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Chris: As organizations, it’s one thing to improve internally. I think one of the
greatest movements or the improvements in performance management came in the early ‘90s
when we saw the introduction of revenue come in.
And so organizations realized that ‘okay, we have a staff; we have process, we can improve
our efficiencies and so we can produce better outcomes and we can sell those outcomes in
the way of products. If it’s public sector, your outcomes are services, but in the commercial
industry, our outcome’s we want to sell those products and we realized that when we
brought revenue in by customer, we suddenly had this discovery that not all customers
equally contributed to profitability.
And so it was a recognition that there was a second opportunity to do performance management
and then improve the outcomes that much more and that was in the area of recognizing that
there is a profit contribution or if you will a customer contribution.
Alan: So just revenue was not the only measure.
Chris: That’s right. No, because what we found is that some customers may produce lots
of revenue but for every dollar of revenue they produce, the cost us $2 to serve them.
Alan: That’s a bummer.
Chris: Yeah, it’s a bummer and so as many folks recall, going back perhaps one of the
greatest visual graphics that we got coming out of the mid-‘90s was when we did a distribution
curve showing the relative profit that each customer contributed to our organization.
And it was staggering because we assumed, or organizations assumed, that certainly customers,
they may not all be equally profitable, but it’s not like some will be vastly profitable
and some will be real losers where we, as one person said, we’d be better just be
mailing them checks.
Alan: It’d be cheaper.
Chris: It would have been cheaper and we certainly found that. We found where if we had several
thousand customers, we have this band of customers on one end of the bar that were losing money.
We were spending more to serve them than they were bringing in. On the other end of the
curve, we had a 10-15 percent of our customer base that was producing far in excess of what
was normal, really our best producers.
And then we had that big block in the middle that was the life-blood of the organization
but they were sort of neutral, and so this gave tremendous vision into the organization
for executives because now they could figure out where to target their scarce resources
towards improvement because you can’t go focus on everybody on everything.
So if we could identify, if you will, the biggest losers, perhaps we could find a way
to make those customers more profitable and didn’t know we got rid of those customers,
it just meant that we might work with them.
Alan: You don’t like to fire customers.
Chris: They don’t like to fire customers. And customers don’t like to be fired. But
if they don’t know why they are unprofitable, then in many cases it doesn’t work. I mean
I have seen more than one case where somebody went out to talk to a customer to say that
we can’t continue to lose money with you, and the customer said, “Well, we like you.
We like what you do. We’ll pay more”, and so it was a matter of understanding.
Alan: What can we do to work together better?
Chris: How can we reduce your cost? What activities could we stop doing that’s costing you money?
But the key was, if you don’t know who those folks are; you don’t know which customers
to go talk to on the one end, then on the other end, your best producers, not only they
are great for your profitability but they are the shining star of what your organization
wants across your customer base and so you want to feature those best customers. You
want to look at what’s working in those cases. And again…
Alan: Learn from them?
Chris: Learn from them. Help mold the other customers to be more like your most desired
customer, and performance management, when we focused on customers, it extended. We were
just doing process efficiency. Now we extended out to the second leg of the stool, we started
doing customer efficiency so that we were getting the maximum return for the outcomes
we were producing.
Alan: And they kind of supported each other in the end, anyway.
Chris: They support each other in the end, that’s right.