Philip Thomas:I’d like to open the discussion by welcoming everyone. The focus, as you know, is the range of risks involved in attracting and retaining customers.
Tony Wilkinson:I’d like to broaden that, as I think that there is a massive risk impact as to how you acquire a client and that is pre-acquisition risk management. If you do due diligence while you’re going through a bidding process, you can ensure that you mitigate the risks that you are going to get when you actually acquire the client. In my own company, we use our own tools to analyse the risks of a contract. Some of these contracts are fairly substantial; they are long-term contracts, and there are all sorts of cultural, currency and experience issues. For example, have you done this sort of thing before? If not, you have to highlight a risk there. And you must take into account the risks you are taking on when you are pricing the contract. There are certain contracts that you have to price higher because they are high risk. There’s nothing wrong with taking risk on board as long as you are aware of it, and so long as you price that risk into the particular piece of business that you are doing.
Philip Thomas: Has anyone else got anything that they’d like to say up-front so that we can get a feel for the subject?
John Hurrell: I think that there are two completely different types of customer risk, which probably need different treatment. Firstly, there are the risks which a company assumes on behalf of its customer. For example when sourcing contracts, such as logistics, IT and so forth, the company effectively assumes the risk of the customer and has to manage it as if it were the customer. Secondly, there is the situation where the customer remains the third party and the company manages the risk with the customer as a third party. I think they require a different approach and different techniques.
Roger Marsden: What is your definition of a customer? The business in which I work predominantly involves mass customer service . Although there is some business-to-business, it will be one to very many businesses. But in a lot of the areas, we are working with individual consumers.
Tony Wilkinson:There is a difference between a company that deals with major corporates and a company that deals with multiple consumer clients. Maybe you can adapt the approach of dealing with a major client to addressing a market sector. Your exposure could be the earning capacity or the lifestyle of a particular group of people, or perhaps the geography of a certain group of people. You can then say: “well we generate £xm from this customer sector; what risks do we take on board from that?
John Hurrell: I think it’s possible to accommodate both types of customer. Rather than simply looking at attracting customers, we can broaden this slightly to looking at the entire customer experience. The customer may be someone who goes into a supermarket and walks out again, or it may be a big company in a business-to-business contract. In either case, there is a customer experience - in fact what you can effectively term a customer life cycle. The customer going through the system has an experience and then, hopefully, goes through the system again if the experience is a satisfactory one. And at every step of the way there are risk elements for the supplier.
Philip Thomas: If we take the objective of attracting, new customers to start with, perhaps we can try and identify the generic areas that are likely to apply to every business. This should help us eventually to identify what the key risks are.
John Hurrell: Let’s start with the brand image and reputation of the company, which will be the very first point at which the customer begins to contemplate trading with the supplier.
Philip Thomas: And some risks attached to that?
John Hurrell: One might well be disgrace.
Roger Marsden: The image and reputation set an expectation, don’t they? If a customer approaches a company based on what he’s seen, read and heard about it, and his initial experience doesn’t tie in with that, the company is unlikely to attract that customer.
John Hurrell: The same applies if the customer hears something bad, prior to picking up the telephone.
Roger Marsden: Of course, you could argue that, if the customer hears something bad and then his experience is better, the company improves its reputation.
Colin Frey: Image and reputation work both ways, both for us as a potential supplier and for a company as a potential customer. In trying to propose brand protection solutions, we are actually quite attracted to customers where there may be an imbalance between the image of the brand and what they are actually doing. Our solutions are about filling that gap so, in some ways, what we throw up as risks here will probably flip back as opportunities.
John Hurrell: A lot of these issues will have up and down sides.
Tony Wilkinson: I think the key is that if you are too risk averse, you’re basically not going to do any business. But you have to be educated about the risks that you are actually taking on when you deal with customers, and those risks are many and varied. That is why I think it is so important that you do an analysis before you take the customer on. If you do not and you incur those risks later, you will damage your image and your reputation because you’ll have an unhappy customer.
Roger Marsden: There are two sides to this. You may be a company that can identify a particular market sector and say ‘those are the sort of customers I want’. But if you are a bank, for example, and people say that they want to have an account with you, you are probably going to say yes. What you then have to decide is how to manage that account in terms of how much you can afford to spend on servicing it, and the value of that relationship to your bottom line. Some businesses will take on anybody as a customer and then change the service regime to suit the characteristics that they discover about that individual over time.
Philip Thomas: What does success look like in terms of attracting the right customer?
Tony Wilkinson: I would measure success at the end of a project - and we’re talking about major projects that can go on from three months to 12 months or even sometimes 18 months - in terms of profitability. They are on time and on budget. And that is why you should look very carefully at potential clients. There are some clients for whom it is impossible for anyone to do a project on time or on budget because of the client’s culture.
