Making Customer Centricity Pay in Good Times and Bad: Lessons from Ten Leading Companies

In these challenging financial times many companies may be tempted to drop customer-centric business models that have become popular over the last decade. However, a recent Booz & Company study has found that companies that truly have a customer-centric business model have been able to reduce product development costs and increase customer retention and revenues—imperatives for all businesses, particularly when competition for scarce customer dollars is fiercer than ever.

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Vanessa Wallace Peter Burns Fiona Smith Therese Fritzson

Making Customer Centricity Pay in Good Times and Bad Lessons from Ten Leading Companies

This report was originally published before March 31, 2014, when Booz & Company became Strategy&, part of the PwC network of firms. For more information visit

Contact Information Sydney Vanessa Wallace Partner +61-2-9321-1906 [email protected] Peter Burns Partner +61-2-9321-1974 [email protected] Fiona Smith Senior Associate +61-2-9321-1911 [email protected] Therese Fritzson Senior Consultant +61-2-9321-1981 [email protected]

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In these challenging financial times many companies may be tempted to drop customer-centric business models that have become popular over the last decade. However, a recent Booz & Company study has found that companies that truly have a customer-centric business model have been able to reduce product development costs and increase customer retention and revenues—imperatives for all businesses, particularly when competition for scarce customer dollars is fiercer than ever.

A skeptic might dismiss customer centricity as just another expensive management fad. Yet a recent Booz & Company study suggests that the problem isn’t the concept; it’s the execution. By taking a disciplined approach, a select number of companies have been able to achieve significant revenue and profitability gains through

customer centricity. Thanks to their development of a more customer-centric business, a fashion retailer shortened its product life cycle from the six-month industry average to just 15 days; a telecom operator increased its profitability by 22 percent; and a major European department store increased its profits by 7 percent per year.

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A Holistic Approach to Customer Centricity

Why did these companies succeed where so many others have failed? That’s the question that Booz & Company asked these and other global companies with successful customer-centricity programs. We found that these companies, regardless of industry, had taken strikingly similar paths in developing customer-centric businesses. A successful program demands a change of process and a change of culture. In particular, executives at these companies told us, building a customer-centric company requires a clear vision, backed by strong leadership and a clearly defined goal to grow shareholder value; an operating model that breaks down functional boundaries, allowing information to move freely and decisions to be made quickly in response to customer feedback; and significant changes to what we call “business enablers”—the people, processes, and technology that keep the business running from day to day.

A Clear Vision and Defined Goals

of customer retention or a risky post-merger integration, were able to quickly rally the organisation around a customer-led goal. When a North American bank found itself losing up to 30 percent of customers in some branches due to merger-related service failures, executives had an urgent imperative to quickly make changes. Such urgency enables companies to quickly identify problems and reach key milestones. However, when organisations reach their original goal, they sometimes find it difficult to move up to the next stage of customer centricity, since customer capabilities are not yet firmly embedded in the culture. This is particularly problematic when the value of a customer-centric strategy has not been clearly articulated and embedded in financial targets. One European bank was able to successfully build its customercentric focus over the course of a decade by setting targets for customer profitability and measuring and managing these metrics with the same discipline as it applies to more traditional product profitability targets. It began with low-risk experiments and, when those paid off, made more public, high-profile changes to the way it did business. This rigor is critical to avoid customer centricity becoming a feel-good fad

Everyone, it seems, tells their shareholders they want to “make the customer the center of all our activity” or “create value for customers to earn their lifetime loyalty.” The difference in the winning programs we studied was they all shared a concrete vision about the goal of their relationship with customers and a clear articulation of how this relationship will deliver superior shareholder returns. The most successful programs also have two other salient qualities: strong leadership and good advance planning. Interestingly, while strong leadership seems to be more important in a situation in which the company isn’t under pressure to change, advance planning is essential regardless of the reason that the customer-centricity program began. Companies faced with either a threat to their existence or a clear imperative to change, such as plummeting rates


