Creating a SuperiorCustomer-Relating CapabilityI n rival mos s bt markets y staying, mor theree closel are on y connecte e or twodcompanie to their customer s that outperfor s — Enterpris m theierRent-A-Car, Pioneer Hi-Bred Seeds, Fidelity Investments, Lexus and Intuit areprominent examples. Their advantage, however, docs not have much to dowitb CRM tools and technologies. In fact, information technology is merely anecessary, but not sufficient, condition for achieving this advantage. On itsown, as mounting evidence indicates, IT contributes little to creating betterrelationsbips with customers.’ Rather, superior customer-relating capahility isa function of how a business builds and manages its organization. In particular, it results from a clear focus on, and deft orchestration of, three organizational components;The first is an organizational orientation that makes customer retention apriority and gives employees, as part of an overall vi^illingness to treat customersdifferently, wide latitude to satisfy them.The second component is a configuration that includes the structure of theorganization, its processes for personalizing product or service offerings, and itsincentives for building relationships.Information is the final component: information about customers that is indepth, relevant and available through IT systems in all parts of the company.Although each of these components is, by itself, relatively straigbtforward,it is only when all three work in concert tbat a superior capability is created.My research has indicated that the most successful companies •— those witbthe best connections to their customers —• are those able to create and maintain that integrated focus on orientation, condguration and information. Thisfinding held true for companies in all types of markets, whether they weregrowing fast or slowly, were extremely or moderately competitive, had manycustomers or few, or whether they were selling to businesses or to consumers.{See “About the Research.”)All companies can improve their customer relationships and, consequently,their performance by concentrating on these key components and developinga clearer sense of how they interrelate. To do so, managers must gain a greaterunderstanding of each.George S. Day is the Geoffrey T. Boisi Professor at the University of Pennsylvania’sWharton School in Philadelphia. He can be reached at [email protected]Companies withthe best connectionsto their customersunwaveringly focustheir orientation,configuration anduse of informationon the peopleand businesses thatbuy from them.George S. Dayiirusrration: iL”> John SPRING 2003 MIT SLOAN MANAGEMENT REVIEW 77About the ResearchA survey was sent to senior managers in 342 midsize tolarge businesses; the focus was on CRM initiatives and theirrelationship to competitive strategy. A representative sample of senior marketing, sales and MIS managers and executives was drawn from a database combining informationfrom Dun & Bradstreet and Marketplace. U.S. companieswith more than 500 employees and from all 50 states wereselected from the manufacturing, transportation, publicutilities, wholesale and retail trade, finance, insurance andreal estate sectors. In the first mailing, 1,100 surveys weresent out; about four weeks iater, a second wave was sentto 900 new contacts. The final response rate from tfie twomailings was 17%. Data collection was completed in March2001. In addition to the survey, managers were interviewedfrom 14 companies, including Dow Chemicai, CE AircraftEngine Business Group, Ford and Fidelity Investments.OrientationThe mojit important indicator of an organizational focus on customers is the shared belief that customer retention is a high priority for everyone, not just a concern to be delegated tomarketing or sales. Next in importance is the openness of theorganization to sharing information about customers. An orientation is counterproductive when one function such as salesbelieves it owns the customer. Potentially useful information isthen held closely by one person who knows the customer and itshistory, vulnerabilities and requirements and is unlikely to convert that information into knowledge that can be shared by otherteams and functions. Similarly, if the mind-set and history of thebusiness celebrates customer acquisitions through individualeffort, little energy will be spent on capturing customer information or assembling it all in one place.A customer-relationship orientation is also shaped to somedegree by the belief that different customers should be treateddifferently, on the basis of their long-run value. Most companies give lip service to this notion, but few have gone as far asIBM did under Lou Gertsner, who made it a company value totake on only the best customers and to do everything possibleto cater to tbeir needs. That hard-nosed approach saved