(FORTUNE Magazine) – Epidemiologists at the Center for Buzzword Control have issued a New Year's financial health advisory. According to the center, which can be reached at the address at the end of this article, the term "internal customer," long thought to be harmless or even beneficial, is no longer considered safe to use. Swallowing this sacred cow is known to cause corporate spongiform encephalitis, also known as "mad-company disease." This is a form of dementia in which corporations run around in circles, chasing their own tails, under the delusion that there is as much nourishment to be obtained there as from the green grass around them.

What's wrong with the notion of internal customers? Simply this: They don't exist. They are figments of the ever perfervid management imagination, a well-meant fiction that easily, through the law of unintended consequences, turns into ill-winded fact. There are only real customers, people with real money in real hands, which they will give you if you do what they want. Paying attention to internal customers can actually create obstacles to caring for real ones.

The internal customer was a contrivance of total quality management, and not a bad one. The internal customer was the person inside your company who received what you produced: the guy downstream. If you were a designer, the engineer was your internal customer; if an engineer, the factory manager was; etc. If you were staff, he was line. He was conjured into being to make a point. You will recall, from those thrilling days of yesteryear, words and phrases like: "functional silos," "stovepipes," "chimneys," and "throw it over the wall," which we bolted together into mixed metaphors: "The designers sit in functional silos throwing designs over the wall to the engineers' chimney."

The Rube Goldberg imagery all too aptly described the tortuous practices that resulted when too little care was taken to see that what traversed the wall was useful next door. Staff overwhelmed the line with paperwork; designers sketched things that couldn't be built and had to be sent back. In the words of songwriter/mathematician Tom Lehrer: " 'Once the rockets are up, who cares where they come down? That's not my department,' says Wernher von Braun."

To fix that, we told the staff and upstream departments, who never saw real customers: You have customers too, only yours are internal--they're on the line or downstream. Invest them with the quasi-moral authority of customers. Serve and satisfy them, for they are always right.

Among other good things, inventing internal customers helped break up captive in-house markets that can create a kinky kind of synergy. A friend of mine, for instance, worked for the book-publishing arm of a conglomerate that also owned a printing company, which her company was compelled to use. The printer, she told me, took advantage of the market-in-bondage to jack up prices to its sibling company in order to meet their parent's profit goals. Telling the printer to treat her like a customer could stop the price gouging.

The internal-customer idea is fine as far as it goes, but it all too easily goes too far. Says Christopher Meyer, managing director of Integral Inc., a consulting firm specializing in cycle-time improvement that was founded by Harvard business school professors Kim Clark and Steven Wheelwright: "The intentions were fine. Organizations never do things for crazy reasons." But sane reasons can have crazy results. Says Michael Brown, CEO of disk drive maker Quantum Corp. (1996 sales: about $4.5 billion): "If you're in functional silos, you've got to get out--but how you get out is important. It can be distracting and is not useful to set up a chain of internal customers. If you're not focused on paying customers, you get a lot of distortion."

Business, Meyer reminds us, exists to create value, and value is defined only by real customers. Says Meyer, who used to run human resources at Silicon Graphics: "I used to say we don't deliver product, we support. From the customer's viewpoint, we're non-value-adding. How would you react if the sticker on a new car listed so much for air conditioning, so much for antilock brakes, and $12.95 for HR training coordination?"

There's a fine distinction here, but an important one. HR training coordination (or any other internal work) might contribute to something customers do value, such as better workmanship. But the fact that an internal customer wants it doesn't, by itself, show that. Says Brown: "Internal customers build internal hurdles; you do things to satisfy them that might or might not be value-adding to customers." Internal customers might prize convenience more than cost, for example, or not care about costs as long as they're in someone else's budget or if they can pay with Monopoly money. In parts of IBM, people talk about "blue money" vs. "green money." Green money comes into the company from outside. Blue money comes from another department that's willing to pay you to do something--reprogram financial reporting forms, do a little spot manufacturing. It's often easier to obtain blue money than it is to get the real stuff--especially if whoever receives the bluebacks gets some sort of credit for it, such as an accounting notation giving them duplicate revenue credit if by good fortune green money comes in to cover it.

When that system gets out of hand, a whole chain of internal suppliers might get credit for their contributions to a project. Says one IBM finance manager, who adds that the problem has been fixed: "We got so carried away with duplicate revenue credit that a dollar's worth of sales could turn into five dollars on the [internal] books. Everyone could justify their existence on the basis of that one dollar."

Investing someone in-house with the holy name of customer fuzzes up a too-often-forgotten distinction: the difference between a business and an organization. A business, Stan Davis writes in his book 2020 Vision, "applies resources to create products and services that meet market organization is the way in which those resources are administered." A business is defined from the outside in, by markets, suppliers, and competitors. "The internal customer," Davis said in December, "is a happy fiction that creates a business that exists to run an organization--i.e., a bureaucracy."

We want the voice of the customer to be loud in the land, not the voice of the cuckoo. For that we need two things. We need a word for our colleagues, something that tells the folks upstream that we're in this to serve the people who pay the bills while reminding people downstream that it's counterproductive to say, "You're overhead and I'm not." A lovely word, Chris Meyer suggests, is "partner." It's a sign of how far out of whack things are that "partner" has come into vogue to describe buyer-seller relationships rather than collegial ones. Meyer notes: "We've created customers on the inside and partners on the outside. We've got it backwards."

But we need something else, a way to carry the customer's voice, the voice of the business, deep into the organization. Quantum has an elegant way to do that. Like everyone else these days, though perhaps more devotedly than most, Quantum organizes work in teams--project teams, major customer teams, etc. They are, of course, usually staffed by people from several different functions. To this common mix Quantum has added a clever way to keep the teams' collective vision focused on how to grow the business rather than just on how to cooperate inside. The company asks all major customers--companies like Apple, Compaq, and Hewlett-Packard--to fill out quarterly report cards. These provide detailed scores of how Quantum has performed on measures like product quality, responsiveness, meeting delivery dates, and so on. Wherever possible--it's usually possible--the grades are quantitative. Customers submit report cards from each of their sites, a level of detail that helps Quantum spot problems and best practices.

Quantum takes the report cards seriously. A group of 15 to 20--quality gurus and key account people--pore over each report card; CEO Brown and the management team study them each quarter too. Where there are problems, he expects to see plans to fix them. Says Brown: "We really want the report cards to be very visible. It's important for everybody to see who our major customers are and how they see us." A key benefit, he says, is that the report cards bring facts from the marketplace to help set in-house priorities. Says Brown: "They help us make investment tradeoffs. Support organizations tend to develop goals that might or might not be what customers want. Should we invest more in finance or engineering? The reports tell us what customers would choose." Which is what you need to know if you want them to choose to do business with you.

Contact TOM STEWART at FORTUNE's new Smart Managing bulletin board on the Internet at or by E-mail: