Thursday, March 26, 2015

The Missing Customer

It is time to transform the Business Case model that is used by companies for approving projects.  I have seen hundreds of business cases. I even wrote a book on how to develop them.  But I am now convinced there is a critical weakness in them.

The customer is usually missing.

A project business case normally will evaluate a project opportunity by comparing the benefit and the cost through a Return on Investment (ROI) formula.  Most companies now incorporate the best practice of also evaluating whether the project is aligned with the business strategy.  If the project is aligned and the benefit is greater than the cost, the business case recommendation is to do the project.  
This is a company-centric approach.  The customer is missing from this evaluation.  Sure, sometimes the business strategy may be to increase customer satisfaction or grow market share and revenue, but the measures used are always internal measures.  The business case evaluates the cost to the company and the benefit to the company.  While I agree that those are important, I also believe that a better decision will be made when a company includes the consideration of the cost to the customer and the benefit to the customer.

Business Value Chain

Business transactions require a customer.  Until an individual or organization has decided that they value something more than the money in their bank account, there is no business transaction.  (I am ignoring for the time being the coercive power of government to take money through fees, fines and taxes.)  The business value chain starts with a customer decision and ends with the fulfillment of the customer order and payment for the product or service.  It is only when the chain of events that makes that happen occurs that value is created.  Creating new products that no one wants does not create value.  Offering services that no one needs does not create value.  Building facilities and systems that do not improve customer service or customer satisfaction do not create value.  These may create assets that we put on a balance sheet, but non-performing assets have no value.

To fully understand the business value chain, you must include the customer’s actions and decisions in the process.  If you expect the customer to purchase something because of this project, the value chain should start with the customer condition which results in the recognition of the need for the product or service.  The business value chain should then proceed through the steps and decisions made by both customer and your organization to get to the point of a sales transaction.  Depending upon the type of product or service, the business value chain continues through the steps of creating and delivering the product or service, including work done at your suppliers.  Of course you need to include the final invoice and payment at the appropriate step.  Even then the business value chain is not complete.  It should include the initial use of the delivered product or service and the resultant customer satisfaction or irritation as they experience the product or service.

Only when you have fully mapped and understood the business value chain will you understand where value is created or potentially where value is destroyed.  Otherwise, you may get a local optimization that improves value at one step yet decreases the value at many other steps.   A classic example of this is the phone systems where the caller has to listen to a menu of options and then select a number.  This reduces cost for the company operating the phone system, but it can be a problem for customers.  I have been on several systems where I went through multiple layers of selection, but there was no suitable option for the purpose of my call.  Eventually I get to a point where I am put on hold for many minutes waiting for a live body to pick up the phone.  This has been so annoying that there are several business that I refuse to do business with now because of this system.

Business Case Value

So let’s go back to the business case.  How does a company account for the value to the customer?  How do you calculate ROI when the “return” for the investment does not occur in your company?  I suggest that companies calculate two ROIs for each project, the internal ROI and the customer ROI.  The internal ROI would be calculated in the same way that a typical business case ROI is calculated.  Use internal costs and internal benefits to calculate whichever method your company normally uses, such as the NPV, breakeven, or payback method. 

But a second ROI should be calculated and this is the ROI for the customer.  I recommend that this be done for a single customer and that the calculation be a “static” ROI instead of the dynamic “ROI” calculations, like NPV and payback that include a time factor in the calculations.  The static ROI would be the net benefit divided by the cost to acquire, expressed as a percentage.  The most difficult portion of this ratio will be to calculate the net benefit.  Some types of customer benefits are “hard benefits,” meaning they are measurable and can be easily converted to a monetary value.  This would include productivity savings or performance improvement.  But some benefits are “soft benefits,” which are much harder to quantify and may vary significantly from customer to customer.  This would include brand affinity, peace of mind, or societal responsibility.  The only ways to place a value on these is to talk to the customer.  It is likely that there will be different customer ROIs for different customer segments.  I’ll discuss how to do this in a future blog post.

With internal ROI and customer ROI, a company can make a better decision about a project.  High customer ROI will likely lead to enhanced project impact and future benefits for all parties.  A low customer ROI will likely lead to reduced project impact and alienation from your customers.      

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