Next-generation customer service: The new strategic differentiator

Executive summary

Across industries and markets, considerable changes in customer expectations are putting new challenges on the customer service function. To fully understand the demands of next-generation customer service, Strategy& recently completed a comprehensive survey. The Next-Generation Customer Service study reflects more than 30 face-to-face interviews with senior customer service executives (including chief service officers and CEOs) — and a survey of 50 senior-level managers — in Europe and the Middle East. Our research uncovered five key challenges to becoming a successful customer service practitioner: Leverage service for revenue growth; innovate the customer interface; integrate customer touch points; drive customer-centricity; and create high-performance operations.

Customers are demanding more from customer service; meeting their expectations requires an enterprise-wide understanding and commitment, not simply an isolated departmental upgrade. Leading customer service organizations are emphasizing transparency in service performance and demonstrating its contributions to company-wide strategic targets, consumer engagement, and top-line impact.

The new customer service agenda

Consumers have never been smarter than they are today. They have more information than ever before to help them make purchasing decisions. They are accustomed to, and expect, regular interaction with companies. The breadth of established and new channels for customer interaction — in shops, in contact centers, over the Internet, and via mobile devices — is ever-increasing. Over the last five years, the ways consumers communicate, learn about products, and make purchasing decisions have fundamentally changed.

Companies are beginning to understand these changes in consumer behavior and are adapting to them accordingly — e.g., by changing their marketing mix. Customer service interactions are increasingly seen as opportunities for engaging more intensely with customers, gaining better customer insights, and leveraging service propositions for revenue growth. Technology innovation supports this trend, as large amounts of customer information can now be generated and leveraged more efficiently than in the past.

Over the last five years, the ways consumers communicate, learn about products, and make purchasing decisions have fundamentally changed.

Strategy& recently conducted the Next-Generation Customer Service study to more fully understand where customer service is headed. The study reflects more than 30 face-to-face interviews with senior customer service executives (including chief service officers and CEOs) — and a survey of 50 senior-level managers — in Europe and the Middle East.

Through this study and numerous discussions with clients — especially those operating in mature markets — we have learned that many organizations share a new customer service vision, one that fundamentally redefines service as both a key tool to grow the value of the customer base and an important strategic differentiator in saturated markets.

However, our study also reveals that many companies are struggling with a serious disconnect between their innovative customer service vision and their actions, which remain largely focused on incremental enhancements aimed at reducing cost and addressing day-to-day performance issues. Service organizations are at a critical crossroads that will determine whether customer service remains merely a “hygiene factor” or produces a step change toward a truly customer-centric organization. Achieving the latter places the head of customer service in a fundamentally new role, away from serving as an operational expert and toward becoming a C-suite peer with strong strategic capabilities. Our analysis points to five key trends that are shaping the next-generation customer service agenda (Exhibit 1).

Five trends drive the next-generation customer service agenda

Leverage service for revenue growth. Best customer service practices seek regular engagement with the customer and take advantage of every customer contact. In the past, customer service focused on “getting the screen green” — closing one call and moving on to the next one as quickly as possible. We are experiencing a shift from contact avoidance to smart contact management. The new challenges: Engage the customer, manage the relationship proactively, cross- and up-sell to different audience segments, and, in mature markets, emphasize service quality as a brand differentiator.

Innovate the customer interface. Leading customer service companies offer multiple channels to their most valued customers, adjusting their channel mix to the customers’ communication preferences and striking a smart balance between automation and human interaction. They are using Web 2.0 tools to engage with their target audience and offer a series of self-service options to streamline the experience for customers and encourage them to return. Investments are shifting from back-end automation to front-end enhancement.

Customer service sits on one of the largest untapped resources for companies: customer feedback and proprietary customer data.

Integrate customer touch points. To maximize the value of every interaction, distinct silos of customer touch points are being abolished. Multi-product companies make sure they can service their entire portfolio across touch points with most contact channels being deployed for both sales and service interactions. Best-in-class players deploy integrated management of all contact channels in order to align cost and value of interactions and to ensure that customers enjoy a seamless experience.