Philip Thomas: Who are the on time, on budget criteria most important for?
Tony Wilkinson: It’s important obviously for the client. And that impacts on our ongoing reputation and brand name because, if we can prove that we regularly put projects in on time and on budget, people will consider that they’re taking on less risk when they contract with us. That is very much a reputation issue, and everything else stems from it. You then have an ongoing relationship with the client, because the client is happy, so you generate more revenue. The most expensive part of the whole customer relationship is acquisition. If you are forever acquiring new customers and losing old customers, you are not going to be a profitable company. If you can acquire new customers - and they are happy customers, and you can generate revenue from the customer base - then you are going to be profitable.
Philip Thomas: So success in a profitable company involves retaining the customer?
Roger Marsden: It involves retaining the right customer - and that means a profitable customer. For a bank, for example, the profitable customer is one who costs you less to service than you can make out of the assets that he has deposited with you.
Colin Frey: I think that keeping your reputation intact has some other dimensions. If you are in the project business, then obviously delivering on time and on budget is key to attracting more projects. However, with our work in the security business, we could deliver a solution on time and on budget, but if there is then a security leak or problem with a customer - not necessarily with us - that will reflect back on our reputation. In a sense, we are investing our ethics or integrity or whatever you like to call it into the customer.
Philip Thomas: Perhaps this comes down to your ideal choice of customer - a customer that you can rely upon subsequently to implement or operate properly what you have delivered?
Colin Frey: It is probably going to require a change in that customer and in their processes. If it’s a cultural change, then you are up against it. If the customer has a secure supply chain, for example, it is relatively easy to add things onto it. But you have to assess either the supply chain, or the customer’s willingness to make it secure.
Tony Wilkinson: Another aspect which spins back into profitability is that if you do the risk assessment before you take the client on board, you can then price according to the risk. If I may have to put loads more resources into a given client to keep my reputation for getting a project completed on time and on budget, then I have to price that into the initial contract. Otherwise, it’s not going to be profitable.
Colin Frey: There’s probably a large amount of business that is lost or not pursued because the perception of the risk is higher than the actual risk, which, as you say, will have to be priced accordingly to allow you to put in the dedicated resources.
Tony Wilkinson: Objectively then, if you don’t get that particular piece of business you walk away happy, because you know that if you had priced it at a level that would have got the business, you would have lost money.
Paul Stone: I think it also depends on the project. It may be that you’re being offered a very small piece of business to see how you perform. There may be special considerations here, because the end goal is getting the bigger contract down the line. So you may come in and price it at a level which you would not normally do, in the knowledge that if you perform on this contract, there’s a bigger one waiting.
John Hurrell: I think there are one or two other measures, which would apply perhaps more to business to consumer, for example market share and market dynamics, where you can measure what’s happening in the market place.
Philip Thomas: If you were successful in attracting new customers, assuming that you weren’t losing them at the other end, your market share would automatically increase.
Roger Marsden: Market share’s a good point. A lot of people who launch new services or products will never achieve profitability if they don’t achieve a critical mass. A certain market share in their target market is key to their success.
Sue Copeman: So are you saying that one of the things that success looks like is market share?
Roger Marsden: Increased market share is a way of measuring your success. Customer retention values and customer acquisition rates might be other ways.
Philip Thomas: I think measures are important in terms of actually managing risk. But we don’t seem to have talked much yet about customer happiness.
John Hurrell: That’s a hard one to talk about generically, because every company will have its own measure.
Philip Thomas: But how do you make customers happy?
Tony Wilkinson: I think that it’s dedicating resource to the customer base.You have to invest in your customers to keep them happy. You will invest differently depending upon your business, but you can’t just acquire a customer and assume that they are going to stay.
Colin Frey: They need to feel that they get value for money.
Roger Marsden: It’s a comparative thing. You would hope that they have more satisfaction dealing with you than with one of your competitors. You can’t make everyone extremely happy - but you want them to be happier with you than they are with the other guy. There is a lot of talk in the customer services world on ‘what is the norm for the industry’. For example, if you’re in the parcels industry, your potential customers are likely to be people who want to send a package and who are working their way through the Yellow Pages. They’ll ring up, and if you don’t answer the phone quickly they will ring the next person. So you have the challenge that you need to answer every phone call consistently within 10 seconds. If you’re in the credit card business and someone rings for an approval, you also want to answer the phone quite quickly. But if you know it’s a complaint, you’ll take your time to answer the phone. There are different treatment strategies according to different customer situations.
