Good customer relationships are now widely acknowledged to be an essential ingredient of business success. John McKean, author of the latest 'must-read' primer, Customers are People: The Human Touch, claims that as much as 70% of customer decision-making is based on how we are treated, and only 30% on the product itself.
But if customer management is that important, surely it should be a prime indicator of a company's status and performance? Instead of relying mainly on sales and costs, stockbrokers and economists could also take account of customer relationship management (CRM) metrics when they assess its shareholder value. That might help provide fairer and more accurate valuations of companies. Valuations are often woefully wrong: last year only 20% of brokerage firms beat the market and, to take one example, Goldman Sachs was lauding Enron as a brilliant prospect just two weeks before its crash.
Some experts think such failures point to a fault in the way companies are analysed. Among them is QCi, which provides benchmarks of CRM capability and will shortly publish its latest State of the Nation report on UK companies' effectiveness in this regard.
"If the professionals are systematically incorrect it may be that relevant information is being left out," says chairman Neil Woodcock. "Our message is that customer management competency is a key intangible. If analysts really want to get to the bottom of a company's business performance, they have to dig deeper to see how much it invests in this."
QCi Customer Management Assessment Tool (CMAT) comprises 260 best-practice measures and provides firms with a much more realistic idea of their customer management capability than can be achieved from checking boxes on questionnaires.
Eventually, Woodcock believes, such a tool will provide a clear link with value, so that, for example, a company that improves its score from 40% to 50% might automatically increase its market capitalisation by 5%.
There is no lack of research to back up the link between customer management and business performance. One study, by the University of Michigan Business School, uncovered a direct link between corporations' Dow Jones quotes and their scores on the American Customer Satisfaction Index (ACSI). It showed that companies with the top 50% ACSI scores created an average of $24bn (£15.22bn) in shareholder wealth, while those with the bottom 50% generated only $14bn (£8.89bn).
Another study, by Vinod Singhal of Georgia Institute of Technology, found that companies that won best-practice awards typically achieved a 44% higher stock market price. And QCi's research shows a strong correlation between good CRM and high business performance, suggesting companies that look after their customers get the best financial results.
In the US the Exchange and Securities Commission has recently been encouraging companies to provide more intangible data. As a result, many have been offering figures on customer numbers, retention and satisfaction levels.
A similar trend is starting to appear in the UK, as firms that have invested millions in CRM systems seek acknowledgement for the improvement in their capability.
That especially applies to financial services. Lloyds TSB recently gave a presentation to analysts to describe new segmentation and CRM processes that underpin its drive for growth. Another example is HSBC, which had its systems and practices evaluated by IBM using CMAT.
The bank found it scored in the top 10% of firms that had undertaken similar assessments, and has been highlighting this evidence of expertise in its shareholder reports.
"We've known for a long time we had good CRM systems in place, but we did not have any way to benchmark externally against other companies," says Andy Ripley, senior marketing development manager. "Now we want to work toward an even higher score by developing more skills and even better capabilities to serve our customers."
Systems vendors say companies take into account the positive impact of a CRM investment on investor confidence at the planning stage. For many, indeed, it is an essential requirement.
"These days companies have to install systems for contact management, sales force automation or CRM as a means of showing they will manage customers effectively," says Mark Carlile, UK manager of Pivotal, a vendor that specialises in the medium-size market. Typically the buyer presents this as its own initiative, when in many cases potential investors have insisted on the inclusion of CRM capability in the business plan .
Among analysts, the notion of measuring CRM has yet to take hold, largely because common standards have yet to become available. But investors, consultants, and others with an interest in the topic see the idea as viable and even necessary.
"A tool that assesses a company's CRM performance across a broad spectrum would be very useful for us and in due course we would hope to see standard measures," says Andrew Hartley, managing director of Kleinwort Capital, which makes a point of boosting the customer management capability of any company it invests in.
Rebecca Caroe, customer and marketing consultant at Pembridge, compares CRM to human resources, where the level of a company's investment in its employees, as shown by Investors in People accreditation for example, is generally taken as an indication of its worth.
"All the softer issues of how much staff enjoy their work and how long they will stay impact on the bottom line," she points out, recalling that the level of spend on employees is one of the issues US investor Warren Buffet's Berkshire Hathaway company examines when investing in a business.
Measuring brand value
Intangibles such as brand value have for some time figured largely in assessments of shareholder worth, particularly for well-known names such as Microsoft and McDonald's. The difficulty is how to quantify this rather woolly concept in figures, and that is where CRM comes in, argues Charles Proctor, senior CRM consultant at Proximity London.
"It can break down that brand value into what the company does well, and what the market and customers want, attributing measures to these things," says Proctor. It can also quantify the chance of losing a customer to another brand, he continues: a low score in that respect would translate into high brand value, and vice versa. That can be proved by putting CRM systems with metrics that measure attrition and acquisition rates.
Similarly, David Brown, director business planning at Carlson Marketing Group, points to the shift in emphasis from brand awareness to the customer's brand experience as a measure of success. "Here, you are into the area of retention and satisfaction, where the experience starts to focus on what it actually means to the customer," he says.
But QCi's Woodcock argues that existing CRM measures may actually be misleading as indicators of a company's value and future performance.
For instance, a new mobile phone company can quickly acquire a huge number of customers through competitive pricing and then lose them just as rapidly through poor service. On the other hand a business with high levels of customer loyalty, such as The Body Shop, is built on much more enduring foundations.
Similarly, retention is rarely measured properly and typically fails to distinguish low value from high value customers, Woodcock believes.
