Heart of the matter

first_imgWhileCustomer Relationship Management may be the talk of every informed board,putting the theory into practice is another matter. The software hype that hassurrounded its implementation has seen it move too far from what it is reallyabout – people – and it is up to HR to bring it back into line. By Keith RodgersWhenhe first began to study the issue of customer retention in the mid-1980s, FredReichheld, director of US consultancy Bain & Co, had a number ofpreconceptions. He knew that by improving loyalty among its client bases,companies could create tangible business benefits, primarily by increasinggrowth and improving profitability. And as a “kind of bonus”, heassumed the process could enhance employee motivation along the way.Oncehis consulting team started researching the subject in depth, however,Reichheld had a rude awakening. As he recalls in The Loyalty Effect, one of theleading customer management publications of the past decade, it became apparentthat the link between employees and customers went far deeper than heoriginally supposed. “We came to understand that business loyalty hasthree dimensions – customer loyalty, employee loyalty and investor loyalty –and they are far more powerful, far-reaching and interdependent than we hadanticipated. Loyalty has implications that extend into every corner of everybusiness system that seeks the benefit of steady customers.”Today,the conclusions that Reichheld began to reach some 15 years ago are morepertinent than ever. Customer Relationship Management – a business philosophythat puts the customer at the heart of an organisation’s strategy and thinking– is firmly on the agenda of every boardroom. Armed with better choice, widerproduct availability and the ability to switch suppliers with relative ease,customers are empowered as never before, and companies face an uphill struggleto keep hold of them. While the 1990s were characterised by a corporateobsession with internal processes and efficiency, the new millennium has seencompanies reach out to solidify their relationships with suppliers, partnersand clients. TheIT industry, never slow to pick up on a profitable trend, has rushed to help,arming organisations with a raft of applications designed to improve both theirbusiness processes and their ability to analyse customer value. In many ways,the IT sector has helped to define what CRM really means (see box, p24),focusing on improving operational effectiveness in areas such as sales,marketing and customer service. CRM technology has become closely identifiedwith the business philosophy – sometimes to the extent that the two becomedangerously confused – and to a greater or lesser degree, technology underpinsnearly every customer management project. Butamid the boardroom strategising and the software industry’s hype, the keyelement that makes all of this work – the people – is often overlooked. Whenthey close a CRM sale, IT vendors routinely expect to find themselves pitchingto board directors and senior executives from customer-facing functions such assales and marketing – they don’t anticipate dealing with representatives fromHR. That is a big problem for companies, a problem for technology suppliers –and a problem that HR itself needs to address. Thereason is that even at its simplest level, implementing CRM software bringssignificant change to job functions. Perhaps the most elementary CRMapplication is a contact manager – a straight- forward means of organisingclient details and tracking conversations or pitches.Byreplacing individual paper-based records and employees’ personal organiserswith a centralised contact system, companies can aggregate information aboutindividual clients, track past interactions and monitor how effectively salesstaff are converting leads. Better still, the company takes ownership of theinformation – when a salesperson leaves, some of their knowledge and thehistory of their client relationships stays with the company. Atan employee level, however, even this kind of low-level application is oftenfiercely resisted. For one thing, many salespeople recognise that theirpersonal relationships with clients give them great power. Indeed, the strengthof their contact list is often one of the fundamental reasons why they areemployed. That is not information they are used to sharing. Justas important, sales staff have traditionally been measured on the basis ofresults – the revenue they bring in – rather than on how they execute, so asystem that allows managers to track the way they perform their duties isunwelcome.  