Customer Relationship Management.

The Promise and the Reality

Pick up almost any business publication and you will see that customer relationship management (CRM) is a hot topic. The reality of the connected economy has created an unprecedented amount of choice and control for customers over how they choose to do business and with whom, and an ever-increasing commoditization of products and services. In the face of these new realities, business leaders have concluded that success in the new economy will depend on how well their organization manage what they believe to be the only remaining source of sustainable competitive advantage: the customer relationship.

The heightened focus and attention on CRM has left many firms wrestling with the need to develop relationship strategies and build operational processes to deal with acquiring, servicing, and retaining customers. Creating the right infrastructure to support these processes means investing in technology projects such as sales force automation, data warehousing, customer analytical tools, and other software and hardware. As a measure of how significant the focus on CRM has become, respondents to a recent Ernst & Young survey indicated that they plan to increase their CRM spending by 31% in a year in which overall technology spending increases are expected to flatten to 8% (after several years of accelerated growth in the wake of Y2K and the Euro conversion). This year, and for the next few years, many firms will be paying more deliberate attention to their relationships with customers. There is, however, a great deal of confusion about the definition and context for customer relationship management. The followi ng outlines how successful organizations will use GRM as a competitive tool.

Customer relationship strategies and issues. Although there is considerable interest in customer relationships, there is also a great deal of confusion and uncertainty. Many companies are sponsoring a number of CRM initiatives, yet a majority of respondents to a recent Ernst & Young survey reported that they did not know how much these initiatives increased or decreased the profitability of their organizations. Much of the lack of clarity points to a lack of strategic focus. Customer relationships strategies begin with two basic questions: Who are our customers or prospective customers? And what kind of relationship or range of relationships do we want to have with these customers? Do you know the answer to these questions for your organization?

Customer relationship strategies can be mapped along a spectrum of three basic types of relationships, of which there are many variations and gradations. These three types include: transaction-based relationship; a relationship that includes technical advice in addition to transactions; and one that includes all these elements in a full partnership based upon extensive knowledge of the customer. Each of these relationships relate to a corresponding type of product offering. Transaction-based relationships involve a single product; technical advisory relationships tend to revolve around product and service bundles; and partnerships imply theme-based products and services that change as the customer's life stages evolve.

The most profitable customer relationships as long-term and expand over time, and consequently, retaining customers frequently ranks as the number- one objective for CRM efforts. Whether the customer management strategy is a superficial one-time relationship, or a long-term customer-centric relationship, the pivotal element in today's customer relationships is information. Invariably, organizations exhibit a bias towards their own internal information; nevertheless, to achieve any depth of understanding, it is equally important to have access to external behavioral and economic data about the customer's lifestyle, preferences and behaviors.

There are five fundamental dimensions to implementing successful CRM:

1. Customer Relationship Strategy applies discipline to decisions about which customers to pursue to ensure that investments in people, processes, knowledge and technology made in support of customer relationships provide maximum return. It involves assisting clients with the research, analysis, and visioning associated with the development of the optimal relationship strategy. This includes building the right customer portfolio, maximizing the range of value delivered, identifying the most appropriate role to play within the market, and determining the balance of reward/risk associated with the customer relationship.

2. Customer Access Management establishes appropriate customer-connecting channels. Clients must establish the appropriate channels to connect with the customer. Success involves ensuring that there is an optimization of the systems and process customers use to gain access to products, services and information - including both assisted (i.e. direct sales force) and unassisted (i.e. Internet) channels.

3. Customer Process Management maximizes customer-related information flow using workflow and enterprise resource planning (ERP) applications. The key challenge and opportunity is to successfully integrate the significant investments in front-end systems that have been made in capturing and managing the information necessary to provide high-quality customer service with the back-end systems in order to maximize customer-related information flow.

4. Customer Experience

Management transforms service centres into strategic relationship management assets. World-class companies are transforming what were previously considered service centers into strategic relationship management capabilities. The call centre is at the heart of this transformation. Successful organizations are gaining maximum value out of their contact centers by aligning call center capabilities with the needs and expectations of customers in a cost-effective manner.