IBMfrom the worst of the problems that HP, Cisco and Compaqencountered by chasing every Internet startup without regardto their long-term ability to pay. Tbe kind of leadership andorganizationwide emphasis on customer ix’tcntion shown byIBM sets leaders apart. In general, companies tbat embodied theattitudes and values of a true orientation toward customers —about 18% of those studied in my research —• enjoyed a significant advantage over their rivals.ConfigurationTbis term refers lo the incentives, metrics, accountabilities andstructure that align an organization toward building customerrelationships. Configuration is the most influential componentol a superior capability and hest explains differences betweenbusinesses in their success witb customers.The use of incentives is an important means of keeping people in an organization focused on customers. Although this ideais well known, few companies act as though they believe it. Acounterexample is Siebel Systems — not siu-prisingly, perhaps,since it is the leader in CRM software — which ties 50% of management’s incentive compensation to measures of customer satisfaction.•* In addition, 25% of its salespeople’s compensation isbased on those measures — and is paid a year after the signing ofthe sales contract, when the customer’s level of satisfaction withthe results can be determined. In most software companies, salespeople are paid when the contract is signed, a policy that fostersa one-time-transaction mind-set.Companies with superior configurations are also structuredto ensure that their customers have a seamless interaction with allparts of the husiness. That prevents a customer from having todeal with different functional groups as separate entities withinthe same company. A seamless connection is often best achievedwhen accountability for the overall quality of customer relationships is clear. Companies organized around customer groups andprocesses (rather than products, functions, or geographies) aremuch better at providing clear accountability than those organized according to products, functions or geographies.The real payoff comes whenall the elements of a configuration — metrics, incentivesand structures •— are properlyaligned. Achieving that alignment was the challenge to theCeneral Electric Aircraft EngineBusiness Group when it found The real payoffthat its jet engine customers werenot bappy with the service component of the offering, eventhough the company’s internal (six-sigma quality) metricsshowed the opposite. The groupthen began a CRM project thatwas based on an in-depth studyof what customers really wantedin terms of responsiveness, reliability, value added by the servicesand help in improving their productivity. The project led thegroup to make wholesale changescomes whenall the elementsof a configuration — metrics,incentives andstructures — areproperly aligned. 78 MIT SLOAN MANAGEMENT REVIEW SPRING 2003in its configuration: New metricsbased on customer requirementswere added to traditional functional metrics (such as productreliability and compliance withstandards), and the sales, marketing and product support groupswere organized around cus tomer-facing processes ratherthan functions. A corporate vicepresident was assigned to each ofthe top 50 customers for the solepurpose of building the relationship, so each customer had aclear channel to the top of theorganization.To help customers improvetheir productivity — which waswhat they wanted most from therelationship — the engine groupalso put leaders of their six-sigmaquality program on site with customers to provide training andMost companiesthink of information technologyfirst when theyconsider CRMcapahilities —instead of last,as they should. work hand-in-hand on engine-service projects and parts inventory management. Working and learning together, employeesfrom GE and its customers found that the Internet was the besttool for personalizing the delivery of parts, and it became part ofthe CllM project. The technology was not the driver of the project, but it did help to tighten tbe connections. The last step wasto incorporate customer-service metrics into the employeeevaluation criteria and provide rewards for superior service.Throughout the capability-building process, all aircraft-groupemployees were kept informed of new developments — forexample, a screen appeared on their workstations each morningwith a summary of the group’s performance on key customerrequirements, as well as current engine-related problems such asdelays or aborted takeoffs, so corrective action could be takenswiftly. As a result of its efforts to reconfigure tbe organization infavor of its customers, the aircraft-engine group now routinelyearns high ratings on a range of customer-satisfaction metricsand is seen by its customers as an irnportant contributor to tbeirproductivity.InformationMost