Over the last 20 years, the customer management outsourcing industry has been one of robust, double-digit growth and attractive margins. Such a market cannot help but attract competition, and throughout the 1990s many small outsourcing companies entered the industry. Outbound telemarketing was the traditional entry vehicle for these companies because of the low cost of entry, readily available sales prospects, and potential for more widespread client opportunities. Additionally, contracts were plentiful, as many companies proved willing to outsource this non-core activity. As these outsourcing firms grew, many attempted to migrate up the value stream by offering more customer care- and support-related services.

These firms continued to grow, along with a strong economy and an increased customer-centric approach on the part of potential clients. Increasing competition and the downturn of the global economy, however, took its toll on the outsourcing market, forcing longer sales cycles and compressed contract values. Companies, and many of the outsourcers who service them, have taken an increasingly tactical approach to managing customer value – and they have been doing this during a time when maintaining and growing a profitable customer base is more important than ever.

Many desperate companies tried to save themselves through cost cutting and temporarily strayed from the concept of customer centricity. Despite the backlash against customer relationship management (CRM) solutions, maintaining focus on the customer is more critical today than during any time in the past. Product and service differentiation is vanishing rapidly, and in today’s environment there is a direct correlation between the attention that you pay to the customer and the retention that they grant to you.

One of the most dramatic changes over the last ten years has been the increasing rate at which we have become what I call a “portable society.” In the fairly recent past, the local office supply store was the only place for local businesses to purchase their paper and pens. Now everywhere from Sam’s Club to Office Max provides these bulk products, even in small towns. Only a few years ago, consumers had a single choice when selecting service providers for their telephones or televisions. The regional bank was the most trusted of institutions. These geographic monopolies could be found everywhere, limiting consumer choice and opportunity to defect.

Times have certainly changed! I can change my long distance carrier without ever speaking to a person. In fact, I can even use a different carrier each time I make a call if that is my preference. With wireless number portability, one of the last switching barriers in that industry is vanishing. In both of these cases, consumers can vote with their fingers. Consolidation in financial services means I can choose from any number of national institutions, and they will offer me the same basic services. The result is consumers switching from one free checking offer to another, or transferring balances from one low introductory credit card rate to the next. Healthcare provider networks continue to expand, meaning that a patient may find the service they need at any one of many plans. Across these industries and many, many others – for both products and services – commoditization is increasing and feature sets are indistinguishable.

As a result, customer treatment is where the battle will be fought. It only takes a few bad, or even slightly negative, experiences to cause massive customer defections: service outages, poorly handled recalls, or terrible in-store experiences. Too often these things are unavoidable in the normal course of business, but without the proper customer management strategy, things can quickly go from bad to worse. Software alone cannot solve these problems. It also takes strategy, processes, infrastructure, and real live people – with knowledge, empathy, and proper training – to avert a customer base disaster.

Experience a few disasters, and that coveted corporate pot of gold known as “brand equity” will never be obtained. Even stainless steel brands can quickly become tarnished in this portable society. The converse is certainly just as true. I believe that there is a real opportunity to differentiate since so many corporations have taken a tactical approach to managing their customer base. If you can ensure experiences are something that allows the customer to feel a positive emotive attachment, due to a successful or unique experience, the consumer will ultimately keep coming back, in addition to going out of his or her way to share experiences with others.

For example, for a warranty interaction with an automotive organization, the enterprise should ask whether the consumer was treated like a true customer, whether he or she was trusted on the issue, how swiftly the issues were handled, and so on, as opposed to the consumer being doubted and demoralized throughout the process. If handled properly, the consumer will take advantage of the first opportunity to establish or reaffirm an affiliation with that brand.

Of course, if this were as simple as it sounds, all companies would foster customer devotion on par with Max, my eternally loyal golden retriever. So what drives so many companies so far astray? It is an unbalancing of the most basic customer management equation. There are certain tradeoffs between customer delight and enterprise profitability that a company must make with every customer management decision.

What drives the highest levels of customer satisfaction? Calls answered on the first ring by live humans. No-questions-asked return policies. One-to-one in-store employee to customer ratios. Low prices, high quality and unconditional guarantees. PhDs ready to answer consumer questions on any topic.

