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k€r" 9

Chapter 10 Performat*e Measurefitent 477

Casn Lo+z
CUP ConponarroN

The CUP Vorstand (Board of Directors) decided Background: Product Lines Responding
to create a Customer Care Center (CCC) to to Declining Growth Rates
stem the increasing defection of customers re-
CUP was one of the largest insurance firms
sulting in part from dissatisfaction with the
based in Europe. It had a worldwide operation
firm's services. The central idea was to provide
private customers with one telephone number and was recently acquired by another major in-
su,ranee company. CUP had enjoyed remark-
to be used for all their questions and problems
able growth of more than 25 percent each year
and f<ii all types of insurance offered by CUP.
over thepast 10 years. The firm had used a se-
The CCC would be staffed 24 hours a day,
7 days a week to make sure someone was al- ries ofacquisitions to broaden the type ofinsur-
ance offerings and had also grown internally to
ways available for the customer. The CUP per-
meet the expanding needs of its served market.
sonnel would be able to address all inquires and
handle customer prollems 90 percent of the It sold various forms of insurance in the health,
time on the first call. The remaining 10 percent
life, casualty, property, and automotive areas.
of the problems would be resolved in one day Over the last couple of years, the growth of ti
premium iocome in the German insurance in- t'
with a follow-up call. l.
Derrick Westmuller was assigned as the proj- dustry had leveled off. In 1993 and 19g4, the in- t
ect manager responsible for the creation and de-
dustry still enjoyed high growth rates and grew
velopment of the CCC. In developing this center
at 10.3 percent and 9.5 percent, respectively.
he was tasked to display the kind of entrepre-
By 1995,, however, the growth rate had de-
creased to only 4.8 percent. By 1gg6 and 19g7,
neurial behavior the chairman of CUP was
gr:owth was {lat instead of the planned B per-
seeking to develop. Mr. Kirk, the energetic and
cent and the expectation was that "growth will
dynamic chairman, was seeking to change the
only be moderate, if any growth is recorded at
CUP insurance company from a stiff bureau-
cracy to a nimble entrepreneurial-driven firm.
The design was to have the center function as a
The declining growth rates resulted from a
set of reinforcing trends:
central services profit center supporting the sep-
ar:ate insurance business units of CUP. 1. Worsening economic climate with
Derrick, a seasoned manager, saw this as- increasing economic downsizing,
signment as a real career oppoitunity. He began increasing unemployment, and stagnating
to think about meaningful indicators and meas- real income.
ures for success of the center, He was politically 2. Higher trixes and social welfare levies, in
savvy and wanted the performance of this cen- part due td the reunification of Germany.
ter to stand on its true accomplishments. 3. Increasing competition resulting frorn the
deregulation of the Europearr market,
which was "fu'lly noticeable for the first
time" in 1995.
This case was prepared by Professor Lawrence Carr, Babson 4. Extensive satisfaction of the basic demand
College. Copyright by Lawrence Carr. for insurance in Germany, an area of
sustained growth up to 1994.
478 Part II The Manogement Control Process

