The thorough buyer usually can close its acquisition with a strong degree of comfort in a wide swath of a target's most appealing attributes, ranging from finances to marketing capabilities to brand strengths. But standard due diligence cannot provide much help in an area that may be most critical to making the deal pay off - the attitudes and loyalties of customers toward the target, especially if sales and cash flow are heavily dependent on one or a few clients. Acquirers that cannot risk inheriting shaky relationships with the customer base increasingly are turning to the Customer Relationship Audit (CRA) to establish how well or poorly customers perceive their product or service supplier. By going directly to the customers, CRA reveals the attitudes, levels of satisfaction, prejudices, and problems that may be negative enough to capsize a deal. Target companies usually paint the rosiest pictures of their links to customers. But, as many buyers have sadly learned without the proper probing, the clientele may be dissatisfied with everything from delivery schedules to quality to pricing and terms. The audit is designed to produce critical answers on whether the new owner can hold the base, such as: * When the company changes hands will essential customers scamper off? * Will key customers desert simply because a change in ownership is a great excuse to leave the company? * Do some of the most influential customers "have a history" with you, the buyer, that could cause friction? Maybe a key customer simply doesn't like the people at the buying company and doesn't want to do business with them. For example, advertising agencies usually lose clients after an acquisition. Sometimes that's because of client conflict but other times it's just a case of bad blood, camouflaged as "cultural" or "chemistry" reasons. When the audit process was in the development stages, target companies often asserted that no new information or revelations could be found. After all, we were told, the ad agencies were on top of things, the PR agencies were on top of things, and so were the market research people, the sales force, and anyone else who tended to linkages between the company and the customers in the field. When the number of completed audits reached 100, we learned that there is almost always new information, for better or worse, generated by the inquiries. At the 200 mark, new information became confirmed as a virtual certainty. So there is a two-fold underpinning of the audits: * They are predictive of future corporate behavior, and * They always reveal unanticipated information that is both new and important. A good audit also can provide useful information for the buyer. Does a customer see a new owner as a ruthless carpetbagger with no interest in improving the brand but aimed at using the company as a cash cow to be milked every day? Conversely, the findings may show that a key customer is rejoicing in a new ownership that will reinvigorate and improve the target. In addition to being predictive, properly structured CRA uncovers new information that the acquirer did not know about but can use productively. Key customers are critical because they represent a disproportionate share of the target's sales. There may be one dominant purchaser or a small group, say 10 or 20, that accounts for 80% or more of the company's sale - frequently referred to by marketers as the 80/20 formula. Losing this select group of key customers is tantamount to losing the basic value of the acquisition. So if the 10 or so key customers are unhappy and ready to bolt, the acquisition is on the rocks before day one. An important caveat is that if the target has a fragmented customer base with thousands of customers, none of which is dominant, the audit would not be practical. Other research methodologies using representative, quantitative samples of customers would be more useful. How It Works CRA is a highly qualitative investigation. It involves an interview process directed at the top management of the target and a trained interviewer with the skill to reach and question these people. At the start, the audit is a one-on-one measurement of the past, present, and future of the relationship between the target and its indispensable customer. The basis of the audit involves: * A professionally crafted in-depth interview of customer executives at the SVP, president, or CEO level; * Recording and transcribing of the interviews by a professional third-party interviewer at the target's locations; * Production of a verbatim transcript of about 80 to 120 pages; * A one-page executive summary for each interview; and * A 5-to-10-page detailed summary with recommendations Level 1: Exploring the Past Finding how the relationship began is as important as knowing where the relationship is heading. In this part of the audit, you may discover that you're not actually speaking with the person who initiated the relationship. This is a red flag. If the current CEO wasn't in his or her position when the customer company originally bought your products or services, a strange disconnect occurs. How would he or she know why the relationship was established? If there's a disconnect, the relationship could be in trouble. The people who bought the goods and services, perhaps years ago, are not around to defend their decisions. But the audit process can be used to measure these historical dimensions: * When did the key customer's relationship begin with the target company? * How has the relationship evolved to date? * What is the scope of the involvement? * Has the target distinguished itself in matters of technology, personnel support, and involvement of senior management in the day-to-day relationship? Level 2: The Present After establishing a historical information base, the audit moves on to determine how the present relationship is going, in such areas as: * Are the target and its customers in a mutually positive, growing relationship? * Are these