Treasure Chest

Treasure Chest

When Queensland Treasury Corporation (QTC) discovered that its customers weren't exactly a bunch of happy campers, they really took it personally. Now, at the highest levels QTC is committed to re-inventing itself with customer relationships at the core of its organisational structures. In an era of cut-throat competition, the word monopoly conjures up juicy images of plump profit margins and guaranteed market shares. Insulated from the normal feeding frenzy of the capitalist jungle, monopolies enjoy the privileges of a protected species. But even they can stray into dangerous territory when they start polling their customers. They may irritate shareholders who view the exercise of soliciting opinions from a captive clientele as a waste of corporate resources. Worse yet, the results of an honest poll can deliver a savage battering to the comfortable self-image cultivated by most monopolies. One monopoly that will never be the same after it decided to ignore those risks and canvass its customers' opinions is the Queensland Treasury Corporation.

Expecting pats on the back, it got a negative bombshell from its client base that "gave us a helluva shock" in the words of CEO Steve Rochester. It was the type of jolt that would have sent the average monopoly into a sulky retreat nursing its bruised ego. The QTC did exactly the opposite. It is using the experience like a trampoline to bounce its business into a customer-centric trajectory. Not simply embracing hot new trends like customer loyalty and customer relationship management (CRM) but rebuilding its entire management culture around the concepts.

In the last two years, QTC has brought in overseas gurus, harnessed its in-house brainpower, and invested several million dollars on a radical redesign of its operational systems. It is revolutionising the way that customer information flows through its internal structures and is leveraging its growing expertise in automated workflow technology. The QTC qualifies as a gold-plated monopoly, courtesy of its membership in the cosy, conservative club of government finance bodies. It prides itself on being the very model of a modern, central finance management authority, borrowing funds on the domestic and international markets and lending them to government instrumentalities. At last count, it was financing its customers to the tune of about $17 billion.

Along the way, it has become one of Australia's largest international leasing players, topped only by Qantas, which leases its jet fleet, and QTC's counterpart in the NSW government.

Who Doesn't Love Ya Baby?

Its clients are compelled by legislation to use its services, but QTC is proud of delivering lowest cost, best quality financial products. So when it smugly fired off a questionnaire to its 230 public sector clients, it was expecting to hear accolades for its world-best-practice services. To its astonishment, what came back was the message that QTC customers weren't seeing the services they really wanted and would have no compunction voting with their feet and moving to another provider. In so many words, they told the QTC they needed much more than just competitive interest rates, but weren't seeing this. "We came to the conclusion we had been getting it wrong," Rochester says. "They wanted someone who could speak their language and provide services that allowed them to be more competitive in terms of how they thought about their business, not how we thought about it. We decided we should be focusing on the outcome side of the business and not looking just at the inputs." For several years QTC had a sense that it needed to do more than simply dump money on its customers and congratulate itself for doing a good job; but senior management thoughts on the subject began crystallising into action under the influence of customer loyalty guru Peter Wilton ("The Customer Connection", page 32). Wilton has developed a business model for creating and managing customer loyalty. He believes any company which follows his paradigm faithfully can create a bond with customers so strong they wouldn't think of transferring their business to competitors.

Wilton has compelling arguments to convince even monopolies with locked-in client sets that they should embrace his Ladder of Loyalty methodology.

"Fundamentally, monopolies lose their monopoly for one reason: they fail to serve their stakeholders and their customer base," Wilton says. That applies even to government-owned monopolies like the QTC, because its stakeholders include politicians, who are vulnerable to pressure from dissatisfied users.

"The proposition the QTC realised is that if you want to remain a monopoly, you should act to create a customer base that is in full support of your organisation. And the way to do that is to tackle the customer loyalty issue." Wilton says most companies confronting the customer loyalty problem react in two ways once they have absorbed the real meaning of the concept. First, they realise it requires substantial changes in every aspect of their business, including the way they measure and reward staff. Second, many become alarmed at the size of the job and its expense. "In a lot of cases a [company] will have to spend money to create loyalty, but to look only at the expense line is grossly misleading," Wilton claims. "The net effect of customer loyalty on the bottom line is dramatically positive. Across a wide range of industries we have found a 5 per cent increase in customer loyalty translates into a 25 per cent profit impact. Many managers hear that and they can't believe it is true. A lot will say it is a very interesting concept, but either they are too focused on the short term to make the investment or they believe it requires too difficult a transformation of their company."Not so the QTC. It has committed itself at the boardroom and executive management level to re-inventing itself, with customer relationships at the core of its organisational structures. One sign of its seriousness has been the establishment of a customer services division whose top positions have been filled with overseas talent. But the change goes far deeper than that. "It is a fundamental transformation in terms of approach and people," Rochester says. It means a basic shift from having people who sold products to customers, to having people who are looking at developing customer loyalty. We have swung completely from an input-focused organisation selling products to a knowledge management organisation focused on customers."Winning Ways What are loyal customers and how are their hearts and minds won? Standing on the topmost rung of Wilton's Loyalty Ladder is "the customer who believes no other person in the world can supply the needs of his business better than you", Rochester says. According to QTC's analysis, creating the right climate to sustain customers at that level requires a four-pronged approach. "The first part is customer intimacy," Rochester says. "You have to know and understand your customers better than they understand themselves. I know it sounds like marketing hype, but we don't have any other way of saying it. It is about understanding your partners so well you can foresee what they need and become very proactive in supplying it." One of the building blocks needed for customer intimacy is the ability to satisfy their basic requirements. In QTC's case this translates into the fund-raising and delivery of financial instruments and services it has long excelled at.

