k€r" 9
Chapter 10 Performat*e Measurefitent
Casn Lo+z
CUP ConponarroN
The CUP Vorstand (Board of Directors) decided
to create a Customer Care Center (CCC) to
stem the increasing defection of customers re-
sulting in part from dissatisfaction with the
firm's services. The central idea was to provide
private customers with one telephone number
to be used for all their questions and problems
and f<ii all types of insurance offered by CUP.
The CCC would be staffed 24 hours a day,
7 days a week to make sure someone was al-
ways available for the customer. The CUP per-
sonnel would be able to address all inquires and
handle customer prollems 90 percent of the
time on the first call. The remaining 10 percent
of the problems would be resolved in one day
with a follow-up call.
Derrick Westmuller was assigned as the proj-
ect manager responsible for the creation and de-
velopment of the CCC. In developing this center
he was tasked to display the kind of entrepre-
neurial behavior the chairman of CUP was
seeking to develop. Mr. Kirk, the energetic and
dynamic chairman, was seeking to change the
CUP insurance company from a stiff bureau-
cracy to a nimble entrepreneurial-driven firm.
The design was to have the center function as a
central services profit center supporting the sep-
ar:ate insurance business units of CUP.
Derrick, a seasoned manager, saw this as-
signment as a real career oppoitunity. He began
to think about meaningful indicators and meas-
ures for success of the center, He was politically
savvy and wanted the performance of this cen-
ter to stand on its true accomplishments.
This case was prepared by Professor Lawrence Carr, Babson
College. Copyright by Lawrence Carr.
477
Background: Product Lines Responding
to Declining Growth Rates
CUP was one of the largest insurance firms
based in Europe. It had a worldwide operation
and was recently acquired by another major in-
su,ranee company. CUP had enjoyed remark-
able growth of more than 25 percent each year
over thepast 10 years. The firm had used a se-
ries ofacquisitions to broaden the type ofinsur-
ance offerings and had also grown internally to
meet the expanding needs of its served market.
It sold various forms of insurance in the health,
life, casualty, property, and automotive areas.
Over the last couple of years, the growth of ti
premium iocome in the German insurance in- t'
l.
dustry had leveled off. In 1993 and 19g4, the in- t
dustry still enjoyed high growth rates and grew
'q
at 10.3 percent and 9.5 percent, respectively.
By 1995,, however, the growth rate had de-
creased to only 4.8 percent. By 1gg6 and 19g7,
gr:owth was {lat instead of the planned B per-
cent and the expectation was that "growth will
only be moderate, if any growth is recorded at
all,"
The declining growth rates resulted from a
set of reinforcing trends:
1. Worsening economic climate with
increasing economic downsizing,
increasing unemployment, and stagnating
real income.
2. Higher trixes and social welfare levies, in
part due td the reunification of Germany.
3. Increasing competition resulting frorn the
deregulation of the Europearr market,
which was "fu'lly noticeable for the first
time" in 1995.
4. Extensive satisfaction of the basic demand
for insurance in Germany, an area of
sustained growth up to 1994.
478 Part II The Manogement Control Process
Despite these worsening market conditions,
the operating divisions of CUP were often able
to gain market share. However, the squeeze of
inc-reasing competition and increasing client
priee sensitivity led in the private insurance
market to shorter contracts and mofe cancella-
tion of existing contracts. This effect varied in
intensity by product line.
In response, product lines and the branch of-
fices began to pay more attention to providing a
better service as a way to keep agents, brokers,
and existing elients satisfied. There was a
range of ideas and responses to the problem,
varying from remaking new:sletters for cus-
tomers to creating "a Calling Center." The lat-
ter was in response to the complaints of many
customers, agents, and brokers about the diffi-
culties of reaching clerks and about the level of
service they received if and when they could
reach them.
Within the decentralized structure of CUP,
in which product }ines operated rather inde-
pendently, a number of "calling centers" were
created. Those more concentrated product lines,
such as Life and Health, created their own cen-
tral telephoner centers. Some branch offices also
created *telephone centers" for those product'
lines that had decentralized much of their cleri'
cal work to the branehes.
Reforming the {Lapse Rate" P-roblem
as a Customer LoYaltY Problem
Traditionally tn'e firm, through its two brand
names, CUP and Southern, had focused on the
lower middle segment of the market that was
not very price sensitive. Exclusive agents han-
dled 70 percent of this business. The increasing
defection rate began to draw the attention of
some senior executives. They ordered a study
by an international management consultant'
In March 1996, this firm reported that the
"lapse rate"-the number of customers cancel-
ing conttacts eornpared to the total amount of
coitracts-had reached DM 800M in 1995 OM
900M in 1996), which is around 10 percent of
total premium revenue. The lapse rate
age $ras comparable to other German i
firms.'In some products, such as ear
the figures were much higher (20
had passed a pain threshold.
