Customer Due Diligence

As the nasty red blob heads your way, the national weather service already has a plan in place to communicate with you – and to reinforce the message about the impending storm.  Likewise, a communication plan should be a key element of your Customer Strategy.  An often overlooked step in communicating with customers, partners, and employees is to reinforce the message. This step is every bit as important as defining your audience, crafting the message, and choosing the right vehicle(s). 

It struck me as a powerful storm came through Indiana this past week - another in the increasing list of dangerous storms that have hit the U.S. recently. This particular storm was determined to be a “potentially dangerous situation” and had a history of tornados. Local weather forecasters did everything possible to get the word out and convey the need to take shelter.

The message was reinforced in many ways throughout the event. Television stations broadcasted the live radar. Radio stations reported on the situation across the state. Tornado sirens sounded in neighborhoods. Websites communicated the information online. And, news stations sent text and email alerts.  It was critical that people were aware and prepared. 

As a customer strategist, you need to do your due diligence to ensure your message is reinforced. Whatever you do, don’t just deliver your message and walk away. The message needs to be consistent and reinforced in order to really have an impact. Consider some of the following best practices:

-          Use multiple communication vehicles

-          Send follow-up messages

-          Provide status or progress reports

-          Ensure leadership actively supports the effort (when appropriate)

Positive reinforcement just might make the difference in taking action and achieving your goals – what are you waiting for? 

Kitty Radcliff
Vice President 

• Client interactions - Walker clients shared their journey and best practices for leveraging customer, partner, and employee insights to create world-class outcomes. We heard numerous stories about individuals who have used the customer or partner perspective to drive change within their organization and generate a return on the investment.
• Roundtable discussions - Walker clients and Walker associates facilitated roundtable discussions on the topics of 1) strengthening channel/partner relationships , 2) engaging account teams, 3) leveraging the customer perspective for a competitive advantage, and 4) increasing the value of customer comments through text analytics.
• Six working sessions  - Walker consultants facilitated discussions and activities related to each of the six essential elements for world-class listening (see diagram for the six elements). Each session included a description of world-class and steps for getting there.
• Social time - There were several opportunities to network and interact with all of the attendees and to enjoy the Palm Springs destination.

In an effort to keep up with the latest news related to mergers and acquisitions, I am continually educating myself by pilfering through a never-ending inventory of content, online and elsewhere. Recently, I have read a number of very good articles and blogs on merger and acquisition strategies, processes, trends, etc., and many of these articles are very articulate in how they advise completing a successful merger or acquisition. 

Most recently, I read an article in Consulting Magazine that mentioned some staggering statistics related to the percentage of CEOs that were interviewed not knowing the clear strategic rationale or the long-term financial contribution that the deal would bring to the company.  The article was well done and went on to talk about the right questions to ask and shared many strong points related to today’s mergers and acquisitions climate.  However, nowhere in the article, or in many other articles on this topic, was there any mention of the need to clearly understand the customer base that is being acquired.  

I realize that many mergers and acquisitions are aligned to a pure financial play or intellectual property or other non customer-related attributes, but for those mergers and acquisitions that have greater strategic implications the goal still remains to impact the multiple or potential market share gain or successful entry into a new market.  So shouldn’t it be of primary importance to include a thorough examination of the customer base? Thorough, meaning a deep, fully representational view crossing segments, geographies, and the population as a whole? I have seen, first hand, the fall-out of completing an acquisition without proper due diligence on the customer base.  Needless to say, it didn’t end well.  This does not have to be the case.  Understanding your customers to create competitive advantages begins before and culminates with the completion of an exit with favorable valuation multiples.

Here is the link to the article from Consulting Magazine – it’s worth a read. 

Michael Good
Vice President, Strategic Account Manager

Many companies are focused on growing through acquisition, and those with a lot of experience are starting to get good at it. However, companies still want to know whether or not a strategy of mergers and acquisitions is a smart approach in today’s economy. Do acquiring companies outperform those who are continuing to focus on organic growth? When is the right time to acquire? Will my company get a better deal today than I will in 2011?

Some experts say that “deal-making” companies are in fact outperforming others today, particularly when it comes to cross-border deals. Others stand firm on the belief that making acquisitions in today’s economy is still too risky.  Recently, Forbes released a list of the “Top 10 Deal Makers in 2010”, adding to the commentary of whether or not making acquisitions is a smart decision now and in the near future.

Those who believe that now is the time to “make a deal” should keep these success factors close at hand:

Know the risk of the customer base you are buying. It is extremely critical to take the due diligence process seriously, investing appropriately in order to make a sound decision. This includes predicting the future loyalty and growth of the customer base, in addition to understanding historical trends.

Find the hot-spots. An acquirer doesn’t have to know every single area that needs improvement within a company they are hoping to purchase, but having indicators of weak areas or hot-spots will give a clear indication of whether or not that company is a good fit. If customer support has always been a weakness for the acquirer, adding more customer support problems will only create more headaches (not to mention risking greater financial losses).

Gather customer comments. Simply gathering comments from the customer base that an organization would like to acquire can provide clarity to any current feelings. Tone comes through clearly in comments customers provide, and typically can shed a lot of light on areas that could have already been a concern.

Gathering insights from a customer base that an acquirer can analyze during the due diligence process should be done by a third party to keep neutrality. It is something that can be done fairly quickly and is an absolutely critical component prior to making an acquisition.

Are you thinking about making a deal? Do you have all of the information you need to make a good decision?