companies tbink of information technology first whenthey consider CRM capabilities — instead of last, as theyshould. In distinguishing leaders frotn followers, it is the leastimportant piece of the puzzle. And yet in interviews, executivesconfess to spending most of their resources on databases, softvi’areand data mining. They often do so reactively or out of fear:“Software vendors and consultants keep bringing us new solutions. We know they are making the same pitch to otir competitors, and we don’t want to fall behind” — this is a representativecomment. At the same time, most companies are not happywith the poor quality of their data and their continuing inability to obtain a full picture of their customers’ history, activity,requirements and problems. It’s the classic Red Queen syndrome: Although the companies are going faster and faster,they stay in the same place.CRM technologies can help companies gain a coherent andcomprehensive picture of customers, better organize internaldata to ctit service costs, help salespeople close deals fasten andimprove the targeting of marketing programs. But they can assistinthese ways only if the organization has begun to reconfigureand reorient itself toward customers.A Battle for CustomersTo understand how differences in customer-relationship capability lead to differences in financial performance, considercredit-card providers Capital One and First USA, a subsidiary ofBank One Corp. Despite being half the size of First USA, CapitalOne has leveraged its superior capability to consistently outperform its bigger rival, earning 40% more interest income fromeach customer and enjoying double the profit margin.”Strategic differences are at the root of the story. First USA’spriority is rapid growth in the “prime market,” which is made upof relatively low-risk customers who have established credit histories and can command low-interest cards. Since many othercard issuers are chasing the same people, these customers are neither loyal nor especially profitable. First USA has been moresuccessful selling “affinity” cards through organizations likeuniversities, but it otberwise gives little consideration to differences in customers’ credit risk or potential profitability. The realthrust of First USA’s strategy, according to Richard Vague, the former chairman, is “to be laser-focused on operating efficiency andpass those savings on to customers.”The essence of Capital One’s strategy, according to a published mission statement, is to “deliver the right product, at theright price, to the right customer, at the right time.” The company has consciously avoided the low-profit, high-churn primemarket in favor of the “superprime” and “subprime” segments.In the former. Capital One focuses on “high chargers” who generate large merchant fees in place of interest charges fromrevolving balances. In tbe subprime market, the company targetspeople with limited credit histories such as college students; ithopes that they will remain loyal customers as they becomemore affluent. Capital One contains risk in this market by issuing cards with low credit limits that are partially secured (by astudent’s parents, for example).First USA’s strategy is not panning out. As personal debtSPRING 2003 MIT SLOAN MANAGEMENT REVIEW 79mounts, the company has had todeal with a climbing customerattrition rate, declines in revenueand quarterly losses. Efforts tochange will he severely hamstrungby an absence of the right orientation. Information or configuration needed to forge customer relationships.Tbe strategic focus on efficiency at First USA contributes toa self-centered orientation tbatdoesn’t allow employees to seecustomers as individuals. Thisinsensitivit notably wrong-foote y has ledd decisions to some.In mid-1999, the company eliminated the grace period for latepayments, while raising late fees.The policy was applied across theboard; no distinctions were madeon the basis of differences in thelifetime value of their customers.Not surprisingly, customers de-parted in droves, and the bankwas forced to rescind the move.Capital One’sorientation isshaped by abelief in microsegmentation —that is how thecompany identifiesand keeps itsmost valuablecustomers. First USA also lacks the information it needs to build customer relationships. The company grew to its large size byacquiring customer portfolios from other credit-card companies and by usinj;^ third parties like Affinity Partners to sourcepotential relationships with associations. Because it hasacquired many of its customers indirectly. First USA has beenunable to obtain the data needed to build warehouses of richcustomer information — the raw material of the customerrelating capability.The configuration of First USA also gets in the way. The company is hierarchically organized according to products or functions like