By Mohammed Latib
In an era when disruptors like Uber, Netflix, and Amazon are reimagining markets and eroding the boundaries between markets, incumbents know they need to change. The problem most are confronting is how to begin, where, and how much?
One answer to this question is digitization. Our competitors are able to deliver greater levels of efficiency and effectiveness through digital technologies. So, in order to compete, we also need to be digitally adept.
But is technology the cause for disruption, or is it a mere catalyst? I will support the latter claim, that technology does not cause the incredible success of disruptors but only enables success. Keeping your customers happy is the more direct source of value.
First, I would point out that change initiatives, which are commonly technology-based, are floundering in most organizations. In fact, of the companies that have undergone change initiatives, the rate of failure is 70% (Mckinsey, Changing Change Management). Whether you are implementing Salesforce CRM or developing your own applications, the success of these initiatives is dependent upon satisfaction, on employees using the software as it is intended, on customers loving the interface and finding the value add easily. Technology is not the solution unless it is used by our stakeholders to solve problems. Therefore, when we are thinking about ways to improve our business, we need to focus, first, on the real problems our stakeholders want to solve.
If you are a numbers person, then look at the difference in impact between technology and customer satisfaction. If digitization is the primary cause of success, then digital companies will reap the majority of the rewards, don’t you think?
Image source: McKinsey & Company
However, we do not find this to be true. When companies respond with comprehensive digital initiatives, change programs spanning Operations, Marketing, processes, ecosystems, and supply chains, these initiatives are correlated with significant lifts in revenues (11.2%) and EBIT (7.3%) (McKinsey, The case for digital reinvention). On the other hand, businesses with above-average American Customer Satisfaction Index (ACSI) scores within their industry have delivered over 400% the returns to shareholders as those with average scores between 2004 and 2014; below-average scores have returned even less (McKinsey, Putting customer experience at the heart of next-generation operating models). In the last decade, mastery in customer satisfaction has delivered a CAGR of 15%.
If we were merely comparing size, we would conclude that customer experience is much bigger (approximately twice as big). Why?
My understanding goes like this: Technology is an element, possibly even a catalyst of change, but customer experience is the reason for change. Incumbents who have poor digital mastery, but excellent customer experience, will retain more customers simply because their customers like them. And because digital technologies increase the network effects of positive feelings, well-liked companies will attract more new customers, and quickly. Digitization just happens to be one popular way to keep customers happy.
Experience innovations in banking and insurance industries over the last five years — the mobile interfaces that allow customers to upload pictures of a car wreck rather than talk to a representative, mobile deposits for banks, quick account creation — were driven by an understanding of sources of dissatisfaction; customers were frustrated by traditional processes, which were downright byzantine by comparison.
While a single initiative to understand customer journeys is laudable, this practice needs to be sustained over the long-term, or success will be temporary. Never before have we seen such rapid change. A top-of-the-line experience in 2018 might easily seem frustrating in 2028. Maintaining customer satisfaction despite such rapid shifts, the greatest challenge, will separate the 400% return from the 100%.
So, how to accomplish this. First, there needs to be a shift in thinking at multiple levels of the organization. Instead of business efficiency, employees will be more effective by taking a compassionate perspective, understanding not only where they are but also where the customer is in their journey. From front lines to the C-suite, customer experience training will empower employees to piece together what this journey looks like currently, on a practical level and also an emotional one. This will make priorities clear for future initiatives and create a deep motivation for those initiatives to succeed.
Almost every notable digital innovation we’ve seen has been based on using connectivity and data to transform the customer experience or to reshape products and services by allowing customers to interact with them in new ways.
(McKinsey, The seven decisions that matter in a digital transformation: A CEO’s guide to reinvention).
What is more integral to success, digitization or customer experience?
Both digital technology and customer experience are integral to competitiveness today, but I would argue that customer experience is more important because it provides vision and direction, without which technology provides no value. Digitization is in many cases an integral part of keeping customers happy, but it is not enough to grow or sustain relationships; you need to know what to build. By understanding our customers, how they engage with us, what they are trying to achieve, etc., we have the vision and guidance for change.
Customer satisfaction is correlated with much higher returns to shareholders than digitization
Customer experience increases success of digitization initiatives
Therefore, customer experience is a more direct cause of success than digitization
Prioritize customer experience at multiple levels of the organization to drive growth
Ewenstein, Boris, Wesley Smith, and Ashvin Sologar. "Changing change management." McKinsey & Company. July 2015. Accessed January 29, 2018. https://www.mckinsey.com/global-themes/leadership/changing-change-management.
Mellbye, Anette, Laura LaBerge, and Jacques Bughin. "The case for digital reinvention." McKinsey & Company. February 2017. Accessed January 29, 2018. https://www.mckinsey.com/business-functions/digital-mckinsey/our-insights/the-case-for-digital-reinvention.
Roggenhofer, Stefan, Ewan Duncan, and Shital Chheda. "Putting customer experience at the heart of next-generation operating models." McKinsey & Company. March 2017. Accessed January 29, 2018. https://www.mckinsey.com/business-functions/digital-mckinsey/our-insights/putting-customer-experience-at-the-heart-of-next-generation-operating-models.
Singer, Marc, Driek Desmet, and Peter Dahlström. "The seven decisions that matter in a digital transformation: A CEO's guide to reinvention." McKinsey & Company. February 2017. Accessed January 29, 2018. https://www.mckinsey.com/business-functions/digital-mckinsey/our-insights/the-seven-decisions-that-matter-in-a-digital-transformation?cid=other-eml-ttn-mip-mck-oth-1712.