Avoid the four perils of CRM

Customer relationship management is one of the hottest management tools today. But more than half of all CRM initiatives fail to produce the anticipated results. Why? And what can companies do to reverse that negative trend? The authors--three senior Bain consultants--have spent the past ten years analyzing customer-loyalty initiatives, both successful and unsuccessful, at more than 200 companies in a wide range of industries. They've found that CRM backfires in part because executives don't understand what they are implementing, let alone how much it will cost or how long it will take. The authors' research unveiled four common pitfalls that managers stumble into when trying to implement CRM. Each pitfall is a consequence of a single flawed assumption--that CRM is software that will automatically manage customer relationships. It isn't. Rather, CRM is the creation of customer strategies and processes to build customer loyalty, which are then supported by the technology. This article looks at best practices in CRM at several companies, including the New York Times Company, Square D, GE Capital, Grand Expeditions, and BMC Software. It provides an intellectual framework for any company that wants to start a CRM program or turn around a failing one.     

The perils of the imitation age

Imitation exerts enormous influence over society, and business and finance in particular. And its influence has grown as the avenues by which people imitate--and are imitated--have multiplied and the process has gotten faster. Thousands of communications channels make it possible for virtually anyone in the developed world to know, almost instantaneously, what others do, think, believe, claim, or predict. More significantly, we can and do act upon such knowledge. The resulting fads and fashions, bubbles and crashes are ever more frequent, severe, and complex. The information age has cast up more than its share of paradoxes, including this one: When information is plentiful, we often use it not to make better decisions but to imitate others--and their mistakes. In consumer purchases, financial markets, and corporate strategy, what others do matters more to us than the facts. When there's too much information, imitation becomes a convenient heuristic. This is the basis for a self-referential society. Imitation has its virtues, but it also promotes instability and unpredictability. That's because, by definition a multiplier, it can swell a single opinion into a mass movement or catapult the smallest player to the forefront of a market. Mastering the dynamics of self-reference won't ensure mastery of its consequences. But businesses that understand how imitation works can at least attempt to gird themselves against its worst effects--by accounting for it in their forecasts and risk-management plans, by becoming more sensitive to unexpectedly changing circumstances, and by avoiding mindless imitation of other companies' moves. In some instances, they may even be able to build strategies around self-reference and use the tools of imitation to capture new business. That won't make the world any less confusing. But it may make it more profitable.     

Blockholder monitoring and the efficiency of pay-performance benchmarking

In this article I examine how the performance sensitivity of CEO compensation is related to the level and turnover of outside block ownership. Separating firm performance into firm-specific (Skill) and exogenous (Luck) components, I find that pay sensitivity to Luck increases with blockholder turnover, whereas pay sensitivity to Skill increases with blockholding size. Furthermore, when blockholder turnover is higher, CEO pay increases more with positive Luck but does not decrease as much with negative Luck; also, excess CEO compensation is larger. Thus, the rent accruing to CEOs via asymmetric pay sensitivity to Luck is partly explained by short investment horizons of large shareholders.     

Ensuring the validity of labor productivity benchmarking

Limitations of high-level metrics, such as FTEs per adjusted occupied bed, can cause them to be misleading when used to compare a hospital's labor productivity with that of peers. Rather than serving as the sole basis for management decisions, these metrics should be used as a means to determine whether a department-level productivity assessment is warranted. When using an outpatient conversion factor (OCF) for such a benchmarking analysis, the hospital's OCF should be comparable to the median OCF of the comparison group of hospitals. Similarly, when a case mix index (CMI) adjustment is used, the analysis should allow for differences between the hospital's CMI and the median CMI of the comparison group.     