operations, collections and systems. Within thebrand-marketing function, which manages all cards under theFirst USA name, there are separate groups for acquisitions, portfolios and e-business — but no tine has responsibility for customer retention. Incentives are also misaligned. Because theinformation system can’t tease out an individual’s profitability,frontline employees can’t be rewarded for keeping valuable customers. Instead, tbey try to retain everyone, whether they aregood, bad or indifferent long-term prospects.By contrast. Capital One’s orientation is fundamentallyshaped by a belief in the microsegmentation of its customers —that is how tbe company identifies and keeps those who aremost valuable. Employees at all levels have implicit permissionto act as customer advocates, and service representatives aremeasured not only on their performance but also on how supportive tbey are to colleagues. The sense of shared values andcollaboration contributes to a low turnover rate (5% per yearamong customer-contact people versus an industry average of15% to 20%), which improves service and helps keep costsdown.Capital One is also a leader in its use of information. It investsheavily to learn about its customers: In 2001, the company ran45,000 tests on product variants, procedural changes and customer interactions. Thus whenever a customer calls, for example.computers instantly pull up the full history of the account andcross-reference it with data from millions of customers. Poorprospects are routed to a voice-response unit and allowed to closetheir accounts. Others are routed to a service rep along with twodozen pieces of information about the cardholder and tbe likelyreason for the call. A representative dealing with a customer whowants to close the account, for example, will find three interestrate counteroffers displayed by the IT system. Armed with thefreedom to negotiate, the contact person can try to persuade thecustomer to accept a better offer; if the customer stays on at thehighest of the new rates, the retention specialist will be rewardedwith a bonu.s.Tbe alignment of the whole organization with strategy isfurther reinforced by Capital One’s configuration. The company structures its U.S. card business by market-segmentgroups based on customers’credit quality, their activity with thecard, membership in affinity groups and so on. Each segment istreated as a profit center. The manager of the prime segment,for example, has the autonomy and the team to run that part ofthe operation like a small business. Instead of a cumbersometop-down organization. Capital One is adroit at sensing opportunities from the bottom up and is motivated to pursue themquickly.Improving the CapabilityThe process of improving a customer-relating capability hasmuch in common with that of creating a market-driven organization, in which success comes when commitment by the company’s leaders signals that they are serious about the initiative,wben the key implementers understand the need for change andsee what must be done differently, and when there is a sense ofurgency.^ The best impetus for improvement is a realistic assessment of how tbe company compares with its rivals in orientation,information and configuration. The organization must also consider the consequences of not catching up and possible improvements (or countermoves) by competitors while the initiative isbeing carried out.These general guidelines are not sufficient, however, because aprogram for improving a customer-relating capability introduces8 0 MIT SLOAN MANAGEMENT REVIEW SPRING 2003additional complications and pressure points. One recurringproblem is that success depends on bringing IT, marketing andsales together. Although these groups are not instinctively adversarial, deep differences in interests, priorities and backgroundsoften frustrate cooperation. Divergent approaches may escalateto turf wars. For example, one part of the business may not wantto let others tap into its customer database as “free riders” who,inaddition, might spoil established relationships. A furthercomplication is that CRM initiatives can be inwardly focusedwhen they are undertaken to fix productivity or service shortcomings. The antidotes are a deep immersion in the customerexperience and an understanding of what customers expectfrom a closer relationship.