Management Consulting News

Management Consulting News - Vol. 4, No. 10 - October 4, 2005

In This Month's Issue:

Welcome: What's Your Web Site Done for You Lately?

Meet the MasterMinds: Don Peppers and Martha Rogers Know the Real Value of Customers

Upping the Ante on Creativity, by Luc de Brabandere

An e-Newsletter on e-Newsletters

What the Media Wants from Consultants

More Business Planning for Consultants

Items of Interest

Coming Attractions

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Welcome: What's Your Web Site Done for You Lately?

I stepped gingerly onto the bathroom scale, glared at the ~~disaster~~ reading, and concluded that my best option was to have lunch and figure out what to do next.

Objective scrutiny of ourselves—or what we create—isn’t easy. But the best consultants always look for ways to improve, so it’s routine for them to step back and look at the big picture.

What about our Web sites—are they up to snuff? To see if we’ve made progress in building better sites, I did some research on the marketing capabilities of consultants’ Web sites. I looked at sites of the mega-consulting firms, medium and smaller-sized firms, and independent practitioners.

From slogging through consulting Web sites, I learned that too many of our sites just scratch the surface of the Web’s potential marketing power. Why waste valuable time and money on a Web site if it doesn’t help bring in new clients?

If you want to know what your Web site does for you, take our confidential Guerrilla Consulting Web Site Self-Assessment. It will only take five minutes, and you’ll receive a customized report, which will be available immediately after you complete the assessment. The results will also be sent to your e-mailbox.

It’s easier than facing the scale and it doesn’t cost you a dime.

Take the Guerrilla Consulting Web Site Self-Assessment.
http://www.automatedassessments.com/assessment.aspx?id=144

Enjoy the newsletter and, if you have any comments, please send me an email.

Mike McLaughlin
Editor, Management Consulting News

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Meet the MasterMinds: Don Peppers and Martha Rogers Know the Real Value of Customers

Business strategists Don Peppers and Martha Rogers are founders of the Peppers & Rogers Group and coauthors of seven books, including Managing Customer Relationships, The One to One Future, and Enterprise One to One.

Their most recent book, Return on Customer: Creating Maximum Value from Your Scarcest Resource, presents a new way to measure the long- and short-term value created by a company’s most important asset—its customers.

MCNews: Let’s begin with some definitions. What is Return on Customer?

Peppers: We define Return on Customer in terms of the total value created by a customer. Start with the sales you generate from a customer in the current period, and add any increase or decrease in the customer’s lifetime value during the period. Then, divide that total by the customer’s lifetime value at the beginning of the period. This is just like ROI, but we’re talking about customers rather than capital.

If you treat customers really well and their lifetime value goes up, that action creates value for your company, even though you don’t collect cash for that until sometime in the future.

We know that a customer’s lifetime value can change today as a result of today’s actions. If you treat customers really well and their lifetime value goes up, that action creates value for your company, even though you don’t collect cash for that until sometime in the future.

But just because you don’t collect the cash until later doesn’t mean you haven’t created value today. If your CEO announced today that you expect higher earnings two years from now, your stock would go up today. Return on Customer is based on that principle—that the actions you take now create value now.

MCNews: Can you briefly define what you mean by a customer’s lifetime value?

Peppers: Sure. A customer’s lifetime value is the net present value of the future stream of cash flow attributable to all of a customer’s behavior, both positive and negative.

For any operating company, all cash flows come from customers. If you add up all the cash flows from your current and future customers, you have the cash flow of the company. The sum of the lifetime values of all current and future customers is a quantity that Martha and I call customer equity, and it is virtually equal to the discounted cash flow of an operating company.

MCNews: So is the lifetime value approach to company value similar to the discounted cash flow (DCF) analyses used to evaluate investments?

Rogers: It’s not really that different, but it may be more reliable. When you calculate the cash flow from a particular investment, usually you’re working with aggregate figures. You look at market conditions, and you make estimates, forecast trend lines, and so forth.

You may base your discounted cash flow analysis on a dozen or maybe a few dozen data points. The decisions you make using DCF could impact thousands or perhaps millions of customers.

But if you’re tracking the lifetime values of those customers, you don’t use just a few dozen data points. You literally have thousands or millions of data points. That calculation is a lot more stable, a lot more dependable.