customers an asset in the acquisition? * What do they contribute to the equity of the target? * Are unpleasant surprises awaiting the buyer? If so, what are they and what parts of the business are they in? * How have these customer relationships evolved, or have they been stagnant? * How do key customers rate the target company as compared with industry peers on the following attributes?: - Responsiveness and resourcefulness - Attention to detail - Knowledge of the industry - Proactivity - Billing and invoicing accuracy - Price-to-value conscientiousness - Competitiveness on pricing and value added - Productivity gains Responses will help determine whether the acquisition and new ownership will expand the business relationship with these customers. They will show what parts of these relationships are strong or weak - if not toxic - and whether existing problem areas are being addressed or must be tackled in the future. Level 3: The Future of the Relationship? The 60-to-90-minute interviews have gone on now for a while. Polite. Businesslike. Professional. Now we're down to the moment of truth. The interview subject has invested his or her time in this process and the interviewer finally cuts to the chase. This is the so-called tipping point - the place where the hard truth comes out. Don't assume that the target and the customer have a future together because the businesses are a fit on the macro scale. It's time to zero in on such questions as: * Is the relationship broken in places? * Can a damaged relationship be repaired, or should it be written-off? * What is the residual value of the deal if problems that are identified cannot be resolved? * What are the buyer's realistic future expectations for the customer relationship? * Will the relationship become more or less involved? The "future involvement" question is a polite one with the $64,000 answer. "Involvement" is a seemingly noncommittal soft pitch. I have used dozens of words for this part of the audits I've done. Involvement is comfortable, open-ended, and safe but usually dead-on effective. If the key customer says that things are going to continue in the "same" fashion, this may not be good news. The customer may say "the same" but really mean "Gee, I don't really know, or maybe I don't really care." With this response, it's important to know whether the customer intends to leave - and why. And does this departure have anything to do with the acquisition? A sampling of cases - I've done nearly 500 audits - will illustrate what CRA can find in practice for a buyer. Generally, they reveal a fatal disconnect between suppliers and their customers, who complain that despite the high dollar volume of their business, they consider themselves out of the loop. These are problems in the making for an acquirer. Jumping ship A key customer complained that there were too many product representatives at the target. He repeatedly requested a customer relationship manager to help speed communications and work flow without success. The customer believes he must get another vendor that is better organized to function in multi-product situations. The president of this company is ready to jump ship as a result of the acquisition. Moreover, he's looking forward to changing suppliers. Behind the times The target has not updated operating system software in a timely fashion. The future of the relationship is poor because the acquired company doesn't listen to needs for software migration and doesn't seem willing to upgrade systems that might involve enormous capital spending. The target's management is faulted for poor listening skills and failure to adapt to newer technologies. The CEO of the customer is really annoyed. He believes that system software problems should be in the basement boiler room, not on the CEO's desk. Poor communications The target has a major financial service software package that has been enabled to process multi-currency accounts. However, customers were not fully informed and went to other vendors to purchase competitive multi-currency software. The target lost a big sale because it failed to share this critical product news with its clients. Resistance to change The target is an advertising agency for a premium chain hotel property in suburban Chicago. The agency has worked with the hotel to build traffic on weekend nights, when business is slow. The agency spent roughly $1 million locally, with lukewarm results, without ever changing strategy for what was a basically failed effort. Meanwhile, another agency entered the picture with a campaign offering 50% weekend discounts to flight attendants on several airlines. The hotel is now booked solid every weekend and campaign expenses were a fraction of the cost charged by the original agency. Beset by complacency, the original agency lost the business. Deeds, not words Through a customer audit, the buyer learned that a customer of its target was very dissatisfied with the pricing structure it had endured for years. The target had a suite of products priced individually rather than as a whole. Yet, the target relentlessly preached "enterprise software solutions." As a result, the target lost the business because of repeated unwillingness to adapt to new pricing realities. The Customer Relationship Audit is a qualitative, investigative, and management tool that can, in the right hands, be a predictive assessment. The audit discovers meaningful new information about a target's customers that can be used to make a deal work, and even relatively angry customers appreciate how the audit gives them an opportunity to register their attitudes. Steven Jareo is a marketing and customer relationship expert and head of Jaero@Jareo Marketing Consulting Partners ([email protected]) based in New Buffalo, Mich. (c) 2006 Mergers and Acquisitions Journal and SourceMedia, Inc. All Rights Reserved. http://www.majournal.com http://www.sourcemedia.com

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