*Companies must also recognize that the collective mind-set,beliefs and values embedded in an orientation toward relationships is what sets leaders apart. Yet efforts to change this aspect ofa culture directly are unlikely to succeed — change happens whenbehavior patterns are altered and people come to understandhow the new behaviors lead to better performance. To gain organizationwide coniniitment to the improvement program, companies should invest in market understanding and align theconfiguration; only then should they install CRM technologyInvest in Customer UnderstandingThe key to such understanding is segmentation: The more a company can break down its customers into different groups with different needs and expectations, the better it can serve them.A major publisher of directories shaped its transformationthrough careful segmentation. The company had always doneconventional segmentation studies — which mostly served tosatisfy its curiosity about a very diverse customer base. Becausethe sales force was rewarded for acquiring rather than keepingcustomers and the other functions were unwilling to disrupt theirprocesses, the organization resisted having different types of relationships with customers of differing value.The turning point came when the publisher set out to understand how its customers viewed the total experience of dealingwith the company. The publisher also polled a diverse group ofcustomers, asking each to describe its ideal experience. The difference between the expectations of the largest customers (the4% that represented 45% of the publisher’s revenues) and thesmallest was startling. The largest customers wanted a singlepoint of contact where they could resolve problems, coupledwith service tailored to their needs, consultation on how to usethe directory to build relationships, and help in tracking results.The smallest customers wanted a simple, low-risk experience;the predominant view was “Leave me alone unless 1 need you.”They clearly didn’t require a sales call, and the economics seldomjustified one.This gave the organization clear signals about how to meetcustomer expectations better while also cutting costs. Keyaccount managers with industry expertise were assigned to thelargest accounts, and the smallest were served over the Internetand by a telephone sales force.Cliange the ConfigurationMost postmortems of CRM failure trace the problems back to theconfiguration — the lack of incentives and metrics and theabsence of a customer-facing organization. (A common pitfall isto concentrate on the customer-contact processes without making corresponding changes in internal structures and systems.^)Superior configurations, such as those of Capital One and Siebel,use incentives that emphasize customer retention.But before incentives can be established, the right metricsmust be in place. Many companies don’t know their customerdefection rate or their customer-purchase share. But even if thosemetrics are available, they cannot easily be traced back to specificparts of the organization. Are defections and a declining share ofwallet the result of service shortcomings, quality problems ordelivery missteps? Or are defectors simply attracted by a competitor or consciously “polygamous”? Many companies rely oncustomer satisfaction measures, but even these are problematicwhen as many as 90% of customers do not respond to surveysand those that do may have a courtesy bias and not give a ratingbelow four on a five-point scale.A better approach is to have a portfolio of metrics that revealsthe long-term profitability of the customers. Companies can stillmeasure customer loyalty and satisfaction but should supplementsuch metrics with those thatdetermine the cost to acquire andserve customers as well as withproxies for direct measurementsof loyalty and satisfaction — metrics on employee retention, cus tomer complaints and companyperformance on attributes thatar aseon-tim importan e deliver t to customers y and servic , sucheresponsiveness.Although organizing according to customer groups or segments is a common hallmark of asuperior capability, it is not alwaysappropriate. Companies must bewilling to treat different kinds ofThe collectivemind-set, beliefsand valuesembedded inan orientationtoward relation-ships is wbat setsleaders apart.customers differently and to tolerate the accounting and organizational complexities that threatento erode economies of scale. SPRING 2003 Mn SLOAN MANACEMEm” REVIEW S INokia successfully split its monolithic $21 billion mobile-phoneunit into nine customer units, each with its own product R&D,marketing and P&L responsibility.