Do Operations Profit Centers Detract From Customer Profitability?


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You would think that as I moved my life 3,000 miles “across the pond” for the opportunity of turning a major financial institution’s collections cost center into a $1 billion P&L (profit center) that I would be a fan of operations P&Ls. However, I believe it is a distraction that can lead CRM efforts up a blind alley.

It is seductively compelling for operations leaders and their teams to seize the opportunity to step up from managing a cost center to leading a business unit with its own profit and loss sheet. There are a couple of challenges. The first lies in deciding which revenue should be put against the operations cost centers.

The obvious revenue to consider is the cross-sell revenue from customer service associates and the sales of the outbound telemarketing group. This is a rational and worthwhile move. These selling efforts generate significant profits for many companies. However, they rarely build the “customer relationship.” Even with good scripting, we are often taking our customer’s time to pitch products such as “vision insurance” or “payment protection insurance” that we all know generally create much more value for the company than we are creating for the company’s most valuable resource: the customer.

This leads to the second challenge that such an operations P&L does not address: It distracts from some of the trickier (and more valuable) challenges of customer relationship management. How are your teams’ actions improving the customer experience, and is that affecting retention profitably?

Hence, while my company’s president was pushing me on our conference calls to turn our U.K. operations into a profit center, my CRM focus was on other areas: working to build marketing’s understanding of the customer and learning how our actions affected customers.


Marketing and sales believe they know the customer. They have a lot of data (e.g. customer demographics, focus groups, customer surveys and customer purchasing data) that they analyze. But how many of them listen to customer calls? Introducing “Customer Listening”€”where we insisted marketing executives listen to just one hour of customer calls a month€”into our U.K. operations was initially like pulling teeth.

However, the insights started to flow as marketing started to realize how the marketing material could confuse the customer, leading to more calls and higher cost. This opened the door to have planning sessions where we would work with marketing to identify the servicing cost driven by the product characteristics. In so many organizations, the frontline associates who deal with the customer are a “pot of gold” for understanding how product design hinders, rather than helps, the customer. The frontline staff can provide key insights into CRM.

For example, the team noticed that one easily identifiable rentention group appeared to be much more motivated by customer service rather than price reductions. Hence, the team tested focusing on product attributes for this group and acknowledging customer concerns, and the new focus significantly increased profitability. It is interesting to note that this team was based in India, and it provides a good example of the advantages of the highly analytical and intellectual Indian associates there. Having such a sharp analytical workforce can bring significant benefits, in addition to lowering one’s cost base.

Another key component of CRM that operations can champion is providing different levels of service to different customer groups. I worked with credit unions in the mid-’90s, and they found this idea abhorrent. They assumed that if you weren’t giving good service, then you must be giving bad service. We highlighted how a long-term member holding a mortgage, savings, an insurance policy and a car loan contributed significantly more than the new member with the less expensive insurance policy. They, then, realized that, although both customers were valuable, the organization needed to go the extra mile on service for the longer-term member to ensure the credit union kept the person’s business.

Hence, although operations P&Ls help raise the visibility of operations and integrate the team more closely with revenue-generating activities, I believe that this can result in focusing on pitching many, often less valuable, products to the customer. This can be a distraction from the richer veins of CRM involved in understanding different customer segments, and the impact of your products and service on customer profitability.

David Farlow
Farlow and Co.
In his career with Bain & Co, Capital One and Wells Fargo, David Farlow has focused on building, leading and improving operations in the United States, Europe and Asia. His company, Farlow and Co., works with operations teams to drive cost and effectiveness improvements, often through off-shoring.


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