Scorecards feature all manner of wonderful objectives relating to the customer value proposition and customer outcome metrics—for example, market share, account share, acquisition, satisfaction, and retention. Yet amid all these measures of customer success, some companies lose sight of the ultimate objective: In their zeal to delight customers, these companies actually lose money with them.
They become customer-obsessed rather than customer-focused. When the customer says "jump," they ask "how high? How can companies avoid this situation? By adding a metric that summarizes customer profitability.
Consider the situation faced in the s by one of the nation's largest distributors of medical and surgical supplies. Despite the tripling in sales, margins had declined by one percentage point and the company had just incurred its first loss in decades. The experience of this company is hardly unique. Companies often capture additional business by offering more services. The list is wide-ranging: While all of these services create value and loyalty among customers, none of them come for free.
For a differentiated customer intimacy strategy to succeed, the value created by the differentiation—measured by higher margins and higher sales volumes—has to exceed the cost of creating and delivering customized features and services. Unfortunately, many companies cannot accurately decompose their aggregate marketing, distribution, technical, service, and administrative costs into the cost of serving individual customers. Either they treat all such costs as fixed-period costs and don't drive them to the customer level, or they use high-level, inaccurate methods, such as allocating a flat percentage of sales revenue to each customer to cover "below-the-line" indirect expenses.
The remedy to this situation is to apply activity-based costing ABC to accurately assign an organization's indirect expenses to customers.
Many companies, however, have tried ABC at some time during the past twenty years and abandoned it because it did not capture the complexity of their operations, took too long to implement, and was too expensive to build and maintain.
Fortunately, a new approach is now available that is far simpler and much more powerful than traditional ABC. The approach has been successfully applied in more than organizations and readily scales up even to companies with hundreds of thousands of products and services, dozens of operating departments, and thousands of customers. The end result is the ability to measure individual customer profitability accurately and in a system that is easy to implement and inexpensive to maintain and update.
The ability to measure profitability at the individual customer level allows companies to consider new customer profitability metrics such as "percentage of unprofitable customers," or "dollars lost in unprofitable customer relationships.
BSC customer profitability metrics are also highly actionable. If a company finds that an important customer is unprofitable, it should first look internally to see how it can improve its internal processes to lower the cost-to-serve.
After all, we can't expect customers to pay for our inefficiencies. For example, if important customers are migrating to smaller order sizes, the company can focus on reducing setup and order handling costs. The company can ask the customer to use electronic channels, such as Electronic Data Interchange EDI and the Internet, that greatly lower the cost of processing large quantities of small customer orders.
Customized pricing policies should be at the heart of any strategy to manage customer profitability. Keep in mind, you may have multiple initiatives focused on improving your measures and achieving your objective. And, if your projects are not helping you improve in these areas, you may need to rethink your overall strategy. There are many reasons why you should implement the Balanced Scorecard, but here is one way to look at it.
Your leadership team is responsible to some group of people: This depends entirely on the type of organization. In order to answer to this group, your team needs to ask two important backward- and forward-looking questions:.
In order to answer these two broad questions, you need a management system that is able to to look backward and forward with leading and lagging indicators. The Balanced Scorecard is the closest management tool to a crystal ball as you will find.
A Balanced Scorecard is more than just a strategy map, but the strategy map is an important element. I like to use Upward Airlines as a teaching example, because most people have flown on an airplane and thus understand the objectives listed in the map. First, notice the vertical text on the left side of the strategy map. These are the four perspectives of the Balanced Scorecard: These perspectives make the BSC unique, because traditional reporting frameworks typically only look at the financial perspective.
Strategy maps are read from top to bottom. The objectives are listed in order of importance. Beneath the financial perspective is the customer perspective. So what makes the customers happy? And, the cost and experience need to be Comparable To Other Travel , like cars, trains, or buses. Upward knows that to meet financial goals and make customers happy, they need to focus on Innovation by offering Fast Ground Turnaround , Good Locations that better serve their customers, and Direct Routes to big cities.
In order to execute all of this, Upward looks at their final perspective, which is Learning and Growth. So as you can see, each of these perspectives directly relates to the next, offering a ground-up approach to strategy management.
For Upward Airlines, this strategy is very effective, and helps them ensure that they continue to add value to their firm. Reviewing strategy maps from both inside and outside your sector is critical, as it will give you a good idea of what other organizations are doing to ensure their success. Naturally, any for-profit financial institution scorecard will list financial objective statements at the top of its strategy map. As you can tell from this map, this bank wants to be certain it can both support its clients and grow the business simultaneously.
Some organizations have one map for all departments and divisions and others have a separate map for each. Manufacturing companies are primarily concerned with operational efficiency—both increasing their output and decreasing production costs. Some of the ways they can achieve these goals are by creating correctly-priced goods, ensuring their products can be easily obtained by customers, and manufacturing the right assortment of goods, among other things.
Manufacturers also typically place a large emphasis on safety, and so implement many related goals and metrics. Innovation is fairly common in manufacturing strategy maps today, but it is not included in the example above. In the software example above, the customer and internal perspectives are combined. This highlights what the customer is looking for and how the company is responding.
There are three areas focused around the customer relationship, market leadership and operational excellence. Industry Expertise and Talent. For example, this strategy emphasizes safety, a strong economy, and a creative culture, among other things. Unlike the other examples above, this strategy map begins with a purpose statement.
According to what we see daily, 'Customer' is one of the most problematic perspectives of the Balanced Scorecard framework. And it is not customer KPIs that cause strategists the most problems One needs to clearly understand: Who is the 'customer'.
The balanced scorecard demands that managers translate their general mission statement on customer service into specific measures that reflect the factors that really matter to customers. Customers’ concerns tend to fall into four categories: time, quality, performance and service, and cost.
In the past, the customer perspective was not the focal point of the Balanced Scorecard, as companies believed product performance and technology innovation to be the backbones of business success. Nowadays, both of these take a backseat to customer satisfaction. The Balanced Scorecard introduced customer metrics into performance management systems. Scorecards feature all manner of wonderful objectives relating to the customer value proposition and customer outcome metrics—for example, market share, .
Customer Service Balanced Scorecard Use this example of a Customer Service Balanced Scorecard as a starting point to build your own strategy map and KPIs, align the operations of customer service with overall strategy, and measure the performance with KPIs. & Associates Balanced Scorecard for Customer Support recognizes the strains placed on the organization by including apparently contradictory outcomes – such as reduced cost and increased customer loyalty – in the same model.