Eachaspect of CRM brings these kinds of cultural problems, whether in sales, thecall centre, field service or marketing. The further you go up the CRMfunctionality ladder – particularly as you roll out more sophisticatedperformance measurement systems – the bigger the issue becomes. Softwarevendors and industry analysts alike have begun to focus on these human aspectsof CRM projects, identifying several critical people-related issues that canmake or break a CRM software project. Some of these are indisputably the domainof HR. A key component of any CRM project, for example, is training – in largerrollouts, the training budget can match the cost of the application softwarelicence. Ata basic level, the training requirement includes the need for instruction onhow to use a new system – a course often managed by the IT department – butalso incorporates broader programmes explaining the corporate implications ofadopting a customer management philosophy. As Eben Frankenberg, vice-presidentof midmarket CRM application vendor Onyx, says, “The best CRM applicationscan give employees perfect information about the client, but if the employeehas no relevant management skills it is not going to help. That is reallyimportant in CRM implementations – if you are not training people to becustomer-centric, the best CRM won’t help.” Thewider implications for the HR department, however, are more fundamental and ata corporate level, require companies to understand the links between goodcustomer management and strong human capital management. Some of these areintuitive. GregWynne, director of enterprise performance management marketing at PeopleSoft,believes CRM analytics can help companies understand the links between employeeperformance and customer satisfaction – particularly in a recessionary economywhere organisations are looking to slash costs. Knee-jerk layoffs, he argues,can be “devastating to your company – they can take away your capabilityto serve your customers.” Companiesshould be able to examine the effectiveness of their different businessactivities in detail and, rather than implement workforce cuts across theboard, should make “smarter cuts” by focusing on unprofitable marketsor segments. “Companies want to cut costs but keep their growthplans,” he says. “There is a lot of recognition in our customer basethat managing human capital is wise.”Thislink between customers, employees and ongoing profitability has been exploredin depth by Reichheld. His thesis begins by establishing that the longer acustomer is retained, the greater its contribution to profitability: he thenbuilds a similar model to examine the impact of employee retention. Theparallels between the two are remarkable, suggesting companies could benefit byspending as much time on employee retention as they do on keeping theircustomers. Reichheld’scustomer model, which underpins much of today’s CRM thinking, demonstrates thatthe first year of any client lifetime cycle is heavily impacted by the cost ofcustomer acquisition. That includes direct costs such as advertising andsalesforce overhead, as well as less obvious charges such as loss-leadingpricing, which is often used to draw new business in. This outlay is balanced inthe first year by the base annual profit derived from whatever products orservices the customer purchases. Inyear two and beyond, the acquisition costs have already been written off, andso the base annual profit drops straight to the bottom line. Better still,other benefits kick in. Reichheld’s studies have shown that customer spendingaccelerates over time if they are happy with the levels of service provided,bringing an increase in per-customer revenue each year. Operatingcosts also tend to drop – if a customer is familiar with a company and itsservices, it is less likely to take up employees’ time finding out answers tobasic questions. And in most industries, existing customers usually end uppaying higher prices than new ones, partly because new customers have to beenticed with special offers, and because older customers are usually lessprice-sensitive.Whatthis means in practice is that every year a customer is retained, the greaterthe benefit to the organisation. Using the example of a credit card operationthat retains customers for a period of 10 years, Reichheld demonstrates that a5 per cent increase in the level of customer retention can increaseper-customer profit by between 75 and 125 per cent.Bain& Co has developed a similar model to assess the value of employeeretention. Here, the costs in year one range from recruitment – including theoutlay associated with interviewing and relocation – to training. From yeartwo, once the employee “acquisition” costs have been written off, thebenefits start to increase. Training slowly shifts from a cost to a benefit asemployees begin to pass on their experience to colleagues. Efficiency improvescontinually as employees become more settled into their roles. Sales andmarketing staff get better and better at selecting and attracting profitablecustomers. And customer loyalty increases, as clients develop personalrelationships with individual staff members. AsReichheld writes, “This model of employee loyalty bears some strikingsimilarities to the model of customer loyalty. Since the two sets of effectsare mutually reinforcing, the economic advantages of loyalty are often morepowerful than intuition might suggest.”Establishingand measuring direct links between employee and customer retention isnotoriously difficult, but in general terms, Reichheld’s conclusions reinforcewhat organisations instinctively know but rarely address. Not only does CRMhave major cultural implications that HR needs to tackle, but good employeemanagement actually improves the whole customer management process. The testfor HR is whether it can lever itself into a position at a corporate level tomake those points