A Bird In The Hand

Dec. 21, 2004
Success in the 21st-century marketplace will depend on a company's ability to retain and expand profitable relationships with a select customer base.

In the mid-1980s, Ryder System Inc. began a relationship with one of the large Bell operating companies via a short-term truck rental. Over time, Ryder has provided more value to the customer, including full-service equipment leases, drivers, a full outbound delivery network, and logistics solutions. In the last three years, Ryder also has assumed operation of all inbound transportation and distributor-center packaging/shipping/cross docking and storeroom operations, all staffed and operated by Ryder personnel. From the humble beginnings of a single truck rental, this account has grown into a totally integrated supply-chain system worth $30 million to Ryder, with a 1998 estimated account value of $50 million, including extended support into Latin America. In fact, in the last three years the Integrated Logistics division at Ryder has increased average account value from $5 million to $20 million by providing ever-increasing levels of these kinds of services. The message is clear: Building on the established customer base is a powerful and efficient way to grow, exemplifying one of the basic tenets of "relationship marketing." That's the term many academics and marketing-savvy companies are using to describe the most potent weapon on the battleground of the 21st-century marketplace. In relationship marketing, companies lend more importance to individual-customer "share of wallet" than overall industry market share. Relationship marketing carries with it the idea of selectivity, a concentration of resources and preferential treatment for customers with the most potential long-term value. Unlike the antagonistic supplier/customer interactions of the past, there is a sense of loyalty and commitment in relationship marketing. More than product discussions and price negotiation, suppliers focus on business issues and develop cooperative and collaborative partnerships with their customers. Suppliers anticipate the needs of their customers and position themselves to meet those needs with expanded product and service offerings. "In the end, the goal is to drive your customer's business, taking cost out of the process of doing business so both can reap the reward, while at the same time increasing value to the ultimate customer," says Jack McSweeney, president of Customer Relationship Management Group LLC, Atlanta. "It's a win-win-win situation." "For us, relationship marketing is a question of survival," says Jerry Bowman, senior vice president, North America, Ryder Integrated Logistics, Miami. "The cost of new sales in this industry is very disagreeable. It's not unusual for a request-for-proposal response to a major client to cost $250,000 to $500,000, due to the engineering work and the hours required to digest data and process the mountains of information just to benchmark a client's supply-chain, 'as-is' state. You can cost-of-sales yourself right out of business pretty quickly unless you're selling 80% of those proposals. It's much more cost-effective for us to pursue a major opportunity with a current client--plus the returns on new growth exceed the returns we get selling business to a new client." Valued Customers "Customer relationships are assets that should be evaluated and managed as rigorously as any financial or physical assets," says Paul Cole, national director of the customer-connection practice at Ernst & Young, Boston, and co-author with Robert Wayland of Customer Connections: New Strategies for Growth (1997, Harvard Business School Press). "We stress that it is the relationship that is the asset, not the customer. The value of a firm is ultimately equal to the sum of the values of its customer relationships. . . . By viewing itself as managing a portfolio of customer relationships, a firm can take actions to maximize its value by deploying effectively its customer acquisition, development, and retention resources. A business cannot develop a customer-based strategy simply by bolting new customer service, satisfaction, or loyalty programs onto a vehicle propelled by product-driven thinking." In fact Ernst & Young practices its preachings, having pared its customer base significantly to focus on a smaller target population while penetrating more deeply into more aspects of its customers' businesses. To cull its customer base, Ernst & Young evaluates clients in terms of three basic questions:

  • Are they in a pace-setting industry?
  • Are they operating globally?
  • Are their business problems and opportunities complex enough to play into a range of Ernst & Young strengths?
