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The Three E's of CRM
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In the early days, many organizations sought customer relationship
management (CRM) technologies to drive operating efficiency within
sales, service, and marketing. Today business executives are recognizing
the next opportunity to come from CRM. According to Gartner, Inc., in
2005, the primary business justifcation for investing in CRM applications
will shift from cost and efficiency savings to focus more on revenue growth.
CRM Phase II will be about integrating customer information across the
enterprise and increasing collaboration with customers and partners. Over
the next two years, the fastest growing areas of CRM investment will be in
internal integration, customer analytics, and customer collaboration. In
looking at the new customer focus of CRM initiatives, Gartner analyst
Michael Maoz predicts that customer data integration will rise in importance,
as part of the "glue" that connects the back office with front-office CRM
investments.
If organizations are to be successful in Phase II of the evolving CRM
strategy, they will need to deliver on what Technology Solutions Company
(TSC) has defined as the three "E's" of CRM: experience, execution and
equity. More and more, companies are developing new business models
or retooling existing models to focus on creating competitive advantage by
delivering unique customer experiences. Technology advances have generated
opportunities to streamline and integrate front-to-back office business
processes and drive real-time analysis of customer interactions. And leading
many organizations through this dramatic shift in strategy, capability and
structure is the newly appointed Chief Customer Officer.
This paper presents the three E's and outlines TSC's 5-Step Action
Plan for driving the organizational changes necessary to deliver experience,
execution and equity
Introducing The Three E's of CRM
Experience
Although internal integration of technologies appears to be the
current focus of most Phase II CRM initiatives, the logical place to start is
redefining the experience of the customer. As products become indistin-
guishable and markets and geographies converge, it will be the experience
that differentiates and drives retention and loyalty among customers.
Experience management is driven by three critical capabilities in dealing
with customers, the ability to 1) visualize, 2) personalize, and 3) colonize.
These capabilities will be built into the business delivery model and define
the organization's value proposition.
Consider this example: an entrepreneurial manufacturer who is bringing "garage shop" motorcycle design to the
mainstream market-and turning the traditional business model on its head in the process. In his technology-driven
business model, he will provide customers the opportunity to design "form-fitting" bikes complete with the most
intricate artwork and details from custom handlebars to custom gas caps. Before the customer commits to a
purchase, an approved dealer will provide a digitally-created, online, 3D concept model of the bike. The dealer will
also provide a simulated ride that mirrors the unique bike design. All the digital information about each design is
saved...just in case the customer wants to buy another bike. In the spirit of added value, he will capture the entire
design, build, and delivery experience in a personalized coffee table-sized book that the customer can share with
friends and other motorcycle enthusiasts.
This business model delivers on the three core capabilities of experience management. From the personalized
design to the visualization of the bike's design and ride characteristics, the manufacturer has created a unique
buying experience. But the real hidden asset is the book, which accomplishes two critical goals. He has created
what Malcolm Gladwell in his book, Tipping Point, calls a connector, and has formed an emerging customer
colony. This concept of colony is an extension of the community concept 1rst exploited by the Amazon.com model.
In a customer colony, the connection is high touch, personal and geographically focused. In this case, it's the
customer's neighbor, friend or family member. Through the book, the manufacturer can define a localized market
of potential customers with a built-in advocate. Colonization is distinguished by a high-touch interaction-a
dialogue-that shapes the market and creates new opportunities to collaborate with distinct customer segments.
A host of other companies have placed experience at the center of their customer strategy. Parents of little
girls can refiect on sipping tea with their daughters and their dolls at the American Girl Stores in New York City
or Chicago. Disneyland creates an experience for all visitors that's unmatched, and Starbucks continues to attract
and retain customers for $4.00 coffee with its coffeehouse ambiance.
Execution
Now that the customer experience and business model have been defined, we can turn to execution, recently
the buzzword of many corporate executives. Execution around the customer is built on three key principles:
- Buying (selling) requires an emotional connection.
- Experience is the integration of singular events.
- Relationships must evolve to grow.
A growing manufacturer of exhibit booths provides a good example. This company embarked on an initiative
to improve its ability to execute-and to integrate the design and manufacturing processes within its business.
Selling in the exhibit booth marketplace is all about innovative design and capturing emotion. When a business
invests in a major trade show such as COMDEX, it is looking for booth designs that create an experience for
attendees, express the company brand, and facilitate interaction between booth representatives and attendees.