Drive customer-centricity. Customer service sits on one of the largest untapped resources for companies: customer feedback and proprietary customer data. Exploiting this potential throughout the company is a significant value driver. The most forward-looking companies are empowering a strong chief service officer — someone with advanced strategic capabilities who works closely with peers in marketing, sales, and technology. These executives establish a cross-functional end-to-end perspective on customer processes with customer service as the key driver for customer-centricity in a central coordinating role as the “voice of the customer.” They establish transparency in customer service performance and contribution to strategic targets. Some companies merge the sales and service functions in order to avoid counterproductive rivalry.

Create high-performance operations. Mastering the basics of customer service is still the imperative for customer service organizations that are struggling with poor service and inefficient processes. The key challenge lies in putting these changes in place while simultaneously maintaining activities that will truly create value for the organization.

Leverage service for revenue growth

A shift in mind-set from contact avoidance to active contact management is one of the most fundamental changes in next-generation customer service. Rather than decreasing contact time with the customer to reduce cost, organizations are discovering new value by using each contact to generate new consumer insights, build loyalty, and leverage the interaction for cross- and up-selling.

Effective customer interaction and comprehensive customer data management can help generate the insights that support individualized service — and finally make those costly customer relationship management (CRM) investments pay off. As one of the participants in our study observed, “Customer service excellence means securing and leveraging know-how about the preferences of the customer.” The return on that investment is eminently quantifiable: “The more customer service insight you have, the more revenues you will get,” another participant stated.

Although it often takes advanced trial-and-error data analysis and behavioral profiling to personalize offers, targeted information helps marketers cross- and up-sell customers. One telecommunications company in our survey claims extraordinary success through such automated support. Available data about incoming callers enables service representatives to make customer-specific recommendations. For example, the system displays products and services already purchased by the customer on the line, automatically proposes new products and services, and simultaneously provides the agent with a script to help pitch those recommendations. Agents are then able to make client-centric offers in 50 percent of incoming calls, at a success rate of 20 to 30 percent.

Targeted up-selling is already at work in a number of the telecommunications and financial-services companies we surveyed. In years past, the primary goal of customer service was getting the screen green, but our survey results clearly show that companies today have a stronger focus on active customer management (Exhibit 2). As a result, leading customer service organizations are making a note of every customer contact to increase customer satisfaction, improve the service offered, and develop customer value.

Focus during handling of incoming calls

Innovate the customer interface

Across industries, the most successful customer service organizations have fixed the basics of service and shifted their focus to truly reshaping the customer interface as a core driver for new value. These leading players have tapped into third-party services, and they’ve learned from best-in-class innovation examples in other industries.

Again, technology and service innovation is no longer solely used to enhance productivity and drive down staff costs (Exhibit 3). State-of-the-art voice recognition systems not only understand what customers say using natural language but also can detect emotional “vibes” that allow the routing system to deliver the call, depending on the customer’s mood, to a complaint specialist or sales representative. In addition to applying channel-specific technology innovations, more companies are leveraging technology to enhance the interplay of channels. On the front end, next-generation support systems allow a smooth interaction of an e-channel customer (e.g., a Web shopper) with a contact center agent, especially when the customer appears to be abandoning his shopping basket, or ensure that shop workers have customers’ full interaction history from the contact center. On the back end, shared, consolidated knowledge management tools improve both the customer experience (customers receive consistent information across channels) and drive down IT costs associated with maintaining multiple knowledge management systems.

Technology innovation in customer service

Best Buy’s Geek Squad turns the ordinary business of technology troubleshooting into a customer adventure.

Some companies have found that a service offering, in and of itself, can be an important differentiator and provide an opportunity to create an emotional bond with customers. Best Buy’s Geek Squad is a customer service differentiator that offers a unique customer experience. The concept is simple: Turn the ordinary business of technology troubleshooting into a customer adventure. The retailer uses Geek Squaders — dressed in Men in Black outfits, addressing one another with military titles, and driving specially marked Volkswagen Beetles — as a unique way to provide customer service to residential and commercial clients. More than 17,000 Geek “agents” are at work in the U.S., and the program is expanding to Canada, the U.K., and Spain.