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that may have some initial success if championed at senior levels in the organisation but quickly abandoned if profits dip or the macroeconomic environment becomes more challenging. Proving the financial value of a customer-centric strategy can be challenging—particularly in the data-rich financial services and telecommunications industries, where executives are used to hard facts on product line profitability. The most successful companies that we studied were comfortable with an evolutionary approach to building proof in their customercentric strategy. Companies used controlled experiments of short duration, in a specific customer group or geography, to demonstrate the value of a customer-centric approach without betting the house on an untested theory. For one European bank, this approach built customercentric momentum through the accumulation of small victories—a slow and bumpy ride that stretched out over the better part of a decade. The advantage of such slow growth is that it made it possible to fully

embed the customer-centric ethos in the organisation. Similarly, for one Asia-Pacific bank, it took almost five years for employees to really see a deep-seated connection between employee engagement, customer service, and shareholder value. Only now, they say, is customer centricity a true part of the company’s DNA. The companies in our study had differences in their approaches to implementing customer centricity, with programs of varying duration, emphasis, and objective. What was common to their success was commitment from the leadership that this was more than a passing fad—it was a critical part of the strategy to secure profitable growth. These companies backed up their vision with clearly articulated financial outcomes of the strategy, even if these financial benefits were expressed at the outset as hypotheses that need to be validated through controlled experimentations. Doing so gave the organisation a clear signal that this change of direction will endure, improving the odds that the change will succeed.

Clear Vision: Questions Is the goal for customer centricity clear? Has the vision been translated into a financial goal? Has the organisation identified proof points to measure success at each stage of the transformation? Are the organisation’s leaders demonstrating how the customercentric strategy will deliver growth in the organisation?

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Breaking Down Functional Boundaries

The second element that successful customer-centric companies have in common is that they have implemented an operating model that breaks down functional boundaries, allowing information to move freely and the organisation’s people to quickly respond to customer feedback (see Exhibit 1). There are five steps to doing so: Shift the organisation’s focus to hearing the voice of the customer: Companies in the study used a variety of methods to improve their customer listening, including walking in the customer’s shoes for a day, having executives work on the front line in call centres and retail outlets, bringing customers into the organisation to tell their stories, and establishing customer advice panels in which small groups of customers provide ongoing input into new products or service developments. They also used more traditional methods, such as customer focus groups and feedback from customer-facing staff, to learn more about their customers’ needs. To develop true customer intuition, winning companies increasingly blur the boundaries between themselves and their customers and suppliers. Many such companies use open architecture models, in which customers, suppliers, and the customer-centric organisation collaborate, sharing ideas and feedback and working together to

improve the offering to customers. This level of openness will likely feel uncomfortable for many organisations—and it does require careful consideration to ensure the organisation’s reputation and intellectual property are protected— but it can be hugely powerful, both in terms of insights gathered and customer relationships built. One global mobile telephone operator solicited its employees, suppliers, and customers for ideas about how to improve service. This process had a high success rate, with thousands of ideas generating 25 truly highpotential opportunities in a matter of weeks, rather than the months that an internal team could have spent brainstorming ideas. Clarify decision rights: Opening up the organisation to learn more about what customers need is only of value if the organisation is clear about who makes decisions based on this information. Decision rights clarity is important for all effective organisations, but for organisations adopting a customer-centric strategy it is absolutely critical, for at least two reasons. First, poorly managed decision rights mean that the rich customer insight the organisation has accessed will go unused. Product designers will continue to make decisions on product features in isolation from operations managers