John Hurrell: I think the word that’s key to this is expectation. Expectation is structured by a number of different things, including competitors who can redefine expectation within a market place. But as long as a customer is able to have his expectations narrowly met or exceeded - even vastly exceeded - without any associated cost, the company will retain customers.
Tony Wilkinson: This comes back to the culture aspect. You have to treat every culture entirely differently in terms of setting and moulding their expectations.
Philip Thomas: Is the key to attracting customers giving them what they need, rather than what they want?
John Hurrell: It goes back to structuring expectations. There is quite a lot of complex marketing psychology involved. For example, you can supply a utilitarian product that does what a customer needs and then move that away to generating demand because the product becomes a fashion buy. Take cars, for example. All cars do the same thing, but some of them are sexy, some of them are safer, and some of them convey the family image. The manufacturer is actually structuring the want behind the basic need.
Colin Frey: It may be easier to establish a want with consumers. But if you don’t deliver what customers really need, there is the risk that a competitor may educate them in that, and therefore you lose them. Whereas, if you can manage their expectations and get them to understand what they really need, and that is exactly what you deliver, I think there’s a better chance of retaining them.
Tony Wilkinson: A major part of the sales cycle is setting the client’s expectations. It is imperative that you train your personnel to understand what you can deliver, so that the client’s expectations are based on it.
Philip Thomas: Colin mentioned the competitor. What does success look like in terms of beating the other guy? What have we beaten him at?
Tony Wilkinson: That’s an interesting one. How many people actually analyse why you get business rather than analysing why you lose business?
John Hurrell: Given that it is the customer who is voting, then as long as you are getting the market share, by definition you are beating your competitors.
Roger Marsden: As an overall figure, it costs 10 times as much to acquire a new customer as to retain an existing one. But it is very hard to differentiate some products - whether they are white goods, brown goods, financial service products, they’re all much of a muchness. So the key way of differentiating one financial service from another, for example, is the way you manage the customer relationship. People change their bank when they don’t get the level of service that they expect, need or want at that point in time. How do you get brand loyalty?
John Hurrell: I think it goes back to customer experience. And that starts at the very point where the customer hears of you for the very first time and hasn’t yet traded with you, and moves on to the first contact with you, - walking into your shop, or phoning your sales people or whatever. It carries through to what it feels like to be in your shop, or what it feels like to talk to your salesman, through to the price that is quoted for the goods, through to your experience when you actually received the new car or whatever, through to the after sales service, through to what your neighbours said when they saw you had bought a certain make of car. At every stage, there’s plenty of opportunity to enhance or damage that customer experience. Some of it is a risk issue and some of it is just the way you do business. But there are some external interventions that can interfere with the way in which business happens, for example a defective part bought in from another supplier that necessitates a recall.
Colin Frey: In terms of your competitors, the stage of the life cycle of your particular market is also relevant. If it’s relatively well-established or mature and not growing that much overall, you will mainly be battling for market share. But you may want to be very careful about what you actually win as well as what you lose, because you’ll need to manage the risk later on. If it’s a relatively new market, the most important thing may be that somebody wins the business, so that the market is evolves. You may not be happy to lose to a competitor, but at least something is going on and the market is growing. And you may learn something so that you’ll have a better offering next time round and ultimately beat the competitor.
Philip Thomas: How important is it to have a better product than the competitor? You might have an inferior product but you still might win business and do quite well for other reasons.
Tony Wilkinson: There is a definite risk of your product becoming outdated irrespective of what you do. That has to be a risk as far as acquiring new clients is concerned.
Colin Frey: It depends on how you define the product or service. The product may be inferior, but if you wrap good customer service around it, it may mean a better experience for the customer. One of the risks is that you may open the potential customer’s eyes as to what he should be looking for and then, after he’s been educated, he’ll choose your competitor’s product because it’s better.
Paul Stone: There’s a risk in thinking only about your existing competitors. Your quality may be slightly better than theirs, but there will be a real risk if there’s a potential new entrant out there who can come in and provide a much better service than you - because you’re only looking at what’s around you and not what’s outside and might come in.
Tony Wilkinson: That was a point that was very well made in the book In Search of Excellence. Don’t judge yourself by mediocrity, judge yourself by excellence - and so, rather than measure yourself against the competition, measure yourself against your aspirations and dreams.
Philip Thomas: It could also be that, as a result of getting a new customer, you identify a new market opportunity.
Roger Marsden: This can also be where retention comes in. Someone who has only got a current account with a bank, for example, is far more likely to change banks than someone who has also got a mortgage, a deposit account, perhaps three or four products with the same bank So one of the challenges is how you can continue to build on the relationship with your customer. It could be simply a matter of how many different products you can get him to take from you, so that his propensity to change diminishes.
Tony Wilkinson: I think that banks in particular are struggling with analysing customer profitability rather than analysing product profitability, which they can do.
