Telco Corporation
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Case 8.1 Summary: This case deals with Telco Corporation and its need to adopt an effective CRM approach for its customers in order to increase its overall profitability. Telco is a $25 billion corporation operating in six major, but separate, divisions, each of which has its own sales force, manufacturing facilities, and logistics network. Out of Telco’s roughly 15,000 clients around the world, however, 40 percent buy products from multiple divisions. At a recent council meeting, CFO Jean Beierlein pointed out that pretax profits were falling despite increasing revenues. Upon a back-and-forth exchange from leaders in different divisions, the issue then became clear to the newly appointed president of Telco, Nick Martin, who claims he has dealt with this issue before. Nick claims, “the problem is that we are treating all customers alike and we are not taking into consideration those customers who buy from more than one division.” Upon running a profitability analysis, this problem was confirmed. It was shown that 33 percent of all customers account for 71 percent of Telco’s operating profits, while another 27 percent account for $100 million in losses. It became clear that some customers were far more profitable than others and that a strategy needed to be developed that would divide Telco’s customers into segments that offer only services which the customer is willing to pay for. This, however, could be problematic for the sales division. Taking away certain services from the less profitable segments would not be received well by the customer base, as was pointed out by the VP of corporate sales, Chris Sills. This dilemma brings me, a customer relationship management expert into the picture, as I prepare to outline an approach that may be suitable for this situation. How should Telco approach segmenting its customers? That is, on what basis (cost to service, profitability, etc.) should the customers be segmented?For Telco to effectively segment its customers, both cost to service and profitability must be taken into account. An activity-based costing method should be used by Telco in order to measure the cost and performance of activities, resources, and cost objects. In this method, resources are assigned to activities and activities are assigned to cost objects based on their use. In other words, activity-based costing would more accurately assign costs to those activities, or in this case customers, that use the most resources. This costing method provides a clear advantage over a traditional accounting method by assigning resources to an activity, identifying cost drivers and then allocating these costs to products, customers, markets, or business. Whereas a traditional accounting system would simply assign resources to department cost centers and then to individual products. Because of this, activity-based costing methods are able to more accurately reflect the actual cost of performing an activity than traditional cost accounting can. Combining this knowledge with profitability measurements will provide Telco with the appropriate means to segment its customers.
How should Telco tailor its service offerings to each customer segment?Upon determining the cost to service and profitability of each customer, Telco can now effectively segment its customers into categories that reflect the different customer’s worth to Telco. For the customers that do not sit well in either category and are likely incurring a loss for Telco, different actions must be considered. Telco could change the manner in which it interacts with this customer with the goal of moving this customer to another segment. Telco could also simply charge the customer the actual cost of doing business, however it should be noted to this could certainly worsen the existing relationship with the customer and possibly result in losing business. Lastly, Telco may want to consider transferring the customer to a different distribution channel (for example encouraging ordering through a wholesaler). For customers who result in a low cost to serve but also generate a low net sales value, Telco should aim to build net sales value while maintaining cost to serve. Likewise, for customers who have a high net sales value as well as a high cost to serve, Telco must seek more efficient ways of interacting with the customer in order to reduce costs. As far as particular services provided by Telco to each customer, product quality and customer service should never be compromised as it would lead to bad customer relations or possibly sever existing ones. Instead, Telco must strategically manage order fill rates, lead times, and delivery times on the basis of cost to service as well as the profitability of its customers. Companies who fair well in these categories should receive premier service in these areas and vice versa. However, companies who fall relatively low in these categories would be able to pay more for better service. While this may anger certain clients, it makes more economic sense than providing premier service to clients who actually result in losses for Telco.