Certainly, high levels of customer satisfaction can increase profitability, but, except for a few niche exceptions, most companies will quickly find a point of diminishing returns where the cost of ensuring customer delight outweighs the associated shareholder return. To be safe and avoid a gray area surrounding that point of diminishing returns, most companies swing a bit too far towards the profitability side of the equation. After all, it is much easier to measure the cost of customer care than it is to measure the (sometimes) qualitative impact of satisfying customers.

Short decision horizons driven by depressed economies only exacerbate this problem. A major challenge is to create a balance between the need for immediate cost compression and the medium- and longer-term goals of strengthening and rebuilding customer relationships. For almost all companies, there is ultimately much more to be gained from managing the customer properly than there is from simply compressing cost by moving labor offshore or by introducing a piece of technology that may assist in eking out a bit more productivity. Pushing too hard on the cost compression side can make a company end up with a negative customer satisfaction outcome.

Achieving balance requires companies to take objective, thoughtful looks at themselves, their competitive environment, and their customer base. The overall plan should benchmark the company’s position in the competitive landscape, where their customers’ current satisfaction and loyalty levels stand in relation to the rest of the industry, and what drivers have the greatest impact to the customer relationships in such a way as to achieve the most significant bottom-line results – typically those things that help companies acquire, grow, and retain customers.

A great solution is one that addresses the questions: Is the solution going to have an impact on the acquisition of new customers? Is it going to have an impact on wallet-share growth – the ability to expand the business you have with your customers? Is it going to address the longer- term aspects of getting customers to stay with the company for a longer period of time? Many solutions do not consider these fundamental questions, and as a result, miss the mark entirely. “Point solutions” may solve any one of these challenges, but it is critical to have a holistic vision that takes into account customer loyalty, the brand impact service, the revenue impact of satisfaction, and the profitability driven by the combination of all of the above. Great solutions that consider the entire customer lifecycle can pay for themselves very, very quickly.

The ideal solution is one that manages the entire customer lifecycle. This includes customer touch points such as: prospect targeting and education; customer acquisition; customer welcome and provisioning; service and support; customer growth and development; and, finally, retention and win back. The solution strategy must take into account the systems, processes, analytics, and infrastructure required for these lifecycle categories and the many sub-components that exist within each step.

Anything less leaves a gap that will result in something less than full value being extracted from a customer base.

An often-overlooked aspect of managing the customer lifecycle is the connection between the front- and back-office. Despite what may be implied by the term back-office, these operations are a critical customer interface. How much front-office traffic do back-office issues such as billing errors or incomplete claims drive? Communication and feedback between front- and back-office operations are important to optimize back-office processes, minimize front-office customer interactions, and increase customer satisfaction. Soloed operations simple will no longer work, and many companies are learning to break down the communication barriers. What is not so obvious, however, are the potential infrastructure and operational synergies that exist between these traditionally separate functions.

Certainly many back-office functions are technology heavy or require specialized infrastructure, but many others require infrastructure and resource management capabilities almost identical to those of the front- office. Workflow, systems access, and the ability to hire, staff, and manage large numbers of human resources are often common requirements. Yet many call centers stay 100 percent utilized for 1.5 shifts and sit fallow for the remainder of the day. While most call centers require real-time management of customer interactions, many back- office jobs could be completed during the second and third shifts, dramatically increasing the utilization, and thus return on investment, of those customer management assets. Any large enterprise that does not find a way to keep the call center lights on 24x7 is missing a substantial value-creation opportunity.

While front- and back-office synchronization is an often-overlooked component of a successful customer management strategy, one area that receives too much focus is technology. As bizarre as it may seem, all too often it is the chief information officer that is given the mandate to develop the customer management strategy. This is most likely a result of that crazy period of time when so many technology products and applications were marketed – by both the developers and the consultants – as the silver bullet to end all customer management ailments.

The fact is that what really dictates solid customer management is the integration of many technologies with constantly improving processes, all tied back to a strategy that delivers results. Just good technology by itself does not, and will never, deliver a result with any form of a meaningful return on investment. Conversely, just a good strategy or process, without the supporting or enabling technology, will not yield the maximum result. Once again, successful customer management is a balancing act.