Swisscom, Switzerland’s leading telecommunications provider, offers two innovative service propositions. Help Point classes provide product-use training (e.g., help using a PC or cell phone) for specific customer segments. The service is offered in specially designed training centers or aboard mobile training buses that tour the country on a fixed schedule. The HomeService Team helps residential customers with computer and network configuration, home installation, security, data backup, and general IT topics. The service is available not only to Swisscom clients but to anybody who needs help — a true market innovation.

Other companies are experimenting with paid service as a key element of their value propositions. Apple’s ProCare package is an example of a service “building block” that offers — for a price — a premium level of customer support. Similarly, BT and BlackBerry have found that customers will pay for advanced support. Some organizations have even found that their business-to-consumer (B2C) customers are willing to take a step up in service and pay for the programs offered to business-to- business (B2B) customers.

Companies are also leveraging Web 2.0 offerings to actively involve customers in the service process. Classic Web service features include live chats with service agents, moderated communities and forums, employee and user blogs, and product demonstration videos. Two-way interfaces capture customer suggestions and allow service agents to comment or directly follow up. These tools not only provide high-quality customer service at a low cost but also generate the customer-specific insights necessary for value creation.

Our research shows that interactivity will be a primary driver in upgrading call center operations to enhance the service experience. Web 2.0 possibilities include wiki-enabled knowledge databanks, Web chats, and in-store visual contacts. The use of these alternative, innovative channels to reach customers plays an especially important role in the channel portfolio in the telecommunications industry, in which 55 percent of our interview subjects reported engagement in such services. Striking a smart balance between contact automation and human interaction is a key success factor for service organizations.

Integrate customer touch points

As customer service moves from a pure “after sales” obligation for individual products or services to a key driver of value generation and strategic differentiation in an overcrowded marketplace, companies are pursuing integration strategies for their customer touch points on three levels.

Customer service is becoming a key driver of value generation and strategic differentiation in an overcrowded marketplace.

  1. Product line integration: More and more multi-product companies are moving toward creating a single interface for their customers, away from a product to a customer segment view. For Deutsche Telekom and many other telecommunications operators that increasingly sell bundled products, it is not about providing “fixed line” or “mobile” customer service, but about delivering a comprehensive service experience across the entire product range, based on what different customer segments need. This yields multiple advantages: increased customer satisfaction, more cross-selling opportunities, and cost synergies.
  2. Sales and service integration: The days of functional silos are gone. Shop does not equal just sales, and contact center does not equal just service. The need to respond to the customer segments’ preferences and the desire to maximize the impact of every customer interaction make every customer touch point a sales and service outlet — be it the shop, the contact center, or the Website.
  3. Touch point integration: In an environment where sales processes often engage as many as three different contact channels and customers use very different service touch points depending on the request, the situation, or their mood, next-generation customer service means two things: First, the ability to provide a seamless customer experience across channels — i.e., a smooth handover of customer transactions starting on the Website, requiring assistance by an agent, and ultimately leading to a sale closing in a shop. Second, the ability to formulate and execute a cross-channel service strategy, which means defining a target service portfolio per customer segment and contact channel, and implementing steering mechanisms and customer incentives to reach it.

Many customer service companies are taking first steps toward integration that encompasses all touch points across both sales and service, although we have so far seen few truly best-in-class examples of full integration across touch points as well as across sales and service functions. Some customer service organizations already leverage channel interplay to drive usage to certain channels or to generate more valuable contact opportunities. For instance, the online portal of U.S. consumer electronics retailer Best Buy makes use of integration with the company’s stores to foster traffic and sales. The Website offers specific functionality, such as reserving items for pickup at the closest store within the hour. Meanwhile, in-store customers learn about the e-channel at online access points in stores and through special online vouchers they receive.

In another example, computer retailer Dell integrated the online channel with its contact center activities. Live chat helps agents instantly resolve customer questions, hence minimizing costly dropouts in the sales funnel. Furthermore, Dell offers a platform where customers can provide suggestions and solutions to problems. Dell representatives monitor the site, providing comments and assistance as needed.

Best Buy’s online portal allows customers to reserve items for pickup within the hour at a nearby store.

While most contact centers today already integrate sales and service, other channels — shops and the e-channel — still provide attractive untapped opportunities to integrate the two.

Meanwhile, some shops are using best-practice “premium service” to promote further cross- and up-selling.

