The CEO’s Dilemma
May 1 2002 by Jennifer Pellet
Getting an edge has never been so tough. As competition intensifies, segment boundaries blur and pressure on margins mounts, more and more companies are struggling to combat commoditization by enhancing customer relationships.
Yet, as many of the CEOs who gathered for a roundtable sponsored by Chief Executive and Cap Gemini Ernst & Young are quick to point out, that’s no easy feat. “One of the issues that flows from commoditization is how to distinguish yourself from your neighbor,” says Clive Mendelow, vice chairman and COO of industrial and commercial brokerage consulting firm Binswanger/CBB in Philadelphia. “You have to attach a certain value to your brand even though it’s a commoditized product that you’re selling.”
Increasingly, companies seeking to meet that challenge are learning to excel at integrated marketing and to reposition themselves as customer relationship managers that not only produce products and services but repackage the products and services of other providers. At the same time, customer demands are growing ever more distinct, exacerbating the difficulty of delivering a positive customer experience, points out Phil Lawrence, director of wealth management for consulting firm Cap Gemini Ernst & Young. “It’s the dilemma of any, any, any,” he asserts. “Any product, any device, any time, any place-that’s what the typical customer wants. How do you balance these channels out-whatever your value proposition or your customer experience decision is-to make money?”
But even as CEOs debated the difficulty of catering to wide-ranging customer segments, the pitfalls of cross-selling and the tricky business of measuring the value of client relationship management, many expressed optimism about the opportunities inherent in the mission of delivering value in a multi-faceted, multifunction and multi-channel world. “What I’m seeing is the gap between provider and customer getting closer and closer,” says Mike Blum, North American financial services leader for Cap Gemini Ernst & Young. “There’s a better understanding of customer desires and wants than there was 10 years ago. So I think we’re getting there.”
Phil Lawrence (Cap Gemini Ernst & Young): The biggest single shaping issue that we see in the marketplace is commoditization. This has been going on for a long time, but the intensifying connectivity and intensifying communication that we’re all dealing with is accelerating and exacerbating it. How do we escape commoditization?
One of the ways is through customer analysis. At the core of that there are two paths: to be a customer manager or to be a product manager. Most firms focus on being a client manager. But increasingly, firms are trying to do both. They’re saying, “We need separate operational entities-a customer management side and a manufacturing side. On the customer side we’ll offer complementary products from other vendors, or-perish the thought-competitive products. On the manufacturing side we’ll sell the product wherever we can. We can compete against our own distribution.”
One of the critical issues facing firms is what it means to be a successful customer manager. I liken the competitive landscape to a World War I movie, where you know every inch of the territory and you fight for every inch, just to stay where you are. But some companies spend huge sums to think about the big question: Is there a possibility to create the killer app, the killer model that will allow me to break through and take higher amounts of share? And the other big question is, are there new down market segments that you can go for, and, if so, can you do that profitably?
I know of some [financial services] companies that say their wealth management business now starts at $100,000 of investable assets and up. The question is, what is the value proposition for each of those segments you’re going for, and what are the measurement techniques that you use for going for those segments?
Companies powered by the new technology are wrestling with which models are best. Back when you got $4 per online trade, Fidelity looked to get users over to the Web. And they were successful; they got well into 90 percent trading on the Web. Then they found out that for each trade online, investors were making three calls to the service center at $14 dollars and change.
That’s catastrophic success. So people are beginning to worry about how to manage multiple channels to be successful. It’s a real Goldilocks problem: “What’s just right? What’s too little? What’s too much?”
Jerry Selitto (DeepGreen Bank): The days when a company designs, manufactures, markets, distributes and services a product are over. Three of those five functions are cost centers. They do nothing to add to profitability. The Internet allows you to outsource those to a company, industry or entity that has actually converted that to a profit center.
My company, for example, took our mortgage product down into its component parts, outsourced to best-practice firms almost every single function and tied those venders together electronically. We own the glue that holds that together. Customers can come onto our site, apply for a home equity line of credit and get a decision in less than two minutes. Why is that important? Because customers who use the Internet today want to conclude a transaction, and they want to do it in a seamless, frictionless environment.
One of the big misconceptions about the Internet is that it’s a channel of distribution for your existing products and processes. But if you attract customers to the Internet and you don’t change your processes, you will have that Fidelity $14 dilemma, where they’ve come on but you’ve done nothing to change the back end in those processes. My view is that the financial franchise is up for grabs. If your competitors are not going to be the major financial institutions today, they’re going to be a technology company that’s figured out how to be cost effective and how to deliver what the customer wants today.
Clive Mendelow (Binswanger/CBB): We’re all moving toward becoming integrators as opposed to manufacturers and distributors. We’re becoming integrators of excellent services, some of which we’re excellent at ourselves and some of which we need to combine with suppliers who are excellent at it. Because I don’t think any of us can pretend to be excellent at everything.
Jim Mead (Capital BlueCross): That’s exactly what we’re becoming. We got there kind of from a different route than many others because we operate in a relatively limited geographic territory with a very well-known brand. And that’s fantastic for us-except we can’t take that brand and expand outside. So if we’re going to grow and to maximize our bottom line we’ve got two options. One, we can operate outside that geographic area unbranded, which is going to be very difficult to do, though it has been done. Two, we can become an integrator within that geographic area and expand the number of services that we offer to our customers.