Assuming that you understand lifetime value and have some experience using it, at a very minimum, it gives you a way to check the cash flow figures you came up with using general trend lines.

Focusing exclusively on return on investment may be driving less than perfect decisions. That opens up a whole new way of thinking about the challenges a Chief Marketing Officer faces.

MCNews: Can you give us an example of how to use the Return on Customer approach?

Rogers: There are many applications. For instance, we think Return on Customer is helpful in thinking about broad financial strategies, including mergers and acquisitions. Let’s say one phone company is deciding whether to buy another. Of course, they look at the customer list, but they focus mostly on the infrastructure—how much wire is underground, how much is overhead, how many trucks do they have, how many phone numbers are in service?

Instead, we find it’s more useful to figure out the Return on Customer at both the parent company and the target company. Then, we determine if the Return on Customer for the combined company would be higher or lower than that of the individual companies.

MCNews: Are many companies currently using the lifetime customer value model?

Peppers: According to most surveys, only about 20-25% of companies make any attempt to measure lifetime customer value.

Rogers: More importantly, some of the measures that are in use can paint a false picture. Some companies correlate customer equity directly with satisfaction scores. Although customer satisfaction can help determine lifetime value or even customer equity, it certainly is not something we like to rely on all the time.

Peppers: Yeah, you’re feeling the tail to deduce that it’s an elephant.

MCNews: In general terms, how do you determine the lifetime value of a customer?

Rogers: Instead of reporting where you’ve been, we predict where you’re going to be. We don’t just look at the past—how much your earnings were this quarter, or what your same source sales were for the past quarter as compared to the same period last year. We want to know how much your customer base is going to be worth.

We hold people accountable not only for current revenues but also for the changes today in the future value of customers. That’s a very significant metrics breakthrough.

We rely on four measures, or leading indicators, and combine them in a way that works for a particular company and is justifiable. The four leading indicators help us understand how much your customers will be worth tomorrow. And, by the way, that includes your current customers and also the customers you don’t have yet.

We use the right combination of variables and weight them properly to see where you’re going. We think the most important variables are behavioral, life stage, attitudinal, and then the usual measures such as churn rate, share of customer, and others.

Peppers: The leading indicators point to the right financial answer. And that is a financial justification for the principle we started out with: to create the maximum possible value for shareholders, companies ought to concentrate on creating maximum possible value from their customers.

MCNews: Do the leading indicators influence a company’s customer practices?

Peppers: Customers are the productive resource. I can push a customer to try to get him to buy now, please buy—here, how about some money off? The more I do that, the more likely I am to damage his long-term value. And yet at the same time, I do need to harvest some money from him today. I can’t live just on future value.

It’s a balancing act—like farming. Do I replenish the land, practice conservation, and keep the land productive for many years? Or do I plant cash crops on every acre every year and burn my land up? Most farmers don’t do the latter because that’s stupid. They know that the land is a scarce resource for a farm just like customers are a scarce resource for businesses.

MCNews: So is there an optimum balance between short-term, aggressive marketing and long-term value creation?

Peppers: That balance is different for different customers. You have to optimize for each customer.

Is there a single criterion you could apply that would make it appropriate for each customer? Perhaps it would be this: Any given customer is going to create the most value for your business at about the time he’s thinking that your business creates the most value for him.

Of course, you must have the right product, price, and service. But assuming that price, service, and quality are on a par with your competitors, whom do customers prefer to deal with? They prefer to deal with companies they trust. What customers really want is a company they can trust to act in their interests.

Research confirms this, but it’s only logical. If I think you’re acting in my interest, then I’m going to want to deal with you more, not less. Every time I deal with you I benefit.

So this leads us to a very basic argument: If you want to maximize Return on Customer, you have to create a culture in your organization designed around earning and keeping your customer’s trust. And keeping that trust may mean giving up short-term opportunities for gain.

Perhaps refusing a refund is a short-term opportunity for gain that might destroy long-term value. Maybe an overly aggressive sales approach leads to long-term value destruction.

MCNews: Isn’t the pressure on executives to produce short-term earnings so great that they often sacrifice long-term value to achieve those earnings?

Rogers: Yes. They know they’re in a vise and they come up with all sorts of non-financial metrics—things like the balanced scorecard—to solve the problem.

