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The Economic Impact of Superior Customer Experiences —
Why Merely Satisfied Customers No Longer Ensure Success for IT Service Providers

This is the first of a two-part series presenting an in-depth analysis of the economic impact of creating superior customer experiences, as well as the four critical success factors today’s IT service providers must master in order to compete in the global IT services market.

Introduction
Thousands of technology manufacturers, resellers, and independent service providers compete in the global market of information technology (IT) services. Moreover, this market promises to reach a trillion dollars within the next decade. Which IT service providers will prevail in the competition to differentiate? The answers are becoming clearer - economic trends show that those companies that focus on creating a superior customer experience (CE) are taking the lead.

To bring context to the existing IT services market, we must consider the greater economic picture. During the past 50 years, rapid development and innovation in technology hardware and software products drove global economic growth. Productivity increased in this product economy because people continually exploited innovative technology products to do more with less.

Then, over the last 20 years, as technology products gradually became commoditized, the services economy emerged as the dominant driver of economic growth and a major component of the U.S. gross domestic product (GDP). The 2005 list of Fortune 500 companies contained more services companies and fewer manufacturers than ever before.

Today, the services economy is growing, evolving, and undergoing commoditization. Competition has introduced a myriad of choices for buyers, so companies now must differentiate on the total customer experience. As a result, we are now entering an experience economy that challenges IT service providers to go beyond delivering basic products and services. The new economic landscape requires IT service providers to create superior customer experiences that drive revenue, profits, customer loyalty, and shareholder value.

Part 1 - The Real Economic Value of the Customer Experience

The global, digital, and virtual reach of today’s business world has challenged and transformed the once simple concept of customer service. The days of sending disgruntled customers to a customer service desk are gone. In the Internet age, you may not have a brick-and-mortar location, so such face-to-face interactions are less common. Furthermore, the visibility of numerous competitors makes it easy for dissatisfied customers to simply take their business elsewhere. Customer service can no longer remain an afterthought to business transactions; the entire customer experience must become the culture of the business.

The Services Economy
As technology products gradually became commoditized during the past few decades, services became the dominant driver of economic growth and a major component of the U.S. gross domestic product (GDP). As the relative importance of the services component in product offerings grew, the services economy emerged. In fact, the 2005 list of Fortune 500 companies contained more services companies and fewer manufacturers than ever before.

This is also true in the world of IT products and services. For example, market leader IBM has transitioned to a services business model. Although it still manufactures hardware and software, it views its product business as a smaller component of its overall business. In IBM’s case, 52% ($47B) of its revenue comes from services.

Over time, competition and commoditization in technology products have driven many other traditional hardware and software manufacturers, along with their resellers, to invest heavily in their long-neglected professional services organizations. The common objective is increasing revenue, profits, and customer loyalty. However, many organizations are finding that creating a robust IT service organization presents a real business challenge.

The Services Challenge
Like the evolution in the product economy, the services economy is evolving and becoming increasingly commoditized – especially information technology (IT) services. According to Gartner Dataquest, end-user spending for IT services worldwide grew to $624 billion in 2005. Even at a modest annual growth rate of six percent, the worldwide technology market promises to reach a trillion dollars in the next decade.

Given the modern global economy, this market is highly fragmented. Consider the fact that, according to VAR Business magazine’s VARBusiness 500, IBM was the largest player in the IT services sector in 2005. Yet with $47 billion in services revenue, IBM captures only seven percent of the market for worldwide IT services spending. The second-biggest player, EDS, less than half the size of IBM at $21 billion, claims only three percent market share.

The last company on the list of 500 reported only $18.5 million in revenue, indicating that a vast majority of IT services are being delivered by tens of thousands of independent IT service providers. Thus, as we’ll see, the market is now wide open for IT service providers to claim a larger share of the growing market.

Good News and Bad News for Buyers
Such a highly fragmented and commoditized market represents both good news and bad news for buyers. The good news for buyers is that the balance of power has now shifted in their favor. Rapid technology advancements and global competition have led to a proliferation of technology products and services -- a rich opportunity for buyers to find just the right product and service mix to solve their customers’ business problems.

Moreover, these trends in the technology marketplace have contributed to global commoditization, which forces prices down. Buyers now enjoy instant access to information on products and services, as well as multiple channels of distribution, including the Internet. For example, Dell and Cisco transact most of their business online, sometimes unaided by any human selling component. As a result, buying products and services has become faster, easier, and cheaper for buyers - placing them in the driver’s seat.

