Note: This blog entry originally appeared as a guest post for Boye & Co. – a group for industry experts to exchange opinions and experiences. As noted, it is a continuation of a previous post – which you may want to read first.
What’s really the value of content? And how do we measure the impact and value of our work on improving the customer experience?
As I wrote in “Why Are Most Organizations Stuck Solving The Same Content Problems As 20 Years Ago?”, one of the major issues is that management often does not have an understanding of the value of content. The root cause of this is due to a lack of business schools teaching accounting systems that actually account for customer experience.
What follows is a little bit of history, a little bit of accounting nerdery, and maybe a tangent or two – but I do promise I will get around to explaining how organizations can start to properly account for customer experience and produce incentives around that topic.
Bringing accounting into the digital world
In the beginning, there was the dual-entry bookkeeping system. Formalized in the 13th century by Amatino Manucci this concept is the basis for all financial accounting. Financial accounting consists of looking at the overall financial health of a company by measuring assets against liabilities as well as looking at income and cash flow. It is this form of “backward-looking” (in that it acts as a historical record of the transactions that have occurred) that is still used as the basis for most day-to-day accounting and even the regulatory reporting that publicly-traded corporations must regularly undertake.
However, financial accounting has many limitations. Starting in the industrial revolution, factory managers realized that financial accounting simply didn’t take into account some of the key decisions they needed to make in order to ensure a well-run factory. In a simple sense, managerial accounting introduced concepts related to understanding business processes to a greater level of detail.
The really interesting thing is those clever bean-counters who understand more than one system of accounting can direct business efforts in order to meet the incentives which are likely aligned to a single (and usually wrong) system. You may have seen your local car dealers attempting to offload a glut of vehicles sitting on their lot. Ironically, it’s not actually a result of unintelligent people doing poor planning, but quite the opposite in fact. CFO magazine has an article explaining why this occurred:
To boost profits and keep up with short-term incentives, the automakers used an accounting trick, overproducing while “absorption costing”. Using this method, the cars the automakers made “absorbed” all manufacturing costs, including the cost of paying rent on idle factories.
Because this method considers all fixed costs as part of the cost of goods sold, it gives companies an incentive to spread that cost among more products to make the cost-per-product appear lower. If this company has excess capacity, produces all the products it can, and sells up to demand, its cost of goods sold will be lower than it would if the company had only produced up to demand. This lower cost boosts profits on the income statement.
In other words: Incentives matter. A lot.
“But what does this have to do with customer experience?”, you may ask. Well, not only does this eventually hit the balance sheet… eventually…
“Even though they can make their companies appear more profitable in the short term by concealing excess capacity costs on the balance sheet, holding so much excess inventory could be costly, she says.
“When [the automakers] couldn’t sell the cars, they would sit on the lot. They’d have to go in and replace the tires, and there were costs associated with that,” Sedatole says. The companies also had to pay to advertise their cars, often at discounted prices. And by making their cars cheaper and more readily available, they may have turned off potential customers, she adds.
… but there are also customer experience implications:
“If you see a $12,000 car in a TV ad is being auctioned off for $6,000 at your local dealer, that affects your image of that vehicle,” says Sedatole. This effect on brand image is difficult to quantify, but the researchers correlated 1% of rebate with a 2% decline in appeal in the J.D. Power Automotive Performance Execution and Layout (APEAL) Index.
Not to mention the very frayed relationship between the manufacturer and dealers, where the latter are forced to overextend themselves to take inventory which simply isn’t moving. The added financial pressures would likely also manifest themselves as poor customer service as dealers attempt to cut costs or soak customers in an attempt to mitigate the financial fallout of the additional inventory and holding costs.
The reason this is important, is because nowhere in the accounting and incentives did the customer factor into those decisions. In fact, as mentioned, there was actually a tangible cost to overall brand appeal and customer experience.
How SaaS accounting bring the customer to the center
Now, in the last few years, we have entered what some would call the era of “SaaS accounting”. In the strictest sense, it’s a method for Software-as-a-Service vendors to fit their business model into traditional accounting methods.
However, in a larger sense, it means that SaaS vendors tend to look at metrics such as Monthly Recurring Revenue (MRR) – which seems obvious enough. But the real interesting metrics are Customer Acquisition Cost (CAC), Lifetime Value (LTV) and Churn (lost customers).
The interesting thing about those is that unlike the other systems, in this case, the organizations relationship to the customer is central to those metrics.
In the past, a bank or telco, for example, might look at an effort to improve their website or phone self-service. They would justify this under old accounting systems as “cost-savings” – and while there is a potential cost savings in having fewer support workers, it’s far more likely that these efforts are now guided by metrics which relate closer to CAC and Churn. In other words, businesses can now justify CX efforts by calculating churn against CAC. Simply put, if it’s cheaper to fix the problem (reduce churn) than it is to acquire new customers, then it’s a no-brainer to focus on churn. It’s through this change in thinking that organizations have been able to prioritize CX efforts, especially in business dominated by long-term contracts (banking, telecommunications, insurance, etc.) because it’s clear that LTV is high, but customer acquisition is also very high (telecommunications and banking/insurance are over $300 per customer, retail is only $10 in comparison), therefore for those vendors, churn needs to be reduced at all costs. Those industries dominated by high CAC already have started using “SaaS metrics” as a primary means for evaluating the health of the business and targets met. I was recently on a panel hosted by our partner myPlanet, where we discussed this trend in telecommunications with our customer Rogers (the largest telco in Canada).