Despite these worsening market conditions, total premium revenue. The lapse rate
the operating divisions of CUP were often able age $ras comparable to other German i
to gain market share. However, the squeeze of firms.'In some products, such as ear
inc-reasing competition and increasing client the figures were much higher (20
priee sensitivity led in the private insurance had passed a pain threshold.
market to shorter contracts and mofe cancella- The frrm also reported tlat the
tion of existing contracts. This effect varied in of the agents were almost exclusively
intensity by product line. generating new contracts. The agents
In response, product lines and the branch of- spending 70 percent of their time just
fices began to pay more attention to providing a ing enough new business to keep up wiffi
better service as a way to keep agents, brokers, ."Uutioot. If this trend were to contin$
and existing elients satisfied. There was a would have to spend 100 percent of their
range of ideas and responses to the problem, by the year 2000 on just finding new
varying from remaking new:sletters for cus- to keep up with cancellations.
tomers to creating "a Calling Center." The lat- In-depth interviews with defected
ter was in response to the complaints of many or "root cause interviews," indicated tha#'
customers, agents, and brokers about the diffi- percent ofthe defections could be i
culties of reaching clerks and about the level of CUP (without changes in the contracts), fl
service they received if and when they could cating that 5.8 percent of the custorner
reach them. the firm was lost through the firm's own
Within the decentralized structure of CUP, Dissatisfied customers mentioned (apart
in which product }ines operated rather inde- price, 33.3 percent): problems with agents
pendently, a number of "calling centers" were percent), bad claims processing (13.3
created. Those more concentrated product lines, slow and bureaucratic responses (9.3
such as Life and Health, created their own cen- and too little information (4,0 percent)-
tral telephoner centers. Some branch offices also customers mentioned high price, it would
created *telephone centers" for those product' not be an issue as such but in combination
lines that had decentralized much of their cleri' other problems such as dissatisfaction
cal work to the branehes. the agent.
Finally, the firm found the following:
Reforming the {Lapse Rate" P-roblem . Customers who had more than one
as a Customer LoYaltY Problem insurance contract were less likely to
Traditionally tn'e firm, through its two brand defect.
names, CUP and Southern, had focused on the . Trjgger events, (e.g,, exasperation about
lower middle segment of the market that was being passed from one clerk to another
not very price sensitive. Exclusive agents han- . without getting any help) seemed to
dled 70 percent of this business. The increasing precipitate cancellation.
defection rate began to draw the attention of . If a customer with several policies
some senior executives. They ordered a study one, it was likely that the customer would
by an international management consultant' not continue when other contracts came
In March 1996, this firm reported that the for renewal.
"lapse rate"-the number of customers cancel-
ing conttacts eornpared to the total amount of The traditional market research
coitracts-had reached DM 800M in 1995 OM used by CUP, the consultant maintained,
900M in 1996), which is around 10 percent of not able to detect these kinds of problems b*"'
A:hapter lA PerformanceMeasutctnant 479
cause they were geared rnore toward customer to'tlre telephone centers, a senior manager from
satisfaction with a (new) product aud not one of the product lines mentioned that they
evenUaction related. lackerl critical mass. There would be insuffi-
The "lapse rate" problem for CIIP was sum- c-ient sophisticated technolog-y and training of
marized by the irnage of a lealing bucket; new :personnel, and not enough would be learned
customers would flow into the bucket while at from the customer.
the same time many leaked out through big The customer needed to be viewed as a per-
holes. The focus of product lines was on increas- son, a family, or even an extended family, going
ing the inflow rather than intelligently address- through a life-cycle with critical events 0ike
ing the outflow. This was not only the case getting a driver's license, getting married, hav-
within CUP but also the, case throughout the ing kids, buying a house, setting up a retire-
German insurance industry. meat fund, etc.) each creating new-insurance
Instead of focusing on the "lapse rate" or needs. The firm was a collection of product
"customer defectjon rate" of individual product lines. In anticipation of future business, CUp
lines, the problem was restated as a customer should try to satisfr the customer needs in all
Ioyalty problem that out across product lines oftbese stages.
and was considered a corporate problem. Moreover, rather than the risk of each cus-
tomer being treated as part of a large pool with
A Corporate Problem: From Vicious certain statistical averages, customers could
to Virtual Cycles and shsuld be segrnented into highly prof-
Customers looked at the firm as a whole, not as itable groups, not-profitable groups, and loss-
a product line with whom they had one con- gengrating groups, The firm as a whole should
tract It turned out that the more contracts cus- proactively pick and target the most profitable
tomers had, the longer they remained loyal to group, and learn more about the cusiomers. At
CUP. The longer they remained with the firm, the same time, it should defend its existing cus-
the lower the eommissions for new products tomer base through (i) becoming sensitive to
and the lower the damage rate. If this virtual early signals of defection, (ii) monitoring care-
cyele were to lead to small improvements in fully trigger events, and (iii) tlying to recover
customer' retention, profrtability would be sig. "lost" contracts/customers.
:*ificantly improved. While the efforts of individual product lines
Conversely, if customers had only one con- would be important, clearly, ro.oe at
tract, they canceled much more frequently. Re- the corporate level felt that there""""otives
was a need
placement then led to a commission for the for a comprehensive and integrated approach.
wgent. And when this process gained enough However, such an approach should be taken in
momentum-as it did-all insurance firms suf- incremental steps.
Sbred from high lapse rates and paid high com.
emissions. Hence a vicious cycle. The First Step: "Quick Hits"
To induce a virtual cycle, custorner retention and New Discoveries
wuuld have to become a strategic target. There The data suggested that CUP could benefit
: ffiere many positive ideas and, responses in from using a number of ideas for customer re-
r:S€fPs product lines and branch offices at the tention derined from the practices of leading US
l$l$me. There were also managers who thought insurance firms and banks as well as new inter-
qpite differently. They felt the responses were nal intentions. The CUP Vorstand (Board of Di-
,Se.a geared to symptour-s, and would have lit- rectors) ordered a specific study of customer
#* positive effect on the business, With regard loyalty for CUP between May 1996 and October
480 Part II The Management Control Proces,s