That can be especially misleading, as too many of the former can damage profitability when their need for assistance and frequent returns are taken into account.
Even quality of service can be a doubtful indicator of future value: customers may be delighted with the treatment they receive when they buy a product, but that does not automatically mean they will buy again.
"British Airways treats me like a star and its communications are absolutely right," says Paul Schulz, a partner at Zalpha. "Yet it is being eaten alive by Ryanair, because the basic premise that consumers will pay more for CRM is not the case. The fact everyone knows me and is polite to me doesn't mean I'm prepared to pay £400 to fly to Geneva when I can pay £90."
For CRM to impact on the bottom line in this respect, there needs to be a proven correlation between good service and value to the company.
That is implicit in CMAT assessments of the extent to which a company analyses why it loses customers, can identify its most profitable customers, and has systems in place to attract and keep good customers.
"It's about reconfiguring the business so you anticipate the customer requirement and react to it, being there with the right product at the right time," says Chris Bromiley, deputy managing director at EHS Brann.
Many internet firms are starting to get the hang of this, he suggests, citing Cosmetics Direct, whose "excellent CRM work" he believes is having a favourable impact on its value.
A firm that scores heavily on integration of customer service, such as First Direct, would clearly benefit if this were quantified and included on its balance sheet. "The most important thing would be to see how well joined up the approach to the consumer is," says the bank's head of brand marketing Nick Bowyer. "CRM creates shareholder value because it optimises sales, enabling you to approach a customer with offers proactively through any channel, all driven by a single integrated database."
A harder measure is the effectiveness of CRM in boosting customer value, for instance by using sophisticated data systems in contact centres.
"We have found that the better informed the agents are, the more confident they feel about talking to customers, and the more easily they can cross and upsell to consumers calling in with service issues," says Bob Barker, director of marketing EMEA at E.piphany. Orange uses a prompting engine to good effect, he says, while Halifax supplies real time data to its branch representatives, as well as to agents in its contact centre.
An E.piphany system installed for Bell Mobility, Canada's largest wireless company, has led to a visible improvement in its customer service and maximised the value of each customer contact. More relevant and personalised interactions have reduced the time it takes to create a campaign from four days to four hours. Top users sales per hour have increased by 18%, and sales revenue by 16%.
"Customer service is becoming more important as competition increases and will help our shareholders as a whole," says Derek Pollitt, associate director of CRM strategy development and deployment at Bell Mobility.
Using data intelligently to identify and market to profitable segments is also a key measure. Frequently mentioned in this context is Tesco, which owes much of its dominance to customer management and clever segmenting.
Geoff Webb, chief executive of the Webb Partnership, a business innovation consultancy, says: "Tesco is the smartest grocery retailer in the world, small on the global stage, but punching above its weight." He compares it favourably with its rival Wal-Mart, which largely neglects this area in favour of rapid supply chain replenishment, a strategy he thinks will create problems for it in the long term.
Follow the leader
Webb argues the best way to go forward is to copy the leaders in each area rather than waste time and resources by experimenting. Few companies target lifetime value and share of wallet as single-mindedly as Egg and easyJet, he suggests, while clothing company Lands End and Bristol & West offer prime examples of excellent customer care. When it comes to focusing marketing communications and distributions, companies to watch are Guinness and MBNA.
And the ability to understand and respond quickly to what customers are buying, is much in evidence in the case of Zara, he adds. This clothing company based in Spain, constantly checks what customers think about current fashions, and converts them into new products within a matter of weeks, giving it a clear advantage over slower-moving rivals. A similar example is provided by credit card company Capital One (see box).
The conclusion must be that the idea of including customer management metrics in shareholder assessments is fundamentally sound, but it may be a while before a consensus is reached on what to measure.
There is also the difficult question of how to convert scores into a single figure for the benefit of analysts. But given the growing importance of customer management to a company's balance sheet, it seems likely that moves toward such an outcome will steadily gather pace.
HOW CUSTOMER FOCUS HELPED CAPITAL ONE'S GROWTH
By focusing clearly and constantly on its customers, Capital One has grown rapidly since 1995 to take 5% of the US credit card market.
It has bucked the downturn to raise its target 2002 annual earnings per share to 30%, and is acquiring new customers at the same rate as the market leaders.
The company attributes this sustained performance largely to the quality of its customer segmentation and information systems. As a newcomer to the market it was able to avoid the cumbersome and time-consuming processes with which large businesses are too often burdened.
Rather than wait until a consumer trend is clearly established, it identifies and exploits opportunities quickly, aiming to create tailored products in greater number and faster than its rivals.
That requires copious amounts of information about its customers and prospects, enabling it to spot trends and share insights rapidly and cheaply across the company. Aided by technology systems, it uses an 'identify, test and learn' model, driving customer acquisition by thinking up new products, and testing them against an appropriate consumer sample from within its database. The sample is kept small by rigorously identifying appropriate criteria.
Customer acquisition is achieved through high volumes of direct mail, TV advertising and the internet. The firm also uses an in-house call centre, where it can perfect dialogue scripts for use by outsourced agencies.
Segmentation data on customers and products is used in the routing of calls to the most suitable operative available at the time.
As a result Capital One has grown at an impressive compound rate of 31% over five years. Through effective micro segmentation it has kept late payment rates well below the industry average, while growing its high-value customers from 30% to 50% in the three years to 2001.
LEADING UK CRM SUPPLIERS
Siebel Systems www.siebel.com
This article was first published on Marketing