Roger Marsden: This is because they have traditionally worked in silos with, for example, separate departments for insurance, mortgages and investments.
John Hurrell: I think effective lock-ins, such as the low-cost mortgage which ties the customer for so many years, are a genuine success factor. They give you the time to sell other products to that customer.
Roger Marsden: There’s another aspect which directly affects your profitability. That is your own staff. There is a cost base to acquiring customers which is: how much can I afford to spend and still make a profit? Part of that cost base is heavily impacted by your own ability to retain the right people to deal with customers. If your competitor pays an extra pound an hour, you may have a major hiccup and lose all your staff. Then your ability to meet customers’ expectations falls through the floor.
Philip Thomas: So the success factor is really enhanced by staff satisfaction?
John Hurrell: There is a logical progression in terms of customer risks. First, there is the customer experience. Second, comes everything that we do within our organisation to ensure successful interface with our customer. Third, what is the risk of any of the things that we are doing not being delivered in the way that we want them to be delivered? And fourth, how do we manage those risks?
For example, take customer happiness. To deliver that, you must have a motivated sales force, and products and services that are likely to generate customer happiness. You have to have after-sales service, a supply chain that is geared to delivering the product at the point of sale, a price structure that remains competitive, and so on. You can’t identify the risk of the customer being unhappy without knowing what it is that’s supporting customer happiness.
Philip Thomas: Let’s take effective sales and marketing. What are the risks here?
Tony Wilkinson: I think it comes back to the point I made earlier of setting expectations. The people who set those expectations are your sales and marketing people; they are the window to your products and your company and have a responsibility to educate the potential client and set their expectations correctly.
John Hurrell: Another risk is that you might have good products and a great sales strategy but be using the wrong distribution network. For example, a lot of people have chosen to go into internet marketing or services too early. There’s a risk of misreading the technology.
Roger Marsden: One of the things that we notice more and more is that people are selling through the internet, or on the telephone. They think they are improving the options for their customers. But they have disjointed channels that don’t know what the other channels are doing. This means that a customer has a worse experience than someone who just had one channel.
John Hurrell: Another risk is not controlling your distribution network. This has happened in the UK motor industry, where some companies have been caught out by websites offering cars at European prices.
Colin Frey: It’s also important to control your product offering. You can construct a product offering or promotion where each piece makes sense in terms of a specific customer need or expectation. But when you look at the whole thing, it is far too complicated and the customer won’t understand it.
Philip Thomas: How do organisations measure whether their marketing is effective and whether they are offering realistic expectations? If they don’t do this, it’s going to be a key risk.
Tony Wilkinson: I think in general it’s a cultural issue. The culture of responsibility has to be driven down from CEO. It’s not only the sales and marketing people, it has to go right through the organisation. You may not necessarily know when it’s right, but you certainly know when it’s wrong.
Colin Frey: We have some checks and balances, but it’s not formally measured. Our sales and marketing and customer services people interact on how to manage the customer, so any points relating to the ability to deliver according to set expectations will show up.
John Hurrell: I think it goes back to the wider issue of the key drivers behind the sales process, which is where the rubber hits the road. You have to be market leaders in terms of your ability to deliver at lowest operating costs. You have to have the best, or close to the best, products and after sales service. So in a sense, although we are highlighting the sales and marketing process, almost all the other key drivers underpin that. Customer satisfaction surveys and repeat business can measure whether your sales and marketing people are effectively setting the right expectations.
Roger Marsden: In the telesales/telemarketing area, you actually have some easily obtained numerical information on how well your sales people are performing in terms of how much business they are booking and what its profitability is. Then you can look at how you can improve sales productivity. Can I get them talking to people more susceptible to the proposition? Can I get them talking to more of those people in any day? You can capture information about the people they are talking to, and which groups produce the most sales. So you can do statistical analysis of where and how you increase productivity and performance. If you do it right, there are huge opportunities to really monitor, measure and improve your sales performance.
Tony Wilkinson: I think it’s important to have a well defined methodology that is applied consistently across the organisation - whether you’ve got a sales force of 1,000 people selling commodities to retailers, or three or four sales people each generating £5m or £10m worth of business a year. Your risk is obviously significantly higher in the situation where you’ve got only four sales people - if you’ve got one rogue in there, then it’s a very big deal.
Colin Frey: It’s also about how long it takes you to find out. The customer satisfaction survey comes after the event. You can do a lot in terms of increasing the apparent effectiveness and efficiency of your sales force, and they may be getting more leads and delivering more business. But you don’t actually find out that they’ve set expectations too high until the delivery team comes along and hits problems. You may even have paid out huge bonuses by this point.
