Executives Overlook The Management & Measurement Of The Relationships That Matter Most.

The vast majority of senior executives agree that customer and employee relationships are essential to the long-term success of their businesses, yet these sources of value are largely overlooked and often inadequately managed in their companies’ current business models and practices, according to a study by Andersen, the leading integrated professional services firm.

Andersen, in partnership with research firm DYG, Inc., conducted a survey of senior corporate executives to determine which types of relationships they considered to be most essential to business success, to identify which assets and relationships are most consistently managed, and to discover what assets and relationships they choose to measure to gauge performance.

Customer and employee relationships were clearly the most important sources of value according to the research results, a finding that reinforces the long-standing claims of many executives. Yet more importantly, the research points to a widespread disconnect between those beliefs and the actions of senior executives in corporate America. Simply put, while executives believe that relationships with customers and employees are more important sources of value than their balance sheet assets – including such tangibles as financial capital, as well as plants, property and equipment – this conviction is often not reflected in the current realities at their companies or even, to a large extent, in their business strategies for the future.

“Executives certainly realize the importance of their customer and employee relationships, yet they are not taking a proactive approach to managing these incredible sources of value,” said Andersen’s Barry Libert, the director of this research project. “Today’s increasingly networked economy requires that all companies build intimate relationships with their customers, employees, suppliers and investors – as well as use emerging technologies to connect these relationships throughout the enterprise in order to realize unprecedented value.”

Measure, Manage and Invest In What Matters
In late 2000, DYG, Inc. interviewed nearly 500 C-level executives – CEOs, CFOs, COOs and presidents – from United States-based publicly traded corporations. Respondents included executives from all industry sectors, including manufacturing, mining, utilities, construction, agriculture, finance, insurance, real estate, retail, professional services, computers/technology services and transport. The results pointed to an inconsistent management by most companies of their most valuable relationships:

Customer Relationships:
95% of the executives said that “acquiring and maintaining relationships with customers” is essential to business success,
But only 54% of those executives’ companies have a strategy in place to build one-to-one relationships with customers,
Only 62% say they measure “customer turnover,” only 43% measure “cost of customer acquisition,
And only 44% think it will be necessary to measure cost of customer acquisition in the future.

Employee Relationships:
94% of the executives said that “hiring and retaining the right employees” is essential to business success,
Yet only 43% of them said their respective companies had a strategy in place to hire and retain the required head count and skill level.
And while 84% currently measure the cost of employee turnover,
Only 63% think it will be important to measure employee turnover in the future.
And despite the importance so many companies have recently placed on the use of technology to build digital marketplaces and enhance their supply chains, survey respondents placed a relative lack of emphasis on the management of supplier relationships as sources of value.

Supplier Relationships:
Only 41% of respondents said that “securing and maintaining relationships with suppliers” is essential to success, and only 49% said that “optimizing distribution channels” is essential.
And while just 40% of companies currently have systems to “manage relationships with suppliers,” only 23% have processes in place to measure the cost of effects of “supplier turnover,”
And perhaps most surprisingly, only 17% of respondent feel it will be important to measure “supplier turnover” in the future.

Further, while innovation has been shown to drive competitive advantage in today’s economy, respondents exhibited the same inconsistencies in the management and measurement of their companies’ core organization assets.

Organization Assets (including intellectual property, innovation and brand):
68% of the executives say that “the innovation of competitive products and services” is essential to business success, and 58% say the same of “proprietary knowledge, systems and databases.”
However, only 53% of respondents said they currently measure “time to market new products and services,” and only 45% measure “return on research and development,”
And only 33% manage any system to consistently convert “ideas into processes, products and services.”
This is likely to continue, as only 38% think it will be important to measure “return on research and development” in the future.

“Nearly three quarters of the market value of today’s most successful companies is built upon sources of value that can be classified as relationship-based or as intangible, including people, ideas, knowledge, innovation, and relationships with customers, suppliers and employees,” said Libert. “This research shows that while companies and executives intuitively know their relationships can create incredible value, they are struggling to find ways to measure, manage and connect these relationships. The solution is to use today’s technologies to identify, capture and connect these relationships to realize the potential for growth and value inherent in each.”

Sources of Risk in a Changing Economy
The executives were also asked to evaluate a series of ten contributing factors – including relationships with customers, competition, and alliances, as well as sources of capital, facilities and new products – as either “risks” or “opportunities,” or both. Two of the ten factors, competition and the ability to attract and retain talent, were rated as both high risk and high opportunity. Less than 10 percent of the respondents saw these areas as low risk, and the majority of the group indicated that all of the factors represent higher opportunities than risks. Even e-commerce, which many companies used to regard as a major risk to disintermediation, is now rated significantly higher as an opportunity.

“The overall results of this research confirm Andersen’s hypothesis that business leaders use generally inconsistent models and practices to evaluate and manage all the sources of their company’s value,” said Madelyn Hochstein, President of DYG, Inc. “In an economy affected by constant change, these inconsistencies raise questions about the ways in which companies could and should assess the sources of value that make up their business.”

According to Andersen, failure to identify and manage all the sources of corporate value – as well as the risks and opportunities they create – can have a direct impact not only on market valuation and volatility, but also on business operations, business risk, technology, and the use of accurate information at all levels of business and investing.