1996. It was anticipated that this would create lytical eulture. When confronted with the
ideas for "quick hits" and begin to close "the they would say, "this is true for health but
holes in the bucket." life" or "it is worse with other insurance
But the project also led to new discoveries 5. When customer focus groups were
about the prevailing thinking in the firm con- ized in..lune 1997, the Vorstand (Board
cerning the customers. According to one of the rectors) members were invited to attend-
consultants: one showed up apart from the manager r{',
1. A customer typically called because his or study. he others maintained that "we
her agent was either unreachable (either a the customer."
part-timer, or trying to generate new business)
or could not effectively address a question. The Customer Care Center
When a customer called one product line, say,
Ilealth, and then had a question about life in- By October 1996 when the results of the
Burance, the Health clerk would say, "I don't
tomer loyalty studies were in, the CUP
know." On average, it would take a client four stand ordered a feasibility study for a
reaching far beyond specific product lines"
contacts to get to the right person, and,even
then, in 30 percent of the cases, the questions key idea was to provide customers witk
rvere not resolved. Customers tended to cancel
telephone Rumber and professionally trqi
people who could effectively answer a vari@
when a specific question or problem was dealt
questions, and thereby increase the service
with in the wrong way.
matically. In addition, a center wouid be ab
2r A clerk worhing in one product line had
only one screen (related to the contract that line eliminate process steps in the future and
had with the client) and had little access to in-
nate sources of errors. Finally, it was be
formation about other contracts the customer that the center would be a cheaper and rno#
fi cient way,of processing information.
may have had. However, if a custorner with mul-
tiple policies canceled one policy because the cus-
By January L997, an outline for the
tomer was dissatisfied with the service in one design was ready and specified the fol
product line, this person was likely to cancel the
other policies as well. The clerks often did not 1. CUP's private customers would have
(,\ sense the business was at risk because, quite lit- and only one telephone number for all
erally, it was "not on their screen," and therefore questions and problems. This service rvo
the pattern of defections remained hidden, available,to them in addition to the agents.
3. Car insurance played a eritical role in 2. The center would be open 24 hours:,
"E binding clients because it was often the first day and 7 days per week. It would be able
contract. It appeared that most people bought a nalize 9Q percent of all customer inquiri
car on the weekend when insurance firms were one telephone call. It would lead to a signi
closed. In addition, it was difficult to create a increase in service quality and effrciency.
tr-s team to help clients because, in general, cus. 3. CUP *,ould benefit from a reduction in
tomers could not reach a clerk after 5:00 and lapse rate, specificaliy, in cases where, in
trade unions did not allow work after 6;00. past, the client's inquiry was not addres
Therefore, the response to the idea w,as often the service was unsatisfactory.
'yes, but it can't be done.n' 4. Additional goals of CUP were (a)
4. Most CUP people talked about the cus- ing.a service leader in the insurance j
- tomer but didn't do anything about improving (b) inereasing the number of customers
the customer service. The firm had a strong ana- multiple policies.
Chapter 10 PerforrnancellleasurctTent
#oncerns and Inventing Solutions
A final set of concerns had to do with the fact