资本革命:艰辛与惊险

9月7日,深沪证券交易所《上市公司股权分置改革业务操作指引》出台,至此,股权分置改革的三大文件《指导意见》、《管理办法》和《操作指引》全部公布完毕,股改全面铺开。回首第二批试点走过的风风雨雨,不仅感叹资本革命的艰辛与惊险。其中,诚信“负”溢价、股市定位之变、股市生态治理方构成这场变革的内在核心     

Executive compensation and aspirational peer benchmarking

Using novel data on explicit compensation benchmarking peer groups, I document that small public firms engage in upward compensation benchmarking to a much greater extent than larger firms. Small firms choose aspirational peers that reflect their executives’ shifting opportunity sets. For these firms, compensation benchmarking is indicative of future growth and performance, and the rate at which pay adjusts toward peer levels is sensitive to executives’ outside employment opportunities. Growing and outperforming small firms strategically use upward benchmarking to adjust pay in an effort to retain valuable managerial talent.     

Auditor benchmarking of client disclosures

Review of Accounting Studies - We examine auditors’ disclosure benchmarking, which we define as auditors’ acquisition of nonclient financial statement information for the purpose of...     

Asymmetric benchmarking of pay in firms

This paper examines whether asymmetric benchmarking of pay exists for vice presidents (VPs). Using ExecuComp data for 1992–2007, we find that companies reward VPs for good luck but do not penalize them for bad luck. However, asymmetric benchmarking of VP pay is mitigated by governance, CEO power, gender, and industry factors. The presence of asymmetric benchmarking of pay could suggest that managers are involved in skimming, or it could mean that firms insulate managers from poor firm performance to prevent them from accessing outside opportunities. We find that unlike CEOs, asymmetric benchmarking of pay for VPs is not consistent with the skimming hypothesis.     

Offsetting the implicit incentives: Benefits of benchmarking in money management

Money managers are rewarded for increasing the value of assets under management. This gives a manager an implicit incentive to exploit the well-documented positive fund-flows to relative-performance relationship by manipulating her risk exposure. The misaligned incentives create potentially significant deviations of the manager’s policy from that desired by fund investors. In the context of a familiar continuous-time portfolio choice model, we demonstrate how a simple risk management practice that accounts for benchmarking can ameliorate the adverse effects of managerial incentives. Our results contrast with the conventional view that benchmarking a fund manager is not in the best interest of investors.     

Correction to: Auditor benchmarking of client disclosures

Review of Accounting Studies - The original version of this article unfortunately contained mistakes.     

The utility of gambling and the favourite-longshot bias

The traditional explanation for the usual favourite–longshot bias in gambling is that gamblers are risk-lovers. Conditions are derived under which the bias occurs and it is shown to be consistent with a utility function that has elasticity greater than one in a certain range. With a utility function that displays risk-aversion as well as risk-loving behaviour over its domain, it is demonstrated that the expected return–win probability frontier is not monotonic as has been hitherto tacitly assumed. This provides a consistent explanation for both the usual favourite–longshot bias and also for the few examples where a reverse bias has been observed. Pooled data supports the thesis that the frontier is not completely monotonic but does indeed have a turning point.     

Asset pricing implications of benchmarking: a two-factor CAPM

The paper considers the equilibrium effects of an institutional investor whose performance is benchmarked to an index. In a partial equilibrium setting, the objective of the institutional investor is modelled as the maximization of expected utility (an increasing and concave function, in order to accommodate risk aversion) of final wealth minus a benchmark. In equilibrium this optimal strategy gives rise to the two-beta CAPM: together with the market beta a new risk-factor (termed active management risk) is brought into the analysis. This new beta is defined as the normalized (to the benchmark's variance) covariance between the asset excess return and the excess return of the market over the benchmark index. The empirical test supports the model's predictions. The cross-section return on the active management risk is positive and significant, especially after 1990, when institutional investors became the representative agent of the market.     

Firm listing status and the investment home bias

Are public firm investment rates more sensitive than private firm rates to new investment opportunities? We offer a new explanation for differences in public and private firm investment sensitivities: investment sensitivities differ because the type of investments favored by firms varies with their listing status. Specifically, we consider the geography of investment opportunities and find that private firms have a much stronger investment home-bias than similar public firms which makes their investment decisions more sensitive to local investment opportunities than public firms. Controlling for local investment opportunities explains four-fifths of the differential sensitivity between public and private firms not explained by more traditional measures of investment opportunities.     