Duke University ran a study and found that of the 400 senior executives who were interviewed, more than 75% of them said that, if it would help produce the earning they needed this quarter, if it would help them get the results that Wall Street demands, then they would be willing to give up economic value of their companies.

Now that’s appalling because, in theory, that short-term reporting is supposed to be for the shareholders’ benefit. When high-level executives admit they would be willing to give up economic value to improve performance for this quarter, that’s not good for shareholders. But that’s what we’ve driven everyone to.

We’d all be better off if those executives used a measure that would give them credit for the numbers that they make this quarter but, at the same time, hold them accountable for how much of the company’s real value they had to use up to achieve those earnings.

MCNews: If you had just one piece of advice for an executive embarking on a Return on Customer journey or process, what would it be?

Peppers: Martha and I might have different answers. I would say that it depends on the type of company we’re talking about. If a company doesn’t have great data, systems, modeling or statistical capabilities—if they have to work hard just to get any customer numbers—I would say focus on the philosophy of earning customer trust first.

Even before it’s demanded by Wall Street, Return on Customer will help us make better decisions about the kind of company we need to be.

Change your organization so that you put the customer truly at the center of it, and then adjust the metrics as and when you can get the data. For data-rich companies, I would suggest that they try measuring Return on Customer and begin holding people accountable for it. What do you think, Martha?

Rogers: We’ve had clients who said something like this to us: We don’t know how long it will be before Wall Street starts demanding that we measure Return on Customer and, of course, we want to be ready when it comes. But we’ll just be a better company if we put this in place.

Even before it’s demanded by Wall Street, Return on Customer will help us make better decisions about the kind of company we need to be. We’ll have a better business model and our people will be better. We’ll be able to balance short-term with long-term issues and hold people accountable for the right things.

MCNews: Thanks to both of you for your time. It’s a great concept.

Find out more about Don Peppers and Martha Rogers at www.1to1.com and at www.returnoncustomer.com.

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Upping the Ante on Creativity, by Luc de Brabandere

As management consultants, most of us no doubt secretly enjoy being portrayed as the “smart people” who get called in to fix client problems. Everyone likes to be flattered, and consultants are certainly no different. But let’s be honest—our clients are smart too. The real reason management consultants get a seat at the table is that we bring a fresh perspective on how to solve thorny problems—or to find where they may be lurking—and the experience to turn that new perspective into a better reality.

As I argue in my latest book, The Forgotten Half of Change: Achieving Greater Creativity Through Changes in Perception, this ability to see things in a completely new way is the essence of creativity. And the more creative we are, the more value we can potentially deliver to our clients.

But the question is this: Can we make ourselves more creative?

Creative vs. Innovative Thinking

The short answer is ‘yes’—absolutely. But before saying how, let me first make an important distinction between two kinds of thinking that are completely different, but that we often run together—creativity and innovation.

Both relate to ideas. The difference between them comes down to how the ideas are born. Innovations arise from looking at how things are—existing business operations and processes, for example—and considering how they might be “tweaked” to make them better. This is our left brains, our old reliable analytical engines, at work. Left-brain, innovative thinking is fundamental, and something we should be, and usually are, doing all the time.

Creative thinking, on the other hand, comes from stepping out of our day-to-day reality and seeing things from a drastically new perspective. This radical change in viewpoints allows us not to just tweak the system, but often to replace it wholesale with something that’s dramatically superior, and which is often described later as coming from “out of the blue.” Call it a “paradigm shift” or a “Gestalt change”—whatever you like—what it boils down to is right-brain, non-analytical activity.

Astonish Yourself into Creativity

But how do we do invoke the power of our right brains? How do we generate more creative ideas for our clients?

I suggest that the best way to have creative ideas is to have lots of ideas. And to do that, we need to reawaken something we all have within ourselves: our ability to be astonished by what goes on around us. And, perhaps even more so, by what doesn’t.

The old saw is true: The world is full of surprises. Only most of us don’t see them. Religious and secular sources alike remind us of this. The Talmud, for example, tells us that we don’t see the world as it is; rather, we see it as we are. The English philosopher Francis Bacon makes roughly the same point when he notes that people prefer to believe what they prefer to be true. How many executives today, particularly in companies that are doing well, bother to ask themselves whether their entire business might be vulnerable? Probable answer: Not many.