The proposal generated a number of, concerns. that calling centers were already
$-or instance, the agents saw the center
as some product lines and branch ofEces.
For ia_
ttreat to their relationship with the clierrt. Ina stance, ifsomebody changed an address, prod-
rs$porlse, it was decided that agents would
r.nformed of any communicati; betw;1h;
uct.line would argue trr"i tni. .";il[
be dealt
wtth by a center because a change of address
eenter and his or her clients. Moreover the mryht have implications fo, irrrdu"ou related
ter could act as a backup for the ,g"t in case to the house,. Or some product 1i""" ;;rld-;;;;
{e_agent- was inaccessible to th" aloi (e.g, at "We are.learning from the *u"t tt ro"gl,
aight and on the weekend). Finally, tlr" .ulrtu"
"i our ear,,,ooi
calling center, and now we lose
eSuld help agents by contacting"pf;pective -wny break up a winning
elients. T)rpically, an agent might"set one out
of At the time that a central center was dis_
ten potential insurance contractsl th" cusse{, some of the branch ofn."s t aa just
wuld provide a first screen by telephone """i*
and stalled their own telephone .""t"". way to
i-mprove this ratio. screen c.alls to the back office. Branch"rl oifi""
_- ?he prod.uct lines had a different eoncern. managers had received employee acceptance
They thought that it was impossitrte ;h;;-; cJaiming that ,,this was their future., Disman_
'generalist" could address qouriiorr. ,"f"t"a to tling their unit would undermine trustworthi_
their specialized b-usiness, and that,jt woul.d ness. th.e first two concerns could be dealt
.{sk: "El least ten y€ars,, of experien." i" i"*." !h"ofgr, agreements about rnaking information
to do this. However, it was tir.o""""a-ifrrl
product.line-clerks got caught in a vicious
!3 the- center readily accessible tJ the product
.;;l;: lines. The latter concera might Ue a*aii;t;;,;
'I.lpically, the clerks part, by a promise that the center woul.d
intended to provide the be in
$righest possible quality when taf[ing or around the two branch offices *itf, tei"pfr""
tomers but in doing so tended to betme
too centers. This would.make it easy for empioyees
eechnical. Their response was,,over-engin""ruai to apply for jobs in the central cerrter.
end they tended to waste their time ,i,t it" tfr"
client became exasperated. ,, By $pri] 1997, the Vorstand haa ugreed on
the.following critical aspects for the'center,s
_ In addition, many customers had the, same design.
Linds of questions. An expert might
noyed when having to repeat t-he answers
1. The CCe would be a ,,greenfield,, solution
or and it would be the only centler within the CUp.
yight forget to mention part of the answers. Other_ newly establishea
Less specialized persons *itt additional in
3a*wever, might quite easily answer questions
branches and some produc.t ".fii"g-.;ters
linls would be
closed down.
&a11d o:r seripts that providu "Sooa ans^wers.,,
2. It would centralize all customer inquiries
Finally, it turned out that -at least 70 to g0
and be available 100 percent of the time, and
percent of the questions (depending o"
tt able to address effectively g0 percent of all
product lines) were rather mundane-and "
did questions and problems.
s*t need a specialist to answer them becarrse 3. The center would be established outside
the question was merely about the status oia
the existing organizational structur" of CUp,
ciaim or the custome, grr" , Jr;;;;ilffi;
*f._ASain, an expert might becomJ exasperated ].e,, it would not be part of any of the product
lines or operating divisions. it i, *r.ia ut*o
xrith such questions. A special team *ith ex-
make it possible to sign more flexible employ_
fended product knowledge could. ,tiU aA;;;.;
ment contracts (flexible working hours and
fhe remaining 20 to30 peicent.
482 Part II The Managemant Control Frocess

