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Back to Basics

In light of the current situation, companies need to get back to basics to keep their current customers loyal; increase market share; decrease expense; and maintain ongoing, high-margin revenue streams. As the cycle turns down, it is a perfect time to refocus efforts on understanding the needs of target customers, redoing pro formas, and looking at options for making customers happier.

Customer Care

As mentioned in my book, Service Provider Strategy, customer care is an excellent channel for sales and to gain market information. Call center service representatives (CSRs) are generally the front line of company communications with the customer. It is in the company's best interest that these people be well-trained and have as much customer information as possible available at the time of the customer's call. Even more important is a pleasant phone voice and an ability to relate well with people. Company managers should be sure to make random checks. These may seem like common sense items, but how many times have you called customer support, only to have a CSR snarl and put you on hold? Competent customer care will be a differentiator and will keep customer churn lower, saving money.

The call center is another venue for understanding customer needs and get feedback on service levels. I interviewed one service provider who polled customers at the end of each call, requesting information about service satisfaction and whether any features or functionality should be added. Using this method, he was able to understand the level of customer satisfaction and credited this with lowering his customer churn.

Focus On Core Competencies and Outsource the Rest

It takes discipline to maintain focus and not change service features for each customer. At times, it would be so easy to add yet another bit of customization onto a service or to make it available on one more platform. To keep operational expenses in line, service customization must be limited. Each change has a ripple effect across other parts of the company that can, over time, greatly affect the company's bottom line. In the short term, therefore, it may be better to focus on doing one thing well instead of trying to please everyone.

It is an interesting trend (and to be expected) that companies with products first to market typically have higher costs of sales.

Each company must decide what it wants to be famous for, develop that core competency, and keep it in-house. Then, the company can decide what to outsource and to whom. Outsourcing and partnering are both important ways to keep the financial bottom line in check while offering more service(s) with more value-add functionality. If negotiated correctly, these two venues are also good ways of increasing market share by having access to the others' customer bases. Hard economic times breed invention, and many vendors are offering imaginative ways to attract business. These include joint sales, marketing, and funnel sharing. HP and Sun are just two of a variety of vendors offering these sorts of plans.

Normally, a process is outsourced because of the following:

  • It requires a large capital investment and focus expertise that materially affects the business.

  • The company does not have the means, interest, or personnel to execute the functions.

Common examples of outsourced processes are customer care and billing. Both of these require huge investments in infrastructure and personnel, and are core to the business functioning properly; however, many companies don't have the means to do a good job. When outsourcing, it's very important to understand exactly what services will be provided for which price. The idea is that the outsourcer be an expert in the features and functionality needed; can seamlessly integrate these in your service; and have the technical infrastructure available, both now and in the future, to support the services you will offer your customers or internal staff. If outsourcing is done correctly, it will benefit the bottom line. If done incorrectly, you will end up paying more than if you made the investments yourself.

Do You Have a Niche?

Another way to differentiate against competitors and maintain customer loyalty (return to profitability) is to develop a solution for a niche market. An example is an end-to-end solution for lawyers that would include shared hosting services; Lexus-Nexus services; data-base services; bookkeeping software; HR software; and end user Internet access, training, and computers. Often partnering with a company or organization with a well-known name can help establish the brand recognition of this new niche service. In this example, partnering with the local bar association would mean instant brand recognition in and access to the legal community.

Keep Loyal Customers and Expand Customer Segment Sizes

Acquiring customers can be very expensive, so it's in every service provider's interest to keep churn as low as possible. In this industry, there are statistics that say a new customer costs approximately US$500 to acquire, a figure that can affect your bottom line quickly. As mentioned in my book, the service provider walks a fine line of perception. The service offering needs to fit customers' needs to bring them in the door, but as services become more complex, switching costs for customers also become higher. This is good for the service provider, but the customer must not perceive that he/she is "locked in" and can't change providers if necessary. This is best done through contractual language with offers of help when transferring providers if/when the customer is unsatisfied with service. For example, it is much easier for a company to change service providers if it only has a shared hosting service with some Web site development, than it is if it uses Managed Exchange email services. Offering guaranteed two-month switchover support in case of service dissatisfaction can go a long way to increase customers' peace of mind. After they are happy with the Managed Exchange service, the provider can consider cross-selling other services that would further "lock in" the customer.

