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Performance Management - Making It Work:
From Working for the Boss to Working for a More Demanding Overlord: The Customer

online columnist Gary Cokins     Column published in DMReview.com
January 5, 2006
  By Gary Cokins

Our fathers worked for the boss, and when they left the office at five o'clock, they left their job worries behind. Today's managers and employees work and worry nearly 24x7 - and probably for someone other than their bosses on the organizational chart. What has caused this shift, and who is this new boss? The answers to these questions are the Internet and the recently empowered customer, respectively. The Internet, with its powerful search engines and near-instant gratification, has irreversibly shifted power from sellers to buyers. Every supplier of products and services is scrambling to become more customer-focused.

Performance management, defined narrowly by most as merely better strategy, budgeting and control, is increasingly becoming recognized as a much broader concept. Performance management runs end to end as the complete, closed-loop planning, design, marketing, sales and customer order-fulfillment cycle. One of the critical components in the portfolio of performance management methodologies is customer relationship management (CRM). Why is CRM now so critical to performance management?

A Shift of Power from Sellers to Buyers

Organizations have realized they must be increasingly focused on customers because:

  1. They need higher customer retention. It is more expensive to acquire a new customer than to take the steps needed to retain an existing one.
  2. The source of competitive advantage has shifted away from making and delivering commoditized products toward value-added service differentiation for customers and prospects.
  3. Micro-segmenting and improved targeting of customers helps businesses focus on their customers' unique preferences - a departure from traditional, spray-and-pray mass advertising and selling that have proven very little return.

These forces should not keep organizations from attempting to acquire new customers. However, they should balance their use of financial and manpower resources between growing sales to higher-potential, long-term existing customers and acquiring new customers who share the same characteristics as existing customers projected to deliver higher profits in the long term.

The Internet has shifted power from suppliers to buyers because shoppers can instantly view comparative pricing from a broad range of vendors while collecting more information about products and service lines.

Just imagine the shopping experience of a forgetful husband the evening prior to his 10th wedding anniversary. When he realizes on his drive home from work that he has forgotten a gift, he types ‑ or even speaks - these five words into a search engine on his Internet-equipped cell phone: "tenth wedding anniversary wife gift." In less than a second, his phone provides a list of gifts other husbands have purchased, ranked in order of popularity. With a click, he can view price ranges. When he further specifies his price range, he can locate nearby stores complete with driving directions, and he can even immediately phone each of those stores to talk to a salesperson. If he had been prudent enough to remember his anniversary only a few days earlier, he could have been directed to Web sites where he could purchase the item at a lower than retail price and have the gift wrapped and shipped.

There are dozens of different purchasing experiences that you can imagine, and not just for consumers in households but also for purchasing agents in the virtual business-to-business (B2B) marketplace. Buyers are no longer restricted to suppliers from the local geography; now they can order globally.

How Can Suppliers Gain a Competitive Edge?

Some suppliers overreact by becoming customer-obsessed when they attempt to transform themselves away from developing innovative new products and services and motivating their sales forces to sell them. Most eventually realize that they should work backward by first understanding the unique buyer preferences of the types of customers and prospects they want to serve. There is a difference between being customer-focused and customer-obsessed. The latter approach may cast too wide a net and capture savvy, high-maintenance, price-driven, non-loyal buyers who ultimately yield little profit margin in the long term.

As a supplier increasingly micro-segments its customers and sales prospects, the company will need more accurate intelligence on the current and future potential profitability of its products, service lines, channels and customers. The idea here is not just to know which types of customers to grow or acquire and which not to, but also how much to spend growing and acquiring the desired types. You destroy shareholder wealth if you bribe loyal customers and prospects with unnecessary deep discounts and excessively costly differentiated services or if you neglectfully fall short with offerings or services to non-loyal customers and prospects thus risking their abandonment. The spending and investment of sales and marketing is ultimately a financial optimization problem. This is why an effective managerial accounting system is another one of the key components of the performance management portfolio of methodologies.

A Single View of the Customer

Placing aside the skills and capabilities needed to measure customer value and derive a return on customer value score, there is a myriad of other tactics available to exploit customer intelligence data. For example, sales and marketing campaigns can become continuous, closed-loop learning cycles. Based on known patterns of psycho-demographic customer data (for example, teens' television viewing preferences), their recency-freqency-monetary (RFM ) spend history (how much, how recently and how often money was spent) and predictive response models, companies can customize offers, deals and discounts to micro-segments and, ultimately, to individuals. Then, based on the actual-versus-expected response behavior, future marketing campaigns can be refined.

To create higher shareholder wealth, a company must analyze its customer portfolio in new ways to discover new profitable revenue growth opportunities. Many organizations have difficulty accessing, consolidating and analyzing the necessary customer data that exists across its various business systems. This issue is exacerbated over time as the number of systems and discrete customer databases expands. Becoming customer-centric requires a view of data that involves no walls. For example, a bank should ideally consolidate its information onto a single decision-making platform, instead of keeping its credit card data in one silo, its banking account data in another and its mortgage data in yet another. A "single view" of the customer must eventually be created, one that consolidates relevant and accurate data related to a single customer across different organizations, databases and operational systems.

As initially mentioned, customer relationship management (CRM) is one of the critical components in the portfolio of performance management methodologies for this very reason. When customer analytics is combined with the other components of the performance management portfolio, such as balanced scorecards, demand planning/forecasting, marketing automation and predictive resource capacity management, the full vision of performance management can be realized.

For more information on related topics visit the following related portals...
Corporate Performance Management (CPM) and CRM.

Gary Cokins is a strategist for SAS, a market leader in data management, business intelligence and analytical software. He is an internationally recognized expert, speaker and author on advanced cost management and performance improvement systems. He is the author of five books, An ABC Manager's Primer, Activity-Based Cost Management: Making It Work, Activity-Based Cost Management: An Executive's Guide (Wiley), Activity-Based Cost Management in Government and his latest work, Performance Management: Finding the Missing Pieces to Close the Intelligence Gap (Wiley). You can contact him at gary.cokins@sas.com.

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