by Jim Cash with Keri Pearlson

The New Mandate for CIOs: Meet The Customer

Sep 01, 20057 mins
IT Leadership

How leading companies generate revenue has evolved over the past 20 years: from managing markets to managing market segments to managing customers. This shift creates significant issues for the board of directors and the entire executive team, including the CIO. If this change in strategy hasn’t affected your company and industry, you are in a distinct minority.

For the average CIO today, external customers are not a primary concern. Yet the CIO is uniquely positioned to help the executive team address customer management, for two reasons. First, the CIO is usually one of the most senior executives with a broad process view of the corporation. It is the role of information systems to span functional, geographical and hierarchical boundaries. Second, the way information is collected, stored and delivered can either help or hinder the corporation in managing customers. The CIO is best placed among executives to understand what these information needs are and to ensure that data systems can deliver the information needed by the company to support this marketing requirement.

The Right Way to Focus on Your Customers

The traditional belief that simply increasing market share translates directly into higher profitability has been proven false in our current economy. You need look no further than the U.S. airline and automotive industries to note that market share leaders are not the most profitable companies.

Deciding who to serve is a critical decision for any organization. One of the world’s experts on this topic, Harvard Business School Professor Das Narayandas, says, “Who we are affects who we can serve, and who we serve affects who we will be.” In today’s business world, a company’s customer set defines what products and services it will offer.

Another of a company’s most important decisions is identifying who should be excluded from the customer list. Serving a specific customer can sometimes preempt your ability to serve others. The most obvious example is working with one large customer on a proprietary component for its product, which may require an agreement to not provide similar technology for its competitors, thereby excluding other potential customers. Sending unprofitable customers to your competitors can sometimes actually contribute to your comparative advantage.

Although executives usually acknowledge the importance of customer targeting, in many companies salespeople are left to develop a de facto marketing strategy at the customer level. As Narayandas points out, since a salesperson’s behavior is directly affected by compensation schemes, letting salespeople determine whom to sell to is one sure way to get into trouble. Segmenting and prioritizing customers must be an executive-level decision.

Narayandas outlines four steps for customer management:

  1. Develop a clear vision of the customers to serve and not serve.
  2. Develop and manage a portfolio of customer relationships-the set of activities that serve the customers.
  3. Monitor the health of customer relationships-understand whether customers are satisfied with the activities designed for them.
  4. Link the customer management effort to economic rewards-that is, the benefits to the company and its employees for successful management of customer relationships.

Marketing Information Systems

As we transition from the Industrial Age to the Service Economy, customer retention and loyalty have become better predictors of profitability than have traditional measures of market share. Scale is still important, but it must be attained with an increased focus on customer selection and management that facilitates the design of an efficient product/service delivery system.

Understanding which customers are profitable is a matter of studying what it costs to serve each customer and the price of the products or services they buy. Surprisingly, in most companies there is little analysis done of the cost-to-serve and prices, and frequently no relationship between them.

Obviously, when prices or the cost-to-serve is too high, the situation is not sustainable. Success, then, comes from building a portfolio of customer relationships in which customers pay a fair price for goods or services developed at a profitable cost-to-serve for the corporation. This portfolio is built through a delicate combination of product development, service, sales incentives-and information management.

The CIO’s Role in Reaching External Customers

As a CIO, you have the unique ability, and therefore the responsibility, to ensure that marketplace discussions are focused on the customer at a very granular level. Most organizations have not restructured to reflect market changes and shifting customer requirements and power. Industrial Age organizational structures still dominate many companies. They were designed to implement mass production and vertical integration strategies, rather than the highly selective customer management strategies that companies need now.

For example, a large computer manufacturing company in the early 1980s was organized by relative size of computersystems: a small systems division (including PCs), a mini-computer division and a mainframe systems division. For many years, this product focus had provided significant efficiency in the development and delivery of the company’s products and related services. As long as customer buying power was low and there was minimal overlap of customers across the business unit boundaries, the product-focused organizational structure was appropriate.

But by the mid-’80s, customers wanted to implement MRP-II solutions that required highly integrated applications, which used systems from all three divisions. Customers were required to navigate through the company’s organizational structure and cross the business unit borders. It took the company six years to understand and respond to these emerging customer needs, since the internal organization (which was initially designed with customer needs in mind) was blind to this evolution. Until executives recognized that the market was requesting integrated solutions, the company continued to be product-focused and to build systems for each siloed business unit.

An organizational structure that isn’t aligned with marketplace requirements causes misinterpretation of important data. When customer requests are viewed through a product lens, a company might respond in a way that actually conflicts with customer needs, as the computer maker did. CIOs must look to the marketplace and customers to ensure that information systems are responding to their requirements, regardless of how the company is internally organized.

The CIO’s role is to ensure the data that matches marketplace and customer requirements is brought to light and brought to the attention of the rest of the company. Doing this requires a horizontal view of the business, and the CIO is one of the best C-level executives to have this view. He or she has allies in the organization, such as the supply chain owner and the quality management owner. But the CIO is often the senior-most executive with this view. CIOs are best-positioned on the executive committee to present this horizontal view.

CIOs must keep their executive colleagues apprised of several important areas:

* Changes in customer and marketplace activity that could affect the company’s goods or services

* Internal organizational structures that potentially could be at odds with customer needs

* Information systems that target only the present, or are based on an outdated past perspective, and thereby obscure future views of the business

These responsibilities hold significant ramifications for CIOs. First, you must make sure that your company is fully committed to the shift to customer management. Second, you have to ensure that the information your corporation collects is parsed and granular enough, down to the customer level, to enable customer management.

This may mean driving a set of activities aimed at changing the sales-force data-collection activities-something the CIO doesn’t typically lead. It may mean driving a change in the marketing and sales processes to ensure availability of customer-level data. It may mean crafting a vision to make sure the company is positioned to appropriately respond to a shift from market segments to customer management. For some business leaders, that is a hard pill to swallow.

It’s essential that you navigate these political hurdles, however. If your company can’t stay close to individual customers and change in the ways that they require, then you will find-as many executives have in the swiftly changing economy of recent years-that your company has lost the ability to sustain itself.

James Cash is the emeritus James E. Robison Professor of Business Administration at Harvard Business School, where he was also senior associate dean and chairman of HBS Publishing. Keri E. Pearlson is a research director with The Concours Group and coauthor of Managing and Using Information Systems.