The bad news is that because IT service providers have greater difficulty differentiating their offerings, buyers often feel confused and overwhelmed by the wide variety of choices for IT products and services. Moreover , because of commoditization in IT services, price is no longer a significant factor in the decision-making process. With literally thousands of options, buyers face more compelling concerns: “What combination of products and services are right for my business?” and “Who do I buy from and what sets them apart from their competition?”

The Opportunity
As professional services take a more central role in the overall value proposition, there are clear opportunities for organizations that differentiate themselves by combining world-class technology products with a compelling professional services offering. However, they will still encounter relentless pressure to constantly differentiate and deliver further value to their clients and shareholders.

The concept of differentiation in IT services is analogous to competing in the 100 meter dash in the Olympics: After training and sacrificing for most of their lives, the runners line up, the gun goes off, and in just over 9 short seconds, the race is over and someone wins, often by mere fractions of a second.

The first, second, and third place winners receive their medals, and the winner is showered with contracts and endorsements. But what do the fourth, fifth, and sixth place winners get? Though these are some of the fastest human beings on earth, they leave with little more than the memory that they were there, competing in the Olympics.

For organizations looking to gain market share in the IT services market, the same holds true. Regardless of how strong their product and service offerings are, the only real distinction will go to those that clearly break away from the pack and differentiate themselves by creating a superior customer experience.

Enter the Experience Economy
Even though technology product markets go through continuous commoditization, traditional feature-benefit selling can still be effective since the products are tangible. Demonstrating the economic value of intangible services, however, can present a much greater challenge. For example, how do you convey the tangible value of a $50,000 assessment or a $25,000 installation service?

To overcome this challenge, organizations are now focusing on the customer experience as a competitive differentiator and real economic driver for their services businesses – and in doing so, they are creating the new experience economy.

According to Joseph Pine and James Gilmore, authors of The Experience Economy, the services economy is being superseded by something that most product-centric companies will find even more ethereal and intangible than services ever were: the customer experience. Pine and Gilmore suggest that continued relevance in a services market depends on the ability to provide a rich, compelling experience for the buyer.

In other words, since the product and service economies are now highly fragmented and commoditized, customer solutions that simply combine technology products with services are no longer sufficient to provide a competitive advantage. To differentiate in a hypercompetitive technology market, IT service providers must surround and support innovative product and service solutions with consistent, predictable, and even delightful customer experiences.

Thus, products and services alone are no longer enough – future economic growth depends on mastering superior customer experiences.

Before we explore the ways IT service providers can achieve superior customer experiences, let’s examine the real and “tangible” value of the customer experience.

Superior CE Drives Higher Shareholder Returns at Lower Risk
A recent article in the Journal of Marketing entitled Customer Satisfaction and Stock Prices: High Returns, Low Risk examines the correlation between customer experience and shareholder value. Authors Claes Fornell, Sunil Mithas, Forrest V. Morgeson III, and M.S. Krishnan suggest that superior customer experiences tend to increase shareholder value through repeat business, positive word of mouth, cost competitiveness, and long-term growth.

Furthermore, superior customer experience tends to reduce risks by lowering customer complaints, transaction costs, warranty costs, field service costs, customer defection, and employee turnover.

Based on this evidence, we see a chain of events linking real shareholder value with superior customer experiences. Superior customer experiences drive customer loyalty. In turn, loyal customers drive growth in revenue and profits, which are ultimately the key drivers of shareholder value. For organizations looking to build their IT service businesses, the implications of this pattern are measurable.

The authors found that customer satisfaction, as measured by the American Customer Satisfaction Index (ACSI), relates directly to market value of equity. According to their findings:

"Between February 18, 1997 and May 21, 2003, a period when the stock market had both ups and downs, a portfolio of the top 20 percent ACSI performing companies generated a cumulative return of 40 percent. In fact, these companies outperformed the Dow Jones Industrial Average by 93 percent, the S&P 500 by 201 percent, and NASDAQ by 335 percent."

"When the stock market grew, the stock prices of many firms with highly satisfied customers grew even more. The only exception occurred at the peak of the stock market bubble in 1999 when NASDAQ and the S&P 500 generated short-lived, but higher returns. When the stock market dropped in value, the stock prices of the firms with higher customer satisfaction seemed to benefit from some degree of insulation."