For instance, Apple’s Genius Bars — technical support stations located inside Apple’s retail stores — provide a unique experience that uses service to attract and retain current and new customers. The universally trained sales and service staff uses the in-store customer interaction to promote additional sales. The Genius Bar concept represents a highly successful example of sales and service integration and is referred to by Apple’s management as “the heart and soul” of the Apple store experience.

In addition, the company’s retail stores are integrated with the online channel; customers can schedule and manage service appointments online, or make reservations for personal shopping, workshops, and other in-store activities.

In the e-channel, more and more companies realize that online service should be treated as more than a tool to avoid live customer interaction (and hence reduce cost). Successful online service destinations actually draw customers regularly and decisively blur the boundaries between sales and service. Mobile operator O2 Germany, for example, has three times as many online visits per subscriber as its competitors, and far more sales online. For registered users, the “contextual selling” in the service area generates more sales than the e-shop itself.

Customer touch point integration also creates significant challenges at the back end of customer service. In our survey, we found that more companies are establishing consistent standards and processes across all contact and interaction points to ensure that every customer receives the same service experience. To that end, they are making customer data available across the customer’s product portfolio. In fact, 60 percent of the companies we surveyed believe that making data consistently available across service channels will become more important in the immediate future.

Drive customer-centricity

So what does all this mean for the role of customer service within the organization? The vast majority of interviewees insist that their organizations will become more service-centric in the future, with a focus on increasing customer satisfaction. Ultimately, the success of customer service depends on the strength, strategic capabilities, credibility, and influence of the head of customer service.

In our research, we found strong support for an institutionalized chief service officer role. Of the companies we interviewed, only a third already had such a position. Strikingly, among telecommunications companies, a quarter think customer service should be a separate board function, whereas the majority believe it should be embedded in a broader customer contact function.

Most companies in our survey stressed the necessity of interaction among the service, sales, marketing, and technology functions, with nearly three-quarters believing that sales and marketing will become more strategic customer service partners in the near future. Among telecommunications companies, 71 percent believe that having detailed customer data will become increasingly important in the next two to five years. Since service accompanies customers along various touch points throughout the entire relationship life cycle, it has a unique ability to listen to customers and understand their needs in a holistic way. Hence, in a service-centric organization, the role of customer service is to represent the customer and drive improvements aimed at increasing customer satisfaction across the organization (Exhibit 4). Relevant insights can be leveraged for enhancements in functions such as product development, marketing, sales, and operations. In fact, the best customer service practitioners already have institutionalized this collaboration with regular cross-functional exchanges and even “product factories” that include sales, marketing, and service representatives during the development of new products and services.

Customer service as “the voice of the customer”

Given the new goals of customer service to retain customers and drive top-line growth, customer service organizations must make their contributions transparent. Although there is strong evidence that service is an integral part of building customer retention and loyalty, there are no precise metrics to substantiate it. Today, only 20 to 30 percent of customer service organizations systematically track the success of their cross- and up-selling efforts. On a more positive note, more than 85 percent of the companies we surveyed plan to have some metric in place to measure customer satisfaction within the next two years.

EDS, for instance, uses a proprietary service dashboard that provides management with a reliable, real-time overview of service quality while also offering insights about customer preferences. Customers are encouraged to document their level of satisfaction during the entire customer service process, providing immediate feedback to the agent and contributing to a growing database of customer preferences.

EDS’s customer database is impressive and powerful: It includes more than 2,000 executives from 700 active customer companies. Additionally, EDS conducts yearly in-person interviews with more than 500 executives in its top 150 to 175 client organizations. This level of commitment to service excellence, the company insists, is its primary differentiator in the information technology marketplace. EDS’s objectives — 100 percent customer satisfaction and 100 percent customer retention — bear witness to this commitment.

Listening to clients — particularly, understanding their needs and aligning service offerings to address them — remains the principal item on the agenda to retain customers (Exhibit 5). More specifically, when we asked our interviewees about the development priorities for customer service capabilities, our respondents cited listening to and understanding customers’ needs (34 percent) and improving customer service (32 percent) as their most important priorities. By comparison, keeping up with technology (18 percent) and optimizing systems and processes (16 percent) were regarded as maintenance factors — rather than breakthrough elements — of next-generation customer service.