As a result, we’ve moved toward focusing on bringing that customer more products-those we don’t manufacture. We hope to sell them that very narrow health product that we do manufacture, but then integrate it with other products. One of the frustrations that we have had is it’s hard to get the sales force to offer that mix.
Compensation has been the most frustrating part. How do you design the incentive and compensation plan to get that individual or that channel working with the customer? We’ve not done well in terms of the right kind of incentives.
Peter Nauert (Ceres Group): When I started the company, I wanted to get agents to go in and make a first sale and then come back and make a second sale, a companion sale. So I put together complementary products; if you sold product A, product B could be sold in conjunction with a simplified application and delivery process. When the companion product was sold more compensation would be paid. But it died, because the insurance agents were products of their own environment, accustomed to selling one product and then coming back maybe later and selling another company’s product, because most sell for multiple companies.
So now we’re rolling out a different program where we will pre-package the multiple products. Say package A is a basic product with a small add-on, package B is a less basic product with a bigger add-on and so on. With each package the profit margin should be higher and the compensation structure to the person selling it should be higher. It’s really more package-selling than cross-selling or up-selling.
Hard work-but rewarding
Onno Ruding (Citibank): I’m the first to admit cross-selling is not easy. It works but it requires total dedication at all levels. It must be done by the guy who is close to the customer every day, but also by senior management. I think I spend 80 percent of my time now, after our merger, on cross-selling products from Solomon Smith Barney to Citibank’s customers and vice versa. It’s very time consuming. But you’re talking about incremental revenues without incremental costs and without incremental risk.
On the issue of whether it’s about distribution or manufacturing, for us it’s distribution first. We think we are good at it, and we can do it all over the world, which is something nobody else can copy. So we go all out to further perfect our distribution channels and leverage them to sell more products.
Manufacturing is more difficult. Our conclusion is not that we must continue to manufacture all those products that we want to cross-sell; rather it depends. We are willing to outsource where it makes sense, cost-wise or otherwise. But the decision depends on the country. In Europe, for example, Travelers simply didn’t exist, so we are selling the products of first-class European insurance companies through our branch network.
Aart de Geus (Synopsys): There are three fundamental dimensions to differentiation: product or technology differentiation, customer proximity and operational efficiency. If you feel that you’re in this commoditization-is-upon-you timeframe, now is the time to decide which is your main differentiator and which is your secondary. Because once you decide that, you can deal with this other question of how to incent the sales force. If the sales force is confused about product differentiation vs. customer relationship, you’ll never get alignment. However, if they know that it is customer relationship, for example, then you will be able to cross-sell other things because they’ll know very well what the deal is.
Ed Kopko (Butler International): A business school professor told me that when you hear people starting to say they’re in a commodity business, you’re hearing uncreative managers talking about their industry. My professor pointed out the dilemma of the sneaker manufacturers who all thought that sneakers were completely a commodity product and only sold on price, and then many years later, lo and behold, the whole industry was radically changed because some creative people decided not to accept that fundamental premise.
Do financial services firms become broad-based suppliers to their customers and say, “We’re Citibank. We’re the most broad”? Or do you say you have a unique fund capability, unique insurance capability or the like, and are better at it than anyone else? Almost every industry you look at over the years has been radically changed by people who’ve come in and not accepted the conventional wisdom.
Alexandra Lebenthal (Lebenthal & Co.): We have an interesting formalization of integration that’s becoming more and more prominent whereby we know that you have an account at Lebenthal, an account at Fidelity and an account at Merrill Lynch, so if the relationship is there with whatever firm, we say to the customer, “We are going to give you one statement that shows all those accounts.” That’s aggregation in financial services-and it actually helps the cross-selling process in sort of a back-door way. We accept and acknowledge that you have all these accounts, we’re going to be the one to show you everything you have and therefore the relationship ends up getting strengthened so it becomes a little bit easier to focus on the cross-selling.
Mendelow: In our industry, one of the great value drivers used to be market information. Now that has become a commodity. You can get it on the Internet, and you can get it essentially for nothing. In the services provider industry the real value added to the customer is not the information but the expertise to convert it to an advantage for our customer.
Michael Blum (Cap Gemini Ernst & Young): That’s the cement. More and more you’re starting to see customers cemented to a particular provider because they’re not only providing the product, but also other things around that product, such as tools. The customer is connected informationally. As a customer myself, I’m seeking not only a customer experience, but almost a contract. In other words, I need to understand our long-term contract. What more am I going to get, both from the immediate experience and from the relationship going forward?
The customer’s experience is also a major differentiator. I’m a customer and I want quick response. That’s an experience. I want to actually talk to somebody because it’s life insurance, which is a very personal product. Experience is becoming more and more of a bond.
Lawrence: One of the interesting things about aggregation is the challenge of what happens with the customer service promise. Because if you’re just doing a pass-through, saying, “Well, you’ve got a problem with this policy, but I don’t know anything about it, I just sold it to you,” then that’s a violation of the promise.
