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transaction processing. Each process involved activities that required substantial time and resources.
The key to building the economic model was to identify the resulting value and cost elements of these
activities, because, ultimately, if the value did not exceed the costs, there was no business model.
The capture process had three activities: customer identification, customer qualification, and
customer sale. To accomplish the first, Company Z advertised in trade publications, and employees
attended trade shows where they demonstrated their system to identify leads (i.e., potential
customers). These leads were then qualified through an outside third party that prepared a short onepage
summary of each lead‟s credit history, revenue size, and growth rate. From these outside reports,
target customers were identified and a direct sales process followed. Over the past 12 months, 1,200
leads were generated, of which 80 were targeted and 10 ultimately signed contracts.
The first two activities were relatively homogeneous in accomplishing the end goal. Essentially,
equal amounts of effort and resources were expended first to identify each customer and then to
qualify. As a result, these could be aggregated and then averaged without any material error in the
calculation. The sale activity, however, proved very different. It required visits to the customer site to
demonstrate the relative cost of the current internal customer system compared to that of Company Z.
For customers that were knowledgeable about the cost of their back rooms, this process went
relatively smoothly and the sale became dependent on a CEO-to-CEO discussion of the long-term
viability of Company Z. No firm wanted to outsource these critical operations, no matter what degree
of pain they caused, if it did not have confidence in the service provider. For the customers that were
not so aware of their costs—and unfortunately most of the 10 signed so far (7 out of 10) fell into this
category—sales were much more difficult to close. The analysis showed that this group required more
than twice the effort, and the close rate was far lower.
Unfortunately, the financial reporting system did not support this analysis. In it, costs were
organized by function (e.g., sales and marketing, technicians, travel and entertainment, administration,
etc.), and it took more than a month searching through travel reports, service procurement reports, and
the like to arrive at an estimate of what those activities cost. The job was made even more complex by
the yield factor. Of the 80 leads that were qualified, only 10 were brought to signed contracts, with the
other 70 having fallen out of the process either due to their choice or by the decision of Company Z. It
was possible to estimate the cost of the 10 signed contracts, but it was far too time-consuming to detail
the effort wasted on those dropped individually. Exhibit 13.1 shows the final results.
Exhibit 13.1 Cost to capture a customer.