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The most intriguing leadership opportunity and the most pressing management challenge of our time is measuring and managing the intangibles inherent in value creation through innovation and growth. After a long, long stretch of cost-cutting, executives are now interested in innovation and growth—growing the top line as well as the bottom line. But in this cycle of growth, the customer is in the driver’s seat. And the power of the Internet in customers’ hands has the potential of making every product or service a commodity. There is hope here. Marketing guru Theodore Levitt of Harvard was ahead of his time when he said there was no such thing as a commodity. Even commodities could be differentiated by the relationship between the buyer and seller. Now companies that avoid commoditization and excel at value creation no matter what the economic conditions will be those who are customer relationship-driven and optimize the customer experience while paying attention to profit. But first they have to know what customers experience, what customers value, and what it costs the company to deliver it. It’s a leadership opportunity many CFOs are taking on in a Sarbanes-Oxley era and challenging the status quo in finance, operations, and marketing in the process. Customer relationships are developed cross-functionally and begin before a prospect becomes a customer and continue well past purchase throughout the product lifecycle. What’s needed is a cross-functional, unifying framework with unifying metrics applied in a systematic process to develop profitable customer relationships and execute strategy. Value Creation Paper Table of Contents
Executives recognize the need for action. Some 71 percent of senior business leaders believe that the customer experience is the next corporate battleground, according to a survey by Colin Shaw and John Ivens, authors of Building Great Customer Experiences. No One Said This Was Going to Be Easy. Ever since we heard the results of a 2005 CFO Magazine study, we have been watching for a transition in the role of the CFO to close that gap. CFO Magazine reported the areas for highest growth in responsibility for CFOs were non-financial performance management at 26 percentage points, followed by responsibility as the guarantor of operations efficiency at 23 percentage points. We’ve been asking CFOs how they are approaching this new leadership opportunity. Many see that they have to think differently and bring others in their organization along. In May 2007 CFO Magazine reported on how far CFOs have to go in measuring their returns on marketing investments. The headline for the story told it all: “by the numbers FINANCE VS. MARKETING: Why they still don’t see eye to eye on measures of return.” Lack of cooperation between marketing and finance is hindering efforts to develop ROI measures. Just 19 percent of the finance executives surveyed by Marketing Management Analytics (MMA) report full cooperation, while more than 8 percent report frequent conflicts with marketing over budget and strategy and another 13 percent report no meaningful relationship at all. Only 7 percent of finance executives are satisfied with their companies’ ability to measure marketing ROI. A higher portion of marketing executives, 23 percent, think they are doing a good job of measuring returns. CFO Magazine quoted MMA co-president Ed See as saying “Marketing executives are under a lot of pressure to show exactly how investments in the brand translate into sales.” He believes that CMOs who still think marketing is about brand awareness, with only a loose connection to the bottom line, won’t last very long in their jobs. The same month BtoB Magazine, quoting a CMO Council study, agreed. Nearly two-thirds of CEOs and board members say that their top marketers don’t provide adequate ROI with which to gauge marketing’s true performance. According to the story’s author Kate Maddox, the new breed of CMO must possess not only traditional marketing skills such as brand strategy and product marketing but a breadth of capabilities including operations management, process development, financial analysis and strategic decision-making.
