Opinions

Getting closer to customers seems like a no-brainer - but it may not make you any more profitable than you were before. The key is to take it slow

In January 2005, one of the most resolutely product-oriented companies in the world, semiconductor maker Intel, announced it was reorganizing itself around its customers. No longer would the firm simply announce new chips and expect customers to adopt them. Instead, it would focus on the bundling of processes, ancillary chips and software into platforms tailored to five customer segments.

Intel is far from alone. Organizations have been steadily evolving toward closer alignment with customers. But the changes required by this evolution are disruptive in the short run and add coordination costs in the long run. These countervailing pressures are a warning to CIOs that while closer customer alignment may be correct, it is not sufficient to support a wholesale shift in strategy and organizational structure. The appropriate structure is guided as much by implementation realities as by the strategic imperative to get closer to the customer.

So is it worth doing? The findings from our study of 347 midsize to large firms were mixed. Among those companies that made the shift, accountability for customer relationships sharply improved and information sharing was better. Firms organized according to customer segments were also easier to do business with and better at dealing with problems and queries. But these benefits didn't immediately translate into superior financial performance. There was no direct correlation to increased profitability.

Among the companies we studied, we saw four stages in the transition to being customer-focused.

Stage one: product or functional silo. For small or highly focused firms, this simple structure usually suffices. Problems arise as competitive pressures, fragmenting customer requirements and proliferating channels create performance-sapping conflict.

Stage two: informal lateral coordination. As customer requirements begin to fragment across functional or product divisions, the company responds by coordinating across independent areas. Product managers may serve informally as bridges across multiple business units. Rotation programs, such as moving salespeople through a stint in marketing, are also common at this stage, as is the development of a companywide CRM system. However, these moves are much more successful when done in tandem with the next stage of evolution.

Stage three: partial alignment via integrating functions. Companies create formal positions for market segment or key account managers - sometimes even entire organizations - that span multiple boundaries in the organization to overcome a functionally partitioned view of the customer. IT systems that span functional boundaries are often part of this transition, creating integration issues for the CIO.

Stage four: fuller structural alignment. Companies at this stage have created powerful, independent units to serve as central coordination points for the company's various independent business units. These units act as the front end, assuming primary responsibility for the customer relationship. This design flourishes when customers want solutions from multiple business units that are customized to their individualized needs. However, product business units often retain the ability to sell directly to customers, which means there must be a strong corporate centre to mediate the conflicting demands.

Fidelity Investments' evolution to the front hybrid model began with a strategy that emphasized credible advice and investment solutions tailored to the individual investor's situation. This meant picking the customer segments to nurture and creating dedicated groups to serve each of these segments with personalized guidance and service levels appropriate to the profit potential of the segment members. The product groups continued to develop and manage a broadened array of funds and financial services that could be readily bundled and sold by the front-end customer unit.

From an IT perspective, this kind of structural alignment is very difficult. Inadequate systems are a major source of delay. How can an organization be aligned to its markets if customer data is dispersed, segment profitability can't be estimated and customer defections aren't visible? Indeed, Fidelity Investments managers estimate that it took more than three years to accomplish 60 percent of their reorganization goals - mainly because of systems constraints.