International portfolio diversification and the home bias puzzle

We review the literature on equity home bias, a phenomenon stating that investors do not hold enough foreign equities for an optimally diversified portfolio. We begin by defining the home bias measurement and reviewing related evidence on the bias. Further, we consider four explanations for this puzzling phenomenon: barriers to foreign investment, country-specific risks, information asymmetry, and cultural and behavioral factors. We analyze the related theoretical arguments and empirical findings of prior studies within each explanation. Based on the discussion of previous studies, several avenues for future research are suggested. (JEL G11, G15, F41)     

Restatement costs and reporting bias

Financial restatements are costly, but frequent, events and many firms restate several times. We explore why rational managers engage in misreporting despite the costly consequences. To guide our analysis, we build a parsimonious model of reporting bias and the cost of restating. In our model, the observed cost of a restatement conveys information about the true cost of biasing financial statements, which the manager incorporates into the optimal choice of bias. A restatement hence offers managers an opportunity to learn about the true cost of reporting bias, which allows them to update their biasing strategy if the observed cost differs from the expected. We test the model's predictions by analyzing how firms' accruals quality changes after observing the costs attached to restating, which we measure as the market loss following a restatement scaled by the restatement's net income effect. We find that future accruals quality is increasing in the cost of restating and the change in the cost of restating. Consistent with our stylized model, our results indicate that rational managers use the insights from prior restatements to improve their future bias strategy.     

Integration and search engine bias

We study the effects of integration between a search engine and a publisher. In a model in which the search engine (i) allocates users across publishers and (ii) competes with publishers to attract advertisers, we find that the search engine is biased against publishers that display many ads – even without integration. Integration can (but need not) lead to own‐content bias. It can also benefit consumers by reducing the nuisance costs due to excessive advertising. Advertisers are more likely to suffer from integration than consumers. On net, the welfare effects of integration are ambiguous.     

Immigration and equity home bias

Why do investors hold such large positions in domestic equity when there are gains to be made from international diversification? This equity home bias puzzle has received considerable attention in the literature, with asymmetric information on domestic and foreign assets (whether by individual choice or by market imperfection) emerging as the most plausible explanation. What happens when we consider a subset of investors whose information sets are closer to investors in foreign countries? I assess the relationship between immigration and equity home bias and find that inward migration is positively correlated with increased foreign equity positions and reduced home bias. Looking across income groups, outward migration reduces home bias for relatively rich countries, but may actually increase home bias when migration occurs to or from a developing country. These results suggest that immigration generates a positive externality of increased information flows for developed countries, but not for developing nations. The effects of immigration on investment are strongest within the Euro-Zone, suggesting that this positive externality of immigration is largest when barriers to portfolio diversification (such as currency risk) are lowest.     

A bias in the volatility smile

We show that even if options traded with Black–Scholes–Merton pricing under a known and constant volatility, meaning essentially in perfect markets, one would still obtain smiles, skews, and smirks. We detect this problem by pricing options with a known volatility and reverse engineering to back into the implied volatility from the model price that was derived from the assumed volatility. The returned volatilities follow distinctive patterns resulting from algorithmic choices of the user and the quotation unit of the option. In particular, the common practice of penny pricing on option exchanges results in a significant loss of accuracy in implied volatility. For the most common scenarios faced in practice, the problem primarily exists in short-term options, but it manifests for virtually all cases of moneyness of at least 10 % and often 5 %. While it is theoretically possible to almost eliminate the problem, practical limitations in trading prevent any realistic chance of avoiding this error. It is even more difficult to identify and control the problem when smiles also arise from market imperfections, as is widely accepted. We empirically estimate a very conservative lower bound of the effect at about 16 % of the observed smile for 30-day options. Thus, we document a previously unknown phenomenon that a portion of the volatility smile is not of an economic nature. We provide some best-practice recommendations, including the explicit specification of the algorithmic choices and a warning against using off-the-shelf routines.