The solution
Case 2.2 RS Components: towards individualized CRM with
BroadVision
The Company
RS Components, part of Electrocomponents plc, is Europe’s leading distrib- utor of electronic and mechanical products. It supports engineers in 160 countries worldwide and has an annual turnover of £760 million (2004).
From its humble origins in 1937, supplying spare parts to radio repair shops under the name ‘Radiospares’, RS has grown to a leadership position that encompasses both traditional trading environments and e-commerce.
RS UK provides an unrivalled choice of 130 000 products held in stock for same-day dispatch. In 1998, with the launch of its award-winning, transac- tional web site (http://rswww.com), the company gave its customers immediate online access to this extensive product portfolio. The advan- tages of joining search, order and fulfilment capabilities with the ease, con- venience and ubiquity of the Internet have led to demonstrable returns.
RS’s use of technology to support customer’s purchasing policies and processes is a tactical way of exploiting the e-commerce selling model (one supplier to many customers) to secure cost efficiencies and enhance service provision. At a broader strategic level, it is a means of getting closer to customers by converting customer transactions into longer-term, mutually beneficial relationships.
The challenge
RS Components specializes in the provision of office consumables, tools and equipment at short notice. Research has shown that the cost of purchasing low value, high frequency items – such as the maintenance, repair and opera- tions (MRO) items offered by RS – often outweighs the actual cost of the goods themselves. For example, RS’s average order value is £100. The aver- age cost to the customer, in terms of internal processing, is between £30 and
£150 per paper order. The reason for the disproportionate outlay is that much of the inherent workflow is paper based and manual, or only partially auto- mated. Searching through voluminous catalogues for current product infor-
mation and keeping track of hundreds of paper requisitions is time- consum- ing and labour-intensive.
The time taken by management to approve Low Value Orders (LVOs) and by Finance to respond to queries as well as to record and reconcile invoices prolongs LVO processing and adds to administration costs.
Understandably, staff often turn to ‘maverick’, or unauthorized, buying to shortcut the system and obtain the items they need to proceed in perform- ing their tasks. Consequently, such purchases can go undetected by the purchasing function and can even stray outside contracts negotiated with preferred suppliers, costing the company the full retail price.
For many organizations, increasing pressure to improve profit margins and shareholder value has meant a greater focus internally on containing costs and applying controls. The challenge for RS as a competing supplier of LVO items was to exploit this trend by offering a more cost-effective proposition that would also satisfy the unmet customer need for more strin- gent purchasing control.
In 1997, RS Components saw the opportunity to operate an electronic channel alongside its traditional routes to market. Historically, RS cus- tomers have selected required products from a six-volume printed cata- logue and placed orders via the call centre or fax for next-day delivery. They have also enjoyed the option of going to one of the UK’s 13 RS Trade Counters (branch outlets) personally to inspect items and take immediate delivery. The addition of a web-enabled channel offered scope for expedit- ing the order process and integrating the multiple channels.
The provision of online ordering would allow customers to undertake their own ‘self-service’ product selection and purchase, regardless of pur- chasing office hours. Empowered to purchase direct, users could be encour- aged to expand their breadth of purchase and to make RS their exclusive supplier. Moreover, Internet technology could be employed creatively to join the different channels into a single, cross-communicating delivery sys- tem. This would permit customers to choose the channel most relevant to them at any point in time and RS to manage customer relationships more effectively. In short, RS would be able to serve existing customers better and to gain market entry to new customer segments.
RS was particularly keen to use e-commerce to develop relationships with larger organizations. However, serving numerous users within a core cus- tomer account would mean addressing complex administrative procedures and financial and reporting controls. Because Internet trading can take place at contact level, the web site would have to manage both RS-Customer Organization relationships (T&Cs) and RS-Individual contact level prefer- ences (product interest, job function, etc). Furthermore, until now all RS cus- tomers had received the same printed catalogue listing 130 000 plus products in very much a ‘one size fits all’ approach. RS wanted to personal- ize the offer so each individual user received offers of fewer items but offers
of ones that were more relevant to them. An initial e-commerce goal was, in effect, ‘to motivate a change in customer behaviour through relevance’.
In order to achieve rapid profitable growth, RS needed to establish an e-channel that was flexible, scaleable and responsive – it needed an Internet technology solution with a ‘personalization engine’.
The solution
The drive to create a new channel to market, not just an ordering channel, led RS Components to choose BroadVision as its technology solution.
