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BPO Journal

Saturday, July 22, 2006

In support of the Dell model

Another earnings disappointment from Dell. Clearly, as technology advances and falling component prices render lean supply chains and falling PC prices a pervasive reality in the PC world, the strategy of cutting prices and daring other market players to follow does not seem to be working too well for Dell. Competitors like HP have been able to cut their costs in the last year, thereby diminishing the traditional cost and price advantage that Dell used to enjoy.

Industry analysts also point to Dell's falling customer service that is affecting sales, and the higher costs that the company faces as it expands customer service centers in the United States and Canada. The direct sales model, they warn, precludes the outsourcing of customer service and support costs to retailers and other front-end supply chain partners, resulting in a cost disadvantage with regard to customer support.

However, as the support function turns from being a necessary overhead to being a strategic lever that contributes to competitive advantage, I think organizational ownership of the customer support function presents potentially significant opportunities. Several companies are realizing the significant business potential of the function and increasingly subjecting it to management discipline and process improvement initiatives. The service organization not only delivers customer value but also feeds into other business functions such as product design and marketing to provide valuable insights and increase overall earnings. For example, analyses by Bain Consulting suggest that:
  • Some companies have turned their support divisions into profitable businesses, increasing earnings by as much as 10 to 30 per cent
  • An increase in customer renewal rates of between 1 to 2 per cent can engender a 10 to 12 per cent increase in revenue.
  • In one instance at Cisco, customer feedback on a new voice over IP product was fast delivered to the product design team, who implemented five critical changes to the next generation product, resulting in a 17 per cent decrease in support calls and a sharp increase in sales.
So, it seems the problem at Dell is not the high costs of customer service; it is the inability to embrace the challenges of customer service and deliver business benefits that make such investments worthwhile. Perhaps, low-end support functions may be outsourced but largely, the flexible and adaptive nature of the function, as it turns into a strategic customer touchpoint, may be best served in-house. More important, as customer service agents become increasingly involved in mining data, proactively solving customer problems, and translating customer data into actionable information and innovation directions for other organizational departments and business groups, they must be acutely tuned to business needs and strategies. This too renders the in-house servicing of the function advantageous. Especially as new product lines are added and scale economies are asked of.

The road ahead? Dell needs to check communication lines between customer support and the executive order. If they don't exist, segments of support must be identified followed by analyses of drivers of profitability for each segment. The firm must then invest (yes!) in training, diagnostics and process improvements for the strategic support functions. And then somewhere before the end of the fourth quarter, it must check communication lines between customer support and the executive order again. It may well find its direct sales model somewhat of an advantage.

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