Treating customer service as a cost center can be costly

This article originally appeared in the TurningPoint Executive Search electronic newsletter.

The most important relationship a company can have is with its customers since they are your primary source of revenue. This point seems obvious, but a closer look reveals that many organizations treat their customer service operation as a cost center, not a profit generator. This disconnect can be costly.

Outstanding customer service can help improve sales, efficiency, and customer engagement, but only companies that focus on meeting their customers’ needs (rather than trimming expenses) will realize these benefits.

Sales

In March of 2007, Circuit City fired 3,400 of its highest paid retail sales employees in what their CEO Phillip Schoonover described as “aggressive actions being taken to improve our cost and expense structure.” Circuit City replaced these experienced employees with workers making less money, a move that was expected to save $110 million in 2008. Circuit City had long focused on customer service as a cost center, and they finally paid the ultimate price less than two years later when they announced the liquidation all of their U.S. stores.

Best Buy, Circuit City’s chief competitor, has taken an opposite approach by increasingly focusing on customer service as a profit generator. Their investor relations website announces: “We’re a growth company focused on better solving the unmet needs of our customers – and we rely on our employees to solve those puzzles.” Unlike Circuit City, Best Buy is opening new stores and has weathered the current economic climate better than most retailers.

A key measure of sales performance is revenue generated for each dollar spent on payroll. Circuit City chose to cut payroll and went out of business. Best Buy has tried to boost the return on each payroll dollar spent and they continue to grow.

Efficiency

The number one performance metric in most call centers is talk time; the average time it takes a representative to handle a call. In other words, these customer service reps are focused on getting customers off the phone quickly rather than actually solving problems.

A recent Gallup study estimated that this cost-center approach typically generates three phone calls to solve each problem. This means a talk-time focused agent who averages four minutes a call actually averages 12 minutes per problem. Compare this to a customer-focused agent who averages five minutes a call but usually solves the problem the first time around. This makes the customer focused agent nearly 60% more efficient. And, their customers are probably a lot happier at the end of the day.

The bottom line here is it is okay to measure customer service efficiency, but you should choose a metric that aligns with your goal.

Engagement

Another Gallup study estimates that highly engaged customers are 70% more profitable than customers who are not engaged. Simply put, an engaged customer is enthusiastic about your product or service, is loyal beyond reason, and refers you to others. The express shipping company DHL recognized outstanding service was the primary driver of customer engagement when they ran ads featuring courteous and efficient delivery drivers who went out of their way to please their customers.

The problem was the ads didn’t match what DHL customers actually experienced. DHL used ill-trained and poorly supervised contractors to handle many of their delivery routes and consistently earned the lowest customer service ranking among express shipping companies. In November 2008, DHL announced it was pulling out of the U.S. express shipping market.

UPS, a major DHL competitor, has carefully invested in hiring, training, and supervising their delivery drivers to ensure they can deliver the type of service DHL claims to have. In 2008, UPS was profiled in T&D magazine, a leading training industry publication, for their outstanding delivery driver training program. Like many companies, UPS has struggled recently, but their commitment to outstanding service has positioned them for success in the long run.

The lesson here is just stating you offer outstanding service doesn’t make it so. It requires a true commitment that goes well beyond an empty slogan.

Conclusion

Customer service has a definite financial impact on every company, but it’s both lazy and dangerous to simply view service as a line item expense. Organizations should take a deeper look at how their customer service improves sales, efficiency, and customer engagement. Companies that consider customer service a profit generator are much more likely to succeed over the long term.