The Need for a Common Understanding of Value. We agree that value is a matter of perspective—not just from the customer perspective that Wilde described, but from the company perspective as well. To complicate matters further, just as there are differences in customer perspectives, each part of the company has a different take on value. Yet each part has something important to contribute to a cross-functional solution. That solution finds a balance between 1) the value provided to the customer and 2) the value received—for the cost expended by the company and the price paid by the customer. Let’s go deeper on the different company perspectives. Finance Perspective In fact, in many companies the finance organization has used cost as a surrogate for value—the money spent to create and deliver what is presumed to be of value to the customer. Cost is something that CFOs are accustomed to measuring and analyzing. Many use Activity-Based Costing (ABC) to have a more realistic view of indirect costs, including cost-to-serve customers. In the Religence Framework for Customer Relationship Intelligence we use a version of ABC as a dynamic process measurement to accommodate the fluidity of sales and marketing and customer service. It makes an important contribution to the cost side of the solution needed. See our thought leadership paper on Next-Generation Profitability Segmentation for more on this. Let’s look at the other perspectives on value. Operations Perspective Six Sigma methodology focuses on eliminating variation. The resulting predictability in business and product performance improve the business’s ability to make and keep customer quality and delivery commitments. This can enhance value to the customer certainly and increase revenue. But Six Sigma is ill-equipped to accommodate the fluidity of sales and marketing in acquiring customers and in customer service in responding to them, where the process flow has myriad twists and turns. And from an innovation standpoint, Six Sigma processes often inhibit a company’s ability to provide a unique or customized product or service. Six Sigma processes are controlled to provide the “correct” output in all circumstances—no variation allowed. In a rapidly changing market where the attributes of value are unique to each customer and constantly evolving, Six Sigma control is ill-equipped to provide the customized and personalized product or service that creates a competitive advantage. Kaizen techniques seek to drive continuous improvement by empowering all employees to find and implement better business processes. The result is both better business process execution and improved employee morale. Both of these results are beneficial to the business, but what is missing here is the customer. Attributes of customer value are seldom the starting point for a Kaizen event. The improvements that are identified and implemented often are unseen by the customer and, therefore, do not necessarily lead to an improvement in value from the customer perspective. Lean Manufacturing principles, whether applied just in the manufacturing organization or throughout the enterprise, focus on waste reduction and the elimination of non-value-added work. The typical result is a reduction in cycle times and lower internal cost. However, Lean Manufacturing assumes a static definition of the value of the product, based on a static, one-point-in-time, and narrow view of customer and market conditions. The technique optimizes business processes to maximize that narrow value definition. Moreover, in most companies the value definition isn’t even based upon an external customer view of product value but rather is based upon what internal department managers consider the value to be to them or to the next step in the process. This can lead to a value definition that is skewed by internal politics and perspectives and often overlooks key elements of potential value creation. For example, if a Lean process is established to manufacture and deliver a product in bulk containers, because most customers order it that way, the process will be unable to deliver product in small quantities—ignoring a segment of the customer base. Each of these operational techniques is primarily internally-focused. Granted, the improvements gained by the business through these techniques may result in higher levels of customer satisfaction due to faster response, better quality, and improved morale. However, customer value is not at the center of the improvement, but is only a secondary byproduct. Of the operational methods just mentioned, we draw most heavily on Lean Manufacturing in the Religence Framework. Value stream mapping, one of its core concepts, has proven its usefulness on the manufacturing floor for understanding how product value is created and eliminating waste and inefficiency. We build on that tradition in planning and have developed a new dynamic variation for strategy execution that we call value creation mapping. For more on this scroll down to the Map Value Creation by Mapping the Customer Experience section of the paper. Marketers as Company Promoters: On the company side, three of the most difficult questions the marketing organization is asked are
The answers have been unknowable in any direct sense although many have tried to answer them indirectly. About the best that marketers have been able to do to “measure what their brands are worth” is compare their brands to others using techniques like Interbrand’s analysis of cash flows attributable to brand performance or linking customer attitudes and perceptions to assets like stock price. Both of these approaches have limitations in an economic downturn—the brands may be as strong as ever, and if the company resists the temptation to cut budgets, they can be even stronger. A study by McGraw-Hill during an economic downturn in the 1980s showed that if a business maintains or increases its marketing investment, within four years it will have four times the revenue of businesses that stopped or decreased their marketing. We’ve seen that happen for one of our clients. See the Brown and Caldwell example in our CRI Reference Section on positioning for how this engineering firm in the environmental industry grew during the slowdown of the early 1990s. The