Working with BroadVision and its other technology partners, RS developed an Internet trading channel capable of migrating, acquiring, developing and retaining online customers. The sophisticated web site took just five months to implement and contained a personalized e-purchasing solution for RS’s range of business customers.
The launch of http://rswww.com in February 1998 was an historic event, marking the first business-to-business implementation of BroadVision in the UK and the first UK plc in the industrial distributor market to have a transactional web site integrated with its backend systems. Integration not only meant that the full range of RS products was available online, but that any purchasing controls already set up between RS and a client company were acknowledged and observed. It also meant that customers wishing to move to ordering RS products online were spared any integration costs and were able to bypass the need for investment in e-procurement software or in integrating e-commerce within their own ERP systems. They could also elect to receive a consolidated monthly summary of invoices generated, complete with a breakdown of individual users’ spend for management information purposes.
The web site’s design catered to the different needs of the two communi- ties of potential site users: purchasing departments and ‘user choosers’.
Purchasing departments, which are primarily concerned with supplier selection, commercial terms and service level agreements (SLAs), are prin- cipally focused on reducing costs. ‘User choosers’, on the hand, are techni- cal staff such as R&D personnel, production technicians and maintenance engineers whose main interest is speed and efficiency.
The e-channel enabled user choosers to make direct purchases under the control of the business rules set by the purchasing department. They could initiate purchases and receive goods within 24 hours whereas, if they were to raise purchase orders in the traditional way through the purchasing department, it would often be several weeks before they received the item ordered. Moreover, ordering the goods directly increased the level of accu- racy and efficiency in the purchasing process, in terms of communicating
correct stock numbers and pack sizes and current stock availability.
(Inventory information on the site is updated every fifteen minutes.) The subsequent launch of the PurchasingManager™ functionality in February 2002 replaced basic e-purchasing with total online purchasing control. This powerful procurement tool provided the controls, workflow and reports necessary to ensure organization compliance while empower- ing end users. A no-cost, no-risk option, it can be implemented immediately as the preferred platform or a stepping-stone to e-procurement.
PurchasingManager™ evolved from an RS analysis of customer needs which identified workflow approval and visibility in reporting as major concerns. Taking account of increasing trade across national boundaries, the programme was designed to work in multiple languages and curren- cies, including the Euro. As Julian Wright, Group Ecommerce Marketing Manager at RS Components, observes: ‘PurchasingManager allows us to talk to groups of customers we couldn’t reach before’.
The results
Customer feedback to the new delivery channel has been overwhelmingly positive. Wright highlights the demonstrable link between managing cus- tomer perception and managing customer behaviour: ‘Customers per- ceived they were getting faster deliveries, where in fact it was just getting faster at the customer end in placing orders.’
The psychological benefit has delivered measurable returns. Since the introduction of the web site, RS has seen customer retention and campaign efficiency improve. Customer churn levels now firmly reside below the industry average, while marketing response rates of 6–10 per cent excel the 2 per cent rate considered good for direct mail. RS’s two metrics of average order frequency and average order value maintain an upward trajectory. RS has gained a significant increase in volume from new customers who are inherently more responsive to a self-service Internet channel. In particular, the Internet enables a level of empowerment not easily replicated through traditional channels. In the last 12 months, over £60 million of revenue has been received via the RS UK web site, http://rswww.com.
The company has completed an International roll out programme of the common BroadVision platform. Localized online trading sites are now live in 66 countries in 16 languages, which include solving technical challenges using Japanese and Chinese characters. A full list of international RS web- sites can be found at http://www.rs-components.com. E-commerce rev- enues continue to grow strongly – 43 per cent last year to over £110 million with adoption levels across markets ranging from 15 to ~50 per cent in Japan.
Furthermore, the company won the prestigious E-commerce Strategy of the Year Award at the National Business Awards 2003.
Internet-based purchasing reduces the cost of processing LVO purchases by cutting the price of materials and services and lowering inventory costs.
The purchase and fulfilment cycle is shortened, giving quicker supply and increased satisfaction. Error reduction via an error detection and correction facility on the web site minimizes the cost of processing returned goods.
The web site also places rich information and a search capability at the user’s fingertips, while providing the controls and audit trails that Purchasing needs but often lacks in paper systems.
RS’s integrated channel offer has improved customer service levels through greater coordination and customer choice. For example, customers can place their orders online and collect from a nominated local RS Trade Counter. Such flexibility is invaluable where jobs are subcontracted or com- ponents are used out in the field. Multichannel integration has also enabled RS to build more complete pictures of customers and to apply this under- standing proactively. RS now targets customers on the basis of customer behaviour instead of customer profile. User preferences are categorized in terms of product interest rather than region or function. As a result, cus- tomer strategies are more pertinent to the user’s individual requirements and relationship with RS.