But an extra component demanded by the new approach is the capacity to deliver customised solutions to each one. Says Rochester: "There is no point in talking their language if you can't add what you know to what they know and produce solutions for their business needs." The fourth and final component in QTC's customer loyalty package is buffing the delivery of its services to a high sheen of perfection. It sounds easy; but to try and produce that package, the QTC has been forced to tear apart and rebuild the network of information pipes connecting its staff to their customers and to one another. Two years of thought and effort have gone into probing the concepts of knowledge management and workflow management that underpin the changes. "Basically, we have gone through a series of processes to ensure that everyone in the organisation has access to all the information they need to contribute to adding value to the customer," Rochester says. "The concept is to get all the information stored in one pool, then supply the business processes that allow you to sieve that information in a way gives value-add to our customers, both individually and in toto.

Take Notes

The document management system developed by QTC to support its drive into customer loyalty is embedded in a Lotus Notes structure and positions QTC on the leading edge of customer relations management, Wilton says. The system is designed to collect data generated by any contact between customers and QTC personnel, from chairman Sir Leo Hielscher to a clerk taking cash-flow settlements by phone. The data is then routed via automated workflow to the staffers who can make best use of it on a customer's behalf. Let's say a customer complains to a lease account manager about a financial product he can't find but that would fit in with his company's expansion plans. The account manager includes that snippet when he debriefs himself after the conversation into a specially structured customer information file the QTC calls a "meeting note". Different parts of the meeting note are linked by automated workflow processes to the QTC personnel most responsible for those categories. So the account manager's little nugget will automatically be forwarded to the QTC's product development manager.

"It is a document management system in which information is filed in one electronic bundle and you use search tools, basically text search, to find what you need," Rochester says. "Our research indicates this allows better information flow within an organisation than the conventional approach to file management, which stores things under a file naming convention." Besides permitting text searches, the system can generate reports based on general questions. If asked what issues are currently confronting local authorities, for example, it can extract and report the information that 27 customers raised operating leases as an issue in the past month. Not everyone ends up with the same view of a meeting note. It is structured into categories such as "product opportunity" or "customer complaint", which can appear as dropdown menus. And the categories that appear may vary depending on the corporate position of the user. Work began on a pilot system two years ago and the process of defining policies, objectives and business processes is virtually complete. Signoff on the electronic document management system is expected in the next month or two, and delivery of the basic first stage and tool sets of the electronic document management system is scheduled for June 30. The second, more strategic stage, which includes performance measurement and data mining tools, is scheduled for delivery in November.

Making life somewhat easier for the QTC, it has been able to draw on the expertise it amassed from building three core Lotus Notes systems already in operation. Cybil is a system for managing international leases on big-ticket items like locomotives, LeMans does the same job for domestic leases on smaller items like office equipment; and Hermes is the human resources system.

Data Blancmange

However, its leading-edge customer information system is extending the envelope significantly for the QTC. "We have not only to collect the data but access it from different views to ensure we extract the most value out of it all," Rochester says. "And there is no value collecting blancmanges of data, where people stick fingers in the jelly and taste it. You also need to ascertain whether the use of data is adding value for the customer," he adds. "So another feature you need is to be able to add in feedback from the customer on how well they think we are performing." Motivating staff to share information is obviously crucial to the new business dimension in which QTC wants to operate.

But Rochester doesn't see it as a significant stumbling block. "To me, this process of information sharing and gathering hasn't fallen out of the sky. It has been a natural evolution of skills for QTC staff. There has been a reorientation from technical to people skills. These people skills now add more value to the relationship with the customer in the performance management process and it is just a question of how you reward people for that."As for what QTC's pioneering systems will do for the corporation when they go live, Rochester has this succinct summary: "They will collect all the data and structure it in a form that can be analysed systematically so we have a clear picture of what constitutes the kinds of opportunities that will enhance customer loyalty."The Partnership Pathway An innovative customer approach Peter Wilton is a globe-hopping business specialist who straddles the divide between theory and practice. Born in Adelaide, he also neatly bridges the gap between US and Australian business cultures. For the past 20 years, Wilton has based himself in the US, building up a flourishing consultancy, Orbis, and lecturing at the Haas School of Business at the University of Berkeley in California. His advanced thinking on customer relationship management (CRM) and customer loyalty concepts has pushed him to the forefront of a field in which business interest is expanding exponentially. In Australia, two large financial services institutions, a chemical conglomerate and a telecomms company are among the companies currently making use of Wilton's insights. It is no accident his client list is dominated by huge companies. Wilton preaches that large companies need to think and act more like small entrepreneurial companies when it comes to handling risk and fast-paced change. How to implant a management model more comfortable with that culture shift is one of Wilton's specialities.