Top five areas for customer service development

Create high-performance operations

Customer service organizations need to put in place a solid service foundation before moving on to establish best-in-class customer service. Our interviews show that many companies are still struggling to remedy service issues. In some cases, poor service actually drives customers away; in others, inefficient processes are inordinately expensive. Nearly two-thirds of survey respondents reported that their latest improvements focused primarily on changing or optimizing existing operations — processes, systems, and staff qualifications.

Once the proper tools and processes are in place, the next step in creating high-performance operations is to optimize organizational structure and staffing. Employee motivation is a prerequisite for efficient operations and high-quality service. Our study identified several best practices to develop and retain high-performing staff: Cross-train agents, develop specialist roles, prioritize training and coaching, understand what motivates agents, and develop flexible workforce schedules.

Telecom operator Orange has created a strategy for managing work hours that balances the needs of employees with those of the organization.

Orange, the U.K.-based telecommunications company, provides a good example for workforce flexibility. In 2007 the company created a strategy for managing working hours that balances the needs of employees with those of the organization. Each of the seven newly introduced working patterns reflects a different lifestyle. The company changed its training programs to make them more flexible as well.

The impact was immediate: The ratio of part-time employees increased from 9 percent to 29 percent, job applications rose by 29 percent, and recruitment costs declined by 30 percent. The attrition of new employees (those with two years of experience or less) dropped from 60 percent to 33 percent. And, most remarkably, not a single worker reported leaving the company because of dissatisfaction with Orange’s shifts.

While stable and efficient customer service operations are indisputably an important cornerstone on which to build the service vision, many companies pay insufficient attention to innovative, forward-looking investments. Within organizations, the next-generation customer service vision proves a hard sell as long as urgent performance or cost issues distract from medium-term step changes aimed at achieving the longer-term vision. However, some interviewees and several of our clients have successfully deployed “freed-up” resources for value-generating activities, or have otherwise managed to strike a balance between short-term incremental investments and commitment to fundamentally redefining the role of customer service.


Next-generation customer service represents a transformation from a necessary function for resolving customer problems into a value-generating service that is a strategic differentiator in the market. Performance is no longer measured solely by cost-to-serve; customer satisfaction and margin contribution are now key metrics for success. Tomorrow’s value will be driven by the ability to leverage service to enhance customer interactions, generate customer insights, and help transform the entire company into a customer-centric organization.

Many companies that commit to next-generation customer service will have to begin with an incremental process-and-tool harmonization. Fixing the basics is the first step in creating a high-performance customer service operation and generating buy-in for medium-term objectives from top management and frontline customer service staff. Although incremental improvements require financial and organizational commitment, they should not come at the expense of the overarching vision. Freed-up resources need to be reinvested into activities that truly create value for the organization.

By taking advantage of every point of customer contact, customer service can begin to contribute to the larger goal of positively engaging the customer — managing the relationship, cross- and up-selling to different audience segments, and using quality as a brand differentiator in mature markets. The organizations that learn to stay ahead of innovation — by using Web 2.0 tools to build an even stronger relationship with individual customers, for example — will find that service can be a powerful means to build consumer loyalty.

Of course, none of this is possible or practical unless customer service is an integral part of an organization’s value chain. The appointment of a strong chief service officer — someone who can speak directly to peers in marketing, sales, and technology — is a positive step in the direction of next-generation customer service.

Providing that individual with the resources to coordinate crossfunctional information exchanges is an essential second step. Merging sales and service responsibilities by creating a “chief sales and service officer” is another.

In today’s mature and competitive markets, a company’s success in winning and retaining customers increasingly hinges on its customer service performance. Only a step change in customer service approach and top management commitment to invest in service innovations will allow companies to deliver on their vision of customer service as a strategic differentiator.


To explore the increasing demands on customer service, Strategy& recently completed a comprehensive Next- Generation Customer Service study in which we conducted more than 30 face-to-face interviews with senior customer service executives, including chief service officers and CEOs. We also surveyed 50 senior-level managers in Europe and the Middle East. We then created a series of best-practices comparisons across several industries and used Strategy& service benchmarks to determine developing trends and the next generation of customer service best practices.

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