Delivering value to customers through CRM

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Over the past few weeks we've been examining the difficulties that some CRM implementation projects seem to be running into, and identifying what we can do to improve things.

At HNC's most stimulating conference in San Diego last week 'Minding the Customer', Michael Treacy, chief strategist and co-chairman of Gen3 partners, provided a useful framework for thinking about these issues that I'd like to adopt and adapt and share with you.

The adoption of new technology in a marketplace can deliver value in at least three ways:
- by improving transaction efficiency (making the old business model more effective)
- by improving value delivery efficiency (devising a new business model which delivers more value)
- or by improving the efficiency of the marketplace

I'm going to leave this third point out of this editorial as it doesn't usually apply within one organisation, but across the marketplace. I do hope it will be the subject of another editorial later.

Over the past few weeks we've looked at three case studies of the successful adoption of CRM, namely Dell, First Direct and Ikea. In all three cases I would argue that the major benefits to their customers came from the adoption of a new business model which delivered additional value to the customer.

Dell's adoption of the direct channel brought significant savings in cost of distribution which were passed on to the customer as better value. A second-order benefit was the integration of on-line customer ordering facilities with back-end supply chain management processes. This has reduced, I understand, inventory levels from an industry average of 58 days worth to 2 days worth, providing a further estimated 5% cost saving.

First Direct took a different approach. Their use of the direct channel was not primarily to reduce cost, but to address their specific target market, the 'Yuppie'. This has led to the development of a new business model which provides industry-leading service standards, and has some costs benefits due to the savings on a physical distribution network, but which is vulnerable to competitors due to the high cost-base implicit in a service which commits to using a human being for every transaction. Of course, the launch of web-services to complement the call center, implementing a web-enabled call center, may well address this cost issue.

Ikea have taken large quantities of cost out of the business model at the expense of offering poorer customer service (you have to build the furniture yourself; they don't accept orders; warehouse picking and delivery is up to the customer, etc), but have passed the cost-savings on to the customer, leading to a significant improvement in value to the customer.

What all three cases demonstrate is that all three companies can use new technology to develop a new business model with improved value propositions for the customer.

It seems clear that, however effective your CRM system is, if a competitor introduces a new business model which provides a step-function improvement in value for the customer, your customers are going to walk.

It is also clear that, to someone working within an existing business model, any new way of running the business is going to appear radical, high-risk, and probably wrong. It is a non-trivial issue to get large organisations to adopt radical, high-risk solutions.

Now let's return from these case studies of success to the CRM projects that are having difficulty meeting their anticipated benefits. A US survey shows that the benefits expected by CEO's from their CRM implementations are as follows:
- 51% expect improved effectiveness of Marketing spend
- 44% expect improved understanding of customer behaviour
- 55% anticipate managing down unprofitable customers

None of these benefits require a new business model, they are improvements of existing processes or transactions. As such they may well lead to benefit, provided the organisation adapts to adopt the new processes - in itself a not insignificant challenge. However, they will not deliver the step-function in value that derives from a new business model.

The question must be, if one is going through significant change at significant cost ($250M per US bank over the next two years on average), isn't there an expectation of a step-function improvement?

Of course, once we have adopted a new business model, there will be 2nd-order benefits in improving the efficiency and effectiveness of that model, and if we don't adopt those changes, then competitors who have adopted the new model will do so.

The challenge for us all therefore is to find the opportunities for new business models that the technology opens up, and to make that business model, once adopted, more effective. Perhaps the key issue facing many CRM projects is that they address how to improve the existing business model, rather than migrate to a new one.

The subject of how we address that challenge will be the subject of future editorials.

As usual, comments on this editorial can be posted on this editorial itself, in our Newsletter Conference, or directly to me at [email protected]

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