For example Microsoft—as executives there will tell you—initially completely overlooked the importance of the Internet. Ken Olsen, the former CEO of Digital Equipment Corporation, was confident (in 1977) that there was no reason people would ever need to have a computer at home. In both cases, the underlying problem was a lack of astonishment—an inability to be surprised by an idea and captivated by its potential.

Fortunately, we can cultivate our ability to be astonished by taking a second look at something familiar, by exposing ourselves to different viewpoints, by questioning our questions.

The Varieties of Astonishment

There are (at least) four kinds of astonishment, and to activate our latent potential to be astonished, it helps to know what they are.

First, there is astonishment over something that is. Over a traffic light that is still red; or a bad cup of coffee; or a statement by a friend or colleague you thought you knew well. Next, there is astonishment over something that has always—or long—been, but that you have never noticed until now. We’re all familiar with this—at suddenly “discovering” there is a photo shop or a pharmacy along your usual route to work, even though it has clearly been there for years.

The third kind of astonishment happens when something, or someone, that has always been there no longer is. It happens when you are shocked to learn that the friend you thought you knew is no longer the same person. Something about that friend has changed, but you didn’t notice it until now. And only then do you realize that the change isn’t new at all.

The fourth kind of astonishment is perhaps the most important of all for today’s executive to cultivate: astonishment at what is not. The dot-com era, despite its (now) obvious excesses, fundamentally changed the way we do business and communicate because some individuals were able to be astonished by the lack of commercial use of a burgeoning Internet. Similarly, several low cost airlines are currently booming because some people were surprised that there wasn’t a more efficient alternative—an insight that enabled them to go out and create one.

Paving the Way for Creativity…and Happier Clients

At the end of the day, clients pay us to bring fresh, creative perspectives to bear on their problems. And it’s what we tell them we can do. Awakening our power of astonishment is the best way to deliver on that promise.

Astonish yourself into new perceptions, and you seed the ground for creative ideas. Be astonished—at what is, what always has been, what has changed, and at what could be. Learn to question what’s behind your newfound surprise, and you will be a long way toward generating the ideas that you and your clients need.

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Luc de Brabandere is a vice president in the Paris office of The Boston Consulting Group, an international strategy and management consulting firm. He is the author or coauthor of nine books and a number of regular columns, and is one of Europe’s best-selling authors on business innovation.

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An e-Newsletter on e-Newsletters

Michael Katz, founder of Blue Penguin Development, publishes a great e-newsletter on e-newsletters.

Here’s a sample of Katz’s advice to readers:

Publishing Regularly

“Reader relationships are like those old fashioned hand pumps. It's no surprise that when you stop pumping, the water stops coming out. But that's not all. When you stop pumping, the remaining water in the pump drops all the way back to the bottom of the well.”

Balancing Content and Promotion

“It's fine (and important) to promote your business within the pages of your E-Newsletter. After all, the point of this is to drive business, not simply send out content. That said, you'll get (much) more mileage from your monthly efforts if you draw a clean line between the information your readers want, and the information you want them to have.”

Dealing with Cranky Readers

“99% of the people you come in contact with are going to be as nice as can be, but every once in a while, somebody's going to try and poop on your car. Don't let it throw you and don't get drawn into somebody else's bad day. Who knows, resisting the natural urge to fight back might even earn you a new client now and then!”

In addition to his newsletter, Katz also publishes a Do-It-Yourself E-Newsletter System. It’s a great multimedia product that gives you a step-by-step plan for creating your own newsletter.

If you’re interested in reading about it, I’ll give you the link with a warning: Katz has one of those long sales letters. But his pitch is very low on the hype-o-meter. Here’s the link: http://www.enewslettersystem.com/.

Just so you know—I’m not getting any kickbacks for recommending this product. It’s just a great resource, particularly for consultants.

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What the Media Wants from Consultants, by John Baldoni

Once you connect with media representatives, you need to be prepared. Consider the points below; each point is not relevant to every interview but the overall structure will help you focus on making the best possible contributions.

So what’s the media looking for? Members of the media:

Want stories. Good articles are really comprised of stories about people—how and what they do. Think of success stories about clients you can share with the media. Make certain you get permission to use a client’s name. If you can’t get that permission, you can disguise the client’s identity, “a manager working in a large industrial firm,” but that has less impact.