Today's groundswell of business interest in customer loyalty and CRM is spurred by two powerful trends, he says. One is the challenge posed to traditional business models by growing competition, growing customer sophistication and technology developments such as the Internet. According to Wilton, the connection that used to exist between market share and profitability is under attack. "Not only does growing market share no longer guarantee profitability in many industries but running a business to grow market share may hurt profitability quite dramatically." Doubts about the ability to further extend cost-cutting programs are also surfacing. "After spending the past six or seven years reducing costs they [organisations] have reached the limit in that direction and are looking for alternatives," he says. Against dwindling returns from the heavily worked fields of market share and cost controls, customer loyalty appears to be a virgin area with rich potential for building the profitability of an organisation. "There is a substantial body of research indicating that loyalty in many cases will have a far more positive impact on profitability than either growing market share or aggressively cutting costs internally," Wilton says. He cites a study by consulting group McKinsey "which indicates a 1 per cent improvement in customer loyalty will improve profitability by the same amount as a 10 per cent reduction in your cost structure".


There is a second significant driver at work behind the upwelling interest in customer loyalty and CRM systems. In the past five years, business globally has pumped billions of dollars into installing massive back-end software systems for managing internal accounting, finances and operations, which collectively labour under the name enterprise resource planning (ERP) software. Now attention is shifting towards applications that better manage the front-end relationships with customers (see "Catching the Second Wave", page 20). The mega investment in ERP applications has created corporate data storage warehouses bursting at the seams with information. In theory, it can be mined for profitable truths about customer habits. But the analysis today is based primarily on pattern searching algorithms which, though sophisticated in themselves, are let loose in what "basically is a random walk through the data", Wilton says. "The analysis is not being driven by a clear paradigm or theory about what kind of strategic opportunities we should be looking for in the data."Worse than clumsy tools, there is a gaping hole in the kind of customer data that business has been stockpiling in its warehouses. Most is either descriptive data centred on who the customer is, or transaction data about what he is buying. "The trouble is it is all backward-looking data that describes what a customer has done but not what they might do in future," Wilton says.

So companies ignore some customers whom they have pegged as low-volume consumers based on historical data. "That approach dooms a low-volume customer to remain one," Wilton notes. "The question begging to be asked is: why aren't they spending more with the company? "The answer to that depends on rich, qualitative data about how a customer thinks, how they define value and how they make their decisions. It can't be captured through simple transactional data, and that is the big gap in data warehousing," he says. "What's missing is the middle data telling you how the customer responds to various choices in the market and how they form their preferences." Prototypes for collecting such data exist on the Internet with online supermarkets like where customers stroll along virtual aisles using a mouse to select goods. "Every click indicates consumer thought processes to Peapod. How they sort through the brands on offer . . . by nutrition, by class . . . all that can be collected by tracking movements along the online shelves.

"So we can get surrogate measures of a customer's decision process at the individual household level. But we still need at some point to collect the data directly from consumers by asking them how they define value, what are their loyalty drivers, what is their minimum adequate expectation when they do business with a [company] and what is their best imaginable expectation. "Those are the range of constructs which are crucial to managing loyalty and whose answers we need directly from consumers." The ultimate vision for a system which collects that kind of data remains a work in progress with development teams around the world, Wilton says. "But one scenario might be an interactive data collection system using the Internet. If you come to my home page, I'll go into my customer information file, find out the things I don't know about you, and put one of those questions in front of you every time you come back to my page."While companies are waiting for the perfect solution to emerge, Wilton says the three most common errors being made by those implementing CRM systems today are: 1. Not spending enough time thinking about the structure of their customer information file. "Today's off-the-shelf CRM systems are in effect data warehouses that make a superficial pass at the loyalty issue. Unless the structure is there to collect rich data on how the customer defines value and what his loyalty drivers are, it will be very difficult to go beyond simple transactions management." 2. Not having a clear understanding of how the customer information can be used to create profitability. "Are you after mass customisation, are you after yield management, are you trying to do event-oriented prospecting, or extend your organisation or find loyalty drivers? You need some idea beforehand of the strategic opportunities you are looking for." 3. Failure to understand that CRM implies a radical change in management thinking. "The activity of information-based competition must become the core focus of the company. In many organisations, it is left to the IT group as a peripheral or stand-alone activity of the [company]."Hear customer intimacy expert Peter Wilton explore customer relationship management and why it is important in today's new business model at CIO Informat: The Customer Connection, May 24-25. For more information about this very important event, e-mail or phone (02) 9439 5133 (switch).

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