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Generating Revenue from Service

Written By: Steve Downton
Published On: July 10 2003

Introduction

Service, generating revenue is a concept not normally considered. The normal assumption is that service, at best, can become more efficient and thereby save money and reduce costs. Applying the real concept of Customer Relationship Management (CRM) allows the possibility of a profitable service organization as not only feasible but expected.

CRM is designed to provide a single view of the business, in other words the customer doesn't identify one person, or group, as salesmen or another as service - this is done through business cards / job descriptions and the like (even down to the cars provided or dress code expected). The customer has been trained to treat them all differently, and more importantly we have trained these individuals to act differently. The assumption is that a salesperson can't service and a serviceperson can't sell. By applying the true concept of a CRM solution, such rigid demarcations do not need to apply. This is shown schematically in Figure 1 where CRM acts as the lens for the customer to focus all the different operations into a single view for the customer.


Figure 1

If the skill of CRM is to develop customer relationships, then there is a legitimate argument to promoting the service team as potentially better equipped and therefore more able to establish a long term relationship with the customer, than the sales team.

The biggest hurdle to overcome is to get the business to realize this as a potential revenue generator. In many businesses, revenue is considered the prerogative of the sales department and is why most sales personnel are measured by volume of sales and not margin. In addition, there is an assumption that as long as the volume of sales is maximized and the rest of the operation is cost controlled, the margins will be delivered. In most service environments this is not the case, particularly when sales become value based, not cost based: the need to manage by margin, as well as volume, puts a very different pressure on the business. This is particularly true when the emphasis in the business moves towards customer relationships rather than product-based selling.

Achieving a targeted return on investment (ROI) depends on how a project is set up and the way it is viewed in the business. If the key value of a CRM solution is to produce satisfied customers and improve customer retention, it does not seem sensible to value only cost reduction. Focusing on Customer Retention and Customer Satisfaction and their delivery, will improve the bottom line. Given that one of the major advantages of CRM is increased customer retention, and that research indicates that re-acquiring existing customers costs one tenth of the costs of acquiring new customers, then the value of a CRM, solution and its significance becomes obvious. A reduction in selling costs will result, and if the percentage of retained customers rises by 10%, then the significant increase in revenue will be easy to measure.

Integration for a Successful CRM

A CRM solution, to be successful, has to support cross-business processes and a number of operations within the business, from Marketing to Service, including Sales. This integration of what, historically, has been treated as very separate parts of the organization, provides the opportunity to rethink existing operational mechanisms.

The most obvious is the role of sales and service working together under account managers who are associated with customer retention and who manage accounts or - in the new jargon - manage customer relationships. If such account managers were part of service, not sales, this would release the sales team to focus on new sales and could significantly increase sales performance while enhancing existing service-led retention projects.

The following outlines, in very simple terms, a generic structure of the way in which businesses are established when selling, and shows the possible impact of applying the practical aspects of a CRM solution into day-to-day working.

The two scenarios consist of a renewal contract and new business. It becomes clear that there is very little significance in the team composition though numbers will vary according to the client.

Scenario 1 Renewal Contract

In most cases the account team will use existing information on the client to understand the current situation.

In the worst case they will only look at the opportunity to sell new products, parts exchange, or contract extension. The one certainty is that they will sell whatever brings the highest commission. This is not a risk if the commission structure is effective and designed to drive the right behavior, but, in some cases this is not so and sales, in true terms, can drop, but the full sales commission will still have to be paid out.

In the best case the account team will review the client with the following departments:

  • The Commercial group: to examine the existing contract to determine the profitability of the client and the potential to maneuver and create options for negotiation.
  • The Service group: to assess Service levels delivered and the Customer Satisfaction performance currently, and historically, delivered.

If it appears that the renewal will become competitive and the client is no longer acting as a retained client then the Sales group will be invited to assess the competitive nature of the bid and help win the sale, on the grounds that their expertise and their desire to earn commission will defeat the competition.

Scenario 2 New Business

In most cases, the steps outlined in the best case example above, would be reversed in that the sales department would be the first to review the opportunity and the commercial department then would be asked to help prepare the bid, and the service department brought in to see if the proposal could be delivered to the proposed costs. Information may be hard to come by and require additional research from the Marketing Group.

The difference in cost, to most businesses, of winning new business and retaining existing, is much smaller than 10 times and at best is more like 2 times under these scenarios. In reality, not enough focus is placed on winning new business and those responsible for retaining existing business do not usually receive rewards, so they often become cynical, and not supportive to the process. This point has to be carefully considered as businesses are beginning to put improved measures in place and thereby recognize the true costs and values across the business.

In a product-centered environment, service support was very much ancillary to the product, with the business placing the reliance for success on sales supporting innovative leading edge products. Then, the quality and caliber of the sales team was paramount, justifiably, as the margins and costs of products were tightly controlled, so providing sales commission on volume made sense. As customers, from our own experience, we know that this is no longer, acceptable; amounts are readily spent on keeping customers happy after the event, yet most businesses maintain the product centric view, paying lip service to customers' needs and underestimating the value of their service organization in delivering renewals at a fraction of the cost of sales teams.

Summary

Reduced costs of sales as a strategy to retain existing customers, can operate as a consequence of not having to pay sales personnel to deliver them, as it is considered an easier sale because they are existing and satisfied customers who have been provided with good service. Many businesses today measure customer renewals and customer retention as a gauge of customer satisfaction of their service operation, but then pay their salesmen commission for delivering on this service performance. This sets a dangerous precedent by effectively paying the sales department for the efforts of the service delivery department.

A CRM solution, if properly used, will deliver the necessary visibility of the situation, and provide clarity on the value of the service operation to customers and should enable real cost savings to be made. If this proves to be so, it is necessary to assess how a CRM solution should be valued, and how the investment should be assessed in terms of return, considering the total marketing sales and service operation. In addition, and one of the lynch pins of CRM, is that the best customer is one who is loyal because of their satisfaction with the service provided, and does not require heavy selling techniques to buy again. This is obviously a long-term objective, not achievable at a stroke.

The real question is to ask how much is being spent either selling to customers who have no intention of buying because of the way they have been treated, or selling to customers who will buy without being sold to because of the way they have been treated. If a customer needs persuasion to make up for previous poor service performance, then earlier investment in service might save a much bigger bill. Ultimately a CRM solution can provide a valuable addition to increased revenues generated through cost effective renewal sales volume as well as supporting improved selling techniques and thereby raising the margins achieved.


About The Author

Steve Downton established Downton Consulting to provide effective business advice within the Services Sector specializing in guiding senior management teams and supporting service operations both large and small to improve their performance profitability and deliver service excellence.

steve.downton@downtonconsulting.com

www.downtonconsulting.com

 
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