A version of this article first appeared in Customer strategy, a magazine published 10 times a year in London by TBC Research. Through its comprehensive portfolio of magazines, events and research, TBC Research is dedicated to helping senior business professionals make more informed technology decisions.
Professor Dr. Reinhold Rapp has the unusual distinction of spending several years with a major commercial organization before becoming an authority on CRM. A visiting professor of marketing at Cranfield Business School, author of several customer relationship management (CRM) tomes, circuit speaker, and managing partner of Europe's first CRM consultancy, Rapp earned his CRM wings with a five-year stint at Lufthansa.
His experience as head of strategy and organizational development and then as vice-president of targeted customer management eventually earned him guru status in the realms of consultancy work and circuit speaking. Before this he was firmly grounded in an academic environment, working as marketing director of Gracht Castle, the German equivalent of the London Business School, founded by Europe's top 100 companies.
His name may not mean much in the UK but his consultancy, Customer Relationship Management GmbH, is currently expanding from its Finnish and German roots into London with some impressive customer stories to aid it. Rapp's recently published book, Customer Relationship Management, is also due for print in English. But it is not these factors alone that will ensure he will become well known.
Rapp's physical presence - he is over six feet tall - and his refreshing tendency to speak his mind help to ensure he leaves a striking impression. There is a slight quirkiness about him, but companies will be pleased to hear that the Harley Davidson-riding professor can also exercise a certain amount of tact. Seated next to him on the panel was Martin Nitsche, director of CRM at Deutsche Bank. Mr. Nitsche was quite rightly shining with pride as he described his company's endeavors to integrate its diverse channels to provide a ubiquitous and consistent view of its customers. Nitsche believed the bank had reached a milestone. And so it had.
Rapp held back until the panel had finished before he disclosed that, "It isn't CRM." Unfortunately for Nitsche, Rapp is a Deutsche Bank customer with both private and business accounts. He pointed out that the business side "does not have a clue" about the personal side and the consequent service is dire.
So what is CRM according to Rapp? His theory is essentially simple. He defines CRM as "a strategic concept to manage the assets of a company" and is adamant that those companies which view it only as a technology are doomed to failure. Technology is certainly a major part of the equation, but it should only be introduced after the strategy has been determined. And this should be built on the foundation of its assets, which in the final analysis are its customers. These should be segmented according to their profitability, and then strategy and tactics can be tailored according to the value of these customers to the company.
Rapp's stance reflects the early days of CRM when in 1985 a group of academics from Europe, Asia and the Americas got together at Emory University in Atlanta to define CRM and create processes for its implementation. Rapp was involved at an academic and exchange level and keenly watched the formation of CRM GmbH, Europe's first CRM consultancy, in Finland in 1994, of which he is now managing partner.
He took this experience to Lufthansa where after overseeing a complete restructure of the business, which involved spinning out almost 60 business units, such as cargo, catering and ground services, into separate entities, he took up the position of head of CRM and put his theory into practice.
Rapp's first step was to increase the company's knowledge of its customers. A database which held transactional data was linked to one designed to hold economic information on the airline's 5 million customers. Previously the only means of assessing the value of customers was through its air miles scheme, which Rapp conceded was a poor measure of customer value, given that air miles could be accrued as a result of lots of cheap flights or a few expensive flights. The project cost e10 million ($9 million) but it was money well spent, he says, because it provided the foundation for Lufthansa's CRM strategy.
Next, Rapp employed data mining techniques in order to find out which customers were defecting on which routes and how to win them back. The airline embarked on a huge telemarketing campaign to find out why these customers no longer used Lufthansa. Rapp says Lufthansa soon identified three major reasons for defection - service failures, pricing issues and scheduling. Of course, there were twice as many other reasons beyond the airline's control. But deciding to concentrate on the aspects it could influence, it began dealing with customers on a personalized level after splitting the group of 70,000 defecting customers who had spent an average £6,000 a year with the airline into almost 60 segments. Personalized direct marketing was sent to each segment and although Rapp hesitates to put a figure on how many ex-customers returned to the fold, he does claim a high return on investment in terms of marketing expenditure, and the move has begun to drive profits.
Lufthansa also consolidated its 48 regional call centers to nine global centers working 24 hours in order to "concentrate on core competencies" and focus customer information. The move was designed to ensure changes to customer service that came out of the program were put into practice. For example, instead of providing buffet food for all of its passengers as the airline had before, only the high net worth individuals were given this perk, in special lounges screened off from the low net worth customers.
There were of course complaints and defections. But Rapp points out that given that these customers were in the non-profit category, the effect on the profitability sales level was negligible. After analysis revealed that between 10 and 40 per cent of customers were not profitable, Rapp suggested the airline took the approach that there was no such thing as a non profitable customer. "We realized that what we had been doing was managing them in an unprofitable way."
Lufthansa is currently setting up new relationship models for unprofitable customers by building up customer portfolios and an IT system to service them. The service elements for these customers are being pared down to a bare bones level, increasing the likelihood of profitability. In the next phase, customer data will be linked to a new check-in system, so staff at the counter can determine which customers are the most profitable and react accordingly.
Technology is not always the answer to the implementation of CRM, Rapp insists. "Most companies...don't feel that they have the time to react to changing market conditions, so they throw more technology at the problem. They don't think in a conceptual way, which compounds the problem," he says.
Leadership is essential in CRM, he adds. "You need someone to take control of the strategy...you need a Captain Kirk from star Trek taking control," says Rapp. "The most successful [CRM] projects are those supported by someone such as the chief financial officer who can see clearly that such a project will have a positive impact on shareholder value."
Rapp was the Captain Kirk of Lufthansa with full control of the CRM implementation. He claims the strategy that he instigated and oversaw not only had a positive impact on revenue but bolstered the share price and set the airline on a trajectory that is taking it into the profit stratosphere.
While there is no doubt that Rapp's work has had a significant influence on Lufthansa, his acknowledgement of the dubious benefits of loyalty schemes is being reflected in other industries, with companies unable to leverage the potential that the accumulated data offers. However, claiming that the customer-facing strategies have boosted revenues and share price too is a little hard for other pundits to swallow.
Bob Shaw, also a visiting professor of marketing at Cranfield, points out that countless other factors influence financial results. "To claim that [CRM] is the 'be all and end all' of business is quite silly, although companies can certainly leverage value from CRM if they do it in a smart way."
Shaw also points to holes in Lufthansa's plans to differentiate between high and low value customers at the check-in desks. He was involved in a similar scheme at British Airways several years ago as the airline sought to drive its customer strategy forward and he speaks scathingly about the difference between theory and reality. He said the staff found little to talk about after a brief glimpse at the data screen. "It also created a bizarre situation where staff were expected to behave differently with various customers." Shaw concedes that it is useful to have a personal fact sheet on customers, but he also points out that "no one has quite figured out what to do with it," several years after its implementation.
Shaw notes that academics are often told "fairy stories" by companies which, when investigated, don't add up. However, because Rapp's journey has taken him from academia to the commercial world and now into consultancy, he is well placed to evaluate them. No doubt he has done sterling work at Lufthansa, and his popularity in consultancy and academic circles is testament to that, but he is unlikely to say, "Well, some of the Lufthansa tactics did not result in what we hoped."
Perhaps one of the biggest shortcomings in Rapp's approach is that customers may not defect as such, but follow the best deal. Shaw puts it bluntly: "It's no good having a service clerk saying 'I know the product is bad but I will talk to you nicely because I can see you are a valuable customer.' Why not just offer them a decent product in the first place?"