For organizations who want to grab greater market share in the growing IT services market, delivering superior customer experiences presents a real, measurable, and tangible opportunity. Yet this research is only one piece of the puzzle.

Challenging the Satisfaction Myth
Most executives would agree that delivering a quality customer experience should be one of their primary objectives. After all, satisfied customers are more likely to spend more money, buy more products and services, and recommend the company to others – generating even greater revenues and profits. In addition, delivering high customer satisfaction has also been shown to reduce the overhead and operating costs of supporting these customers.

However, new research indicates that customers who are only “satisfied” may not actually bring this perceived economic value to the firm. Since the services economy has become more commoditized and competitive, merely satisfied customers are no longer enough. To truly create customer loyalty and produce predictable, sustainable revenue and profit growth, IT service organizations must deliver a superior customer experience.

Comparing "Switchers" and "Loyals"
In the previous research we saw how customer satisfaction drives shareholder value. However, a recent survey by RainToday.com shows that most IT service providers average a score of C+ in satisfaction ratings. This metric appears most important when predicting how likely buyers are to consider switching or remaining loyal to their current IT service provider. Although all buyers seem reasonably satisfied, a closer look at the survey results reveals a startling trend in customer loyalty.

In the report entitled How Clients Buy: The Benchmark Report on Professional Services Marketing and Selling from the Client Perspective, authors Mike Schultz, Andrea Meacham, and John Doerr identify the critical difference between “Satisfied” and “Very Satisfied” customers.

Although 49 percent of customers were “Satisfied,” 66 percent of all buyers indicated that they are still open to switching to a new IT service provider in the next two years. Only the 29% of buyers who rated themselves as “Very Satisfied” were dependably loyal to their current IT service provider.

In other words, if an IT service provider rates a 4 (Satisfied), most of its customers are willing to defect over the next two years. However, if an IT service provider rates a 5 (Very Satisfied), most of its customers intend to remain loyal. Suddenly, the five-point rating scale does not have as much significance – 4 and 5 are the scores that matter most.

Thus, authors Schultz, Meacham, and Doerr suggest:

"For providers seeking to improve client retention, the difference between satisfaction ratings of a 5 and a 4 may very well be the difference between keeping a customer and losing them to the competition."

This represents a critical disconnect for many professional services organizations and it highlights the significance of a superior customer experience for any IT service organization. Merely satisfied customers are not enough to sustain growth and profitability in the new experience economy – IT service providers must deliver superior customer experiences.

Summary
For IT Service providers, mastering the art of superior customer experiences builds security around their services investment.

The question then becomes, “How do organizations deliver a superior customer experience?” The good news is that it can be done. In Part 2 of this two-part series, we examine proven strategies for delivering superior customer experiences.

While superior customer experiences may be intangible, even ethereal, they are not out of reach. By carefully investing in four critical success factors – culture, people, processes, and systems – companies can create an actionable strategy for creating customer experiences that produce real, tangible economic results.

About the Author
Stephen R. Satterwhite founded Entelligence in 1997 with the vision to build the company he had “always wanted to work for.” As President and CEO, Satterwhite has pioneered a new IT services business model for the experience economy, creating private-label IT services for the world’s leading hardware and software manufacturers and their resellers – services that drive revenue, profits and shareholder value.

Throughout the company’s nine-year history, Satterwhite has committed to a forward-thinking business model putting his passion for his employees first and delivering IT services with a 96% superior customer experience rating. As a result, Entelligence was a winner of the Inc 500 list of the fastest growing privately-held companies in America, and a 2-time winner of the Houston Business Journal’s FastTech 50, as well as the 2005 Dell Diversity Supplier of the Year.

About the Entelligence
Entelligence is the leading provider of private-label technology services. The world’s leading technology manufacturers, and their resellers, turn to Entelligence to deliver superior customer experiences across their services portfolio. Leveraging its unique experience from thousands of enterprise technology engagements, Entelligence helps its partners increase their services revenue, impact bottom line profits and create a loyal customer following – services that ultimately impact shareholder value. Entelligence, founded in 1997, is headquartered in Houston, Texas.

For more information, please contact Entelligence at:

CE@Entelligence.com or Toll Free: 1-888-877-4450

Or, visit us on the web at: www.entelligence.com.