What Is/Are the Most Important Customer Segments? Why?

A business can never do enough market analysis and competitor analysis to update its strategy and execution plans. It is also a necessary part of your business strategy when trying to return to profitability. A target market must be as focused as possible to well understand customer problems, service satisfaction, needs literacy, and sales tactics.

What Are Their Problems?

Problem or needs analysis is vital, and should be carried out for the customer segment as a whole and for the actual buyers within the segment. The entire segment may need to streamline purchasing, but will that service disintermediate someone who may have strong input to the buying decision? These sorts of issues must be understood as the selling strategy is developed.

Do Current Services Fill these Needs?

When analyzing the customer problem space, it is important to know if and how well current services are meeting customer needs. Perhaps it's time to find a partner to add some functionality needed as a result of industry technology upgrades? Perhaps the current partner's technology is no longer favored in the industry, and needs to be updated? The sooner trends are spotted and understood, the sooner the service provider can respond and get in at the head of the market, either by adapting current services or launching new ones. This is what loyal customers are looking for: a service provider that understands their industry and its trends, and can help them beat the market and be more profitable in their end business.

Do These Customers Understand Their Needs, Or Do They Need to Be Educated?

Sometimes, technology or markets move too fast, and customers don't know they need a service. This is when the service provider needs to educate the market. The disadvantage is that any competitors will not have to pay for this education; it comes from your pocket. If done correctly, it will be to the service provider's advantage because of the capability to return a profit faster than the competitors. The cash outflow should be more than compensated by the increased profitability of selling a non-commoditized service.

Are Sales People Using Consultative Selling, Solution Selling, and Business Cases as Tools In Their Selling Processes?

Showing end customers the business benefits of any service cannot be overemphasized. Consultative selling will decrease sales cycles, increase individual sale amount, and increase overall sales volumes. It ensures that the sales force understands the provider's unique value and the target customer's business. All of this is necessary for a return to profitability. If a service provider can't articulate these items to its sales force, how can the sales force be expected to articulate them to the end customers?

Redo Pro Formas

Pro forma financial statements are forward-looking business cases used by businesses to decide if it makes financial sense to continue offering certain services. Normally, these include information about net present value or the internal rate of return of a product or service. These statements should be living documents that should be reviewed/updated when downward cycles become apparent.

Time to Exit Some Service Offerings or Reinvent Others?

Results of pro forma business cases will show whether or not the company expects to make money on a product/service. If the service is commoditized (low margin), it will probably not meet minimum margin standards, and the business needs to decide what to do next. This is when the business should reanalyze the service and exit if they can't be #1 or #2 in the market, or rebundle the features/functionality into something profitable if it makes sense strategically.

How Do Ratios Compare with Others in the Industry?

After the pro forma business plan is updated, it is a good idea to compare financial statement ratios with industry standards. If some ratios are higher or lower than industry standards, the corporate executive committee probably wants to understand why and be ready to defend their position in front of analysts. Industry ratios can be found from companies such as Hoover's, Edgar-Online, and so on.

Is Cash Flow a Problem?

There are several quick things to review if cash flow is a concern. First, can financing or pay–as-you-go options be used with vendors? Many vendors are more open to these options in harder times as a way of getting and keeping business. Are supplier/partner payment terms longer than customer payment terms? If this is the case, it's definitely time to renegotiate with the suppliers, or find new ones. Can collection be sped up? This has a direct result on the bottom line, and it is worth paying for collection services in many cases. Is it time for more sensible belt tightening? This may be the time to outsource some functions as a way of lowering expenses, but use common sense. For example, don't lay off operational staff if the outsourced operations are not ready. Run them in parallel for a time until any bugs are worked out; otherwise, there will be more losses from reduced revenue when unsatisfied customers leave. Another example: Perhaps travel policies are too liberal, with executives still traveling first-class when all others are traveling coach. In parallel, it is amazing the effect on company revenues when employees are not motivated due to management saying one thing, but doing the opposite.

Are Operations Efficient?

Finally, it is important to review operations for inefficiencies. For service providers: Are the same processes used across the company, in each data center? Can resources be swapped between installations without retraining? These same sorts of questions can be applied to any plant or business, and they have important impact on the bottom line.

Are infrastructures modular? Can they be expanded to include new technologies without scrapping the whole thing and rebuilding from scratch? These processes will enable savings in the long run as technology changes.

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