Smart Customization: Profitable Growth Through Tailored Business Streams

By Chris Disher, Gil Irwin, Leslie Moeller and Matthew Egol

“You can have any color of car you want – as long as its black” – Henry Ford

Managing customers and services used to be easy. Mr. Ford’s edict seems draconian now but his results were indisputable: a customer base low on choice and high on loyalty equated to excellent manufacturer profits. Today, customers are not so accommodating. Demands have mushroomed, triggering a wave of complex organizational offerings to service these needs, with no estimable end in sight. (See Exhibit 1)

Yet, the wisdom of this potpourri of customized capabilities is dubious. The real challenge is not necessarily in being customer centric or customer focused, but doing so profitably. In a study that benchmarked business units with sales from $1 billion to $20 billion, Booz Allen has found that “Smart Customizers” – those that successfully trade off the value of variety against the costs associated with introducing more complexity into their business models – outperform peers two-to-one in revenue growth and have profit margins 5 percent to 10 percent above competitors (See Exhibit 2).

Why the difference in performance?

The problem is that most companies add variety to their product or service mix indiscriminately, under the auspice of delivering higher customer satisfaction or other well-meaning objective. In truth, most companies do not target customer needs well enough to provide products and services that are true “order winners” – offerings that set one company apart from another. To compound the mistake, the economics of these additional services are rarely analyzed to assess the incremental costs and benefits associated with the differentiation.

By providing customization for too many customers without questioning whether the additional variety is worth the costs incurred. Companies not only destroy profit margins but also institutionalize these underperforming complexities into their service model.

Companies can become “Smart Customizers”

Booz Allen has developed “Smart Customization” approaches for companies in numerous industries, ranging from complex, engineered products such as aerospace to service-intensive industries like banking and telecommunications. We have found that Smart Customizers:

• Understand the sources of value that customization provides their customers
• Find the “virtuous variety” – the point at which customization adds value to both company and clientele alike
• Tailor their business streams – product development, demand generation, production and scheduling, supply chain, customer care, etc – and align them to the sources of demand to provide customer value at least cost.

1) Understanding the sources of value that customization provides

Companies often attempt to generate additional value through more differentiation and complex segmentation approaches. They add assortment, insert new specifications, create brand extensions, and design value-added services. Over time, competitors also add more variety to differentiate and stimulate demand. Invariably, a “capabilities arms race” develops, commoditizing services and eroding industry margins.

Fundamentally, companies lack the customer profitability metrics to understand the consequence of introducing complexity into their business models, relying on intuition alone to manage cost vs. value tradeoffs. This scenario inevitably leads to error, primarily due to a built in bias to add complexity to satisfy customer requirements and avoid lost sales.

We find that “working from the market back” is critical to fully understanding the value of customization. Different methods can be used to quantify this value ranging from simpler survey driven methodologies to more sophisticated statistical analyses to isolate how value is created and captured for different segments.

To provide a real world example, a consumer products company used an independent segmentation analysis of its customers to identify which capabilities were considered “right to play” versus “right to win.” The in depth survey provided unique insights into both the value different retailers placed on a number of service dimensions (e.g., trade funding approaches, innovative co-marketing programs, retail execution, supply chain management) and how suppliers stacked up against these dimensions. Working together, we then quantitatively ranked the importance of specific services in driving the purchase decision, to isolate “table stake” offerings from truly differentiated solutions. This proved a key starting point, in combination with growth objectives and cost-to-serve by account, to develop the portfolio mix of product and services, both standardized and customized, appropriate to each customer.

2) Find the “virtuous variety”

To generate a step change in performance, companies need to drive the segmentation analysis to distinguish the unique requirements of some segments from the needs common to all, to clearly separate the “order qualifiers” from the “order winners”.

Order qualifiers are products and services that allow companies to stay in the battle with competitors. They are not necessarily drivers of growth; rather, they are byproducts of the “capabilities arms race” to satisfy minimum service levels. By contrast, order winners are products and services that meet a customer’s most critical needs, truly distinguishing the offerings between suppliers. These order winners will vary by segment, whereas many order qualifiers are typically shared across customer types.

The reinvention of a U.S. bank’s treasury services unit is a testament to the value of getting the “virtuous variety” right. This business (i.e. cash management, foreign exchange, letters of credit) was far from simple to deliver. Over time, this business had grown into a mammoth enterprise, reaching 30,000 clients in over 20 countries, and generating 10 million client contacts every year. The infrastructure to serve all those clients involved seven separate product organizations, 56 IT systems, and 45 different service centers all over the work.

Like its competition, the bank viewed service as a key basis for competition. Yet the end result of this spider web of capabilities was a one size fits all business model where most clients were either over or under served.

To help address this challenge, Booz Allen performed a segmentation analysis to distinguish unique vs. common service requirements, to isolate the order winners from the order qualifiers. The findings revealed a divergence in customer needs primarily along two dimensions: a preference for specialized, consultative services vs. faster, self-service capabilities.

Based on these insights, Booz Allen worked with the bank to redesign service delivery around three business streams: self-service, standardized, and consultative. Under the new approach, the bank flows the majority of customers through the lower cost self-service offering, while reserving the more complex consultative solutions for customers who truly value the additional service provided. The “Smart Customization” significantly simplified the IT architecture and increased efficiency for the company’s call center operations. The results were prodigious: customer service levels rose even as costs fell by 20%.

3) Tailoring the business stream

Smart Customizers match their segmentation strategies with delivery mechanisms designed specifically to serve each segment profitably – they “tailor the business stream” to provide the highest value at the lowest cost.

Think of these Tailored Business Streams (TBS) as separate, mini-operating models (See Exhibit 3).

Each stream contains the appropriate people, processes, and technologies to deliver parts of the product or service offering. Consider TBS as the implementation and delivery of the “virtuous variety” – each stream caters to different expectations for cost, quality, speed, and innovation with the appropriate management tools in place to drive value in an economic manner. In the bank example, the firm aligned IT architecture, call center services, and other processes around the new business streams of self-service, standardized, and consultative capabilities.

Tailoring business streams is one of the clearest methodologies for optimizing complexity. Businesses can flow the simplest and most predictable products/services through the most efficient and least expensive delivery model. Harder, less predictable undertakings flow through a more robust (and expensive) infrastructure. This ensures that the company’s cost structure is not distorted by the high-customization needs of specific customer segments. Smart Customizers continually look to adapt these streams, providing tailored solutions vs. “transactional” approaches for customers as merited.

The road ahead

Meeting the demands of the fickle customer is a daunting challenge for all businesses. Building Smart Customization requires analytical insight, a richer understanding of the sources of value and cost, the ability to design solutions, and the executive determination to follow through. We believe the destination justifies the journey.