A Strategic Cornerstone: Defining And Measuring Customer Value

Kenneth S. Roper and Maureen McDevitt

Ken is a senior consultant with FMI. His areas of expertise include strategic planning, business evaluation and planning, compensation-system evaluation and design, and management information systems for construction firms of all sizes.
303.398.7218 [email protected]

Maureen is an FMI consultant who provides a mixture of hands-on consulting and training programs to assist contractors and construction materials manufacturers and suppliers with the variety of issues facing them today.
303.398.7243 [email protected]

Many contractors make assumptions about what their customers want but their assumptions are often incorrect. You can create a competitive advantage for your company by understanding what your customers truly need, measuring how your firm meets those needs, and establishing a corporate strategy geared toward achieving customer satisfaction.

IN BRIEF

ow do your customers buy construction services, and what is most important to them when making a purchase? Most contractors we work with assume many things about what their customers want. This article focuses on two issues: how to identify and measure value from the customers perspective, and how you can use this information to develop a process to formulate corporate strategy and build a sustainable competitive advantage for your company.
WHY DEFINE AND MEASURE CUSTOMER VALUE?

Our customers often ask us to lead them in the strategic planning process to identify their companys future direction over the next three to five years. During

the strategic planning session, we discuss the specific market conditions that will impact their business. What are the long and short-term opportunities for further growth? Are there regulatory or technological changes that threaten their current position in the marketplace? Are other competitors entering their market? But while these are important issues in any strategic planning session, the ultimate determinant of a companys future success or failure is the customer. Value is what drives your customers purchasing decision. Your customers perception of what you actually provide is almost always made on the level of a value comparison how your products and services compare relative to those offered by the competition. And its not

only how you compare against what is currently offered in the marketplace, its how you compare against what your customers want to be provided even if it currently is not offered by anyone. Your strategy should align this customerperceived value with your companys capabilities. Contractors that have this broader perception of what the marketplace demands can institute a welldeveloped strategy that defines how to best deliver what their customers value. Effective planning occurs when desired outcomes are linked with very specific activities, or performance drivers. The desired outcomes by themselves only tell you where you want to go and not how to get there. Performance drivers tell you what to do and how to do it. One popular approach that incorporates both the concept of drivers and outcomes is the balanced scorecard, developed by Robert S. Kaplan and David P. Norton, the authors of The Balanced Scorecard: Translating Strategy into Action. The balanced scorecard approach examines the capabilities and financial measures of a strategy, as well as the customer perspective and the development of a workforce that can anticipate and respond to customers demands. This external focus on customer needs and values is a vital element in successful strategic initiatives. A scorecard approach links the strategic activities and outcomes in four key areas financial goals, customer management, internal operations, and growth and knowledge management and the strategies developed for each of the four areas are interrelated. For example, a general contractor wanting to expand geographically would address not only the return on investment for the expenditure of setting up an office in the new location but also the additional

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issues shown in Exhibit 1. The elements in the strategy are interrelated and the emphasis is on what the customer values, how these values influence buying decisions, and how you create value by meeting or exceeding customers needs, thereby building a sustainable competitive advantage for your company.
HOW AND WHY CUSTOMERS BUY GOODS AND SERVICES THE CONCEPT OF COMPETITIVE VALUE

Exhibit 1: A Scorecard Approach to Geographic Expansion

Strategy: Expansion into new geographic market

Financial measures: Return on assets Revenue growth Internal growth and development: Skill level and training needs Access to information
hard-won customers to the competition. Competitive value is a concept that broadens how you should think of your strategy by moving beyond a simple evaluation of your strengths and weaknesses to compare how you stack up against the competition and to determine whether your customers would continue to be loyal to you given the alternatives in the marketplace. Your competitive value can be tested by

Customer management: Number of new customers Customer satisfaction Customer needs Operational issues: Delivery mechanisms Field efficiency

Customers make buying decisions for construction services in a manner similar to most of their other purchasing decisions. They question the quality of the product and services offered, how they will be treated while these services are provided, and the image and reputation of the offeror. In simplest terms, the decision is based on the image of the company prior to awarding the project (marketing), the process and relationship during selection and award

One question to ask yourself when it comes to measuring customer value is whether you are measuring the appropriate indicators of success.

of the project (sales), and the quality of the operations during and after the project (service). You can think of these three aspects as a three-legged stool if any one of them fails, the construction firm will lose the customer. All of the promises made during the marketing phase must be consistent with the offer and be demonstrated in the operational and post-operational phases of the project. Should inconsistencies occur between what is promised and what is eventually delivered, you risk losing your

conducting a customer value analysis and determining your position against the competition. Companies with a strong position on the customer value map will win business while those companies with a poor position will struggle and ultimately fail (see Exhibit 2).
MEASUREMENT TECHNIQUES

How do you know what your customers value and where you stand in the marketplace? How do you know if

your strategic plans are delivering the results that you want? One question to ask yourself when it comes to measuring customer value is whether you are measuring the appropriate indicators of success. For instance, how are you certain that you are delivering what the customer wants and not just what is operationally most convenient for you to deliver? One electrical service contractor interested in customer satisfaction measured whether its service technicians were scheduling calls at the convenience of the customer and how often they were on-time for those appointments, rather than merely whether the service technician was ontime for the appointment. As another example, providing information in a format clearly understandable to an owner during a progress meeting may be much more customer-focused than posting schedule updates to a projectspecific web site if the owner is not familiar with electronic communication. Value is taking the customers perspective and finding ways to deliver what he or she needs in an efficient and profitable manner. Following are several ways that you can ensure that you are really listening to the voice of the customer and not only your internal motivations.