"Our targeting is less a function of eliminating industries, but more a stratification of the companies within an industry," says Cole, "which companies will we manage opportunistically versus which ones we are going to invest in, accounts with the greatest long-term potential for us." This effort reduced the target-customer list from several thousand down to 300 U.S.-based companies and 300 based outside the U.S. Since the culling in the early '90s, Ernst & Young has experienced a growth rate of 30% per year, from roughly one-fifth the targeted-customer base. Square D Co., a $2.3 billion manufacturer of electrical distribution, automation, and control products in Palatine, Ill., is another vendor that has undergone significant streamlining to direct effort to its most profitable customers. Its objective was to reduce 4,200 OEM accounts to a top 100 served directly. The remainder are handled through select distributors, which Square D is helping to develop competencies only Square D itself had before. "We have targeted 15 distributors who now have product modification capabilities, special product competencies, and demo and display rooms including functional appliances," says Jack Carlson, vice president, marketing. "We are training and reimbursing these distributors for their competencies so they can invest and satisfy the accounts we are handing off to them. We call these transition accounts. These distributors have become a real strategic asset for us and have allowed us to focus our resources on our key OEM accounts, which are down to about 200 right now." These top 200 accounts represent about 40% of the Square D OEM business, and as a group grew 40% in 1997 during the first full year of operation under this concept. "We are reducing our operating costs, serving fewer customers, but at the same time satisfying more customer needs because we are taking more time to explore them." Criteria Square D used to trim accounts include account size, product fit, size of potential, existing number of relationships, competitive entrenchment, and complexity of business. "But probably the biggest factor is willingness of the customer to change," Carlson says. "Do they resist change, or are they open to new ideas? There is a lot of archaic thinking out there. People still think you are after something." Hard-wired While in old models of buyer/seller interaction relationships could be adversarial, with the flow of communication filtered through sales and purchasing, in the relationship-marketing model companies are connecting themselves together, hard-wiring function to function, participating in joint marketing and development efforts, even consolidating manufacturing facilities. Relationships are collaborative, designed to grow each other's business, mine out costs, and deliver more customer value. In meetings between companies in these relationships it is difficult to tell who is the customer and who is the supplier. "It's like tying your shoe through eyelets," says Square D's Carlson. "We are trying to create an environment with our customers where we have more eyelets in our shoes. We perceive each eyelet as a relationship between someone inside our company and an individual and function on a corresponding side inside their company." The relationship between Square D and Trane Co., the air-conditioning company, serves as an excellent example of working together for the benefit of both. "Part of our relationship with Trane includes guaranteed price reductions every year, but at the same time they have opened doors for us with sister companies under the American Standard Cos. Inc. [Trane's parent] umbrella," says Carlson. "That account has grown from about $1 million to well over $10 million in the last three years." Trane engineers sit on selected Square D development teams, and Square D also has developed and manufactured PC boards private-labeled for Trane. "We gave up the opportunity [for replacement sales], but gained access to over $2 million worth of things like starters and contacts that we were locked out of before." While both companies operate metal-stamping operations side-by-side at plants in Kentucky, they are investigating operating only one facility stamping for both, freeing the other for more value-added activities. Finally, the two companies are now shopping as a consortium to leverage their buying power with United Air Lines and American Express. Declaring its dedication to channel partnering in January 1997, Procter & Gamble Co. (P&G), Cincinnati, renamed its worldwide sales organization Customer Business Development. While seemingly a cosmetic change, "to insiders and to our retail and wholesale distributors this renaming signaled a watershed change in how Procter & Gamble takes its brands to market," says Lawrence (Mike) Milligan, senior vice president, customer business development. "Simply put, to deliver greater customer value we moved from a tactical focus upon short-term merchandising to a strategic and systemic cooperation with our customers." To minimize confusion among consumers and retailers caused by non-value-added product extensions and constant price dealing, P&G is phasing out 20% of its product line by the year 2000 and cutting out cents-off packs, refund certificates, and even coupons in some test markets. (At one time, P&G was making 55 price changes a day across 110 brands, offered 35 varieties of Bounce fabric softener and 30 variants of Head & Shoulders shampoo, and had 17 price lists.) These reductions in product line and price promotions are targeted to save P&G $1.35 billion from 1997 through the year 2000. P&G had been extremely secretive about consumer research data, but it's now pooling data with retailers in category-management initiatives designed to help stores determine the correct mix of products to meet customer demand and optimize profitability. Dedicated multifunctional teams--market research, finance, logistics, shelf management, sales/marketing, and manufacturing--have replaced sales reps, who had come from six autonomous business units that competed with each other for the retail customer. Functional and system links with major retail accounts now include logistics and systems coordination, joint activity-based costing, standardization of databases and common analytical tools, electronic funds transfer, joint annual product planning, and continuous replenishment (P&G ships to demand data continuously streamed from the retailer's cash register). Key lessons in this transition to customer business development, according to Milligan:
  • Think systemically, not transactionally. Anyone can--and will--beat you on price.
