Heart of the matter

While
Customer Relationship Management may be the talk of every informed board,
putting the theory into practice is another matter. The software hype that has
surrounded its implementation has seen it move too far from what it is really
about – people – and it is up to HR to bring it back into line. By Keith Rodgers

When
he first began to study the issue of customer retention in the mid-1980s, Fred
Reichheld, director of US consultancy Bain & Co, had a number of
preconceptions. He knew that by improving loyalty among its client bases,
companies could create tangible business benefits, primarily by increasing
growth and improving profitability. And as a "kind of bonus", he
assumed the process could enhance employee motivation along the way.

Once
his consulting team started researching the subject in depth, however,
Reichheld had a rude awakening. As he recalls in The Loyalty Effect, one of the
leading customer management publications of the past decade, it became apparent
that the link between employees and customers went far deeper than he
originally supposed. "We came to understand that business loyalty has
three dimensions – customer loyalty, employee loyalty and investor loyalty –
and they are far more powerful, far-reaching and interdependent than we had
anticipated. Loyalty has implications that extend into every corner of every
business system that seeks the benefit of steady customers."

Today,
the conclusions that Reichheld began to reach some 15 years ago are more
pertinent than ever. Customer Relationship Management – a business philosophy
that 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, wider
product availability and the ability to switch suppliers with relative ease,
customers are empowered as never before, and companies face an uphill struggle
to keep hold of them. While the 1990s were characterised by a corporate
obsession with internal processes and efficiency, the new millennium has seen
companies reach out to solidify their relationships with suppliers, partners
and clients.

The
IT 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 their
business 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 identified
with the business philosophy – sometimes to the extent that the two become
dangerously confused – and to a greater or lesser degree, technology underpins
nearly every customer management project.

But
amid the boardroom strategising and the software industry’s hype, the key
element that makes all of this work – the people – is often overlooked. When
they close a CRM sale, IT vendors routinely expect to find themselves pitching
to board directors and senior executives from customer-facing functions such as
sales and marketing – they don’t anticipate dealing with representatives from
HR. That is a big problem for companies, a problem for technology suppliers –
and a problem that HR itself needs to address.

The
reason is that even at its simplest level, implementing CRM software brings
significant change to job functions. Perhaps the most elementary CRM
application is a contact manager – a straight- forward means of organising
client details and tracking conversations or pitches.

By
replacing individual paper-based records and employees’ personal organisers
with a centralised contact system, companies can aggregate information about
individual clients, track past interactions and monitor how effectively sales
staff are converting leads. Better still, the company takes ownership of the
information – when a salesperson leaves, some of their knowledge and the
history of their client relationships stays with the company.

At
an employee level, however, even this kind of low-level application is often
fiercely resisted. For one thing, many salespeople recognise that their
personal relationships with clients give them great power. Indeed, the strength
of their contact list is often one of the fundamental reasons why they are
employed. That is not information they are used to sharing.

Just
as important, sales staff have traditionally been measured on the basis of
results – the revenue they bring in – rather than on how they execute, so a
system that allows managers to track the way they perform their duties is
unwelcome.  

Each
aspect of CRM brings these kinds of cultural problems, whether in sales, the
call centre, field service or marketing. The further you go up the CRM
functionality ladder – particularly as you roll out more sophisticated
performance measurement systems – the bigger the issue becomes.

Software
vendors and industry analysts alike have begun to focus on these human aspects
of CRM projects, identifying several critical people-related issues that can
make or break a CRM software project. Some of these are indisputably the domain
of HR. A key component of any CRM project, for example, is training – in larger
rollouts, the training budget can match the cost of the application software
licence.

At
a basic level, the training requirement includes the need for instruction on
how to use a new system – a course often managed by the IT department – but
also incorporates broader programmes explaining the corporate implications of
adopting a customer management philosophy. As Eben Frankenberg, vice-president
of midmarket CRM application vendor Onyx, says, "The best CRM applications
can give employees perfect information about the client, but if the employee
has no relevant management skills it is not going to help. That is really
important in CRM implementations – if you are not training people to be
customer-centric, the best CRM won’t help."

The
wider implications for the HR department, however, are more fundamental and at
a corporate level, require companies to understand the links between good
customer management and strong human capital management. Some of these are
intuitive.

Greg
Wynne, director of enterprise performance management marketing at PeopleSoft,
believes CRM analytics can help companies understand the links between employee
performance and customer satisfaction – particularly in a recessionary economy
where organisations are looking to slash costs. Knee-jerk layoffs, he argues,
can be "devastating to your company – they can take away your capability
to serve your customers."

Companies
should be able to examine the effectiveness of their different business
activities in detail and, rather than implement workforce cuts across the
board, should make "smarter cuts" by focusing on unprofitable markets
or segments. "Companies want to cut costs but keep their growth
plans," he says. "There is a lot of recognition in our customer base
that managing human capital is wise."

This
link between customers, employees and ongoing profitability has been explored
in depth by Reichheld. His thesis begins by establishing that the longer a
customer is retained, the greater its contribution to profitability: he then
builds a similar model to examine the impact of employee retention. The
parallels between the two are remarkable, suggesting companies could benefit by
spending as much time on employee retention as they do on keeping their
customers.

Reichheld’s
customer model, which underpins much of today’s CRM thinking, demonstrates that
the first year of any client lifetime cycle is heavily impacted by the cost of
customer acquisition. That includes direct costs such as advertising and
salesforce overhead, as well as less obvious charges such as loss-leading
pricing, which is often used to draw new business in. This outlay is balanced in
the first year by the base annual profit derived from whatever products or
services the customer purchases.

