CEOs need hard data on customer loyalty

The following post originally appeared on the Harvard Business Review Blog Network

Three-quarters of the world's CEOs say more emphasis should be placed on measuring the value of non-financial assets such as intellectual capital and customer relationships.

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This was the headline finding of a recent study (PDF) by the American Institute of CPAs and the Chartered Institute of Management Accountants. Considering the sponsors, it's sort of like the Army reporting that what we really need is more battleships. Unexpected, to say the least.

But let's give our financial colleagues credit for acknowledging the fundamental imbalance that the CEOs are referring to. Companies spend countless hours tracking financials: assets, liabilities, revenue, expenses, and cash flow. Many devote almost no serious time to assessing the customer relationships that ultimately create economic value.

Perhaps that's the result of customer metrics long being seen as "soft" numbers with little clear connection to "hard" numbers like revenue or cash flow. Yet companies all over the world increasingly realize they need to correct this imbalance and that customer metrics also must become "hard." For example, many companies conduct frequent surveys asking customers how likely they are to recommend a product or company to friends or colleagues. The surveys provide a steady stream of data on customer attitudes and probable behaviors. Company leaders track this data every week, just as all companies track financial results. And they use it the way other companies use financial reports — to inform operational and investment decisions. In short, it is their primary management system.

When Charles "Chuck" Schwab returned to the helm to turn around his troubled financial firm in 2004, for example, he installed such a system. Today, the firm no longer suffers from informational imbalance. Chuck Schwab and CEO Walt Bettinger regularly discuss customer metrics with securities analysts, including an economic analysis quantifying the value of promoters and detractors. The company's executive committee has embedded its scores in its Key Business Indicator reports.

At the fast-growing company Rackspace, CEO Lanham Napier makes a point of reading customer survey data first thing every day. Rackspace went public in 2008 — shortly before the financial markets went belly up. Regardless of financials, many companies, including Rackspace, saw their shares plummet. Rackspace's response was to double down on its commitment to what it calls "fanatical support" for customers and launched a broad set of customer-focused initiatives, including pricing changes, a reorganization of frontline phone reps into cross-functional teams, and a commitment to building a state-of-the-art process of gathering and acting on customer feedback. The result? Customer-churn rates declined by more than one-third, the company continued its double-digit growth, and its stock price has increased tenfold over the past few years. At Rackspace, the board of directors compares the company's Net Promoter score with the scores of key competitors because it provides a much clearer (and more forward-looking) gauge of strategic success than the traditional financial metrics.

Global conglomerate Philips also found that it could rely on customer feedback scores as a reliable measure of growth. Studying individual accounts in its lighting business, the company found that revenue grew 69% for accounts where scores increased and just 6% for accounts where scores held steady. Accounts with declining scores saw revenue fall by 24%. Moreover, its business lines which enjoyed industry-leading scores outgrew those where Philips lagged the competition by 5 percentage points. Philips used this data along with profitability figures to develop the right investment strategy for each business line and each customer account.

These companies have demonstrated that it is possible to generate hard data on customer loyalty and use them in to inform strategic decisions. We think it's time that all those other CEOs got their wish: more information about nonfinancial assets. After all, can you really run a business without information about the asset — customers — that provides the source of all positive cash flow?

Fred Reichheld is a Fellow at Bain & Company and co-author, with Rob Markey, of the book: The Ultimate Question 2.0: How Net Promoter Companies Thrive in a Customer-Driven World, published by HBR Press.