There is clearly a lot of room for technology improvement, and for the most part it is much more in the ease of implementation than in the capability of the technology. There is a lot of excellent technology that, when it is ultimately implemented, can deliver on a good part of the promise that the vendors make. The problem is that the time required to customize many of these products to do what they are advertised to do is in many cases, quite frankly, not worth it. With a high percentage of technology, the speed from idea to business case to functional specification to implementation needs to be far faster than it is today.

Even if technology alone were enough, I have yet to see what I consider a silver bullet. There is such a wide variety of technologies required, including knowledge management systems, self-service systems, and predictive modeling and churn analysis systems, that no one development shop can provide a complete solution. Many of these technologies integrated together in conjunction with the right human capital, the right processes, the right technology, and the right infrastructure, however, can yield significant result. That is one of the reasons why there has been so much growth in the customer management outsourcing industry. More and more corporations are realizing that they really do not have the scale, scope, commitment, and fortitude to invest in all these different areas; they are realizing that it’s a safer bet to go with someone who eats, drinks, and sleeps the concepts of optimizing profitability and delighting customers.

Finding the right partner, however, is more complex today than ever before. The customer management outsourcing industry has continued to evolve, and several key segments of competition, each with inherent benefits and risks to potential clients, have emerged:

• Aggressive pricers: These firms have reacted to the current environment by stripping out as many cost components as possible in order to offer the lowest price and a basic, commoditized service. Obviously, the benefit is a very attractive initial base price at a time when cost savings are critical to clients. The risk, however, is that these providers are forced, generally, either to take the financial punishment associated with low or negative margin – thus sacrificing financial stability – or boost margins by identifying additional billable events after a program has launched. Some providers are even forced to cut service levels drastically after the initial program launch.

• Offshore suppliers: More and more frequently, large clients are considering moving some or all of their customer management business to offshore locations such as India or the Philippines. The resulting explosion of “pure-play” offshore service providers, and the valuation premium initially demanded by these companies, has been spectacular. By working directly with these offshore companies, many U.S. clients have benefited from an enhanced “in-country” knowledge base as well as the absence of U.S. public company overhead. The associated risks include dealing with small, foreign firms; limitations in scalability, experience, and geographic diversity; and, more recently, the financial risks brought about by the plummeting valuations of these companies. Offshore companies face the additional risk of political and economic instability in many of the countries where their resources are located. Some of the recent “offshore-backlash” is a direct result of these risks.

• Consultants: As increasing numbers of IT and business consultants have gained the scrutiny of a public market listing, most have sought to diversify and strengthen their revenue streams – as well as offset downturns in project revenues – through expansion into customer management outsourcing. These firms offer the benefit of robust consulting services to accompany the outsourcing arrangements, but carry the risk that as the economy improves, they may drop customer management outsourcing projects for more lucrative business consulting engagements. Another benefit is the common practice of “beachhead” pricing for customer management outsourcing as an entry vehicle to greater IT outsourcing or business consulting engagements. While this many not benefit the client business as a whole, it can offer short-term pricing advantages to the customer management organization within the client. An offsetting risk, however, may be the short tenure and limited experience of many of these companies as large-scale customer management outsourcing operators. As experienced strategists, some firms lack the tactical day-to-day expertise to manage a successful customer management program.

• Innovative service providers: Another group of customer management outsourcing competitors has attempted to expand into value-added offerings beyond the traditional outsourcing environment. By offering such customer-centric services as data analytics, billing, technology solutions, up-sell/cross-sell strategies, and enhanced levels of quality and customer satisfaction measurement, these firms typically prioritize business solutions above all else. The benefits of these providers are their ability to provide holistic solutions that drive two key business metrics: value (revenue enhancement, cost reduction) and customer satisfaction. The risk is in the execution. Clients should ensure the provider has the experience and track record to deliver on these promises, because the cost to the client may include a higher base price – or more results-based components – with the benefits occurring through the execution of the value-added solutions.

