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.
No comments:
Post a Comment