Katie Kiernan
Vice President, Consulting Services

So far, we have explored how customer loyalty data can be connected statistically to financial performance at both an internal/micro level as well as an external/macro perspective. To summarize the key findings:

From an internal/micro perspective (i.e., at the customer/account level), we can use the linkage of loyalty and financial performance to:

·         Identify where revenue is at risk (and, conversely, more secure);

·         Evaluate to what extent customers act on their intentions;

·         Articulate the value of improving customer loyalty;

·         Build tailored customer-level strategies to build on existing loyalty or address the impediments to customer loyalty;

These tools are used in conjunction with strategic account planning to facilitate the growth and profit objectives of the firm.

At the external/macro perspective (i.e., at the market performance level), the literature to date suggests that customer satisfaction/loyalty metrics…

·         can be used as a leading indicator of future stock price trends,

·         can be used as a leading indicator of stock returns risk, and

·         have utility in financial markets and should be disclosed in the ongoing filings public companies are required to file with the SEC.

In other words, we have tangible evidence that intangibles such as customer loyalty can add to (or detract from) the value of a firm, and therefore have a place on the balance sheet.[1]

It is interesting to note that each approach, while different in its focus (external vs. internal), complements each other and creates a virtuous cycle of value creation. In other words, it makes sense that a firm that focuses on tailored customer-level strategies would have a more customer base, which means a more stable revenue base. A more stable revenue base means that there is likely less volatility in the firm's earnings, which attracts investors. When a firm attracts more investors (and the current investors are more interested in holding the stock vs. selling it), the laws of supply and demand tell us that the stock price will appreciate. Strong stock returns attract attention (generally positive), which serves to create awareness and demand for the firm’s products and services. And so the cycle continues.

Collectively, these findings reinforce the strategic value of being a customer-focused organization, and the implications are broad-reaching; consider the following scenarios:

1)      A mutual fund manager is interested in investing in a given sector and has narrowed his focus to three firms – each has a strong balance sheet, a solid growth record, and reputable management. With all the basic criteria so evenly aligned, the “tie-breaker” is the customer loyalty metrics each firm publishes.
 

2)      A firm is interested in acquiring one of its competitors; in the due diligence phase, the acquiring firm decides to conduct an assessment of the customers of the target firm. The results suggest that the customer base is tenuous at best. The acquiring firm may determine to back out of the deal altogether (or, at a minimum, substantially reduce its offer price).
 

3)      A management team decides that it wants to “walk the talk” by making certain its managers and leaders are personally invested in the strategy of being a customer-focused organization. To do this, performance targets on customer loyalty levels are set; to further reinforce the level of “skin in the game” that managers and team leaders have, the incentive is stock-based.
 

4)      An account manager wants to ensure that she is allocating her time focusing on the customers with the greatest value to her organization. Rather than focus solely on total spend/revenue, she employs the Value Mapping discipline to evaluate which clients hold the greatest strategic value to the firm. Using the output from the Value Mapping process, she is able to construct tailored, specific action plans for each customer.

These are just a few ways in which customer loyalty can be leveraged to increase the value of the firm. What they all have in common is that they are focused on strategic business questions – in other words, tracking loyalty for the sake of scorekeeping holds absolutely no value to the firm. To create strategic value, the data have to be leveraged to address substantive, strategic business questions.

Mark Ratekin
Sr. Vice President, Consulting Services & Resource Management

 

Companies spend billions of dollars on acquisitions. They spend millions of dollars with lawyers to make sure that the companies they buy are legally formed and protected from certain legal and business risks. They spend millions of dollars with accountants to make sure that the financial disclosures are a good representation of the target’s financial position and operating results. They spend millions of dollars with engineers to make sure that the products do what they are supposed to do. These millions are well worth it.

And most companies spend and do almost nothing with respect to the single biggest and most valuable asset in most transactions—the customer base.

Before you spend your shareholders’ money on acquiring another business, shouldn’t you know how valuable that single largest asset is?

Wouldn’t you like to know…

·         How loyal is the customer base that you are buying? Are they likely to continue to do business with you after the deal?

·         What are they loyal to…management? The brand? The product or service? The account team?

·         What challenges are customers having with the target?

·         What opportunities exist within the customer base to jump start post-deal growth?

·         How much of the revenue stream is in high risk of leaving?

·         How do customers view the target relative to its competitors?

Due diligence on the customer base—real due diligence, not the standard phone call to 5 pre-wired customers—can dramatically increase and accelerate value accretion. After all, what’s more important than the customers that account for every dollar of revenue that you are buying?

You know the Pareto Principle—in most cases, 80% of the effects come from 20% of the causes. This allows us to focus on the important stuff, the stuff that results in 80% of our objectives. But when it comes to mergers and acquisitions, Pareto would roll over in his grave thinking about our inability to apply his principle.

Think about the due diligence done in most acquisitions. Groups of attorneys pore over documents proving the value and ownership of hard assets. Accountants wear out their green eyeshades worrying about how those assets and the related liabilities are recorded in the financial statements. Both groups do a great job of executing their assignments. But let’s be clear—their assignments are to give comfort over about 20% of the value of the total business.

Don’t believe it? Across many industries, the average Price-to-Book ratio is about 5. What that means is that for every $5 of value, $1 is made up of the recorded value and the other $4 is made up of intangible assets. Companies focus their due diligence efforts on the $1 and virtually ignore the $4!

What makes up the $4? A lot of things, but nearly all of them are either the value of the customer base or things directly impacted by customers. A company with a loyal customer base is much more valuable than one whose customers are not loyal. In fact, in a study of IT companies that we performed, the price/book ratio of loyalty leaders was 5.7 times versus 2.7 times for loyalty laggards.

Before your company buys another after scouring records to prove the value of the hard assets, make sure that the assets that really drive the value—the customers—get a good solid investigation as well.