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Exhibit 2: Example Customer Value Map

Selection Criteria: Market Importance to Company Performance

A: Experience on prior projects B: Name recognition C: Relationship/reputation of key personnel D: Initial installed cost E: Project life cycle cost F: Creativity and value engineering G: In-house design capability H: Local to project site I: Quality of project team and subs J: Scheduling ability and commitment K: Safety procedures L: Technical expertise and service M: Project quality and warranties
Outstanding

7.0

Company's Performance

Average Importance/ Outstanding Performance

Critical Importance/ Outstanding Performance

A D 5.5 B F H
Average Importance/ Average Performance

K J I LM

G E

Average

4.0

Critical Importance/ Average Performance

4.0
Average

5.5

7.0
Critically Important

Market Importance

Competitive benchmarking surveys. Comparisons of your performance to other highly successful contractors, or best of class, can provide you with a target goal. Although benchmarks typically are quantitative scores, such as financial indicators or retention and turnover rates, these comparisons are trailing indicators of how you are perceived as a value provider. Exhibit 3 is an example of benchmarking operational performance against best of class contractors. Image surveys. Surveys that compare your company to other contractors providing similar services shed further light on the impact of your action plans. By analyzing image survey data, you can determine not only how well you compete against your competitors but also the importance that your customers place on the services you

provide. Image surveys produce a customer value map based on factors of performance and importance (see Exhibit 2). For example, if you are the worlds expert in earthquake retrofitting of buildings, you will probably find high value on your services in California and other seismic-sensitive areas but not likely in Florida. Most image surveys are performed blind, that is, the customers rate your companys performance and importance against other providers without knowing who is soliciting this information.

into meaningful information. However, several contractors we have worked with have invited current and potential customers to events such as open houses, picnics, and luncheons to identify services that add value for them.

Customer relationship-management programs. Customers communicate with your company through many channels and levels within your organization. These communications may be informal such as remarks about your job-site housekeeping, the accuracy of your Focus groups. Focus groups are one of the invoices, and your performance on submittals or they may be more best ways to find out what both current and potential buyers value. Focus groups formal communications such as marketing and sales meetings, project kickoff typically invite current and potential buyers to a discussion about present and meetings, and post-project surveys. The key to building and maintaining strong future needs. Focus groups often are customer relationships is to act on what conducted by marketing research your customers tell you. When your companies, which organize the results

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customers comment on any aspect of your performance, treat that information with the highest importance; if it wasnt important to your customers, they would not have mentioned the subject. Documenting and communicating this information within your organization, including to your key project and field managers, is critical to ensure that customers perceive the highest value from their interactions with your company. Successful contractors use technology such as voice mail, e-mail, and project management software to ensure that the customer relationship is nurtured at all points of contact. Customer surveys. Customer surveys are typically sent out periodically or upon completion of a project to determine performance. Typically, these surveys dont ask how important your offerings are to your customers or how you compare against your competitors. Even if this information is requested, customer surveys focus on your current customers and dont provide informa-

tion about what the rest of the marketplace values. Although surveys can be used effectively to find out where you stand with a particular customer, they should be only one of the tools you use to determine where you are on the customer value map. Post-project reviews. Post-project reviews are an extremely valuable source of information. Unfortunately, most contractors conduct the reviews with only their internal operations team. This approach leaves the most important view the customers out of the process. Contractors that make a point of including their customers in postproject reviews learn not only how well they performed but also how they can specifically improve to increase their value in the customers eyes. Bid tracking Hit Rates. So youve implemented some key customerfocused activities and you want some measurable data on whether theyve paid off? Look at your bid tracking results and examine your hit rates. If you

really have focused on what customers value and have responded with services they desire, your success rate in securing work will reflect this effort. If not, then you may want to ask yourself if your offerings clearly distinguish you from the competition.
MAKING THE LINK BETWEEN STRATEGY AND ACTION

The objective of identifying and measuring customer value is to develop corporate strategies that meet or exceed customers expectations in these areas. One way to determine this process is by analyzing the value chain for your services, or how each activity in a project is performed to add value for the customer and results in a successful project for the contractor (see Exhibit 4). Value chain analysis looks at all of the activities performed, beginning with selection of the contractor and ending with completion of the project. For example, marketing activities such as project signage may trigger a prospect to call a contractor to discuss services. The value chain analysis ends with comple-