Tony Wilkinson: You need to instill a culture of thinking about risk into your sales people. In fact, every single employee in an organisation incurs risk to varying degrees, and if you don’t get that culture of risk through the whole organisation, the risks will happen. You have to get everyone to understand the risks.
John Hurrell: We haven’t really covered how we respond to external threats - the ‘stage left’ situations. For example, which companies can build recession proofing into their business model?
Colin Frey: One can talk about crisis management after an event, or look at the risk and try to mitigate it. We advocate protection up front, to reduce the chance of a crisis occurring. Obviously, this is difficult in the case of events like those of September 11. But, for example, there’s the whole question of aircraft parts - is it faulty parts or counterfeit parts that have caused some of the problems? The airlines are well aware of this risk, but they are still not doing as much as they could to protect the supply chain. It comes down to realising what the risk might be and choosing to manage it by protection, rather than having a crisis team ready to deal with the PR when it happens.
Roger Marsden: People used to be very secure within a geographic market. The traditional bricks and mortar businesses and the utilities were good examples of that. Now we have a situation where anyone, anywhere in the world, can sell to somebody if they have the right proposition and the right logistics to deliver the product on time.
Philip Thomas: Is it a matter of being able to identify a new business opportunity more quickly than your competitors?
Roger Marsden: I think there’s a set of threats out there that people don’t necessarily consider. It’s not difficult for a business to suddenly find it’s been overwhelmed by a competitor who hasn’t actually had to make much of an investment to do it.
Colin Frey: Products that are well defined and understood are most susceptible. Internet selling raises the importance of price as a selection criterion for your customer way above where it should be. And it can take away some of the differentiating things that you would otherwise have offered in the future. These are hard to communicate over the internet, so you end up bidding on price. That can actually turn out to be a risk for the competitor as well.
John Hurrell: There are also innumerable examples of customer perceptions of risk which bear no relationship to reality. Where your ability to trade depends on the customer having an accurate perception of the risk, for example the safety of keying in credit card details on a website, there’s a real education job to be done.
Philip Thomas: If the new business you attracted was taking your business in a different direction faster than any of your competitors, that would be a possible sign of success, particularly if you were able to move in that direction quickly. Another risk aspect is over-dependence. It’s one thing to win a huge client, but if they turn out to represent 50% of your business, the alarm bells ring.
Tony Wilkinson: If you do 90% of your business with two companies, they might seem totally safe - but one of them could be an Enron. Where a company is exposed to a small number of customers, that has to get the red light going. This goes back to what I was saying about the risk model and taking a new contract on board - it’s one of the factors that you look at. What proportion of my business is exposed? What proportion of my resources are going to be sucked in by this? Is it going to stop me generating smaller, possibly more profitable contracts that spread my risk across a number of organisations?
Colin Frey: It’s an interesting balance. As we said, it’s expensive to get new customers and getting the next project with an existing customer is probably the best way to go, but then you’ve got that exposure.
Philip Thomas: What are the factors to consider with potential new customers?
Tony Wilkinson: They are different in every country. They include language, experience of the culture, even geography. How close am I? What are the time zones and how am I going to support them, if they are eight hours ahead? It may mean that I have to employ people on a shift basis on the support side. There are all sorts of associated costs. For example, we were invited to tender for a very large contract for an African government-owned oil company. We went through the risk profiling and took account of the cultural and political risks as well as whether staff would be happy to be sent there for a fairly long period of time. The result was that we doubled and redoubled the price, and we didn’t get the contract.
Tony Wilkinson: You can capture a customer or you can capture a liability machine - and a lot of potential customers are liability machines. But you can take almost any risk, as long as you are aware of it, you have priced it and you have done everything you can to mitigate it. The risks that are dangerous are the ones like September 11, which you just can t predict.
John Hurrell: There’s another issue here too - a kind of risk arbitrage where a customer’s perception of a risk may be higher than yours because you’re an expert in managing those risks. The customer will value the risk more highly and therefore will feel that your management of it is a very good deal, as long as you’ve got it right.
Roger Marsden: There has been some comment that customer service and customer relationship management projects fail. But they don’t fail if they’re done properly. They fail because the project management does not take into account some of the things that we’ve been talking about. They set timescales that lay out what they want to achieve over three years. But, by the time they have actually done that, their customers and their market have changed. The way we manage that risk typically is to identify the objectives for the first six months. You measure what you are doing today, and decide what you are going to measure in six months time to see whether it’s working.
Tony Wilkinson: On the whole, risk is not about systems. Customer relationship management is an organisational cultural thing and the systems are the tools to do it. Systems don’t manage risk, people manage risks.
Philip Thomas: Changing the subject slightly, how do you prepare your organisation to be able to compete against what your competitors are doing?