AT&T example in that same section is another example of growth during a slowdown, this time in semi-conductors. Marketers as Customer Mind Readers: The marketing organization is also often tasked with advocating for the customer perspective of value in order to position and promote their brands and to define new products and services or new markets. However, there have been few practical tools at their disposal other than Quality Function Deployment and customer research. In each the Voice of the Customer hasn’t been heard as completely as it should be to match the business imperative in our customer-driven world. Frankly, in our experience, few companies resource it as well as it needs to be. See our CRI Reference Section piece on positioning for what happens when it is resourced and customers are heard. In our thought leadership papers on Next-Generation Voice of the Customer Research and Traditional Customer Research with VoC, we identified several other reasons why customers haven’t been heard. Primary among them are that most research is company-focused, not customer-focused and it is static, not dynamic. The papers describe a new way of thinking about customer research that builds Voice of the Customer feedback into the customer relationship development process in the Religence Framework. Quality Function Deployment, which maps customer needs onto product requirements and process criteria, is very powerful for the point in time in which it is conducted. This is usually done at the beginning of a new product development project in order to define the elements of value. It typically focuses only on product use by a particular class of customers. Also, it is static. It is only valid for that point in time and the target customer base analyzed, essentially an episode in the lifecycle of the product. It is unable to measure or analyze the development and sustaining of value within the day-to-day business processes. Company Perspective Overall What is needed is a methodology that allows a business to quickly and accurately assess value creation and value destruction within the day-to-day business processes from the customer’s perspective. We are talking about a dynamic method to measure the value of intangibles in growth and innovation as they are created in real time and then correlating the value to profit. That is what is needed to enlist the cooperation of marketing and operations for the financial organization’s efforts in non-financial performance management to be successful. Customers Determine Value, not the Company. John Todor, author of Addicted Customers, puts it this way: “In an era of abundance and overwhelming choice, customers buy using one of two buying personalities. In one case they buy with indifference, seeking the lowest price and greatest convenience. In the other case where the experience with the brand and the product is emotional and compelling, price becomes less significant and desire goes up. To afford the latter, the customers scrimp on the former.” Customers Perceive Value in Several Dimensions. Brand Value Product Value Brand Value and Product Value In product and service development, it has been typical to measure value in how the customer will use the product or service in the end state. The insight that the relationship with the customer begins before they become a customer and continues to develop past purchase mandates a broader definition of the customer experience—and a broader definition of how value is created. Relationship Value
Relationship Value is the value of the customer’s experience and relationships with the company and the people in the company who make and deliver on the promise of the product or service—from the person who answers the phone, to the sales process, to fulfillment, to technical support to the executive who thanks them for the referral. People buy from people they know or know of—even in the age of the Internet, outsourcing, and automation. That’s why it is easier to sell products and services from an established, trusted brand than from a new company. It is possible to establish instant rapport, just as it is possible to fall in love at first sight. (The consumers’ love affair with the iPod is one example of that.) But establishing a relationship, whether personal or with a brand, is more likely to take time and involve a step-by-step process. The relationship begins before a person becomes a customer and continues well after purchase. Ideally, the relationship develops to the point that the customer is an advocate for you and actively promotes your company and offerings. See our CRI Reference Section piece on relationship status. Relationships with a brand can be built by mass media and the virtual experiences it creates to connect with customers emotionally. But it takes a long time and a lot of money to equal the personal touch. Yet mass media and other baseline infrastructure tactics like corporate identity programs, company literature, public relations, newsletters, co-op advertising, and product placement can help establish your reputation and set the stage for a positive selling and retaining environment. Some companies now are experimenting with the new social media as a way to establish deeper relationships with customers on a massive scale. But using social media to build relationships requires a long-term commitment and a low-key approach. It is not as simple as it may seem. Reputation for a brand can also be established by third parties, such as distributors, agents, or endorsers. A recent Voice of the Customer project for an insurance company bore the truth of this out. The insurance company was faced with competition heavily advertising low prices—in other words commoditizing the product. Fortunately for the company, many customers realized that with insurance “you get what you pay for” and that low prices more likely than not meant lesser coverage. They had been there, done that. The “value” buyers were looking for coverage at a fair, not low, price. How they judged whether the company would be able to deliver that was by their agent’s testimony of the insurance company’s reputation. The company had not advertised heavily. It put its money into paying independent agents a commission. A balance of coverage for price