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adapting customer service standards, separate from marketing teams changing promotions and brand positioning. Acting on customer insight typically requires greater cross-functional collaboration than an internally focused product or service development effort. Decision rights must be clear to avoid having cross-functional decision making either slow the process down while consensus is reached or duplicate effort (and cost) as each function continues to operate in isolation. This requires the organisation to first understand what the critical decisions are, then define who is accountable for making these decisions versus those that provide information to support the decision making process. The second reason it is important to adjust decision rights when adopting a customer-centric strategy is that a little bit of knowledge can be dangerous: Although the most effective customer-centric organisations in our study understand the importance of moving decision

making close to the front line to customize marketing and communication for customers, they also recognize that offering frontline discretion over pricing, credit assessment, and service delivery can increase margin pressure, credit risk, and operational complexity. For example, a bank branch manager may have the authority to run a marketing campaign to specifically meet the needs of his customers bilingual communications in areas with diverse populations or retirement seminars in areas with large numbers of retirees— but not change the products offered or the credit scoring rules that apply. Group customers into meaningful and actionable segments: Customer segmentation allows the organisation to move from developing one-sizefits-all products to creating unique customer value propositions, based on behaviour rather than mere demographics. These unique offerings make creative use of specific product and service bundles for customer segments.

The trick here, however, is to make sure that the segmentation is tied to specific courses of action, through detailed models of the cost to serve. Winning companies avoid building “science projects” that gather customer data to no purpose. Instead, they track metrics that allow customer service and sales teams to easily deduce when an offering might require an adjustment. Just as small shopkeepers know their best customers, and allocate their time and energies accordingly, large customercentric companies need to understand the relative profitability of their customer segments. Having a meaningful and actionable segmentation model is a good starting point, but certainly not the end of the road for a customer-centric organisation. Grouping customers together helps organisations better understand specific customer needs and develop value propositions to profitably target these segments—but it can never be perfect. The best customer-centric organisations are

Exhibit 1 Operating Model Evolution to Support Customer Centricity
Inhibiting customer centricity External view is not valued Customer Listening Enabling customer centricity Customer and suppliers in close collaboration with organisation

Unclear who is ultimate decision maker—particularly when decisions  span functions

Decision Rights

Clear decision rights and streamlined governance process speed time to market

One-size-fits-all approach to customers, with standard products, pricing, and services

Customer Understanding

Needs of customer groups and individual customers understood and used to develop compelling offers

Metrics focused on product profitability (or revenue), average market share, and business unit-level cost control

Metrics And Incentives

Customer profitability central to financial metrics

No defined customer function within the organisation

Organisation Structure

Customer function has own mandate and is represented on executive team with customer P&L accountability

Source: Booz & Company

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moving beyond segmentation to understand what individual customers need. For example, one of the European banks in our study built up such a rich picture of its customers that it was able to offer products and services with features and pricing to fit their individual profiles—while they were talking with a branch teller or call centre agent. This more targeted approach has helped the bank increase sales in key products. For example, it increased sales of a new bank account (with higher fees but more features) by 40 percent, compared with sales growth before this targeting was possible. Align metrics and incentives: Tracking and monitoring consumer response to product performance and service levels—and communicating the result—is a critical part of creating buy-in and maintaining the momentum for a change to a customer-centric perspective. In the best customer-centric companies, employee incentives and customer metrics are all truly aligned to drive customer profitability. These metrics are very serious, and have the same rigor and measurability as other financial measures in the organisation. Executives at most of the companies we studied emphasized the importance of both quantitative and qualitative metrics, such as mystery shopping scores in combination with average revenue per customer, in creating a rich, holistic view of the relationship. A trap for many organisations shifting to a customer-centric strategy is to focus purely on output customer measures such as customer satisfaction and advocacy. Although these measures are important to monitor, on their own, they don’t help an organisation understand what is driving any changes in customer satisfaction or advocacy. Isolating the drivers of customer retention and value creation and