Roger Marsden: If you build a culture that includes an infrastructure of technology which can change rapidly, you are well placed to respond to change from the competition. You need a methodology that you can change quickly according to how your competitors change, and that everyone adheres to immediately.
Philip Thomas: By using the right tools you can create a nimble organisation.
John Hurrell: I think the answer depends on whether you are the market leader or whether you’re an aspiring entrant. If you are a market leader, the strategy is to become the industry standard. If you are an aspirant, then you have to ‘re-invent’ the product; in other words come from a completely different direction.
Philip Thomas: One method that I’ve heard some organisations use is to get a group of clever people together and see whether they can develop a business plan that would effectively put your own organisation out of business. With the benefit of knowing what someone else could do, you can then react or even develop that business yourself to prevent someone else from doing it.
Colin Frey: On the technology front, one of the things that we do is a technology watch. A lot of the technologies that appear to come out of nowhere have in fact been around in academic or other circles for several years. People may even have applied for patents for them. You have got to decide how much you want to spend on checking these things, but it’s possible. We do it to see what might be coming along and whether they could be substitutes for our product.
Paul Stone: You need to take a critical approach to what you are doing yourself. Even if you have a very good product, there may be one area that you are falling down in. That will be the area that your competitor latches onto.
Sue Copeman: How about taking account of market uncertainties with things like scenario planning?
Colin Frey: We do a lot of that with the customer, looking at what might happen to their brand and at what has happened elsewhere with brands such as Firestone and Perrier. These are extreme examples, but changes in trends and fashions can have an impact. Scenario planning helps to educate our customers about their potential risks.
John Hurrell: I believe, although I don t have firm evidence, that corporate governance is having an impact on people’s attention to risk. It may be just the implementation of the Turnbull report, or it may be the fact that highly visible catastrophes are happening more frequently. The business planning process now accommodates far more attention to detail in terms of risk than it has done in the past. For this to be effective, it must be embedded in the business. It is very difficult at board level just to produce a risk plan for the organisation. The planning has to go down by operation, by division, by product, by customer segment, in order to be effective. We now see much more of that going on.
Philip Thomas: I think that embedding risk consciousness is going to take some years.
Roger Marsden: I think scenario planning is mostly about how you keep your services up and running, and mitigate risk there. Some ideas can completely change some of the options available. For example, it’s not necessary to have everyone in the office to do their jobs. If it’s a desk-based job with a computer, people can do from home everything that they could do in an office. That’s got interesting implications when it comes to risk. If you have 500 people working in a building and it suffers severe damage, your business is going to be disrupted. But that’s not the case if you’ve got 500 people working from home. Perhaps people are not paying enough attention to some of the opportunities that new technologies provide, because no one has worked out how to manage the new culture that they invoke.
John Hurrell: The best example of that was September 11. Although it was catastrophic in terms of loss of life, there was fantastic ability to recover by the financial services industry in the World Trade Center area. Almost all of them were back up and running within a week. And you can’t imagine a worse catastrophe.
Philip Thomas: Another area I think it would be good to talk about is brand and keeping reputation intact. Brands are probably some of the biggest assets on our balance sheets. I would be interested to hear
what you think organisations should do to maintain the value of their brand and whether there are actual business processes being developed that will protect that brand when it is threatened?
John Hurrell: We’re working with a number of clients, looking at the anatomy of brand protection. The conclusion we have reached is that, although most companies are focused on the customer, the other stakeholders will have an impact on the customer perception. If shareholders, regulators, lobby groups, and so on have problems with your organisation, your customers’ perception will be next. It’s no use just managing the customer piece of the segment, you have to manage your entire external interface with all of your stakeholders. That brings in aspects like corporate social responsibility, supply chain management and customer expectations.
Philip Thomas: What lies at the core of each of those elements?
John Hurrell: It will be very different. For example, the ownership of the reputation or the brand management for each of those stakeholders will be in different departments in the company. Generally, they won’t have spoken to each other, and they won t have considered the impact that the management of their stream has on everybody else. So the first thing is to pull it all together. The second thing is to make the people dealing with different aspects, for example those handling the relationship with government regulators, understand that what they are doing could impact on the customer. There are weighting factors. Some companies’ customers may have no interest whatsoever in their relationship with government regulators and the companies can survive almost anything that arises in that area. But, on the other hand, their share price may be relevant to their ability to trade. For example, if an insurance company gets less than an A credit rating, its customers will lose faith in its business. You have to manage all of that. The starting point is to understand how the CEO has responsibility for all of this, and to make sure that everyone in the process understands that they are only a part of the process. You can then model, using scenario planning, to show what would be the impact over here if something goes wrong over there.