But if you think about a spectrum of relationships, one is the fast, easy transaction, the other is the tools and the informed decision, the third is you’ve got a partner. If you can get to that last level, then you have an enduring relationship.
James Mead (Capital BlueCross): We look at customer partnerships from a business perspective of trying to get the customer in a position where there’s a cost, be it a dollar or psychological cost, to changing vendors. I’m not going to be perfect every day and always provide absolutely the best service. But I’ve got to provide a link so that the customer says, “It’s not worth it to me to change.”
It’s the brand, stupid
Nauert: That brand identification is so important, whether you’re manufacturing, distributing, cost-selling, package selling, whatever. I don’t think it’s particularly important whether you manufacture or you distribute, because the brand identification will be what you sell. And if you have that brand identification, you can outsource everything. If I could outsource my distribution, manufacturing, consulting and some HR work, I’d be the happiest person in the world, because then I only have to orchestrate who’s the best provider who’s the lowest-cost provider and where can I have the maximum margin with the least amount of work.
Lawrence: Somebody like Wal-Mart in middle America could get into the insurance business-in fact they have. They’re saying, here’s yet another good product that I’m bringing to you under the Wal-Mart brand. Wal-Mart knows nothing about insurance.
Selitto: Branding is a very complicated concept. There’s brand recognition, and then there’s brand experience. And the real key is brand experience. When we’re talking about whether we’re cross-selling or outsourcing, the important element is that brand experience, and that brand experience has to be consistent. If you’re an integrator, and you are actually outsourcing to other providers, you have to do that in a way that is seamless to the consumer and that doesn’t involve a hand-off to another company.
In my experience, cross-selling hasn’t worked. If I go into Citibank and say I want to apply for a credit card, they say, “Here’s the credit card person.” If I also want to apply for a mortgage, they say, “You’ll have to go over to the next desk, wait in line and talk to that mortgage person.” Maybe we’re all recognizing that no one company is in a position to be the best provider of a full array of products. And if customers are armed with more information, they probably know who the better provider is. So you do yourself a service by saying you’ll outsource to a better provider.
Ruding: Cross-selling only succeeds if the institution very actively approaches existing customers and says, “You are apparently satisfied with what we are doing already for X. But we are also very good at Y.” It doesn’t come by itself.
Kopko: But why does your customer care about it? I don’t want to have all my accounts in one institution. It may be of value to you that you’re going to sell me all these services. But it doesn’t matter to me, the customer. So it’s about making a compelling case to your customer about why they want it.
Selitto: You’re saying that you’re really not interested in the one-stop shopping. That’s not what you want. That gets back to an earlier point about knowing your customer. Does your customer really want that contract with you? Or do they want to be more of a free agent in the marketplace? That’s a big question.
Mendelow: We’re living in a society where we’ve become really accustomed to going to a customer and saying, “Here’s what you need.” What I’m hearing is that we should be going to the customer and saying, “What are your goals? And can we become a solutions provider for you?”
Kopko: I don’t think you should necessarily change to meet your customers’ profile as they keep going through lifecycle changes. If you’re a hip manufacturer of clothing, you’re going to keep selling to the youth. You don’t say, well I’m going to start selling to the geriatric crowd because my customer has now gotten older and I’ve got to change my whole concept of what I am. Cadillac did exactly that. They said, “We are going to continue to make the buyers of Cadillac happy.” And they kept going up with age and never focused on the younger people coming in, who are really their new market. So you can get so wound up trying to stay with the lifecycle of your customer that you miss the whole next generation of your clients.
Lebenthal: Actually that was part of our impetus for starting to sell other products, and why selling the company ultimately made sense for us. We needed to recognize that customers were changing, and that we needed to be able to provide other products so that we would retain that customer. The insurance aspect to me is one of the most compelling and interesting. For all these years we’ve been able to save people from income taxes but were unable to save them from essentially the last great tax-the estate tax. Getting into the life insurance business, and now being owned by a life insurance company, enabled us not only to preserve the portfolios that we built up over time with people and to save them from that last great tax, but at the same time, to strengthen the relationship so that we had more of a sense of the entire portfolio and could therefore transition from the 65- to 85-year-old customer to their adult children.
Selitto: Whether it’s a large organization or a small organization, we’re facing some of the very same challenges in this marketplace. Customer preferences or services, in the way customers do business, are really changing. Maybe being in a commodity business is not a bad thing because it then makes you re-examine every single aspect of your business. It almost forces you into a discipline of paranoia where you really have to be on your game to be successful.
Mendelow: We have to listen more. We have to spend more time face-to-face. We have to understand what’s going on inside our companies, and then we have to customize, we have to tailor what we do to suit their objectives. And we have to be in a position to understand that we’re around because of them, they’re not around because of us, and forgive me if that sounds like an old clichÃ©. I readily admit that it is. The concept of acting as an integrator of services is something that I feel strongly about. And that’s based on the fact that you really have to be excellent at what you do, and you have to provide excellence, and surround yourself and your customer with excellence in delivering a platform that’s going to repeat itself.