Love quotes. Do you have clients or client organizations willing to speak on your behalf and be quoted for the media? This is especially important for industry publications. For example, if you are working in the automotive industry, seek to get noticed and quoted in automotive trade publications. If you want to be quoted in your own words, think about the issues your clients face and prepare pithy observations.

Crave facts. As much as stories add color and dimension, it is always good to back them up with data. You can include survey statistics, especially those depicting before and after results, and research sources. Whenever possible, include data to demonstrate your case.

Depend on clarity. Think about what you do and why. Develop your media pitch in two different forms: first, a ten-word or so description of what you do, such as “a behavioral coach working with CEOs”; and, a thirty-second elevator speech about your work—“My firm works to help men and women achieve their leadership potential by focusing on behavioral coaching. I believe we all have the potential to improve and so I aim to bring out a person’s inner self to help that person connect more effectively with others.”

Seek how-to advice. Think about the general advice you give clients and share it with the media. Be prescriptive and describe, for example, the five things people can do to become better listeners, better leaders, or better coaches.

Appreciate accessibility. What can you do to make yourself available for interviews? One way to promote your accessibility is to publicize your public speaking engagements in the local media. Be available when reporters are available. Media people live by deadlines; this may require you to bend your schedule to accommodate interviews.

Convey your message. What is your unique point of view? How can you express it with a story? What is your ultimate goal and why does it matters to the world? Make certain you stay on message. Get in the habit of opening and closing with your relevant key message. Reiteration helps to ensure that you get your point across.

A note of caution: while you want to aim high, do not be disappointed if it takes time to get noticed by publications like the Wall Street Journal or the Harvard Business Review.

If you want to reach your clients, target the forums and journals your clients and prospects reads. You have a greater chance of success and will see your recognition quotient rise where it counts—with clients!

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John Baldoni is a leadership communications consultant who works with Fortune 500 companies and non profits. He is the author of five books on leadership, including his latest, Great Motivation Secrets of Great Leaders.

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More Business Planning for Consultants

We received lots of feedback on Tim Berry’s article, Business Planning, Consultants, and Cobblers' Children.

One reader, Tony Wanless, wrote:

Tim Berry’s article highlights a problem that I often see in my day-to-day dealings with consultants and other knowledge-based businesses. It is my experience that, when it comes to their own businesses, most consultants are poor planners and worse marketers.

Both issues are important because they point to a common syndrome: Many consultants are not very good business managers. Instead, they are often "doers”—an elevated form of tradesmen. They are purveyors of specialized knowledge or skill, but they rarely organize their businesses optimally to sell that knowledge or skill.

Perhaps the reason most consultants don't have business plans is, as Mr. Berry says, they don't really need them. What they do require are adapted strategic plans, or business management plans.

I don’t view this as a matter of semantics. A business plan is, for the most part, a marketing document used by most businesses for a specific purpose: to persuade financiers to pony up operating cash. An adapted strategic plan, or management plan, is an internal guide to operation of the business.

All businesses should have these, of course, but they are more important for knowledge businesses because these enterprises rely more on intellectual capital (organizational, management and marketing skills) than financial capital.

Tony Wanless, Knowpreneur Consultants, www.knowpreneur.net
Email: twanless@knowpreneur.net

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Items of Interest

New resources from David Maister
http://www.davidmaister.com

The National Organization for Diversity in Sales and Marketing
Executive Leadership Summit
http://www.minoritymarketshare.com/?id=2005summit

Daniel Yankelovich Interview
Strategy + Business (reg. req’d)
http://www.strategy-business.com/

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Coming Attractions

“Yes, the pursuit of immediate gratification, properly conducted, can open the door to long-term success.” – Rapid Results!

Next month, consultant and author Robert H. Schaffer joins us to talk about his new book, Rapid Results! He’s the founder of Robert H. Schaffer & Associates, and he helped to found the journal, Consulting to Management, for which he’s long been an editor. His previous books include High-Impact Consulting and The Breakthrough Strategy.

We’ll ask Schaffer how we can help clients succeed with large-scale change using the rapid-results approach.

Look for the interview with Schaffer in the next issue of Management Consulting News on November 1, 2005.

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Management Consulting News ISSN 1539-2481, Washington, DC, USA