and reputation made up value to them and that is why they bought. Why they stayed was their experience of the brand—in how well they were treated by the company and by the agents. When that didn’t happen and the value balance was upset, customers left for price. The promise of the brand had been broken. While tying the investment in mass media and other infrastructure tactics to the relationship with an individual customer is difficult, Brand Value built up over time can influence activity in the customer relationship process and Customer Lifetime Value (CLV). It can influence conversion rates, retention rates, referral rates, cost-per-contact in Acquisition, Closing, and Retention, and the average purchase. That is how we account for it in the Religence Framework in our strategy decision model to recognize the quality and longevity of the effort. We also account for Brand Value as well as Product Value and Relationship Value as part of the elements of success in calculating our Align for Success Factor, which also helps us create more realistic models. More direct and personal relationships with customers over the product or service are established with customers by people on the frontline with customers in sales and marketing as the product or service is promoted and sold and then in customer service for after product or service support. It is a joint collaborative process with customers—what they DO, what you DO. The interactions are how the tactics, designed to execute strategy, are carried out. Because we can measure the customer relationship process and what the individual customer experiences in interactions back and forth with the company and its staff, we can measure Product Value from a Relationship Value perspective. Product Value can play a more important role in generating Relationship Value than the typical role we’ve just described. By using our Product Relationship Roadmap in product or service development, managers identify how their company’s product and service features impact customer relationship experiences. This assessment determines which features of the current products and services are Relationship-enablers and which are Relationship-inhibitors. A “roadmap” can then be developed for eliminating Relationship-inhibitors and increasing Relationship-enablers, leading to stronger customer relationships and more sustainable innovation. Relationship-enablers stimulate the creation of value-enhancing steps and minimize or eliminate or value-diminishing steps. With relationship-enablers positive, reoccurring relationship experiences can be engineered into the use of products or services to continue to build customer relationships after purchase. As new products and services are created and introduced, value creation is maximized. Relationship Value is the foundation of the “value accounting system” needed for non-financial performance management. It is so important the metric we use in the Religence Framework to measure effectiveness in relationship development is called, Relationship Value. It measures whether an interaction with a customer moves the relationship forward or backward. Relationship Value is a Key Performance Indicator for relationship development, which is how value is created and how strategy is executed. Relationship Value can also be a leading indicator for profit. For more about the metric scroll down to the Measure and Manage Value Creation section. Map Value Creation. High-Level Customer Relationship Process Value Stream Map: We use a value stream map to map the customer relationship process at a high level as part of our customer relationship strategy decision analysis. We start with Retention and work backwards to Acquisition. Managers and a cross-functional action learning team of their group leaders from marketing, sales, and customer retention as well as the staff who support them—business analysts, IT and HR professionals—define a high-level customer relationship process value stream map and high-level tactics for what they do now to create value with their customers at a base level. Managers and the action learning team define when a customer has moved from one stage to another in the Customer Relationship Wings in the Religence Framework. These definitions are critical for better handoffs between functions. Customer Relationship Wings™
Customer Relationship Process Improvement: The framework makes it easy to see WHAT tactics and critical interaction processes are missing in the continuum to move contacts through the stages of Acquisition, Closing, and Retention in strategy execution, as well as WHAT needs to be changed. Our alignment reality check tool is another way to see WHAT needs to happen to improve the customer relationship process as is Voice of the Customer research. With in-depth, one-on-one interviews we can see HOW these interaction processes affect the relationship and experience of the customer in positive and negative ways. It helps clarify what you will do when things go right or when things go wrong with customers and what alerts you need to deal with critical issues. Critical Interaction Processes: Some interaction processes are so critical that managers will want to take care of any problems immediately. And in fact, some may want to forgo the high-level customer relationship process value stream mapping exercise for strategy decision analysis and just begin with what is obviously important to value creation:
To map these critical interaction processes, we needed something more than the static value stream map approach, which is adequate for strategy execution planning purposes at a high level. We needed something dynamic and more detailed that took into account the myriad possibilities an interaction flow may take in these critical processes. We needed to take these interaction practices back through all the people in the company who support those on the frontline with customers. We needed to correlate the customer relationship lifecycle (as described in our CRI Reference Section entitled Voice of the Customer Research Helps Establish Status) with the product/service lifecycle. Value Creation Map: To distinguish it from the static value stream mapping, we call this new variation, value creation mapping. Each critical process has its own value creation map. The value creation map includes all of the steps within a process flow—both those steps that are directly conducted by those in your company and involved with addressing the type of customer interaction being mapped, and also the typical steps the customer may take in response. It provides the customer perspective of an interaction. An inquiry that is handed off three or four times in the company until it reaches the “right” organization or individual will be mapped with all of the hand-offs and associated steps, delays, and requests for more information. The map exposes what the customer experiences. For example, what does the customer experience in these situations:
Where in the process does the customer terminate the interactions? During a product inquiry process does the customer purchase; does the customer ask for more information; or does the customer just go away? In a complaint process does the customer indicate the issue is resolved satisfactorily; does the customer ask for a supervisor; or does the customer threaten a lawsuit and hang up? Another aspect of the value creation map is that it ends with the final action of the customer, not the final action of the business. This is one of the keys to understanding whether value has been created. Did the customer purchase the product or service? Does the customer regularly use the product and tell others about it? Did the customer pay their bill or was there a dispute? Was the customer satisfied that their issue had been resolved completely and professionally? Did the customer move through the lifecycle of acquisition, closing and retention? Map the Customer Experience: The customer experience in all of the product/service lifecycle matters. The interactions that make up the experience move the relationship forward or backward. Analysis of the Value Creation Map: Once the value creation map is completed, it is analyzed from several perspectives. One analysis categorizes each step into one of two categories—value-enhancing or value-diminishing. In many cases the company discovers that the steps where value is added are under-resourced. When a company gains a clear perspective on which steps create value and which destroy value, they can begin to align the company’s organization, measurements, and assets so as to optimize value creation. The value-diminishing steps are analyzed to determine how they can be eliminated from the process. The steps may still be necessary for good business practice, but they should be removed from the main flow of the value creation process and relegated to business administration processes. If the steps cannot be eliminated, they need to be streamlined to be as fast and accurate as possible, thereby minimizing the loss of value. Focused Value Creation Maps: Value creation maps for the entire enterprise can provide insight into HOW all of the divisions and departments of the company align to work together to create and deliver value to the customer—or as often is the case, how they work against each other. That is where we hope you will eventually get to, but we recommend starting with critical interaction processes affecting top priority customers and customer segments with profit improvement potential. We want you to avoid the trap many companies fell into with TQM (Total Quality Management), where they went for quality at all costs, without thinking as much about profit as they should have. The same thing could happen in the rush to provide a great “customer experience.” That doesn’t mean that you can’t treat all customers well. It does mean paying attention so that the promises you make and the processes you put in place are appropriate for the customers’ profitability level. That makes for a relationship that is profitable for both you and the customer. Measure and Manage Value Creation. For each channel/product group there is a single customer relationship process to carry out the tactics used to execute a strategy. This customer relationship process is composed of a family of value creation maps. Some are critical, some less so, yet still necessary to execute the strategy. We build on the critical interaction process maps—which detail HOW these important processes work—to create the family of value creation maps for the customer relationship process. With your managers and action learning team, we look at the people and process within the company behind all the other steps needed to acquire and keep customers. We run test scenarios to anticipate WHAT interactions are likely to happen or should happen with prospects and customers as you carry out the tactics needed to execute your strategy. What will you DO; what will they DO? What is likely to happen next? The interactions support the intention of the tactic they carry out. There may be only a few interactions required to implement one tactic, while it may take a couple dozen interactions to implement another tactic. Next, the cross-functional team determines how the contact might respond to each interaction. Again, this is expressed as a series of possible responding interactions that a prospect or customer might have. Developing a relationship is a joint process—a give and take—between the prospect or customer and the company’s frontline staff. Both sides need to be accounted for. These detailed potential interactions will become the basis for configuring the Religence Framework’s operational CRI tracking system. Tracking the interaction flow and what happens next in the development of the customer relationship should be an ongoing operational measure for companies. It can provide a real-time perspective on whether customer value is being created or diminished. The processes leading to positive customer interactions are creating value and those which result in a premature or unsatisfactory end to the customer interaction are indicating a loss of value. Intelligence built into the customer relationship process measures how sales and marketing works to create value and how strategy is executed so both can be managed. In the Religence Framework, determining the possible interactions and responses is important, but the magic happens when we value, monetize, and code the interactions and responses to track with the tactics in the plan. This