1-to-1 Impact

What the Public Sector Can Learn from Customer-Centric Businesses

by Don Peppers and Martha Rogers, Ph.D.

Last summer, well before the tragedy of Hurricane Katrina exposed the weaknesses in oil refinement capacity and caused gas prices to surge past $3 per gallon, the U.S. government enacted an ambitious, sweeping energy bill. Its stated purpose, at least partially, is to reduce dependence on foreign oil sources and develop alternative energy solutions. To facilitate those goals, $14 billion in tax breaks were incorporated into the bill. Some of those breaks will go to energy-efficient consumer goods, such as insulated building materials and the purchase of hybrid cars. Additionally, several companies received tax breaks. Toyota, for example, will receive tax incentives for developing hybrid technologies. General Motors will get breaks for developing hydrogen cell technologies. ExxonMobil will get funding to explore new oil fields.

We're not judging anything about the legislation or the companies involved. We're not applying any politics here. In fact, this bill, and the energy crisis, is a good example of how governments, like businesses, must carefully balance both the long- and short-term effects of their actions. It's a serious dilemma. The U.S. government has a short-term problem that is affecting its citizens in the form of skyrocketing fuel prices. It has long-term issues that also must be addressed, specifically foreign oil dependence. So rewarding domestic oil exploration as well as developing alternative sources for the future looks like a sound strategy.

It also raises some issues about how governments could apply Return on Customers (ROC) principles, and whether they should even try. Just as a quick refresher: We introduced the concept of Return on Customer in our most recent book, Return on Customer: Creating Maximum Value from Your Scarcest Resource. At its core, ROC quantifies how well a company creates value from its customers (as opposed to ROI, which quantifies how well a firm creates value from a given investment). By its very nature, ROC requires a firm to focus not just on short-term results, but on long-term value creation as well, meaning that executives must focus their decisions on creating value from a company's most important asset: its customers.

ROC in government
Think about this: The ROC argument raises an obvious question with respect to governmental entities and other nonprofit organizations. For most (although perhaps not all) government organizations, the very concept of trying to establish the value of the enterprise in terms of future cash flows received from "customers" is meaningless. Needless to say, it isn't appropriate for a government entity to rank customers (or citizens or taxpayers) by their "value" to the enterprise. In the case of the current energy situation, the commuter who pays $1 more per gallon for gas this year deserves lower energy costs and alternative fuel sources as much as Delta Airlines does. And unless the average citizen can cut his fuel bills, discretionary income is taken out of the economy. How much of that discretionary income could help bring a company like Delta out of red ink?

To apply ROC to the government, we must first define the organization's mission. It's easy to state the primary mission for a business: create economic value, in terms of both current profit and the long-term value of the enterprise itself. You can accomplish this mission more effectively if you measure success in terms of the return generated on individual customers. Return on Customer provides a direct "translation" of a company's primary mission, allowing the firm to transfer this mission without distortion, from the enterprise level all the way down to the customer-specific level. For government organizations, however, the mission statement is not so simple. Every agency has, of course, a primary mission or function. The police are charged with making society safer, the tax authority wants to ensure that citizens pay their taxes, the education folks want to make kids smarter, and so on. The value of accomplishing any of these missions is not easily translated into direct economic terms, although applying utilitarian economics can help.

For most government organizations dealing with issues other than foreign policy or national security, the primary mission is composed of some mixture of (a) providing services to citizens or corporations and (b) getting citizens or corporations to do or not do certain things. To accomplish its mission, an agency must constantly balance the service experience it provides to its constituents against the cost of providing that experience. But crafting the right experience, while balancing the short- and long-term costs required to deliver it, is exactly the kind of optimization problem that many private sector businesses struggle to resolve.

As a metric, ROC involves tracking changes in customer lifetime values to help a business strike the proper balance between the short term and the long term. But as a philosophy, ROC involves making operational decisions based on a customer-oriented perspective, acting in the genuine interests of customers at all times. So even though the government cannot realistically track or apply ROC as a metric, it should still be applying ROC as a philosophy; by doing so, governments will likely balance short- and long-term financial results more effectively.

Simply stated, any organization set up to serve the needs of constituents, taxpayers, donors, beneficiaries and others will be more effective at accomplishing its stated mission if it takes a "customer" perspective, and tries to view things through the eyes of the people whose interests it is supposed to be serving. Additionally, earning the trust of constituents is central to running a smooth, cost-efficient operation.

Bio: Don Peppers and Martha Rogers, Ph.D. are co-founders of Peppers & Rogers Group, a management consulting firm recognized as the leading authority on customer-based business strategy. Together, they've co-authored five best-selling books on the subject. Their 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.