Let’s face it. We customer service professionals aren’t particularly good at making a business case for investing in customer service.
Improving service is a good idea. That’s established. But things get a little murkier when we start talking about dollars and cents.
When it comes to money, we often find ourselves applying the logic of the South Park’s underpants gnomes:
Phase 1: Improve Customer Service
Phase 2: ?
Phase 3: Profit
Unfortunately, its Phase 2 that CFOs really care about. It’s where we prove whether or not money spent on improving customer service is a profitable investment.
What we need is a framework. Something that can show our CFOs how investing in customer service is a wise business decision.
Costs of Failure vs. Costs of Control
Way back in 1956, Armand V. Feigenbaum described a process called Total Quality Control in an article published in the Harvard Business Review. Feigenbaum’s framework was innovative at the time because it showed that investing in a quality product or service could save money in the long run.
The Total Quality Control framework differentiates between costs associated with failure and costs associated with controlling quality (detecting or preventing failure).
When applied to customer service, Feigenbaum’s framework can make a nifty business case that your CFO will love.
Step 1: Identify Failure Costs
Start by identifying the real costs associated with service failures. Here are some examples of failure costs:
- Customer contacts (calls, emails, etc.).
- Discounts given to compensate for service failures
- Product or service replacement costs
- Cost of repairs or product service
- Lost business
Step 2: Identify Control Costs
The next step is to identify the costs associated with controlling quality. Feigenbaum breaks these down into two categories: costs associated with detecting failures and costs associated with preventing failures.
Examples of detection costs:
- Quality monitoring
- Product inspection and testing
- Customer service surveys
- Mystery shoppers
Examples of prevention costs:
- Training employees
- Hiring more customer service representatives
- Product design
- Technology investments
Step 3: Identify the business case
You can make a credible business case for improving service if you can demonstrate that investments in detecting and preventing service failures will result in a net savings.
Here’s a simple example:
A small online retailer was concerned about losing sales due to poor customer service. Customers would call in with detailed product questions if they couldn’t find the answer online. This was an opportunity for the customer service representative to close the sale and prevent the customer taking their business elsewhere.
An analysis revealed the problem was staffing. The tiny customer service department would get overwhelmed with phone calls. The customer service reps would rush through each call to get to the next person, which made it harder for them to close sales.
Money is tight in a small company. A cost-benefit analysis was required to see if hiring a new customer service rep made business sense.
The Director of Operations and CFO got together and came up with these estimates:
- Failure cost: $124,800 per year in lost sales
- Prevention cost: $39,000 the annual cost of adding one additional customer service rep
That was the business case. Spending an extra $39,000 would earn an additional $124,800.
The retailer decided to hire a new customer service representative based on this analysis. Just one month after hiring a new employee, the results justified the move. Sales were already on pace to increase by nearly $150,000 as a direct result of hiring the new employee.