Exhibit booth manufacturers must be able to design booths that meet these criteria and deliver them by the show
deadline. It is as much art as practical floor design...lighting here, wiring there. Translating that visual experience
into a series of parts that can be manufactured can be a challenge. After all, art is open to interpretation and
not necessarily confined to the rules of geometry. And clients invariably request changes, often just before the
delivery date.
Many booth designers have adopted 3D rendering technology that can simulate the complete trade show expe-
rience for their clients. Creating a virtual experience that captures the prospective client's vision of the booth playsequity
to one of the emotional connections so important to the sale. Clients can actually visualize themselves going
through the booth with all the impact and marketing flair they had specified. The virtual presentation is the "dog
and pony" show that demonstrates the booth designer's ability to translate the client's needs into art form.
Using 3D technology also creates another opportunity. These high-end rendering tools truly create digital art, but
they also can confine the designer to geometric truths and the laws of physics, forcing design-for-manufacturability.
Our booth manufacturer recognized the value of this technology to enhance the selling process, deliver on the
promised vision, and manage the client experience from sales pitch to booth delivery.
Managing the design change process
Typically, even though a client has signed off on a booth design,
changes in that design will likely be requested at some point before the actual booth is delivered. The ability to
respond efficiently to the client's request while managing expectations of manufacturability, cost and delivery
impact is critical.
The design change process can become the hidden cost of manufacturing an exhibit booth. Frequently designers
are contacted directly by clients looking to alter the design. And very often, designers do not pass on charges for
making a change-even when it requires a material increase in the cost of the booth. In our example, the booth
manufacturer found the issue to be less about the client's individual request and more about the ability of the
organization to track request history. And there was greater concern about administering change management than
actually delivering the finished booth. Without a 360 degree view of the client interaction, the manufacturer was
losing money. To eliminate this leakage, workflow and data management software tools along with the new 3D
design tools are being evaluated. The manufacturer's vision is to link these tools to the procurement system and
create a means for designers to re-cost changes online, notify the sales rep via email, and request milling and
manufacturing estimates to make the change. Sales reps will then have time to contact clients to negotiate the
additional charges, review potential timing impact with the client, and release change approval.
While meeting the challenges of driving internal operational efficiency and external client value, our booth
manufacturer is significantly changing the nature of the relationship with its customers. With greater visibility to
customer interactions and an accelerated design change process, the company no longer worries about leakage or
scrambling to make last minute changes before delivery. And this translates into real value for the customer based
on collaboration in the design process and a commitment to deliver the customers' vision.
Dell, Honda, Home Depot and IKEA are other examples of companies who consistently execute against a defined
customer-focused strategy and have yielded consistent returns in the process.
Equity
TSC contends that if experience and execution are market- and organization-facing performance capabilities, then
equity is the financial barometer by which both are measured. Customer equity has been a developing concept for
well over a decade. As a metric, it is defined as the total of the discounted value of all of a firm's customers. By
that definition, it incorporates quantity of purchases, operating margins, marketing, sales, and service costs (or
development, acquisition, and retention costs), and a projection of future purchases. More importantly, it represents
three critical components of a customer's net worth to the firm: value, brand and retention.
Value represents the price-cost relationship of the product or service between the firm and the customer, brand
is the emotional connection, and retention is the likelihood of repurchase. The drivers of value, brand and reten-
tion equity become the framework for defining the customer experience and building the execution capabilities of
a customer-focused organization.
Developing a customer equity scorecard creates a set of metrics by which the organization can assess the impact
of changing sales, service and marketing strategies. A recent TSC client, a leading consumer electronics retailer,
provides a perspective on the value of a customer equity scorecard. This retailer began implementing a new store
model based on a definition of "customer-centricity". The first step in this process was segmenting the customer
base into a series of group profiles defined by buying behaviors-including types of purchases (for example, high-
end electronic versus practical appliances), frequency, spend per visit, and return frequency. The development of
these customer groups allowed the retailer to then assess the equity being driven by each group, and in turn, the
perceived value of the group over the long term.
Distinct growth and investment (or divestment in some cases) strategies were devised for each group, and
value-added offerings were developed to support each strategy. The store operating model was then redesigned to
cater to a segmented customer base in which offerings were made based on the customer group profile. The results
within the 10 percent of the stores operating under the new model were significant- a 300 percent difference in
average sales growth year over year versus the existing store operating model. Based on those results, the roll-out
of the new store concept has been accelerated and the value of aligning to customer equity measures was realized.