5. Customer Knowledge Management captures and accesses the "right" information. Companies that leverage what they already know in the acquisition, development, and retention of customers will experience stronger growth. The central issue revolves around ensuring that an organization captures the right information about the right customers and puts that information into the hands of the right employees.

Tools and tactics. The tools and tactics for managing customer relationships are numerous. Currently, the most popular tactic is segmentation -- dividing the customer base into groups or segments.

Most organizations identify either between one to four customer segments or between six to 10 customer segments, with the definition of these customer segments most often determined by products and services.

Profitability would be a preferred criterion for segmentation, yet measuring profitability has been elusive to many organizations because it is so difficult to define. Segmentation also relies on the availability of consistent customer information across delivery channels and product categories. This ideal, which is often referred to as an "enterprise view of the customer," has been achieved by relatively few firms to date. Yet another tool -- and an indispensable one -- is measurement, an area that continues to perplex most organizations.

Managing Change, People, and Culture

Choosing a customer relationship strategy can be quite challenging in a time of great upheaval. Many of the reengineering efforts of the 1980s and 1990s stumbled in the execution phase. Successful implementation requires an alignment of the right people, processes, and technologies. Because the changes occurring within every industry as a result of the Internet are so dramatic, many companies are choosing to start their CRM and e-businesses by establishing separate entities. This avoids the tangle of technology and change management issues that can result from an attempt to introduce major changes into an existing company.

Leadership and vision. If anything, there has been an excess of innovative ideas and forward thinking in the area of customer relationships. Recent Ernst & Young survey participants indicated that they averaged between two and 10 major CRM initiatives, all of which they considered to be mission critical. At the same time, these same survey participants expressed frustration with these attempts. Companies need a single, clearly articulated vision for their customer relationships. This would make the various efforts more productive and less confusing.

People and culture. Much more challenging than co-ordinating the company's vision is persuading employees to buy into the new vision. Resistance to new ideas is inevitable. Perhaps the most powerful tool for overcoming resistance and creating buy-in is measurement. As the popular corporate saying goes, "what gets measured gets done."

Focusing on customers. It is useful, although difficult, to see our companies as customers do. This type of introspective exercise can result in many fruitful insights. A natural result of a customer-focused point of view would be to break down the traditional geographic and product silos. However, most firms are still organized on the basis of products or geographic regions. These silos present structural and human barriers in any attempt to form more "horizontal" relationships with customers.

One of the most important elements in a successful CRM initiative is sharing information across departments and business units; information hoarding remains all too common. In focusing on customers, many firms have noticed that large segments of their customer populations are not profitable. Although most executives favour a system that sets priorities among customer groups, there has been resistance to treating different customer types differently. It has also been difficult to define and measure customer profitability.

Alliances, partnerships, and outsourcing. Outsourcing is definitely on the rise, and it is the future. As the vision of a "value network" becomes a reality, many organizations today offer complementary products from other firms, with a small but growing number offering directly competing products from other firms. The lesson for organizations wishing to deepen and strengthen relationships with their customers is clear: if you don't manufacture the best product or provide the best service and offer it to your customers, someone else will. In today's fast-moving environment, no one firm can excel in every area, and alliances are a logical and increasingly popular solution. They offer the flexibility and speed that cannot be matched by growing one's own capabilities.

Technology

Although technology plays an increasingly important role in all firms and all relationship strategies, it is particularly crucial to those firms that are striving for a partnership relationship with customers. These more complex relationships will require seamless, complicated technology infrastructures and will therefore raise much more complicated technology issues.

Technology's role. Recent Ernst & Young survey data suggests that firms implementing customer relationship strategies typically do not view technology issues as a major barrier. Nevertheless, maintaining deep relationships is largely technology-driven.

Today's technology has reached an acceptable price/performance point, making it viable for firms to acquire, consolidate, analyze, and manage the large volumes of data that make relationship management possible. Customer relationship management technologies tie together many people, processes, and technologies that have, until now, been kept separate. From a technical standpoint, the need to tie together these disparate units is at the core of the implementation challenge.