^ One unit will serve businessusers, another will focus on barebones handsets for users indeveloping countries, and so on.Microsoft, on the other hand, tried to organize accordingto different types of customers to get product-developmentgroups closer to customers. The intent was admirable but theeffort came undone because decisions about products such asWindows were spread across too many of the new divisions.Short of organizing entirely around customer segments, companies can take intermediate steps by using key accountmanagers and orienting customer-contact functions aroundsegments while leaving manufacturing and development organized by product.Orchestrating ChangeCanadian Pacific Hotels has successfully combined deep customer insights witb configuration changes to build greater loyaltywith business travelers. In 1999, tbe chain had 27 hotels in the“quality” tier and was proficient with conventions and grouptravel, but it was not well regarded by business travelers — anotoriously demanding and diverse group but also a very lucrative one. CP Hotels began by investing to learn what would mostsatisfy this segment of the market. It turned out that businesstravelers weren’t especially interested in earning extra nights in aCP hotel as a reward for loyalty; instead, they wanted “beyond tbecall of duty” efforts to rectify problems, recognition of their individual preferences, and lots of flexibility regarding arrival andcheckout times.CP Hotels responded by committing to make extraordinaryefforts to always satisfy customers in its frequent-guest club.Delivering on this promise proved remarkably difficult. Thecompany began by mapping each step of the “guest experience”from check-in and valet parking to checkout and setting a standard of performance for each activity.^ From that analysis, itdetermined what services should be offered, which processeswere needed, and what level of staffing was needed in order to beable to honor the commitment.The biggest hurdle was the company’s historic bias towardhandling large tour groups, which meant that the skills, mindsets and processes at hand were not the ones needed to satisfyindividual executives. Even small enhancements such as free localcalls or gift-shop discounts required significant changes in information systems. The management structure was changed so thateach hotel had someone witb broad, cross-functional authorityto ensure the hotel lived up to its ambitious commitment. Finally,the company put systems and incentives in place to make sureevery property was in compliance with the new emphasis andperformance was meeting or exceeding the standards.After implementing these changes, CP Hotels’ share ofCanadian business travel jumped by 16% in a flat market. Byall measures, tbe chain had won greater loyalty from its targetsegment. Long-term success will take sustained commitment tokeep ahead of competitors that want to match or leapfrog thecompany. Companies that sustain their commitment send asignal to botb their employees and customers that tbeir customer-relating capability is one of the centerpieces of theirstrategy.More and more companies are turning toward their customers, but there’s still a lot of confusion about what that meansand how to do it successfully. The widespread disappointmentswith CRM systems are a warning about how difficult it is toimprove a customer-relating capability. Tbe key to a sustainableadvantage in this area is the right blend of incentives, metrics andstructural changes. These can start to produce a true customerdirected orientation that, when combined with technology togenerate and distribute information, can turn a company into amarket-driven leader.REFERENCES. See, for example, B. CaulfJeld, “Facing Up lo CRM,” Business 2,0,ugust 2001, 149-150; L. Yu, “Successful Customer-Relationshipanagement,” MIT Sloan Management Review 42 (summer 2001),18-19; J. Taschek, “How To Avoid a CRM Failure,” e-Week, October15, 2001; and L. Dignan. “Is CRM All It’s Cracked Up To Be?” Apr, 3,002, http;//news.com.com.. These three components are also represented in the three factorsf resources, processes and values used to define an organization’set of capabilities by CM. Christensen and M. Overdorf. “Meetinghe Challenge of Disruptive Change,” Harvard Business Review 78March-April 2000): 67-76.. B. Fryer, “High Tech the Old-Fashioned Way,” Harvard Businesseview 79 (March 2001); 119-125.. This case comparison is based on interviews with tbe managementf Capital One and First USA. plus security analysts’ reports, publicources, and B, Anand. M.G. Rukstad and C.H. Paige, “Capital Oneinancial Corporation,” Harvard Business School case no, 9-700-124Boston: Harvard Business School Publishing, 2000),. G.S, Day, “Creating a Market-Driven Organization,” Sloan Manageent Review 41 (fall 1999); 11-22,. Other approaches to understanding customers’ experiences cane found in P,B, Seybold, “Get Inside the Lives of Your Customers,”arvard Business Review 79 (May 2001); 80-91.. D. Rigby, F, Reichheld and P. Schefter, “Avoid the Four Perilsf CRM,” Harvard Business Review 80 (February 2002); 101-109.. A. Reinhardt, “Nokia’s Next Act,” BusinessWeek. July 1, 2002,6-58.. For another look at companies that are concerned with the cusomer’s entire experience, see L,L. Berry, L.P. Carbone and S,H.aeckel, “Managing the Total Customer Experience,” MIT Sloananagement Review 43 (spring 2002): 85-89,1AM 2 2ost( 3R 4osF( 5m 6bH 7o 85 9tHMReprint 44310Copyright © Musuichinctti liistilute of Tcdmology, 2003. All rights reserved.8 2 MiT SLOAN MANAGEMENT REVIEW SPRING 2003
