The Customer Value Scorecard

At a time when financial reporting is less than reliable, Behram Hansotia proposes that companies use a customer value scorecard to report statistics associated with customer lifetime value. These scorecards will clearly show if a company is making progress in increasing customer loyalty and share of wallet. C EOs, academicians and the financial community are all dissatisfied with the standard financial balance sheet and how it reflects the assets of a company. Though the balance sheet may have been an adequate representation of a company's assets in an industrial environment , today's knowledge-and information-intensive company needs better representation of its assets.A company's core assets today are its: • Culture that empowers its employees to do the right thing and provides core values for decision-making, integrity, entrepreneur-ship and respect for all. • Employees who can help the company continuously innovate. • Processes, internal and those that stretch across the company's supply chain, that create value for stakeholders and help acquire,develop and retain the right customers. • Patents, which give the company dominance in the industry and protect it from brutal competition. • Loyal customers who repeatedly buy a variety of products that the company offers. For service businesses like consulting, these assets represent almost the entire asset base of the company. The rapid downward spiral of both Arthur Andersen LLP and Enron graphically attest to the importance of these softer assets.Yet none of these assets are reflected in companies' balance sheets and few companies report them in even a cursory fashion. Assets are a company's core inputs to present and future value creation. In assessing a firm's financial value (market capitalization), investors intuitively struggle with these measures and attempt to impute the total value as a multiplier of a firm's book value. Companies that are estimated to score high on these soft assets typically have market capitalizations significantly higher than book value. A company's income statement — namely free cash flow — provides a second measure that is tracked in estimating value. Financial textbooks recommend estimating a firm's value as the net present value (NPV) of its projected free cash flow. Although theoretically NPV is a sound measure, in practice it is notoriously difficult to estimate , particularly in a rapidly changing environment when viewed at the macro firm level. An approach based on NPV that can shed significant light on the firm's value-creation capabilities is customer lifetime value (LTV) — …