Consistency of information is not a reality inmost firms today. In fact, many respondents to the survey indicated that customers cannot receive consistent information through all their electronic delivery channels. In a majority of cases, the reason for the inconsistency is a lack of integrated systems.

Key enabling technologies. To many technology-focused individuals, CRM is synonymous with large databases and data mining. However, a much broader range of technologies is involved. Many general technology issues need to be addressed to support any customer relationship management initiative, including bandwidth, powerful workstations, Web infrastructure, and computer telephony integration issues. Other technologies are more specifically linked to CRM initiatives. These include advanced algorithms, cookies, intelligent agents, middleware, neural networks, online analytical processing, and push technologies. These technologies represent some of the nuts and bolts of any sophisticated CRM infrastructure.

The CRM application landscape. Even CRM technologies struggle to keep up with the bewildering and constantly shifting array of applications and techniques. Collectively, the customer-facing functions of the firm are often referred to as the "front office," the range of CRM applications that touch the customer.

Broadly defined, these applications fall into three categories: customer service and support (CSS), sales force automation (SFA), and enterprise marketing automation (EMA). These three categories are converging into an integrated front-office suite sometimes called enterprise relationship management (ERM) platforms. Software vendors also have started to create packages called partner relationship management (PRM) platforms that can coordinate these front-office functions among a network of alliance partners and distribution channels. Most of these front-office applications are built upon powerful customer databases. In fact, data warehouses are the linchpins of the CRM architecture. Analytical tools are required to access and make business sense of the data stored in the data warehouses. Data mining is the process of sifting through large amounts of data to find related information. Mined data is often accessed by management decision-makers through applications called executive information systems (EIS) and decision support systems (DSS). Executive information systems are tools programmed to provide standardized reports or briefing books to top-level executives.

Technology-related harriers to implementation. Any CRM initiative needs to be aware of several important technology-related implementation barriers:

* Inconsistent or missing data

* Legacy systems

* Channel proliferation

* Cost

* Lack of in-house skills

* Change management

The Future

Customer relationships past and future. In the end, there are two fundamental choices available to organizations as they face the reality of the new economy. They can produce an established product at the lowest price and the highest efficiency and reliability. Or, they can be intermediaries who develop relationships with customers and serve their needs well. The customer-centered role of the intermediary will be a perennial source of added value, but that role is always changing. Customer relationship management is a new science, still in its infancy, whose central challenge is to use technology to achieve the goal of mass customization. During the next few years, firms will be investing in technologies and new business processes that will enable them to expertly manage and develop their single most important source of growth and value in the hyper-competitive marketplace of the years ahead: the customer relationship.

Paul Battista, senior vice-president, Ernst & Young Consulting Services, leads the Customer Relationship Management team. Darcy Verhun, CMA, senior vice- president, Ernst & Young Consulting Services, works in Calgary focusing on technology and utilities industries.

CRM in context

Customer relationship management may be defined as ANY strategy for managing customers and customer relationships. Historically, customer relationships were solely managed by skilled salespeople such as brokers, agents and bankers. Today's technologies allow this art to become a science, thereby raising the skill level of the entire sales force and increasing the scale reach of relationship management.

TOP TEN

TIPS FOR IMPLEMENTING CRM SOLUTIONS

1. Use a phased implementation approach.

2. Build a cross-functional project team.

3. Partner and outsource as necessary.

4. Focus on the customer, not the technology.

5. Build for scalability.

6. Choose open technologies.

7. Build for speed.

8. Expect hardware to get cheaper.

9. Consider packaged data warehousing solutions.

10. Remember that everything will soon revolve around the Web.

CMA Canada publishes new publication on Customer Profitability Analysis

Exceeding customer expectations is a worthy goal, but profitability is necessary for long-term corporate viability. Achieving both depends on learning what drives value in organizations. CMA Canada has published a new Strategic Management Series publication called "Customer Profitability Analysis." This guideline provides insight and examples of both the analysis of customer costs and the development of long-term customer relationships for increased profits through the measurement of customer value.