Turning Data into Action

by John Gaffney and Larry Dobrow, Peppers & Rogers

In this era of fact-based management, companies are discovering that the key to growth is based on customer insight.

Companies know they must use customer data to make smarter decisions and manage their businesses profitably. However, there are two major links in the chain that have yet to be forged, and these missing links could be costing your company money. The first: Customer data needs to be turned into customer insight. For example, the data from a telecom company's contact center that shows a drop in average revenue per customer needs to translate into an understanding about why that is happening. Customer insight is where customer value and customer needs intersect. It is where data is transformed into understanding.

The second link connects customer insight to action. The telecom company in the example above takes the knowledge about decreased customer revenue and crafts a new contact center strategy to reach out to customers whose usage patterns show they may be ready to use fewer of the company's services. Thus, a crisis in business decision making is averted.

Using customer insight to build the value of your current customers and to acquire customers with high growth potential can make the profitability difference. But customer insight is only useful when it is acted upon.

Insight-based action is vital to increasing profits in today's business world, and there are two keys to realizing these profits. The first key is the current business climate. Every important strategic decision is based on knowledge, and most of those decisions center on the customer. While instinct still plays a part in the boardroom, all available customer data must be deployed fully, because you can bet that the competition will deploy it.

This era has placed even more pressure on industries of "intermediating change," according to Anita M. McGahan, writing in the October 2004 Harvard Business Review. She says intermediating change occurs when a business is not threatened at its core, but when relationships have become fragile due to heightened competition and new technologies. Auto dealerships, investment brokerages and entertainment businesses are at the top of this list. In these kinds of businesses, "executives tend to underestimate the threat to their core activities by assuming that longtime customers are still satisfied and that old supplier relationships are still relevant. In reality, these relationships have probably become fragile."

The second profit key is using customer insight to craft strategies and tactics to strengthen these "fragile" customer relationships. An October 2003 Harvard Business Review survey of 157 companies showed that 23 percent used a "causal" analytic model that showed verifiable relationships between business drivers, strategic success and financial outcomes. Simply put, this 23 percent used customer data to verify that what they were already doing was successful. More importantly, they averaged a 2.9 percent higher return on assets and a 5.1 percent higher return on equity.

Finally, customer insight can drive profit by using developing technologies. For example, proactive and predictive modeling in the contact center and marketing optimization applications are adding new levels of accuracy to customer insight. The best customer insights are produced when the customer picture is fused from two sources: The first source is the data from transactions, demographics and attitudes. The second source, which many companies ignore, is data about customer needs and values. It is this fusion, however, that results in the insights that lead to smarter decisions and higher profit.

Say, for example, an automotive company is preparing to introduce a new high-end SUV. It can gather transactional data to identify the customers who are most likely to purchase an expensive vehicle. Demographic data shows the population centers where these types of customers live. Attitudes about competitive models and brands also can be researched. But to complete the picture, the automotive company must determine what customers need in a new SUV. Some need four-wheel drive. Some need interior space for their jobs or for carpools. And what do they value? If it's gasoline efficiency, the automotive company probably would not want to pitch an SUV to them.

Financial services see real payoffs
A 2003 McKinsey report put the cost of acquiring customers at 10 times the cost of keeping them; rescuing defected customers costs 100 times more than keeping existing ones.

Not surprisingly, retaining current customers has been the focus of many customer initiatives, and these efforts are proliferating at a particularly rapid rate in the financial services sector. "Even a small increase in customer retention can lead to a big rise in profitability," says Morgan Stanley Executive Director Tony LoFrumento. "Our processes allow us to find out what customers are most likely to do and when they're going to do it."

LoFrumento has implemented customer data processes that give the bank a single view of customers, even though most customers use more than one of the company's products. In a business where 18 to 20 percent of customers defect within a year, customer insight has led to many forward-thinking decisions at Morgan Stanley, including the creation of new IRA products for various customer groups and a profitability model that replaces the company's former reliance on total assets as the ultimate gauge of customer value. The high cost of customer acquisition has increased the company's interest in the concept of organic growth.

A May 2004 story in FORTUNE magazine highlighted the work of Ed Hess, director of the Center for Entrepreneurship and Corporate Growth at Emory University's Goizueta Business School. Hess identified 23 companies as champions of organic growth, which is defined as the growth that comes from the company's core businesses. Organic growth can also be defined as the growth that comes from your current customer base. According to the article, the stock values of the organic growth index of these 23 companies outperformed the S&P by 22 percent.

One of the 23 companies singled out by FORTUNE and the Hess survey is Automatic Data Processing (ADP). With more than $2 billion in revenue, it is the global leader in payroll and benefits administration. Donna Collins, vice president of business engineering solutions, says that as companies pared employees and payrolls over the past few years, ADP found its customer base shrinking in value. One of its key metrics – checks per client – declined, and the average client payroll shrunk from 80 to 74 employees. The threat of higher interest rates also loomed.

To offset this trend, ADP took a closer look at its customer base. It embarked on a measurement and benchmarking push. It also began categorizing lost customers as either controllable (ADP could have done more to keep them) or non-controllable (the customer left due to reasons outside ADP's control, such as a bankruptcy). This breakdown has allowed ADP to reduce the number of controllable losses by deploying its service and support resources more effectively. Over the past five years, ADP's client-retention rate has jumped from 85 percent to 91 percent, increasing the revenue from its existing customer base.

Experts agree that customer insight should continue to drive decision making. Its importance no longer needs to be sold to the executive suite at most companies. Paul Bierbusse, senior director of customer intelligence at SAS, says, "I see the rise of the intelligent company. This will be a company that uses knowledge about its customers all across the company, and all up and down the demand chain. Customer insight should influence every interaction that a company makes."

Bio: John Gaffney is executive editor for Peppers & Rogers Group. Larry Dobrow is a contributing editor. Peppers & Rogers Group is a management consulting firm recognized as the leading authority on customer-based business strategy. The firm helps its clients worldwide create and execute customer-based initiatives that make a bottom-line impact. Visit Peppers & Rogers Group online at www.1to1.com.