measuring these—as well as the output measures—is vital so that the organisation can adapt and improve the profitability of its customers, rather than helplessly watch a customer advocacy rating slipping down the rankings over time. Establish “customer” as a business function: The successful customercentric organisations we studied have moved away from traditional product silos, with all their inherently territorial characteristics, to truly cross-functional collaboration, whether through an actual reorganisation or simply through better processes. Many leaders in this area have established a specific customer function with a distinct role in the organisation that can efficiently link marketing, distribution, and product development. Executives at the companies we studied realize that creating a specific customer-focused senior executive role is a powerful way to align efforts to profitably meet customer needs and ensure that the customer’s voice is heard in executive decision making. In doing so, companies highlighted the importance of the customer function as having an equal role as the marketing or sales functions, which typically have their own mandate and P&L responsibility. One European retail bank that succeeded in integrating its functions found it had dramatically improved its performance in a number of ways. Better access between sales channels increased the number of products sold to new customers by 33 percent. Better technical coordination reduced the time to open an account from 55 minutes to 22 minutes—and increased the volume of new accounts by 73 percent. At the same time, cost to income ratio actually declined by 12 percent in the first five years of the customer-centric journey.

Operating Model: Questions Are all parts of the organisation able to hear customers and their needs? Have decision rights been clarified to reduce duplication and improve responsiveness? Does the organisation understand its customers’ needs—either as individuals or as meaningful segments? Are metrics and incentives aligned to support a customer-centric strategy? Does the customer function have a seat at the executive decisionmaking table?


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Changing the Organisation from Day to Day

A clear vision, strong leadership, and an operating model tuned to deliver a customer-centric strategy will ultimately be ineffective—and may add more cost into the business—if changes aren’t also made in what we call the business enablers. Business enablers are the people, processes, and technology that operate within the business on a day to day basis. People: Shifting an organisation from a product-push to a customerpull orientation often has a significant impact on the capabilities, behaviors, and attitude required of staff, particularly those in customer-facing roles. Transitioning to a customer-centric culture can be a long journey; all of the companies in our study acknowledged this as the most challenging part of their transformation. The transition often required changes to the competencies and behaviors that staff need, the recruiting process, learning approaches, and performance management systems. For a telecommunications company making this meant changing the recruiting profile from technical experts to people who were passionate about delivering customer service. The company also reduced the proportion of bonuses that were paid based on individual performance and increased the importance of team performance and customer feedback in bonus calculations. In the organisations we studied, as well as adapting the people model, many executives felt that there were also some smaller initiatives that made the difference. This included physical artefacts to signal the change, such as new uniforms for customer-facing staff and wallet cards summarizing key customer messages; personal e-mails from the CEO to individual staff to congratulate them on reaching a particular plan milestone; and monetary rewards for going the extra mile in giving great customer service. In banking and telecommunications, it was also important to selectively hire outside leadership (especially

from fast-moving consumer goods companies) to force the organisation to continue to look critically at customer-centric capabilities. Product architecture and innovation processes: A risk for customer-centric organisations is that the incremental revenue earned by better targeting customers will be eroded by a higher cost structure. Organisations may listen to customer needs without filtering out the features that customers would find nice to have but won’t pay for. Doing so can lead a customer-centric organisation to develop a lot of bespoke, high-cost products that too few customers are willing to purchase at their production cost, let alone a price that will earn a profit. To avoid this trap, the product architecture and business processes need to be modularized. This is achieved by breaking down the product or service into base level components, which are largely fixed across multiple products or services and are delivered by scale processes, and innovative or distinctive modules, which are added to the base level components to create an integrated proposition for customers commensurate with the price they are willing to pay. The simplest way—and the one most often overlooked—to manage cost and complexity in a customercentric business is to actually ask the customers what they value in a product. One of the financial services firms in the survey reviewed its competitors’ offers and noticed that all of the competitors offered hundreds of investment options with their wealth management products. Testing some new product ideas with customers actually revealed that for the firm’s largest customer segment, this number of investment options was bewildering, and customers were much more comfortable making a decision when only three options were offered. This example demonstrates an important lesson for organisations adapting their product and service architecture—checking what