Philip Thomas: What would be the next step?
John Hurrell: That would be the cost benefit. For example, if you said, as might be the case in the railway business, that our relationship with our customers underpins our ability to get our licence renewed, that would get a double weighting, because not only can you lose customers but you are going to lose your licence. You then allocate your risk management budget accordingly. There have been several examples of major companies that were felled, not because their product was no longer any good, or a competitor came along with a better one, but because of reputation issues. These were issues which were completely internally driven, that were entirely within their capability to avoid. If they had had a reputation management process a year ahead, they wouldn’ t have had the problem.
Philip Thomas: As in a good strong crisis management process?
John Hurrell: This comes before crisis management. If the company was properly managing its supply chain, its business processes or whatever, it wouldn’ t have had the problem in the first place.
Tony Wilkinson: Another mitigation is ensuring that all of the main board directors are fully trained in media relations. It’s that first day after something happens when you can manage or not manage the outcome.
Philip Thomas: We agree that media training and good crisis management protect brands. What other processes might lie behind brand protection?
Colin Frey: The brands that we protect range from software and consumer products, to automotive components, just about anything and everything, and there is a digital or cyberspace threat to a number of these things. Some of these are seen just within cyberspace, but some actually come back into your normal supply chain. One of the things that we’re concerned to do is to raise this on the board agenda. When you look at the balance sheet and see that the value of the brand is a huge part of the value of the company, shareholders and other stakeholders should be asking what companies are doing to protect that value.
Roger Marsden: It seems that the brand is now becoming not so much the product as the lifestyle. The penalty of being a lifestyle is that it must be worth more to the company concerned, because it can embrace so many aspects and attributes.
Colin Frey: Yes, the value of the premium that you can get for your brand - for example, compare the cost of a branded T-shirt and an ordinary T-shirt - is a great way of measuring that. Another point is that loss of brand value, or threats to your brand may come from completely different places. One example is what is happening in the pharmaceutical industry in the US. Traditionally, companies in the pharmaceutical industry have believed that, as long as they are clear about what they are doing and where their drugs are going, they will be OK. If someone else is producing a counterfeit version of that drug and distributing it through a non-approved channel for non-approved use, well that s nothing to do with them. Now consumers are asking whether the pharmaceutical company, as the owner of the brand, has done enough to make sure this doesn’t happen.
There are plenty of companies who think that their supply chain is secure, there’s no child labour going on, no human rights abuse, and so forth. But if abuses are going on in a parallel counterfeiting chain and end consumers think that they are buying your branded product - and then a Channel 4 documentary goes into a factory and reveals the abuses - it may be too late to go on television and deny that it was your factory. It’s a branded T-shirt that looks exactly the same as your product. The damage is done.
Philip Thomas: So the main call is that the company hasn’t thought hard enough about enabling customers to identify the real thing.
Colin Frey: Pharmaceuticals may be an extreme example, but you can take some things that are just as life-threatening and are maybe a little closer to home. There are all sorts of domestic products, some of which are associated with safety. It’s pretty important that they are high quality, so the producer or the brand owner spends a lot of money on quality control. They may not be spending any money on making sure that the consumer knows that this is really their product. When customers go down to the local market and gets the product £10 cheaper, they may well be thinking that it must be OK because it’s got the brand name on it.
John Hurrell: The safety is inherent in the customer perception. Generally, customers won’t really make distinctions between the safer brands and the less safe brands, unless the manufacturer does something about it. Twenty years ago, most people thought all cars had similar safety characteristics. Now some manufacturers have pointed out that their cars are safer and have marketed this.
The same applies to airlines. When an aeroplane crashes, people have a 24-48 hour perception that flying is less safe than it was the week before. But they don’t really make the distinction between airlines. You take it for granted when you book a flight that they are going to do whatever it takes to make it safe, particularly as most airlines have the same aircraft.
Colin Frey: Safety is obviously particularly emotive in catastrophes. The perception of risk associated with an air crash or a train crash is much higher than that of a car crash - which doesn’t make sense in terms of the statistics. It’s relatively easy to communicate the safety aspect, and people will often say that it doesn’t have anything to do with their product. The brand erosion side is harder to understand and yet in the longer term more worrying. What does it actually do to my brand, if my branded products appear to be available in the kind of channels that I don’t want? Lines start getting blurred. Can consumers distinguish between the real branded product and the fake? Are they really making a choice? Do they know that it’s a fake and therefore cheaper, but they’re happy with it, or do they start to take a view on the value of the brand. In time, perhaps this situation devalues the brand and they move away from it.
Philip Thomas: Who should be responsible for managing some of these risks?
