Between 1990 and 1993, customers of the commercial waste-collection services of Browning-Ferris Industries (BFI) defected to competitors at a rate of 11% to 13% per year. Senior managers focused on raising customer satisfaction, but between 1995 and 1997, the defection rate increased to 13% to 15%. BFI’s original growth strategy of acquiring similar businesses that would provide new customers had become too expensive. The only alternative appeared to be customer retention, so managers began exploring what effect it could have on profit. When they discovered that a mere 1% decline in customer defection would yield a pretax profit increase of $41 million, customer retention took on heightened importance. Managers learned to follow a chain of links from poor customer satisfaction back to a specific problem action and then invest in correcting it.
The result was dramatic. Falling customer-satisfaction scores leveled off and then began to climb rapidly. Customer-defection rates dropped to below 10%. BFI was able to sustain profitability in the face of losses from its other business operations. Managers learned about the links from the customer-service-dependability rating to overall customer satisfaction to the customer-defection rate. They could see which specific actions would have the best payoff, and they invested in those.
BFI is one of a growing number of companies that are moving beyond a vague desire for “shareholder value” and “customer focus” and asking the questions that can get them there. How does a company identify and measure causal relationships between parts of its organization? What really drives profit and creates value? How does an operating or capital-investment decision affect profit?
That type of probing goes beyond individual departmental goals to a cross-functional view of the company’s objectives and relationships. Human-resource departments strive to improve employee satisfaction. Marketing departments focus on achieving higher levels of customer satisfaction and loyalty. Operations functions attempt to raise product quality. Those goals differ, but each department ultimately shares a larger goal: Make the company more profitable.
Companies may have success meeting departmental goals, but they often stop analyzing cause and effect once the goal is met. Later they wonder why a string of individual successes hasn’t led to an increase in corporate profit or shareholder value. They don’t see that because their analysis fails to bridge functions and actions, they can’t hope to reap the highest corporate profit.