makes it easy to compare the actual day-to-day performance with what is anticipated of the plan in the strategy decision model and to track cause-and-effect. It is these customer relationship metrics that link planning and execution and value creation. Tracking the interactions themselves, the cause, adds significantly to what is known. It is significantly better than having just the results of traditional after-the-fact data mining. Putting a variable cost on them is also significantly better than measuring the cost of strategy execution by a head count and fixed tactical budgets. What makes the Religence Framework more powerful, however, is measuring what the interactions DO to build the relationship with the customer—the effect. Giving each interaction a relative value for its relationship development potential is a major breakthrough. This Relationship Value metric is what has been missing—until now. The value assigned is based on the interaction’s relative impact and relationship enhancement capabilities. We have an interaction database, based on more than 30 years of experience in sales and marketing, to draw on as a place to start. When a company has been doing predictive modeling, we use that insight to help value the interactions as well. Relationship Value ties together many aspects of the customer relationship process and, when correlated to profit, allows a whole new level of analysis. But Relationship Value has an even more important role. With Relationship Value plans can be put directly into operation—in a way that generates that all-important operational value creation feedback loop to enable real-time management of the staff on the frontline. Relationship Value is not just for managers; it allows staff on the frontline to make informed, more profitable operational decisions on their own, one interaction at a time. Then, as managers see what is happening, they can innovate with process changes, making immediate course corrections and in-the-moment decisions. That’s why Relationship Value is the Key Performance Indicator for relationship development, which is how value is created and strategy executed. Relationship Value can also be a leading indicator for profit, linking the customer relationship and through it Brand Value and Product Value to profit. What’s Next: Breakthrough, Repeatable Customer-Focused Performance. We’ve drawn from proven methods from finance, operations, and marketing for use in the Religence Framework—including Activity-Based Costing, Value Stream Mapping, Voice of the Customer Research—and took them to another level for breakthrough customer-focused performance. Our solution finds a balance between 1) the value provided to the customer and 2) the value received—for the cost expended by the company and the price paid by the customer. It provides both value and cost accounting for innovation and growth intangibles. The Religence Framework measures and manages what happens on the frontline with customers—where value is created, where customers are retained, and where the results of hundreds of small, more profitable decisions each day are woven into the profitability of each customer. With the Religence Framework for Customer Relationship Intelligence, executives can explain with more certainty how they achieve success in innovation and growth and how their organization creates value. They now have a way to measure the relative value of the process used, and a way to manage it with real-time operational control going forward. To get started now, mapping what your customers experience in their relationship with you, we invite you to contact us. Our team of senior people is ready to help you listen to your customers, deliver more value, and identify the customers you should cultivate—who the most profitable customers are and why and what their potential is for profitable growth. Our cross-functional team is comfortable starting in finance, operations, or marketing—or orchestrating all three. __________ For More Information: For more on strategy execution please see our Next-Generation paper or take a look at our CEO’s new book Customer Relationship Intelligence: A Breakthrough Way to Measure and Manage Sales and Marketing, Chapter Seven. For more on the Relationship Value KPI look at Chapter Four or our FAQs on What is the context for customer relationship metrics? or How can Relationship Value be used?. You may also be interested in our other Thought Leadership Papers in our Next-Generation series. For more on Voice of the Customer research, value creation, operational control, and continuous learning, see our extensive Religence Framework CRI Reference Section for these topics:
Another excellent resource is our CEO’s new book Customer Relationship Intelligence: A Breakthrough Way to Measure and Manage Sales and Marketing, which explains how to measure and manage sales and marketing by tracking the value created as the relationship with the customer is developed across the customer lifecycle. Check out Chapter Seven particularly. __________ About the Authors and Religence: Linda Sharp is CEO of Religence, Inc. Linda has run her own marketing firms for 30 years, building a strong track record with Fortune 500 clients and understanding success in marketing with a mathematician’s eye. The Religence Framework was born of her five-year odyssey to quantify marketing and has resulted in a business process patent application and the formation of Religence to commercialize her discovery. A sales and marketing innovator and integrator, Linda was well ahead of the movement to customer-focused thinking, having pioneered the use of Voice of the Customer research. She’s built Voice of the Customer feedback into the Religence Framework, taking yet another pioneering step. Learn more about her ideas in her new book Customer Relationship Intelligence: A Breakthrough Way to Measure and Manage Sales and Marketing. Religence is a customer-focused performance management consulting firm specializing in Customer Relationship Intelligence. The Religence Framework links strategic planning to operational execution and customer relationship metrics to profitability for breakthrough business-to-business sales and marketing performance.
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