Colin Frey: I think we certainly feel that with most brands it’s important enough to be raised at CEO level, but it often isn’t. Instead, it can start in any one of a number of areas - legal, enforcement, purchasing, the insurance and risk group. They may be making an effort to enforce brand integrity, but this is not necessarily communicated within the company. I think it is important that all the different areas understand that they feed into the brand valuation, and that they understand the brand risk and its protection. The latter often involves staying one or two steps ahead of the counterfeiters. You can’t always completely drive them out of the business, so it’s pretty important that everybody internally should know what s going on.
Tony Wilkinson: I think it’s the same with all risk management. It should not only be driven up, it’s got to be driven down as well, because it should be a corporate culture. Take a company like Nike. How many thousands of staff does it have? Those are the people in the street, the people who go to the market at the weekends and can recognise a Nike T-shirt from a non-Nike T-shirt. If you give them a pride in their brand and they are aware of the risks of somebody attacking that brand, then you’ve got ears and eyes out there on the street where the merchandise is being peddled. They’re aware of it. If one person takes charge of brand protection and just sits in some ivory tower in head office, one pair of eyes and one pair of ears is all you’ve got. I think it’s the same with all risk management across the whole organisation.
Roger Marsden: I m still intrigued by some of the brand faking element as to what the risk is. Isn’t it flattering for a company like Rolex that I go and buy a copy of one of their watches in Hong Kong for $20? Is that a threat to the brand? I know I’m not buying a real one because I’m not going to get a real one for $20. I’ve just got a pretty good copy which works well.
Colin Frey: There s a distinction between willing and unwilling victims. A willing victim knows what he’s getting and is quite happy with it. A number of brand owners aren’t too concerned about copying, although there are some interesting questions about where the edges start to blur - if I can buy a $10 Cartier watch on Canal Street, am I ever likely to spend the money on buying the real thing? Are the consumers concerned completely separate, or is it the same consumer in a different mindset when they’re buying one or the other?
But the same brand owners are likely to be more concerned about diversion issues. They may ask if there are things that they can do to stop, for example, valuable assets that should be sold in Eastern Europe at a particular price range being sold in Tokyo at the same price, with someone else getting the arbitrage rather than themselves.
Colin Frey: The biggest problem is the unwilling victim who thinks he s buying the real thing. It looks authentic and he has paid the full price, and he’s found out it’s fake and is really upset about it. Not only is he going to take it back and ask the brand owner to deal with it, but he’s going to spread the word. Generally, you tell ten people if you’re upset with a product where you might tell one person if you’re happy. Measuring the risk is difficult.
Some brand owners at some point in their life cycle may actually want their brand name to be out there more. They may not necessarily fight the fakers. But overall the company is under threat, whether it’s through loss of revenue or because a government department comes down on them and says that they can t be paying the right duty because their export and sales figures don t tally. There are different risks depending on the company, the products and the brand.
Philip Thomas: Finally, are there any particularly good existing, or developing solutions for managing customer risk?
Tony Wilkinson: My pre-sales risk analysis tool works well for me, but then everybody’s business is different. It’s largely down to education to ensure good customer risk management. I think your biggest risk is that staff are misrepresenting what you can deliver. Those staff may work in any area, whether it’s maintenance, sales, distribution, consultancy - even your receptionist.
John Hurrell: We’re in dialogue with a retail company at the moment that has always looked at risks by risk category, such as fire, business interruption, and so on. We’re looking at turning that on its head and actually focusing their risk management strategy behind the customer, on the grounds that if the customer experience is right, then everything else will be right. This means looking at every element of the customer experience and then following the chain back to what underpins it. The customer wants the shop to be a safe place, they want the right number of friendly staff, they want the shop to be clean, they want the product that they want to buy to be on the shelf in when they want to buy it. If there’s a problem they want the complaint dealt with satisfactorily. The view is that the entire risk management process starts where the customer touches the organisation and then, following back from that point, everything that underpins it in the organisation. This comes down to are the warehouses managed properly? Is the transportation system satisfactory? Is the customer complaint process satisfactory? Is the IT system that underpins the checkout system robust? I think that is an interesting way of looking at it. And it’s actually a much more effective way than looking at individual risk characteristics.
Philip Thomas: Having focused on what the customer wants, and then working your way back, what is to say that six months later the customer won’t want something different? We’re coming back to the point of being a nimble organisation.
Colin Frey: There are two sides to it. Whatever brand protection systems you put in place, whether it’s in the product, on the product, on the package, or in the supply chain, you must not make the company any less nimble in the way it can react. If the features are overt, you need to ensure that they are in line with the brand and, preferably, that they actually enhance it, so that there is a better chance, six months down the line, that it is what the end consumer still wants. You can call it brand polish in a way - it not only protects the brand but enhances it.
