Measure benefits - not costs

• Oct 01, 1999

Since the mid-1990s, a "shaking-out" of capacity and re-structuring has taken place nationwide in the environmental industry. What will distinguish the survivors and allow them to thrive? Let's talk about value. How do you increase the value of your services to clients?

You should know what your environmentally related products and services are worth to customers. If you can't show customers the value of the product and service you're offering, the only thing left to focus on is price. That is unfair to both yourself and your customers.

Value defined
To define value in the business and corporate world generally, we spoke to James Anderson, a professor at Northwestern University's Kellogg School in Evanston, Ill. Anderson asserts that suppliers and customers should both focus on "net value." To determine net value for your service and product, deduct costs from gross benefits. If the net value is bigger than the net value of the next best available alternative, your service should be the one selected.

Many corporations treat environmental services only as a cost center. This is not the best criteria to evaluate these services. For example, many companies own brownfield properties - real estate stigmatized by real or perceived contamination - that can be profitably reused. Remediation at these properties doesn't have to be a cost. Rather, it can be an investment that yields a return when the property is sold or recycled.

What is the value of your services or product?
Anderson recommends that you answer this question by listing anything that adds costs or benefits to the customer - value elements. The list should include all of the possible costs and benefits that doing business with your firm might have for the customer. For example, an appraiser can provide information about how much a brownfield will be worth after cleanup has occurred. A corporate owner can subtract cleanup costs from the anticipated sales price and see what the difference is. The benefits will also include eliminating ongoing expenses such as reserves, insurance and monitoring. Bundling remediation services with marketing, financing and land use may provide substantially greater value than remediation alone.

Value comes in various forms, including some, such as social benefits, that are difficult to measure. Value also includes the difficult-to-measure goodwill that results from remediating brownfield properties.

How can you add value to your core services or product?
This can be done by bundling additional services together with your core offerings. For example, cleaning up beyond the minimum might facilitate a more profitable reuse of a property. The increase in the market value of the property may greatly exceed incremental remediation costs. Of course, we can't determine the value added by the extra remediation without retaining an appraiser and a land use expert. Appraisers, lawyers, financiers and others can all help brownfield owners obtain the greatest possible return on their remediation investments.

Your firm's service or product must provide more net value than the next best alternative. That doesn't mean that your price must be lower than your competitors. It does mean that the gap between the cost of your services and the value the customer receives must be larger than the best available alternative.

How can you get useful feedback from your customers?
Dave Power III, founder of J.D. Power & Associates, helps businesses recognize the benefits of giving customers what they want. That isn't as easy as it sounds. What customers want evolves over time. Power notes that although it took the car industry years to get the basic components in the automobile right, defects were eventually reduced. Today, there are very few basic problems in the components of cars. Auto manufacturers must now compete with each other using small improvements. Power cautions that the more you give clients, the higher their expectations become.

By comparison, environmentally impaired real estate and brownfields are in the embryonic stage - perhaps the equivalent of where the auto industry was 15 years ago. So, you can be certain that customer expectations will rise. Up until recently, property owners just wanted to avoid Comprehensive Environmental Response, Compensation and Liability Act (commonly known as Superfund) and other liability. Innovative tools from the public and private sectors now facilitate more positive outcomes. Remediation firms must use these tools to help owners optimize value.

Power believes that customers can be surveyed about potential choices. Sometimes this can be challenging because your customers must put themselves in a new frame of mind. While you can provide them with alternatives that they may not have thought of, a conservative approach is considered best. Surveys can include alternatives such as real estate and financing options that your customer may not have known the full potential of, but which could add significant value to your core product or service.

Meet or exceed expectations
Power mentioned that the key criteria is customer expectation. J.D. Power measures the gap between what the customer expected and what they believed they received. Successful companies stay ahead of customer expectations.

This article originally appeared in the 10/01/1999 issue of Environmental Protection.