  • To think systemically, you must be multifunctional and involve both buyer and seller in planning.
  • Multifunctional customer teams need leaders who can sell, not necessarily established sales people trying to lead.
  • Simplify and standardize first. Don't mechanize complexity.
A New Proposition Like Ryder, many companies are building value at current accounts with expanded product and service offerings, acting as marketing, service, and management extensions of the client companies:
  • Via FedEx Express Distribution Centers, companies are strategically placing inventory at 25 worldwide FedEx-operated warehouses so they can react quickly to customer needs. In some cases the entire spare-parts program for a company is handled from these centers. In its integrated repair and returns initiative, FedEx operates a PC-board repair factory in its Memphis warehouse. Customers of Bay Networks Inc., for instance, return boards directly to FedEx for repair and upgrades. FedEx sends out new boards, then repairs and upgrades the old boards and puts them back into inventory, cutting cycle time from 21 days to five days.
  • In the last three years, Xerox Business Services (XBS), the document-management outsourcing arm of Xerox Corp., has grown from $750 million to $2.2 billion, making it one of the fastest-growing businesses in Xerox history. Today XBS provides total document outsourcing from copying to complete mailroom services with its own staff to more than 4,000 clients. Alliances with business partners like Adobe, Microsoft, Novell, IBM, and Digital Equipment Corp. help Xerox bring a total solution to customers.
  • Responding to customer requests for materials-management expertise, W.W. Grainger Inc., an industrial distributor based in Lincolnshire, Ill., birthed Grainger Integrated Supply Operations (GISO). This division now partners with other vendors to provide management of indirect materials, including acquisition, possession, and plant-floor distribution with GISO personnel physically on-site at the client's operations. In a single-site contract with American Airlines, GISO provided a $500,000 savings on $2 million worth of indirect materials in one year via inventory optimization, product consolidation, and cost avoidance expertise. GISO's most unusual sourcing request? Bear repellent for downline stations on the Alaska Pipeline, delivered and applied.
Account Executives Account management in the relationship-marketing model expands responsibility up the executive ladder and focuses teams on specific accounts, all designed to increase the level of personal attention and expertise afforded profitable target customers. At Ryder, for instance, Chairman and CEO M. Anthony Burns has the GM account. Xerox CEO Paul Allaire and the other top officers of the company each have one large corporate account to support. A 100-person P&G multifunctional business-development team located in Arkansas is dedicated to the Wal-Mart account. Coca-Cola Co., another consumer-products devotee of relationship marketing, matches account-team expertise to the customer's business strategy--for instance, an operations-oriented team to serve a customer opening new outlets, and a marketing-oriented team for one redesigning its brand. Groupe Schneider, the French parent of Square D, has a global business-development team designed to network with all customer locations of Ford Motor Co. In North America Square D has a dedicated engineer for every Chrysler Corp. facility and has set up an extranet with Chrysler with organization charts and chat rooms to facilitate communication. To gauge its relationships in the field, Xerox regularly conducts surveys, focus groups, and round-table discussions to benchmark levels of customer satisfaction and loyalty for both Xerox and its competition. "We view customer satisfaction as our top priority, and we think there ought to be some skin in the game, if you will, with our people," says Bob Askew, vice president, customer satisfaction and loyalty, U.S. Customer Operations. "We have found that by putting customer satisfaction in the bonus plan for managers, we get a lot more mind share, and there is a better balance between customer-satisfaction objectives and financial objectives." And while sales reps are rewarded for acquiring new business, a portion of their compensation is based on retaining existing business as well.

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