Gearing your customer service correctly – the key to profitability

The economic recession has led to a demand for a more realistic approach to business, and in particular, with regards to the servicing of customers

July 29, 2010

By Steven Woods, South African Country President at Compass Management Consulting

The economic recession has led to a demand for a more realistic approach to business, and in particular, with regards to the servicing of customers.

While customers are indeed the most valuable asset to an organisation, they also are the biggest strain on its time and resources.

In today’s business environment, organisations need to develop a deeper insight into their customers – which entails being able to distinguish between highly profitable and non-profitable customers, and all those in between.

Service levels, while they may be met or even exceeded, are often geared far too highly. This may come as a surprise as many companies are focused on ensuring service levels are increased, usually driven by a fear of customer attrition. However, more than often, the balance is tipped and in some instances, customers are ‘over-serviced’, eroding the profitability of the customer. In order to maximise profitability while still retaining customers it is vital for businesses to optimise levels of customer service to meet the needs of the customer and the business, in order to ensure profitability.

However, optimising levels of customer service for both parties is a balancing act. Retaining customers is vital to the success of any organisation, as it is well known that the cost of chasing and winning new clients far exceeds that of keeping your existing customers. Added to this is the competitiveness of any marketplace, meaning that an organisation may invest a lot of time and effort into a pitch to a new customer that might not be successful. So it is important that service levels remain high enough to keep customers happy, while cutting out unnecessary services or services that are geared to highly, in order to improve profitability.

One way to optimise levels of customer service and to ensure that they are not geared too highly is to actively manage the customer experience by balancing service level agreements without compromising on service quality.

And in order to do this, organisations need to not only understand their customers, but also their enterprise itself.

Benchmarking an organisation against organisations of similar size in the same industry using fact-based reference data can reveal a lot of insight into business operations and reveal opportunities for improvement as well as assist in developing a specific and quantifiable programme of change built on detailed, factual and actionable recommendations. Performance criteria can then be set based on leading practice.

Internal analysis can also help organisations to better understand their customers. While a traditional approach might advocate that organisations with large revenue must therefore be profitable, this is often not the case.

Understanding the true cost of customers in terms of the cost to service them balanced against the revenue they bring in gives a much clearer picture of the true profitability of customers.

If a client is over-serviced, the cost thereof erodes the profitability of the particular client. This is fairly common, especially in the IT space, when a provider under delivers in one area that they may not be strong in and attempts to make up for it by over delivering in areas in which they are strong. For example, an outsourced or in-house IT service might excel in database management yet under-perform with desktop support. The service associated with database management will be much higher than with desktop support, making up for the ‘revenue lost’ in this area.

The problem with this is, while customers may accept this, there is a distinct risk of losing money for the sake of the relationship by delivering levels of service far beyond what the customer actually needs in some areas, and delivering inferior levels of service in others. Rather than simply compensating for under delivery, it is more sensible, profitable and efficient to address underperformance issues and deliver adequate service on all levels.

Optimising customer service levels and better managing these not only improves profitability, it also helps organisations to become more productive and efficient. By not over servicing customers it frees up employees to take on more revenue generating tasks, changing their role from reactive customer servicing to proactive revenue generation.

More effective levels of customer service also mean that fewer people are needed to handle the tasks, response times and solve times for queries can be handled faster, so head count can be reduced. This can also help to increase profit, as head count is one of the biggest expenses for an organisation.

The bottom line is: profitability in terms of customer service comes down to understanding both the business and the customer, so that service levels can be balanced in a way which keeps the customer happy and offers the levels of service they need, while still remaining profitable for the provider of the services.