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Employee Incentives Lead to CRM Failure?

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Have you set up your customer accounting system? Never heard of customer accounting? Let me explain.

Customer Accounting
Customers are acquired and produce sales, but there are costs to acquire and service them. Different customer segments produce different levels of short-term profitability, and the immediate cash flows they generate are represented in the monthly customer income statement. Customers have future value as well, and this future value is an asset to the company. This asset flows to the customer balance sheet, along with any liabilities created by acquiring and servicing the customer. The customer accounting statements are set up by customer segment so the entire financial profile of the company can be understood in terms of customer cash flows.

I don’t think many firms think about their customers in terms of financial statements, but they should. If they don’t, they could end up sabotaging their CRM efforts by rewarding their employees for CRM failure.

Increasing long-term customer value is a central idea in customer retention and CRM-after all, if you cannot increase the value of customers, then why bother with CRM at all? There may be some measurable operational efficiencies and cost reductions to be had with a properly planned “CRM” implementation, but without a measurable long-term increase in customer value, CRM could be a bitter pill to swallow. The operational efficiency approach to CRM looks like simply upgrading process and procedure with the latest technology-certainly a good idea, but not really CRM. CRM implementations need to create an increase in long-term customer value to be successful.

If the idea behind CRM is to increase the long-term value of a customer, why are all your employee incentive programs tied to the short-term periodic financial statements? Is it really in the best interest of an employee to take the “long view” on customer value, when this approach could very well mean a decrease in bonuses and a drop in the price of the stock? If the employee must make a choice between capturing long-term customer value and driving short-term personal financial rewards, the CRM efforts of the firm could end up losing out to employee self-interest.

You know a company is not just paying lip service to customer centricity when employee incentives are based on increases in customer value. To create such an incentive plan, a customer accounting system must be implemented.

Conflicted Values: Examples
In B2C (business-to-consumer) markets, the long-term value of the customer is often directly related to the method used to acquire the customer; the media, offer, and product can be used to predict customer value. Marketing campaigns can be designed to generate lots of sales in a short time, but these promotional campaigns tend to generate customers of low value. Conversely, highly targeted non-promotional campaigns will generate sales at a slower rate but tend to generate customers of higher value. A Marketing VP reaching millions of consumers with these campaigns has a choice to make between the two approaches. With a bonus system tied to quarterly sales, which approach will be chosen? And when the time comes to look at the customer value increase from CRM, what do you suppose the result will be?

In B2B (business-to-business) markets, the long-term value of the customer is often related to the difficulty of selling to them. Large companies have large budgets but large companies can also take forever to make purchase decisions. A VP of Sales for a B2B company is facing a sales shortfall six months into the fiscal year-along with a shortfall in annual bonus. While reviewing the list of prospects, the VP realizes the prospects with the highest long-term total sales potential will be the most difficult to close, and those with lowest long-term sales potential will be the easiest to close. Which prospects will the VP have the sales team focus on? And then people will wonder why the new sales force automation system did not increase customer value.

A Question of Time
Whether they know it or not, CRM planners are faced with a conflict between the customer accounting approach required for CRM and the periodic statement accounting approach of the CFO. It is this conflict, buried deep in the heart of the firm, which I believe ultimately results in “CRM failure.” Unless this conflict is resolved prior to the implementation of CRM, it will grow and begin to manifest itself in the CFO’s eyes as lack of Return on Investment (ROI), viewed through the lens of the periodic statement system. You must prove you know how to track customer value and establish benchmarks if you ever expect to forecast and measure the effects of a CRM implementation. And your employee incentive plans must be tied to these benchmarks, or employees have no reason to become “customer-centric.”

In order for CRM to be successful, there has to be a reconciliation of these two accounting systems and management styles in order for costs and benefits to be aligned and ROI proven out. The best time to do this is in the “pre-CRM” phase, before any serious discussion of organizational changes or software occurs. The firm should undertake a significant study of customer value and be very clear on how customer value accounting relates to periodic statement accounting as the very first step of a CRM effort. From this understanding, proper customer value-centric employee incentives can be designed.

If a customer value accounting system cannot be established, the first warning shot has been fired. The CRM project, if it relies on customer value enhancement to succeed, will fail. By deciding a customer accounting system is not possible to implement, management has demonstrated they do not have the will to look beyond the periodic accounting system, and in doing so, have made it impossible for the CRM project to generate adequate ROI.

Once customer value accounting has been established, the firm must then reconsider the composition of employee incentive plans. If these plans remain financial accounting-centric as opposed to customer accounting-centric, the firm is literally creating an incentive for CRM failure and encouraging employees to participate in and drive this failure through their action or inaction.

Related Resources
Customer Accounting Systems with Sample Reports. A case study by Jim Novo in the CRMGuru GuruBase.

Principles Make the Best Practices. David Sims feature article; his first principle is “restructure employee compensation to reinforce CRM priorities.”

Connecting Customer Accounting with Periodic Financial Reporting. Jim Novo post to CRM.Talk EMEA, Feb. 2002.

Customer Lifetime Versus Short-term Value. Another Jim Novo post, Jan. 2002.

Copyright 2003 by Jim Novo. All Rights Reserved in All Media

*Originally published at CRMGuru

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Jim Novo has nearly 20 years of experience using customer data to increase profits. He is co-author of The Guide to Web Analytics and author of Drilling Down:Turning Customer Data into Profits with a Spreadsheet. If you want more visitors to take action on your web site, try using the free conversion metrics calculator, downloadable here. If you need to sell more to customers while reducing marketing expenses, get the first nine chapters of the Drilling Down book free at http://www.drillingdownbook.com.

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Employee Incentives Lead to CRM Failure?
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