The frrm also reported tlat the
of the agents were almost exclusively
generating new contracts. The agents
spending 70 percent of their time just
ing enough new business to keep up wiffi
."Uutioot. If this trend were to contin$
would have to spend 100 percent of their
by the year 2000 on just finding new
to keep up with cancellations.
In-depth interviews with defected
or "root cause interviews," indicated tha#'
percent ofthe defections could be i
CUP (without changes in the contracts), fl
cating that 5.8 percent of the custorner
the firm was lost through the firm's own
Dissatisfied customers mentioned (apart
price, 33.3 percent): problems with agents
percent), bad claims processing (13.3
slow and bureaucratic responses (9.3
and too little information (4,0 percent)-
customers mentioned high price, it would
not be an issue as such but in combination
other problems such as dissatisfaction
the agent.
Finally, the firm found the following:
. Customers who had more than one
insurance contract were less likely to
defect.
. Trjgger events, (e.g,, exasperation about
being passed from one clerk to another
. without getting any help) seemed to
precipitate cancellation.
. If a customer with several policies
one, it was likely that the customer would
not continue when other contracts came
for renewal.
The traditional market research
used by CUP, the consultant maintained,
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
goals;
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
Ft
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
.lt:
tomers could not reach a clerk after 5:00 and lapse rate, specificaliy, in cases where, in
l$
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
The proposal generated a number of, concerns.
$-or instance, the agents saw the center
as
ttreat to their relationship with the clierrt. Ina
rs$porlse, it was decided that agents would
r.nformed of any communicati; betw;1h;
be
eenter and his or her clients. Moreover the
cen_
ter could act as a backup for the ,g"t in case
{e_agent- was inaccessible to th" aloi (e.g, at
aight and on the weekend). Finally, tlr" .ulrtu"
eSuld help agents by contacting"pf;pective
elients. T)rpically, an agent might"set one out
of
ten potential insurance contractsl th"
wuld provide a first screen by telephone """i*
and
i-mprove this ratio.
_- ?he prod.uct lines had a different eoncern.
They thought that it was impossitrte ;h;;-;
'generalist" could address qouriiorr. ,"f"t"a to
their specialized b-usiness, and that,jt woul.d
.{sk: "El least ten y€ars,, of experien." i" i"*."
to do this. However, it was tir.o""""a-ifrrl
product.line-clerks got caught in a vicious
.;;l;:
'I.lpically, the clerks
intended to provide the
$righest possible quality when taf[ing
tomers but in doing so tended to betme
il.;;:
too
eechnical. Their response was,,over-engin""ruai
end they tended to waste their time ,i,t it" tfr"
client became exasperated.
_ In addition, many customers had the, same
Linds of questions. An expert might
t";;;;;
noyed when having to repeat t-he answers
or
yight forget to mention part of the answers.
Less specialized persons *itt additional
sf.lffs,
3a*wever, might quite easily answer questions
&a11d o:r seripts that providu "Sooa ans^wers.,,
Finally, it turned out that -at least 70 to g0
percent of the questions (depending o"
tt
product lines) were rather mundane-and "
did
s*t need a specialist to answer them becarrse
the question was merely about the status oia
ciaim or the custome, grr" , Jr;;;;ilffi;
*f._ASain, an expert might becomJ exasperated
xrith such questions. A special team *ith ex-
fended product knowledge could. ,tiU aA;;;.;
fhe remaining 20 to30 peicent.
48r
A final set of concerns had to do with the fact
that calling centers were already
in
some product lines and branch ofEces.
".t"Uti*n"a
For ia_
stance, ifsomebody changed an address, prod-
a
uct.line would argue trr"i tni. .";il[
be dealt
wtth by a center because a change of address
mryht have implications fo, irrrdu"ou related
to the house,. Or some product 1i""" ;;rld-;;;;
"We are.learning from the *u"t tt ro"gl,
3_wn
"i our ear,,,ooi
calling center, and now we lose
or
-wny break up a winning
team?,'
At the time that a central center was dis_
cusse{, some of the branch ofn."s t aa just
in-
stalled their own telephone .""t"". way to
screen c.alls to the back office. Branch"rl oifi""
managers had received employee acceptance
by
cJaiming that ,,this was their future., Disman_
tling their unit would undermine trustworthi_
ness. th.e first two concerns could be dealt
with
!h"ofgr, agreements about rnaking information
!3 the- center readily accessible tJ the product
lines. The latter concera might Ue a*aii;t;;,;
part, by a promise that the center woul.d
be in
or around the two branch offices *itf, tei"pfr""
centers. This would.make it easy for empioyees
to apply for jobs in the central cerrter.
,, By $pri] 1997, the Vorstand haa ugreed on
the.following critical aspects for the'center,s
design.
1. The CCe would be a ,,greenfield,, solution
and it would be the only centler within the CUp.
Other_ newly establishea
in
branches and some produc.t ".fii"g-.;ters
linls would be
closed down.
2. It would centralize all customer inquiries
and be available 100 percent of the time, and
able to address effectively g0 percent of all
questions and problems.