4" The center would be a profit center and be within the fum and wittt@tr"$
be widely watched
paid on a telephone call basis by the product the German insurance industry, If success@[l\
lines rather than a cost center supported by CUP would have a first-mover advantage altd
corporate or the operating divisions' overhead. beinstrumental in reshaping the industry. "[
5, Th" center would be a stand-alone central But what'\trere meaningful indicators of sue"
service business unit with a mission to support cess of the CCC and how to measure that sus^
the product lines. cess? Should Derrick, the project manager *#
6, The product lines would supply insurance the new center, focus on one indicator, or on a

technical know-how and competent personnel, set of indicators reflecting a wider sense of pexl'rtN
and interface with the product lines would be formance? How many should he focus on, a-ud:,:
clearly organized. rvhich are realln critical? Which indicators ca*
he really influence and how?
During the first year, the center would focus When asked how he would measure suce*$.
on "inquiry" initiated by the client. In addition, with the clients, Derrick initially mentioned:
it would also initiate inquiries on betralf of decreasing lapse rate-that part of the lapse
procluct lines in case a customer canceled a con- rate, connected to the serviee quality of t&',I
iract' This initial set-up would require an EDP CUF, should decrease." However, other execr* :

system with the least integlation into the rest tives differed about what constitute a "
of the IT infrastructure of the CUP, allowing for anced Score Card." For instance, a senior exe*ry,
an autonomous EDP center for the CCC with tive suggested: 'lspeed of processing, efftcienqy :

only a relatively small link to the Central EDP. ih terms of cutting out process steps, quality 't*:
However, as soon as the center operated ef' terms of fewer errors' accessible all the timq
fectively (expected within half a year of its
opening), new tasks could be added. For in- Another senior executive, responsible
stance, the center could become involved in the sales through the agent channel, said the crr
clairns processing, in coriecting errors, or cal question was "whether we lose fewe,r.;l
changing information such as addresses, etc. It clients." At the moment, the firm lost alrdlti
could also carry out marketing research at the added 12 percent per year ofits customer basan
request of the product lines' And finally, it If the center could stem losses to L1 percent
miglt become the care ceuter for agents and that would be success, However, "50 percent ctr
brokers as well. the agents grow more ttran the rrarket." If t}ltf'=
The customers (depending on the pro-duct agents'sales force was trimmed, then
line) would expeet the center to address 70 to more professional and entrepreneurial
B0 percent ofthe inquiries through its general- could he created. If the commission
ists. The remaining 20 to 30 percent of ques' was adjusted, agents would remain a for
tions would he passed on to specialized teams ble sales force.
with extended product knowledge in the center' One consultant drew a more comPlex
Not only would the processing within the center for measuring success with clients: "How t8'
be "transparent and traceabler" thereby reduc- measure defection if you have two channels t*b)
ing errors, the links to the product lines would the customer: the center and the agents?" Some
be transparent and traceable as well, customers would call; others not. The firs&i
group would call because the agent channel di$,,,
Indicators and Measurdment of Success not work for them. But as for the second grouP,
The center would have to be up and running of eustomers: .Are they satisfred with the agent"
within one )rear, in May L998, The effort would are they indifferent? One measure could be: if
@prr$.# p*rform,anee
- ilteasu,rement
e existiag customer had reeomrnended
"""' & customer who
complai""J;;;."i";-;; to the following rate: the number of cancenations
',ew A;#ffire to poor servicej after the center
= xsrk through an agent t"'r" t
*uisting -p"tit."l
customer mention th" ;;eri'lir";rnn
trr- il;#;r:ffo^"t to,,recover,,them versus
i'r fisi*ture of what r"a peopie;;;;;;.h;;il ffii";*""nt of cancellation. ff custom,ers the
;;#;H" product ti.,u, o"-ir,e agents,
i. #g:ffitmni::"fj,T:*H$,
?il:ri $*e"'slow and bureaucrati.
# **
I:::,iT: t"ffj}:li:Tli,}ifi;Til:"r:lt}:il:try;, ,lcan
we get them back?,,

ffile information',shoutd """porr"rlil.;d"
For shareholder varue, irrir _##;ft {l!3ser,_wr4tJto ensure the suc- ;
I' g*sted a ,ook at a dec"easiruiLr".i."
""r"rrtant sug- ;,''fiii- cii,"ii;.1"r"il i.i" *ira was get-
selling more contracts. n'i,itty-, lid tiog fi"";rgasures ,iglrt. ?h;s;
ror ir.roruuor, *";'r. i* rrr measures had to
irl geuerate il;a;;J;er
e*d Iearnins he tfrousfrt-
woy].d trr. p*a*t
th;;H:ir;ii#iin" ccc workers,
information that was at corpo"ate-manager$, the
f"esent with ,"*J*, fneg-,
finary himserf
i ff_:^**l,*l iT..essibre t" tr*-d.*, for in_ ""a
ij,,.fle*, jrtng total numb". of r;iil;;;
il: :iiy*ffi were ab.out a new
..i' rreasins, this facto' .;;d ;; di,:'ff!
;ffiff:ffI -
,. As an u1y,*"1torhe prdect manaser,
N*ouitored' Finallv' t'"
1"tt t*nri""Jirr"i",rr" ffiil
westmuiler, whlt set of measures
#H1m1'##?L': 1*"i..1::r':{:T.- wourd vou advise thev adopr?

;mit*ra;**l':, ffiilTffiff". r;*::i:""",

iffi*:J1"fr"?::Xff sys,em
that "the hard nlure;;r*-,,"",i,;; #Xil:]::l*:x.":*.J