A good example of a technology vendor that has successfully undertaken this C-suite “brain surgery” in order to transition from a “unit-based” accounting system to one more focused on SaaS metrics and the consumer, is Microsoft. The Steve Ballmer era was predicated on “protecting the Office/Windows moat” at all costs and this led to incentives that were very much anti-consumer and meant that Microsoft missed riding a significant percentage of the consumer device wave. It led to situations where despite leading in hardware innovations (such as the Courier tablet and Windows phone), Microsoft failed to win in the phone and tablet market due to this need to protect the Windows moat over providing innovations and connectivity to customers. It should be noted that since that article in 2013 where Microsoft stock “functioned like a thermostat set to $25”, Satya Nadella has since dramatically rebuilt the organization around SaaS and customer-centric principles to raise the market cap from around $300m to around $1.6 Trillion dollars.
In the SaaS accounting era, winning that customer means that you have to focus on reducing, or at least maximising the efficiency of your customer acquisition costs. This means that many activities that would be considered “support” in the old model are translated to “self-service” and on-boarding. Customers come ready to purchase have already done their own research and analysis. Similarly, the quality of support also matters a great deal – especially in those areas where the margin is thin and the cost of switching is low (this is true for cloud services and more and more for marketing technology software as well).
What does this mean to the crowded CMS marketplace?
In the end, the accounting system that dictates the incentives and behaviors in the HQ has far more to do with success than we might assume. Those vendors that have a SaaS mentality and not a financial or managerial way of thinking will ultimately have a set of metrics that is more closely aligned with customer experience and will win in the market as a result.
This has some interesting implications when it comes to the WCM/DXP space. Preston So is Senior Director, Product Strategy at Oracle and he did a great series on “the coming CMS wars” and ultimately here is why I think that the SaaS vendors will win – and surprisingly it has a lot less to do with the quality of the development teams, existing features or even the shift in focus from old-school “brand marketing” to new school “marketing technologist” or “agile marketing” teams, but is often more related to how management embeds the customer perspective into the metrics and incentives that define the organization.
As Microsoft has shown, it’s certainly possible for a company with a large war chest to undertake the dramatic transformation required – but WCM/DXP has always been a fairly competitive space, so no vendor has had the benefit of monopoly positioning (and margins) needed to finance that shift.
Similarly, there are far fewer “moats”, and therefore that trend to move vendors easily has been part of this landscape for a few years now. It’s more likely that the SaaS native players will be able to grow their more nimble offerings into a larger force if they remain true to those underlying ways of responsively meeting customer expectations.
What does it mean to your CX initiative?
First and foremost, be sure your incentives are aligned with your larger goals.
A great example of this is in the banking sector, where upstart fintech firms have focused on CX – and learning from Netflix killing Blockbuster by directly attacking the dreaded late fee – have largely eliminated overdraft fees (using analytics and ML to understand client risk and cash flow in advance). Larger banks, in turn, have lofty CX goals from the top, but if the quarterly financial goals and a VP bonus are dependent on greater margin and overdraft fees, that individual will prioritize their own pay structure and job over the larger CX goals that are unrelated to their bonus, scuttling that larger change.
PwC has a great article at strategy+business on the shifting nexus of retail banking discussing the massive CX related shifts in that sector and has even recently coined a term “Return on Experience” (ROX) as a result.
Also, do consider where the disruption in your industry is coming from and what changes this will drive in customer expectations.
There are three major trends related to disruptive innovation as it relates to CX:
- The first is related to those industries with high customer acquisition costs and using CX efforts in order to reduce buying friction.
- The second is related to those industries with greater margins and scale, these would include sectors such as logistics, maintenance, and manufacturing where, ironically, efforts around digitization have often well outpaced so-called “knowledge management” industries because the need was so great and the benefits so lucrative. As an example, the most effective use of machine learning (ML) has been commonplace for quite some time when it comes to transportation fleet maintenance and logistics. In comparison, ML is only beginning to make fits and starts in marketing efforts around areas such as personalization. These organizations have taken their knowledge of managerial accounting principles in order to leverage the benefits of technology into these processes – however, where there are those margins, it also invites competitors who are starting to apply a CX view when competing.
- The third is related to the fall in switching costs. This trend runs across the spectrum of industries from banks and telecommunications down to technology vendors. In other words, the assumptions that could be made in the past as far as retention is concerned are largely changing, and therefore understanding those CX-related metrics such as lifetime value (LTV) or churn becomes more important. As the cost of switching falls, you need to even consider more proactive means of gauging customer intent, as even churn is a lagging indicator.
Any organization needs to consider those factors as either threats (for incumbents) or opportunities (for upstarts) – but CX is effectively the new battleground and your entire C-suite from the CMO to the CFO need to be keenly putting these metrics, process and culture in place to compete.