Using Customer Relationship Management to Increase Profits
Kennedy, Michael E., Strategic Finance
In today's challenging economic environment, both customers and company profitability are more elusive than ever. Many companies are having difficulty stabilizing their business model and have been forced to downsize, more than once. Companies such as Wells Fargo, Harrah's Entertainment, IBM, Boise Cascade, and Lowe's Home Improvement, however, have stabilized or grown their companies by putting a priority on investing in customer relationship management (CRM). CRM helps companies unlock the full value of their relationship assets, accelerating revenue and profit growth. Industry experts indicate that nearly 90% of all companies have yet to adopt the new tools and methods of CRM and continue to fall behind by adhering to the old method for managing their relationship assets. Let's look at the benefits realized by adopting the tools and methods of this new paradigm, the key value drivers of customer relationship assets, how a company can independently determine whether or not they need to adopt this new paradigm, and how financial executives can act as catalysts for change.
Not a part of traditional balance sheets, relationship assets are defined as customer relationships, channel relationships, and partner relationships. Also included are the investments that companies utilize to build these assets, specifically, the investments in sales and marketing.
Industry experts indicate that most organizations don't effectively manage their customer relationship assets, but those that do enjoy a competitive advantage. According to Wendy Close, research director at Gartner, Inc., "Less than 10% of enterprises have a single, integrated view of their customers, and those that do are just beginning to leverage their investments to improve customer loyalty and profitability." The same holds true among mid-sized companies as "less than 10% of mid-sized companies have developed comprehensive systems and processes to actively manage and maximize the value of their market-based assets," says Kevin Myers, vice president of Regional Sales for SalesLogix, a leading CRM software provider.
Managing relationship assets has evolved from old traditional methods to a new paradigm that provides new methods and tools to protect and manage the growth of these assets. The benefits of using these tools are substantial. There's greater visibility into the sales pipeline, lower inventory exposure risk, shorter sales cycle, lower costs to manage these assets, improved customer profitability, and better intelligence on financial returns for specific marketing initiatives (ROI).With these techniques, Lowe's improved store performance and sales, Wells Fargo Home Mortgage decreased loan defaults and risk, and Harrah's raised customer sales and cross-property visits.
MIGRATING FROM THE OLD METHOD TO THE NEW PARADIGM
The core processes of a customer relationship management system merge the so-called islands of relationship information into one comprehensive database. In the old method, islands of information prevailed as customer leads and existing relationship information were retained by the salesperson in their own paper-based system or elementary computer-based tracking system. As a result, all vital relationship information was owned by the salesperson rather than existing as an enterprise asset that could be viewed, leveraged, and retained by the organization. As a result, many of these relationship assets had a short lifespan, and they weren't always passed on to management when the salesperson moved on. Corporations were forced to duplicate their investments as the new salesperson rebuilt the relationship intelligence. See Table 1.
VALUE DRIVERS FOR RELATIONSHIP ASSETS
The value generated by these relationship assets can be quantified from a cash flow perspective, which measures the cash inflows generated by a group of customers, the duration and frequency of those cash inflows, and the cash outflows required to establish and retain customers. …