heard.FredReichheld looks at how to balance CRM issues by pulling together specific informationfrom all departments of a companyTraditionally,Customer Relationship Management has primarily been defined as a”front-office” business strategy – in other words, one that affectsclient-facing personnel in the three prime areas of sales, marketing andcustomer service. Most of the early European CRM roll-outs have concentrated on”process” issues. In sales, that includes automating the distributionof leads and monitoring how effectively they are followed up. In marketing, itmay be managing campaigns, feeding off a central database of customerinformation. In customer service, companies are developing”multi-channel” call centres that can handle telephone calls, e-mailqueries and web interactions using the same customer records. Butwhile CRM projects have their roots in the front-office, their impact is feltacross the enterprise. Three areas in particular bring “back-office”functions into the CRM equation. The first revolves around one of the coreprinciples of CRM, the need to create a “single view” of thecustomer. In order to improve the quality of customer service, target marketingeffectively and establish opportunities for cross-selling and upselling,organisations need to pull together customer data from all their front-officefunctions into one central repository. As customer profiles are refined, theybegin to incorporate back-office information from areas like finance, whichholds data on clients’ credit or payment histories. Although this is primarilya data extraction issue, there are cultural implications for departments thatfiercely guard their proprietary information. Financeplays a more critical role in the second area, establishing customerprofitability. Few organisations have a firm view of which of their customersare generating the most value – or indeed, which are actually losing them money– and the metrics for modelling profitability can be complex. This kind ofcalculation – which helps companies direct their front-office activities moreeffectively – sees finance working more closely than ever before withcustomer-facing departments. In one UK retail organisation, for example, thefinance team was partially disbanded and several employees relocated to themarketing department. Finally,while much of the CRM technology available today is designed to automate andanalyse demand-level activities, those operations cannot be viewed outside thecontext of the supply-side of the business. Sophisticated customer managementapplications allow salespeople – and sometimes clients themselves – to checkinventory levels, configure products online, and monitor the progress of ordersthrough the delivery process. This requires access, sometimes in real-time, tosupply chain systems. From the supply perspective, meanwhile, integratingdemand activities into the planning process brings huge improvements inforecasting and delivery efficiencies.Thenet result is that the ramifications of CRM roll-outs are felt in everydepartment. From an HR perspective, that means the cultural issues that besetmany CRM implementations may ultimately permeate the whole organisation. Tacklingthe cultural problems of CRMDespitethe increasing maturity of the CRM software industry, failure rates inimplementations are still high. Industry assessments differ and vary accordingto the type of technology being implemented, but if failure is measured on thebasis of whether software is still being used six months after implementation,some parts of the industry are deemed to be running at a fallout rate of around60 per cent. While the causes are occasionally down to the technology itself –this is an industry notorious for hyping first and thinking about theconsequences later – in many instances the problems are cultural.Inessence, CRM projects involve a huge amount of change management across theenterprise, and tackling the cultural issues is becoming a major priority.Companies that are now in second or even third generation CRM roll-outs testifyto the fact that the human capital management aspects should be dealt with fromthe top down. Onesolution in the early stages of a CRM project is to generate quick”wins”. Industry analyst AMR Research suggests com-panies shouldfocus on solving recognisable pain points within an organisation, providingtangible benefits for the individuals involved and measurable returns for moresceptical managers. Likewise, harnessing the enthusiasm of early adopters iscritical – by turning them into “power users” charged with trainingother staff and evangelising the system’s benefits, companies can build enoughmomentum behind the project to see it through any implementation problems. Whetherthe HR department is involved in this process, of course, primarily comes downto its standing within the company. Nonetheless, there’s a large amount ofevidence available to show that the people aspects of CRM are critical, andHR’s involvement could make the difference between success and failure. Previous Article Next Article Related posts:No related photos. Comments are closed. Heart of the matterOn 30 Oct 2001 in Personnel Todaylast_img read more

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