational Control/ Profit,” for how.
FOCUS ON RETENTION FOR SUSTAINABILITY AND PROFIT.
A customer relationship strategy achieves effectiveness in building a sustainable, more profitable business with customers’ help. That’s why it is so important to focus on retention. Retention provides a much higher Return on Investment (ROI). It is easier to sell to existing customers. Furthermore, existing customers can provide valuable referrals that jumpstart the relationship building process with new, prospective customers, saving the company acquisition money.
But even more important in the long run, focusing on retention completes the relationship-building process and yields a common framework for organizing and managing all customer activities. Here’s where to start:
- Shift your focus from customer acquisition and revenue to customer retention and profit. 7X as much is spent on acquiring customer as is on retaining them. Work backwards over time to acquisition and revenue. Some 80% of revenue comes from repeat business and referrals; only 20% comes from new customers typically. Know how value is created—or destroyed—for top priority customers like key accounts or franchise customers. Understand the effect of gaining or losing a key customer has on business profit metrics such as risk adjusted return on capital.
- Build more exceptionally profitable customer relationships. First, know who are your most profitable customers and why. Then map and track what it is like to do business with you. Get your distributors on board. The confidentiality of their relationships is protected with Relationship Value, while still giving both of you vital intelligence. See our HACK, “Measure Management 2.0 with CRI for Real-Time Management/ Operational Control/ Profit,” and our HACK, “Measure Value Creation with CRI for Long-Term Success,” for how.
TO COMPETE ON RELATIONSHIPS WITH OPERATIONAL CRI:
- Listen to customers you’d like more of,
- Segment by profitability,
- Promise what you can deliver profitably—deliver on your promises,
- Do what creates value for your customers—stop doing what doesn’t,
- Pay attention to the customer experience and what happens in real time,
- Partner with your customers and key stakeholders, and
- Work together as a team with a common purpose. Collaborate.
It Takes a COMMUNITY and dedicated, innovative professionals to collaborate on the scale we have to develop Relationship Age business processes to:
- Retool from a company/product focus to a customer focus from strategy to execution to profit.
- Retool from backward looking RISK to forward looking ADVANTAGE.
- Share operational control among Frontline Staff, Managers, and Executive.
- Reward the unsung heroes in sales and marketing and customer service for the value they create every day by developing relationships with customers.
- Build on proven methods, many of which we pioneered including profitability segmentation, Voice of the Customer, customer experience engineering, and valuing intangibles.
- Invent new ones like Value Creation Mapping, Product Relationship Roadmap, and the Social CRIàCRI Tracking System with its revolutionary metric Relationship Value.
Thanks to all the others on the Religence CRI Team: Jim White, Ray Sheen, Bob Sabath, George Fruehan, Dick Morgan, Kathleen Robinson, Ray Dunaway, Eve Thompson, John Kauke, Steven Cox, and Anne Chambers plus our colleague Richard Taylor. This team of experienced senior people represent marketing, operations, finance, IT, and change management. A customer-focused enterprise is everyone’s job. Together we have commercialized our CEO’s business process patent and built out the Religence Framework for CRI. What a total pleasure it is to collaborate with this innovative, multidisciplinary team. Thank you.
Many, Many More Acknowledgements can be found at the end of our HACK Measure Management 2.0 with CRI for Real-Time Management/ Operational Control/ Profit.
©2012 Religence®, Registered USPTO, Patent Number US 7,526,434