Importantly, RS is making gains right across its client mix. The company is augmenting the value of existing customers through cross-selling and upselling, attracting new contacts among existing customers through enhanced relationships and acquiring new customers in new markets, such as Japan’s high-growth community of online purchasers, without incurring heavy expenditure. RS’s successful expansion into international markets is attributed to the multilingual nature of the BroadVision engine, which enables RS to supply local language products with local pricing and man- age local customer details via a transferable web site format. (RS’s competi- tors rely on more crude systems and are not able to create and operate country-specific sites so readily.) The development of Purchasing- Manager™ has helped strengthen client confidence and supplier credibil- ity, especially with all-important purchasing departments.
By removing non-value added activity and expediting the purchase process, RS has reinforced its own competitiveness and that of its cus- tomers. The insightful introduction of an e-channel and integration of mul- tiple channels has served the company twofold: RS is able to provide a more superior service for its customers and a more profitable return for its shareholders.
Chapter 3
The value creation process
The strategy framework for CRM
Business strategy
• Business vision
• Industry and competitive characteristics
Customer strategy
• Customer choice and customer characteristics
• Segment granularity
Information management process
Back-office applications Front-office
applications Analysis
tools IT
systems
Data repository
Integrated channel management
Sales force
Outlets
Telephony
Electronic commerce Direct marketing
Mobile commerce
VirtualPhysical
Shareholder results
• Employee value
• Customer value
• Shareholder value
• Cost reduction
Performance monitoring
• Standards
• Satisfaction measurement
• Results and KPIs Value
customer receives
• Value proposition
• Value assessment
Value organization receives
• Acquisition economics
• Retention economics Customer segment lifetime value analysis Strategy development
process:
Multi-channel integration process:
Performance assessment process:
Value creation process:
Creating customer value is increasingly seen as a key source of competitive advantage. Yet, despite growing attention to this aspect of strategic development, there is remarkably little by way of agree- ment among managers and commentators on what constitutes
‘customer value’. Further, companies typically do not specify in sufficient detail what value they seek to deliver to clearly identified
customer segments and micro-segments and how they propose to deliver this value.
The value creation process consists of three key elements: deter- mining what value the company can provide its customers with (the
‘value customer receives’); determining the value the organization receives from its customers (the ‘value organization receives’); and, by successfully managing this value exchange, maximizing the life- time value of desirable customer segments. In summary, the process addresses two key questions:
1. How can we create and deliver value to our customers?
2. How should we maximize the lifetime value of the customers that we want?
However, the emphasis in many companies is on this latter element of value. To these companies, customer value means:
● how much money can we extract from the customer?
● how can we sell them more of the existing products and services they are buying?
● how can we cross-sell them new products and services?
Yet in today’s competitive arena where a growing number of busi- nesses vie for a greater share of a finite customer pool, it has become imperative to consider customer value also in terms of customer ben- efit and how we can ensure the customer proposition is relevant and attractive and that the customer experience is consistently positive.
This chapter examines the value creation process. The value creation process is a critical component of CRM as it translates business and customer strategies into specific statements of what value is to be delivered to customers and, consequently, what value is to be deliv- ered to the supplier organization.1
The value the customer receives
The value the customer receives from the supplier organization is the total package of benefits, or added values that enhance the core product. As pointed out by Harvard Business School’s Theodore Levitt, competition exists not between what companies produce in
their factories but between ‘what they add to their factory output in the form of packaging, services, advertising, customer advice, financing, delivery arrangements, warehousing, and other things that people value’.2The value the customer attributes to these benefits is in proportion to the perceived ability of the offer to solve whatever customer problem prompted the purchase.
In this section we first review the nature of what the customer buys by explaining how the core and augmented product, relationships and brands all contribute to an enterprise’s value proposition. We then examine the nature of the value proposition and the value assessment.
The nature of value – what the customer buys
Customers do not really buy products or services – when they buy they expect benefits and value from the total offer the company pro- vides. This is not just a semantic point, it is an important distinction which can be strategically vital for the long-term survival of a firm.
There are many examples of companies who have taken a narrow view and considered their business purely in terms of the traditional products or services. As a result they were forced out of business when a competitor or competitors effectively reshaped the market by not only getting customers, but by keeping them!