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customers really need and are willing to pay for can actually simplify the customer offer and focus the business on differentiating itself only in those areas that customers truly value. Technology: When many organisations start thinking about customer centricity, their focus turns too rapidly to CRM systems. We have deliberately deferred talking about technology support to a customer-centric strategy until now, as a CRM system should never be the driver of such a substantial change, nor is it sufficient to drive the change. This is not to downplay the importance of improved information about customers in helping employees identify profitable opportunities to extend the organisation’s relationship with these customers. Rather, specifying the data models and architecture needed to support a customer-centric strategy should be defined based on what information

the business needs to capture, analyze, and interpret about its customers to improve decision making—not the specs that a software vendor deems necessary. With a clear vision, financial goals, a redesigned operating model, and people and process enablers in place, an organisation embarking on a customer-centric transformation is in a good position to clearly articulate what customer data is needed to make profitable customer-centric decisions. The goal should be to capture and link customer data in a way that allows profitability to be tracked at a customer level. This allows the organisation to make the right cost vs. revenue trade-offs for different customer groups, test new innovations with small groups of customers, track the impact on the bottom line, and glean insight from customers’ past behavioral patterns.

Changing the Organisation: Questions Has the people model been adapted to support a customer-centric strategy? Is there a disciplined approach to change management supporting the cultural and behavioural transformation? Has the product and service architecture been adapted to profitably accommodate greater variation? Does the product and service innovation process engage with customers to test ideas before significant investments are made? Does the organisation’s data architecture support customer-centric decision making?


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Methodology: Booz & Company Customer Centricity Study Booz & Company completed a study to understand how organisations in different industries and geographies had gone beyond the headlines to make customer centricity a source of competitive advantage. The research identified organisations with superior customer-centric reputations—determined via metrics including customer service and loyalty—and superior financial performance relative to their peers. To understand the secrets of their success, we interviewed executives from the top-performing organisations, asking them to reflect on lessons learned on their journey to customer centricity and the importance of this strategy to their firm’s success.

A customer-centric strategy is equally important in bad times and good. It can help companies understand changing customer needs and the prices customers are willing to pay, and consistently deliver on their promise to customers. Making this happen requires not just lofty vision statements from the CEO or great marketing—it requires an organisation to rethink its operating model and how its people, process, and technology enablers support a customer-centric strategy. For most organisations, this will be a multiyear journey. To ensure that the board and management stay the course, there must be a clear and measurable financial impact from this increased customer focus. Charting out the journey—and the targets to achieve at each stage of the journey—is critical to truly embed this change in the organisation and reap the financial rewards. People used to think of customercentricity programs mostly in terms of CRM systems. In fact, our research suggests that technology can just facilitate customer centricity, not drive it. Many projects need not begin with any major technical investments. What matters more is a sustained focus on the financial goal and the transformation effort required to achieve that goal. Profitable customercentric companies focus not only on integrating customer centricity into the organisation, but on ensuring that the entire “ecosystem” of the business—stakeholders, along with organisational processes, and structures—are aligned in ways that support a customer-centric growth strategy.

Customer-Centric Organisations in the Study

Financial Services

- A  North American retail bank that used a customer-centric service philosophy to improve customer retention - A  European retail bank that empowered front-line staff to give customers what they needed with intelligent point-ofsale systems

- A  n Asia-Pacific retail bank that used improved customer insight to redesign the service model and sales approach - A  n Asia-Pacific wealth manager that focused on delivering compelling value propositions to target customer segments and deliver ambitious growth targets


- A  global telecommunications provider that was able to increase customer retention and average revenue per user by segmenting its customer base and developing tailored propositions for each segment

- A  global telecommunications provider that engaged with front-line staff, business partners, and customers make its product offerings more innovative

RETAIL & Consumer Goods

- A  global alcoholic beverages manufacturer that demonstrated the value of a customer-centric approach to distributors in order to deliver a customized brand experience in specific outlets - A  European fashion retailer that uses real-time customer and staff feedback to adapt its offerings to meet the latest trends

- A  European retailer that comprehensively uses customer listening and mystery shopping to understand customer buying behavior - A  global retailer that captures and interprets customer buying patterns to optimize its offerings in each location and for each customer

Source: Booz & Company

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