The current confusion in the industry has driven clients to select from all four of the categories above for many reasons. The aggressive pricers typically win when business decisions are based on price alone or when aggressive pricing selection processes, such as online auctions, are employed. Similarly, offshore suppliers do well when pricing is a primary driver coupled with a client that wants simply to “test” the offshore market with a pilot program. The consultants have won outsourcing engagements from clients who are traditionally entrenched, or when an integrated IT outsourcing/customer management solution is preferable. Finally, innovative service providers find themselves serving those clients who place quality and customer satisfaction as top priorities and who are seeking a partner that can best represent them to their customers.

Innovative service providers shoulder much of the up-front capital investment required to develop their non-traditional offerings. Nevertheless, I believe such providers represent the future of the customer management outsourcing industry. The winners in this market will develop successful partnerships with IT and business consulting firms. They will develop a broad spectrum of international and offshore capabilities to best serve the needs of an increasingly global client base. They will employ industry subject matter experts and move beyond operational services to offer increased business intelligence to their clients. They will drive revenue through high standards of quality and service and manage costs effectively to keep prices competitive. Finally, they will go to market with solutions that help their clients increase customer satisfaction and promote value throughout the client organization.

The outsourcing companies that survive and thrive in the current environment have an entirely different operational philosophy than most of the companies that have flooded into the industry over the past 15 years. The foundation of this philosophy will be world-class operations and substantial experience. Success will be determined by the quick development of immediately applicable solutions – solutions that can be deployed globally, across a shared infrastructure, that promote nimble and cost-effective operations anywhere in the world.

These operations will increase flexibility and lower costs by centralizing much of the traditional call center infrastructure. The centralization will enable many of the long-awaited customer management practices such as agents at home and true call blending to locations around the world. Offshore operations will be provided at an increasingly higher quality, but offshore location will be only one component of a geographic strategy that takes into account risk mitigation, quality, time of day, language, and customer needs. World-class operations also will look at continuous improvement as a way to both decrease costs and increase quality. By tying together quality assurance, customer satisfaction, and client satisfaction, operations will have a true 360-degree view from which improvements can be implemented.

The middle tier of this operational philosophy will be the best practices and subject matter expertise brought by the provider. These subject matter experts will be able to “talk the talk” within their industries and bring true hands-on experience to the table. Along with client representatives, they will be instrumental in global governance and account management strategies that ensure a continuing partnership between the provider and the client. Finally, the pinnacle of the operational philosophy will be industry-specific solutions designed to address business challenges.

This operational philosophy also allows outsourcing partners to align the outsourcing goals with the client goals. Win-win relationships drive providers to deliver on promises, and as remuneration for living up to those commitments, have upside that is heavily performance-based. The partnership model should be focused on a relationship that is symbiotic, balanced, and designed for both parties to be rewarded based on success. It is critical, however, to define the indicators of success up front. This requires the provider to understand the client, understand the commitments, be realistic about the ability to live up to the commitments, and make sure that they are communicating reality rather than just what the client wants to hear.

The final step is to align the goals contractually. When the basic terms and conditions of the negotiation are complete, both parties should say, “Let’s define in our relationship – in our contract – what the values are going to be that we’re going to be measured against. What will determine that the outcome was outstanding rather than merely satisfactory?” The answers to these questions should go well beyond traditional call center service levels; they should be a means to measure true business results and should be documented clearly in the contract. It is also important to do continuous business reviews to look back and see if, in fact, the partnership is trending and tracking to outstanding overall customer satisfaction. Another way to avoid some of the conflict inherent in traditional outsourcing is to utilize a third-party company to help measure and ensure the partnership remains on track.

Most importantly, the partnership must be able to accept and operate under a changing environment. You cannot be successful in this business if you are not focused on change. The industry and latest thinking will continue to evolve, and 18 months or two years from now there will be an even more inward focus ensuring that enterprises are doing everything possible to focus on the customer. I believe large corporations will ultimately conclude that there are a finite number of customers who are the right fit for their companies. Once they come to that conclusion and realize that their customer base is one of their most valuable assets – although it is not necessarily accounted for on their balance sheets – then the path to creating emotive loyalty among those customers will appear more clear than ever before.