3. The center would be established outside
the existing organizational structur" of CUp,
].e,, it would not be part of any of the product
lines or operating divisions. it i, *r.ia ut*o
make it possible to sign more flexible employ_
ment contracts (flexible working hours and
compensation).
482 Part II The Managemant Control Frocess
4" The center would be a profit center and be
paid on a telephone call basis by the product
lines rather than a cost center supported by
corporate or the operating divisions' overhead.
5, Th" center would be a stand-alone central
service business unit with a mission to support cess of the CCC and how to measure that sus^
the product lines.
6, The product lines would supply insurance the new center, focus on one indicator, or on a
technical know-how and competent personnel,
and interface with the product lines would be
clearly organized.
During the first year, the center would focus
on "inquiry" initiated by the client. In addition,
it would also initiate inquiries on betralf of
procluct lines in case a customer canceled a con-
iract' This initial set-up would require an EDP
system with the least integlation into the rest
of the IT infrastructure of the CUP, allowing for
an autonomous EDP center for the CCC with
only a relatively small link to the Central EDP.
However, as soon as the center operated ef'
fectively (expected within half a year of its
opening), new tasks could be added. For in-
stance, the center could become involved in the
clairns processing, in coriecting errors, or
changing information such as addresses, etc. It
could also carry out marketing research at the
request of the product lines' And finally, it
miglt become the care ceuter for agents and
brokers as well.
The customers (depending on the pro-duct
line) would expeet the center to address 70 to
B0 percent ofthe inquiries through its general-
ists. The remaining 20 to 30 percent of ques'
tions would he passed on to specialized teams
with extended product knowledge in the center'
Not only would the processing within the center
be "transparent and traceabler" thereby reduc-
ing errors, the links to the product lines would
be transparent and traceable as well,
Indicators and Measurdment of Success
The center would have to be up and running
within one )rear, in May L998, The effort would
within the fum and wittt@tr"$
be widely watched
the German insurance industry, If success@[l\
CUP would have a first-mover advantage altd
beinstrumental in reshaping the industry. "[
But what'\trere meaningful indicators of sue"
cess? Should Derrick, the project manager *#
I
set of indicators reflecting a wider sense of pexl'rtN
formance? How many should he focus on, a-ud:,:
rvhich are realln critical? Which indicators ca*
he really influence and how?
When asked how he would measure suce*$.
with the clients, Derrick initially mentioned:
decreasing lapse rate-that part of the lapse
rate, connected to the serviee quality of t&',I
CUF, should decrease." However, other execr* :
tives differed about what constitute a "
anced Score Card." For instance, a senior exe*ry,
tive suggested: 'lspeed of processing, efftcienqy :
ih terms of cutting out process steps, quality 't*:
terms of fewer errors' accessible all the timq
Another senior executive, responsible
sales through the agent channel, said the crr
cal question was "whether we lose fewe,r.;l
clients." At the moment, the firm lost alrdlti
added 12 percent per year ofits customer basan
If the center could stem losses to L1 percent
that would be success, However, "50 percent ctr
the agents grow more ttran the rrarket." If t}ltf'=
agents'sales force was trimmed, then
more professional and entrepreneurial
could he created. If the commission
was adjusted, agents would remain a for
ble sales force.
One consultant drew a more comPlex
for measuring success with clients: "How t8'
measure defection if you have two channels t*b)
the customer: the center and the agents?" Some
customers would call; others not. The firs&i
group would call because the agent channel di$,,,
not work for them. But as for the second grouP,
of eustomers: .Are they satisfred with the agent"
are they indifferent? One measure could be: if
 @prr$.# p*rform,anee
- ilteasu,rement
483
e existiag customer had reeomrnended
"""' & customer who
cuP
complai""J;;;."i";-;; to the following rate: the number of cancenations
',ew A;#ffire to poor servicej after the center
= xsrk through an agent t"'r" t
*uisting -p"tit."l
customer mention th" ;;eri'lir";rnn
.ara
trr- il;#;r:ffo^"t to,,recover,,them versus
=,
i'r fisi*ture of what r"a peopie;;;;;;.h;;il ffii";*""nt of cancellation. ff custom,ers the
;;#;H" product ti.,u, o"-ir,e agents,
i. #g:ffitmni::"fj,T:*H$,
?il:ri $*e"'slow and bureaucrati.
# **
I:::,iT: t"ffj}:li:Tli,}ifi;Til:"r:lt}:il:try;
questionrertra.red, ,lcan
we get them back?,,
the

;Si
igl
ffile information',shoutd """porr"rlil.;d"
.;crrtfi;;;,,
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-
rate
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
51;,
f"esent with ,"*J*, fneg-,
finary himserf
cus-
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 -
euesrions
,. 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
Hr:fF.;".,1;;i:;'#;[#;T;".
that "the hard nlure;;r*-,,"",i,;; #Xil:]::l*:x.":*.J
#:iilffi:*:.::If"".H1:#["r8;t"
f=ry.d