©Karl Erik. Sveiby 1996, 2001
All the time the employees spend working for customers represents
a potential for maintaining, building and developing relations
with customers in direct projects for them. The professionals
spend most of their time - maybe as much as 90% - in a very
intense co-operation with the customers, others in more back
stage positions. So, the choice of customers is crucial.
Most customers contribute much more than money. They provide training for employees, they can be used as references, they talk to each other and so spread the word and the image, and their feedback is a source for developing new products and services. These flows can be called Intangible Revenues because they increase the value of the intangible assets. Intangible Revenues can be divided into Image enhancing, Organisation enhancing and Competence enhancing. Read more about intangible revenues here.
The importance of customers is specially evident in knowledge organizations. The big auditing firms, for example, use their large customers, to train new recruits, by assigning them the routine parts of the audit.
Traditional
financial statements can be supplemented with a statement showing how customers
contribute Intangible Revenues grouped by categories as PLS-Consult
illustrates. Information about changes in customer structure can
provide very useful input for an assessment of the company's
potential for development.
Organic growth, i.e. increase in billings with income from
acquisitions deducted, is a measure of how well your business
concept is received by the market. Note that purchased growth,
i.e. growth attributable to increased billings as a result of
corporate acquisitions, is not necessarily a sign of success. It
may be such a sign if for example the acquisition was a disguised
mass recruitment of a group of Professionals, but if a knowledge
company grows by buying companies in other lines of business,
that may equally well be a sign that its original business
concept is no longer generating enough growth.
Fortune-500 companies and leaders in their industry are valuable customers because their image "rubs off" on their suppliers and partners. Customers that endorse products are a much more effective sales force than our own and gives more image than any advertising campaign. It is like having a sales force out there at no cost! Customers are even better, because their intangible contribution is likely to bring new customers, previously unknown to us and are thus an indicator of innovation in the customer base. The proportion of sales to high-image customers thus describes indirectly an intangible flow to us, which should be measured.
The proportion of sales to customers younger than a year tells how good we are at penetrating new segments. An alternative is sales to new markets.
Companies that make an effort to find out the profitability of
their customer base, often find to their dismay, that up to 80%
of their customer sales are not profitable. There is generally
surprisingly little information in companies on the profitability
of customers. This is because the costs are not accrued to
customers but to products or functions. Customer profitability
should be monitored as a routine. You should categorize costs and
revenues to enable you to calculate the control figure
profitability per customer. This is a much more valuable
criterion than profitability per product or market segment.
Companies that make a lot of their business from tenders, can
calculate a simple index by comparing how many of their
quotations that were successful with how many that they lost.
Compared over time this gives a good indication of how their
customers regard them. The index can also be used for comparisons
when trying out different pricing strategies.
Sales per customer is defined as total sales divided by the
total number of customers. Since selling more to the same
customer is usually easier and less costly than finding a new
customer this ratio tells how efficient your company«s existing
network of customers is. An effort to expand the sales per
customers should therefore be more profitable. (Example see Celemi
Annual Report).
Measuring the degree of customer satisfaction is perhaps the
best way to get an early indication of whether results are about
to improve or deteriorate. Many companies nowadays make a
systematic effort to acquire information about their
customers" perceptions of quality and other attitudes to the
company. The results of these polls are used primarily in
marketing, and hardly at all in financial forecasting, but it is
perfectly feasible to append an index of customers" quality
perceptions and attitudes to the financial statements. There are
several methods on the market for attempting to measure customer
satisfaction. An index of this type need not be sophisticated to
provide valuable information. Simple attitude polls can usually
tell you a lot. The main requirement is that they should be
repeated at regular intervals, always with the same procedure and
the same definitions, so that you can make comparisons and
estimate trends. Results from polls should be cross analyzed with
profitability data or efficiency indicators as in the example
from PLS
Consult.
The proportion of big customers tells you how dependent your
company is on the favor of a few major customers. If the degree
of dependence is great, your position is weak and so is your
structure. Two possible key indicators can be used here:
percentage of billings attributable to the five biggest
customers, or number of customers accounting for 50% of billings.
(Example see Celemi
Annual Report).
Age structure can also provide interesting information. The
longer customers have been with you, the better your relations
with them probably are and the easier it ought to be to keep them
as customers. The age structure usually changes only slowly.
How much of the sales come from customers older than five
years? This is an indication of how devoted the customers are and
therefore a sign of stability. Naturally a young recently started
company will have a low ratio, which in itself is an indicator of
instability.
Another measure of customer satisfaction is the frequency of
repeat orders. A high frequency indicates that customers are
satisfied with the company. And since old customers, as a rule,
are more profitable than new ones, this key indicator also tells
you something about your profitability potential. The willingness
of customers to place repeat orders is further an indication of
customer-perceived quality and whether or not the company has
found the right customers. Stable, loyal customers are profitable
customers in the long term. Customer utility is high, and so are
earnings. The frequency of repeat orders can be measured as the
proportion of total billings attributable to old customers. The
meaning of "old" naturally varies according to the type
of business, but normally a customer who has given you at least
one previous assignment can be regarded as an old customer. (See
example from Celemi«s
Annual Report).