Evaluating Customers Correctly

Most customers are sources of value, in forms other than hard cash. 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 demands encourage the development of competence.

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.

That such customers are valuable is recognized by the senior auditors and the large customers. Indeed, the latter are asking with increasing frequency these days, what they get, in return for teaching their auditors' "rookies" their business.

Other customers contribute their image. Having IBM or General Motors as a customer is a valuable reference, and it is quite remarkable how many big-name companies appear as existing, or former clients, on consultants' CVs.

However, the size of the customer has little to do with how interesting or challenging the projects are. The most challenging and therefore the most educational work is often done for less well-known customers. A knowledge strategy therefore involves getting to know one's customers really well.

When armed with an intimate understanding of its customers, a knowledge company can be more selective in its marketing, and can concentrate the company's most valuable (scarcest) skills on projects where they fit in best, and will do the most good both for the customer, and the knowledge company itself.

Case: PLS-Consult

The Danish management consultancy firm PLS-Consult, follows a deliberate knowledge strategy, and has begun to measure the competencies, and development of its own staff, as well as the ways in which its customers contribute invisible revenues.

Customers are divided into:

customers who contribute to image, references, and/or new assignments (very much/average/not much);

customers with challenging and widely educational projects that contribute to the firm's internal structure (very much/average/not much);

customers who improve individual competence (very much/ average/not much).

About 15% of all their customers belong to the most valuable, "very much" class, which PLS-consult wants to expand.

It divides consultants into three categories of experience: less than three years, between three and seven years and over seven years. The basic qualification is a Bachelor's degree in engineering or business administration. Over half the firm's consultants have over seven years' experience. PLS is anxious to develop three more strategic competencies in its consultants, and therefore seeks to identify:

Leaders competent at managing major projects;

Teachers competent at transferring skills to others working on a project (and so contributing to internal structure);

Generators competent at bringing in new customers.

About half PLS-Consult employees possess one or more of these abilities, which is a high figure. Most of these findings are based on subjective assessments made by the senior executives at PLS. Internal attitude surveys, and customer satisfaction polls have also been run, and will be repeated systematically in future.

These kinds of data enable PLS-Consult to keep strategy under constant review. How much of its revenue, for example, comes from "image", and how much from "educational" customers? What proportion of its most valuable skills is being assigned to customers that can enhance the firm's image? How much of the revenue comes from very satisfied customers? Who are the most and the least satisfied customers? Which customers are most profitable in cash terms? How much revenue comes from "bread-and-butter customers", who contribute 'financial' profit, but nothing else?

The management has, for example, identified the need for more "teachers" to enable PLS to grow faster. This begs questions like "How can actual and potential teachers, be developed and recruited?", and "What kind of customer projects should such people be assigned to?". By measuring the growth of volume in projects in which teachers are involved, the company can tell whether it is on the right track.

PLS would also like to win more image-enhancing customers. By measuring the volume of that segment, they can see the extent to which that goal is being achieved. Customer polls can thus be used for strategic purposes.

An issue of concern: The share of fees coming from highly satisfied are the same as last year, whereas the share of least satisfied customers has increased. (not PLS data)

Satisfied customers are all important so the key to sustained profitability is the ability to establish and maintain stable customer relationships. Regular customer surveys paint moving pictures of customer satisfaction. A summary of responses to such a survey is shown in the chart. The share of fees coming from customers who regard the service as very satisfactory, is the same as last year, whereas the share accounted for by the least satisfied customers has increased. A chart of this kind should raise some questions from the Board.

The value of a customer base can also be assessed in terms of market development, because customers likely to generate a flow of new projects, rather than the occasional one-off, are clearly more valuable.

Large efforts are put into low image projects while the share of fees coming from high quality project, which give high image is low.

One of the most important means of competition is thus the ability to choose the right customers. One might distinguish the following categories:
a) Customers who are profitable.
b) Customers who increase the competence of the engineers.
c) Customers who support the build up of internal structure.
d) Customers who build up the image and provide contacts with other customers.

Thus a key strategic aim should be to attract customers whose projects will improve image, internal structure or individual competence, as well as being of high quality, and profitable.

The graph in the Figure above shows a not-too-favorable picture (the numbers in the example do not come from PLS-consult).

High image projects are both the best and the worst: the best if the customer is impressed by the high quality of the work, and the worst if the customer is dissatisfied.

In the chart above, no revenue is being earned from satisfied high-image customers. If the firm is to gain image, something must be done about a situation like this.

Projects that make it possible to develop new concepts and methods, or which are big enough to be educational for many employees, are more valuable than other projects. Customers who provide opportunities for such projects help to reinforce the company's internal structure.

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