In
year two and beyond, the acquisition costs have already been written off, and
so the base annual profit drops straight to the bottom line. Better still,
other benefits kick in. Reichheld’s studies have shown that customer spending
accelerates over time if they are happy with the levels of service provided,
bringing an increase in per-customer revenue each year.

Operating
costs also tend to drop – if a customer is familiar with a company and its
services, it is less likely to take up employees’ time finding out answers to
basic questions. And in most industries, existing customers usually end up
paying higher prices than new ones, partly because new customers have to be
enticed with special offers, and because older customers are usually less
price-sensitive.

What
this means in practice is that every year a customer is retained, the greater
the benefit to the organisation. Using the example of a credit card operation
that retains customers for a period of 10 years, Reichheld demonstrates that a
5 per cent increase in the level of customer retention can increase
per-customer profit by between 75 and 125 per cent.

Bain
& Co has developed a similar model to assess the value of employee
retention. Here, the costs in year one range from recruitment – including the
outlay associated with interviewing and relocation – to training. From year
two, once the employee "acquisition" costs have been written off, the
benefits start to increase. Training slowly shifts from a cost to a benefit as
employees begin to pass on their experience to colleagues. Efficiency improves
continually as employees become more settled into their roles. Sales and
marketing staff get better and better at selecting and attracting profitable
customers. And customer loyalty increases, as clients develop personal
relationships with individual staff members.

As
Reichheld writes, "This model of employee loyalty bears some striking
similarities to the model of customer loyalty. Since the two sets of effects
are mutually reinforcing, the economic advantages of loyalty are often more
powerful than intuition might suggest."

Establishing
and measuring direct links between employee and customer retention is
notoriously difficult, but in general terms, Reichheld’s conclusions reinforce
what organisations instinctively know but rarely address. Not only does CRM
have major cultural implications that HR needs to tackle, but good employee
management actually improves the whole customer management process. The test
for HR is whether it can lever itself into a position at a corporate level to
make those points heard.

Fred
Reichheld looks at how to balance CRM issues by pulling together specific information
from all departments of a company

Traditionally,
Customer Relationship Management has primarily been defined as a
"front-office" business strategy – in other words, one that affects
client-facing personnel in the three prime areas of sales, marketing and
customer service. Most of the early European CRM roll-outs have concentrated on
"process" issues. In sales, that includes automating the distribution
of leads and monitoring how effectively they are followed up. In marketing, it
may be managing campaigns, feeding off a central database of customer
information. In customer service, companies are developing
"multi-channel" call centres that can handle telephone calls, e-mail
queries and web interactions using the same customer records.

But
while CRM projects have their roots in the front-office, their impact is felt
across the enterprise. Three areas in particular bring "back-office"
functions into the CRM equation. The first revolves around one of the core
principles of CRM, the need to create a "single view" of the
customer. In order to improve the quality of customer service, target marketing
effectively and establish opportunities for cross-selling and upselling,
organisations need to pull together customer data from all their front-office
functions into one central repository. As customer profiles are refined, they
begin to incorporate back-office information from areas like finance, which
holds data on clients’ credit or payment histories. Although this is primarily
a data extraction issue, there are cultural implications for departments that
fiercely guard their proprietary information.

Finance
plays a more critical role in the second area, establishing customer
profitability. Few organisations have a firm view of which of their customers
are generating the most value – or indeed, which are actually losing them money
– and the metrics for modelling profitability can be complex. This kind of
calculation – which helps companies direct their front-office activities more
effectively – sees finance working more closely than ever before with
customer-facing departments. In one UK retail organisation, for example, the
finance team was partially disbanded and several employees relocated to the
marketing department.

Finally,
while much of the CRM technology available today is designed to automate and
analyse demand-level activities, those operations cannot be viewed outside the
context of the supply-side of the business. Sophisticated customer management
applications allow salespeople – and sometimes clients themselves – to check
inventory levels, configure products online, and monitor the progress of orders
through the delivery process. This requires access, sometimes in real-time, to
supply chain systems. From the supply perspective, meanwhile, integrating
demand activities into the planning process brings huge improvements in
forecasting and delivery efficiencies.

The
net result is that the ramifications of CRM roll-outs are felt in every
department. From an HR perspective, that means the cultural issues that beset
many CRM implementations may ultimately permeate the whole organisation.

Tackling
the cultural problems of CRM

Despite
the increasing maturity of the CRM software industry, failure rates in
implementations are still high. Industry assessments differ and vary according
to the type of technology being implemented, but if failure is measured on the
basis 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 around
60 per cent. While the causes are occasionally down to the technology itself –
this is an industry notorious for hyping first and thinking about the
consequences later – in many instances the problems are cultural.

In
essence, CRM projects involve a huge amount of change management across the
enterprise, and tackling the cultural issues is becoming a major priority.
Companies that are now in second or even third generation CRM roll-outs testify
to the fact that the human capital management aspects should be dealt with from
the top down.

One
solution in the early stages of a CRM project is to generate quick
"wins". Industry analyst AMR Research suggests com-panies should
focus on solving recognisable pain points within an organisation, providing
tangible benefits for the individuals involved and measurable returns for more
sceptical managers. Likewise, harnessing the enthusiasm of early adopters is
critical – by turning them into "power users" charged with training
other staff and evangelising the system’s benefits, companies can build enough
momentum behind the project to see it through any implementation problems.

Whether
the HR department is involved in this process, of course, primarily comes down
to its standing within the company. Nonetheless, there’s a large amount of
evidence available to show that the people aspects of CRM are critical, and
HR’s involvement could make the difference between success and failure.

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