Exhibit 3: Example Benchmarking of Operational Effectiveness

Estimating Efficiency And Effectiveness

Hit Rate
30.0% 25.0% 20.0% 15.0% 10.0% 5.0% 0.0% 1999 1998 1997

Volume of Jobs Bid per Estimator

$40,000 $30,000 $20,000 $10,000 $0

1999

1998

1997

Average Contractor Best of Class Your Company

Average Contractor Best of Class Your Company

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tion of the project and closeout, as well as the performance of warranty work and zero punch lists. An activity is defined as any process that generates cost and is necessary for the completion of the project. Activities are conscious choices by the construction firm such as billing and collecting, change orders, scheduling, and value engineering that should create value for the customer. Project design is an activity that generates cost and adds value to the customer; however, rework is an activity that generates cost and does not add value to the customer. This

Activities can be performed efficiently or inefficiently. Operational effectiveness is different from strategy. Strategy is all about the selection of activities that have high value to customers. Operational effectiveness is about execution. A contractor with great strategy and poor execution is in a weak competitive position. For example, Hertz has long been the leader in car rental. Through customer research, Hertz determined that the single thing that irritates customers the most is waiting in line. To combat this problem, Hertz developed its Gold customer

specific individual activities and the entire process are important. Customers can value specific activities such as design services but be dissatisfied with the construction process or feel the construction process was inefficient and did not meet their required schedule. Each activity requires individual evaluation as a component of the complete strategy. Good strategy involves performing high-value activities that fit and reinforce each other. In doing so, operational effectiveness cannot be ignored. Great activities that fit and reinforce each other and are correctly executed create a competitive advantage.
FOCUS ON WHO COUNTS

Good strategy involves performing high-value activities that fit and reinforce each other. In doing so, operational effectiveness cannot be ignored. Great activities that fit and reinforce each other and are correctly executed create a competitive advantage.
Who do you want to define your list of activities? Contractors need to determine who are their A list customers. These customers represent the future for their organizations, are the market gazelles (have growth potential), and contribute the most to profitability. One way to identify these customers is by performing completed contract analysis. Examining the companys results in gross profits for the past three to five years by industry, type of projects, and customers provides insight into the firms top customers. Information about potential growth industries and market segments can be obtained by performing market research that determines demographic trends in your market. By reviewing publications related to your clients industries, you can select and target the right industries, clients, and prospects for the focus of your strategic plan. The ideal process would involve preparing your strategic plan together with your customers as they prepare their strategic plans. Visualize a highly interactive process in which customers

distinction raises questions of value and price. How much are customers willing to pay for design services? How much are customers willing to pay for rework? One example of a successful linking of strategy and action is design-build, the use of which has grown from 6% to over 30% in the past 20 years and is expected to continue to grow in the future. Customers of construction services value this delivery method because of the benefits it provides to them. The process can control costs and accelerate construction schedules. How did this method evolve? Good corporate strategy that integrated activities with customer value is the simple answer. Determining what aggravates your customers the most as well as what they value the most is your strategic assignment.

service. Executed properly, it eliminates waiting. At some airports, however, you will observe long waiting lines for Hertz Gold customers. The activity, which is part of the overall Hertz strategy, is Hertz Gold, and any waiting lines are the result of the activitys poor execution or operational ineffectiveness. Another example of an activity is project scheduling. Although customers are demanding accelerated schedule completion dates, few contractors have an effective scheduling process internally. Many contractors do not develop and maintain project schedules throughout the life of a project, although this high-value activity controls the project and communicates project status continuously. When measuring value, it is important to remember that both the

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Exhibit 4: Value Chain Analysis and suppliers of services develop

Start of Activities
Client Contact
Marketing activities Sales activities

Project Definition
Needs assessment Bid process Contract negotiations

Operations & Construction

Change order process Billing procedures Value engineering

Completed Project
Warranty/maintenance
controls Post-project performance evaluation
A value chain analysis identifies specific activities that provide value to the customer.

interdependent activities that limit internal friction in the delivery process. Waste is minimized. Only activities that produce efficiency and create value for customers are performed. In the real world, it is much more difficult to identify customers strategic directions and develop the activities that will enable them to meet their strategic goals. So a process for determining what customers need and want is critical. Even more difficult but important to determine are customer needs unknown to them. The measurement techniques discussed earlier tell a contractor only where it is on the map and not how to get where it wants to be. To implement a successful strategy, the contractor must provide the services and reinforcing activities that are beneficial to its customers. The essence of good strategy is to create a unique service offering that makes your firm the contractor of choice for its targeted customers. This position offers your firm a competitive advantage. This advantage is only temporary. Maintaining a competitive advantage requires continuous strategic planning efforts. Building strong relationships with customers creates the opportunity to identify high-value activities for customers. Developing those activities, which enhance your competitive position, takes work and effort. Thats why continuously measuring customer value is so important. The entire strategic planning process involves an external focus and answers three basic questions:
s

Identifying the right customers and what they value through a comprehensive measurement process creates an opportunity for sustainable competitive advantage.
CONCLUSION

Why measure customer value? To identify and develop a corporate strategy that attracts and retains the right customers. Such a strategy generates happy repeat customers that contribute to corporate profitability and increase the value of the firm. The process is repeatable and sustainable and can continue to create a competitive advantage for firms with the discipline to practice and execute consistently.

Which customers are we going to address? Which services are we going to offer? How will we deliver these services?
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