The retailer's new business model supports the adage that all customers are not created equal. It demon-
strates the real power of CRM in driving strategic solutions that can be enabled and realized through intelligent
application of technology.
Implementing TSC's 5-Step Action Plan
To drive the change required to deliver the three E's-
experience, execution and equity-an enterprise champion must be identified: one who is pragmatic, passionate,
diplomatic, results-driven, competitive and analytic, with a predisposition to taking a market/ customer perspective.
In first-phase CRM initiatives, that champion was likely the CMO, VP of Customer Service, VP of Sales or perhaps
the CIO, as the efforts were functionally focused under one executive. In CRM Phase II, a functional structure will,
at the very, least slow change and could completely shut down opportunities for competitive advantage. In our first
two case studies, the initiatives were driven directly by the CEO. The champion must have enough organizational
clout to drive a cultural shift in thinking and interacting with customers. More and more, a Chief Customer Officer
(CCO) is emerging in the organizational structure to lead this change.
What steps should the CCO undertake? TSC has worked with clients to implement a 5-Step Action Plan that
will meet the challenges of the three E's . With a bias to act and adjust, this plan is structured in eight to 10-month
cycles aimed at rolling out a prototype of a redefined experience. If the cycle is any longer, market opportunities
may be missed and momentum lost.
Step 1. Develop the Equity Index
Creating a baseline of organizational performance is critical in assessing opportunities
and prioritizing areas of investment. The first step should be to calculate a customer equity index utilizing the life-
time customer value equation and discounting at the cost of capital.
Developing a view of customer equity will require defining the customer segments to be served and calculating
both the potential and realized value. Differentiating strategies for investment and growth by segment will be a
critical outcome of this effort.
Step 2. Redefine the Experience
Develop an Interaction Map of customer transactions through the complete
lifecycle. Focus specifically on areas where "context" of the relationship was lost within an individual trans-
action. These should be low-hanging fruit that point out ways to improve communication flow across the
organization. Then step back and assess how well the experience represents the brand, supports retention,
and differentiates from the competition.
Step 3. Deliver an Execution Model
Do the current capabilities and competencies of the organization support
the customer experience strategy? Can service be differentiated based on customer segments and value? Is
product/service personalization a required capability? Does the technology infrastructure automate workflows
and facilitate proactive customer interactions? Are the right incentives in place to align the organization
with defined customer strategies? These questions will need to be answered when operationalizing the cus-
tomer experience strategy. New initiatives to build out capabilities or invest in new technology and training
will likely be required. Remember to run the expected returns on these initiatives through your customer
equity model to baseline performance. If the initiatives don't project improved customer equity, then you
may need to make adjustments in approach or reset objectives.
Step 4. Prototype the New Organization
Identify a segment of customers to target for an initial deployment
of the new business model. Test assumptions, validate economics and refine the approach. Assess the real
relationship between the drivers of equity originally identified and their actual impact/sensitivity. A number
of creative ways to prototype new operating models exist. One model frequently used is the "Loyalty Club".
Many companies will provide special services to customers who display a certain level of purchase frequency.
Airlines are a prime example, as are rental car companies. This same concept can be applied in testing a
new operating model. Be creative and take some time to assess performance. The rest of the organization
can then be "rolled-up" once the new model has proved its value in return on customer equity.
Step 5. Measure, Adjust, and Renew
As more organizations focus differentiation on the entire customer experience,
the pressure to continually revitalize customer strategies will be greatly increased. In turn, the capability to contin-
ually measure, adjust and renew activities that will drive customer equity is increasingly important. Having completed
the baseline model of value, brand, retention drivers, and calculated customer equity, the organization is well
positioned to continually test the impact of changes in approach and strategy and adjust as needed.
Aligning Strategy and Action
As organizations embrace experience, execution and equity, the critical
elements of CRM will require a transformational effort for many organizations. Having a customer focus must be
much more than something that managers talk about. In Phase II of CRM, continually redefining the customer
experience will require that innovation becomes a core capability of the organization.
Just as important, execution will require aligning all functions of the organization-not just those that directly
face the customer -by integrating the three E's into the strategic planning process. This is an essential action as the
most successful efforts are driven from the very top of the organization, and their impact is felt across every level
and in every department. Although action is the key, organizations aiming to be customer-focused should continually
evaluate whether they are practicing what they preach and use the customer equity model to track their progress.
Technology Solutions Company
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