Management Strategies

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James Beams, Financial Insights
James Beams, Financial Insights
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Take the High Road to Profits

As with baseball's Oakland A's, innovation and management's use of customer metrics is important for banks.

Michael Lewis' widely publicized expose Moneyball charts the unlikely success of the Oakland A's baseball franchise with general manager Billy Beane. It describes how a team with a fraction of the operating budgets of many major league teams used sophisticated technology and analysis to build a constantly high-performing -- and money-making -- team. In our recent survey, we found innovative banks doing the same thing.

Financial Insights surveyed 51 senior line-of-business executives at retail financial institutions in the United States. Respondents included executives at retail banks, brokerages, asset management firms and life/property casualty companies. We focused on the connection between business performance measurement and the use of customer metrics, and how the latter could create better business results. We wanted to understand better what future technology investments banks will make to support the customer-metric infrastructure.

Although the banking industry has experienced record profits in recent years, individual banks face significant challenges as they struggle to survive the next 5 to 10 years. We found that successful financial institutions, similar to the Oakland A's phenomenon, were very innovative in their use of technology and analysis -- in this case, customer metrics to analyze their customer market. That is not all: They have built highly effective and responsive organizations as well to quickly take advantage of uncovered opportunities to build market share and profits.

For example, of the three basic retail strategies -- customer-centric, low-cost and innovative -- 60 percent of banks claim to be customer-centric, a little over 20 percent claim to be low-cost and less than 20 percent claim to be innovative. We found innovative banks to significantly outperform either of the other two strategies by an average of 15 percent to 20 percent.

We found the innovative companies to have sponsorship at the highest level of management for the use of customer metrics, the highest rating of effectiveness for using the metrics, the highest level of management support for continued improvements and the least perceived obstacles for improvement. Notably, innovative companies rated their IT skills higher than either other strategy, and they ranked their IT support significantly higher. This indicates they are more effective at applying their skills and IT resources as well. Innovative companies also had many fewer organizational obstacles.

Customer-centric companies had significantly less sponsorship by line-of-business managers for customer metrics, and they identified major organizational hurdles for implementing improvements. Although they ranked their current technology skills very highly, they also ranked technology cost and organizational support as their most significant obstacles. They ranked their current technology support rather poorly as well. Clearly, some of these supposedly customer-centric organizations are seriously misaligned strategically or have severe organizational issues.

Our findings suggest that what has previously been referred to as CRM has evolved. Those institutions that have promoted the widespread use of customer analytics linked to business performance are gaining significant business returns by being innovative, responsive and flexible to changing market and customer demands. Innovative organizations are using customer metrics to support fact-based decisions and to overcome political wrangling and intuitive guesswork.

We wondered: Was the effective use of customer metrics really the key to innovative companies' higher profitability? We looked at three areas -- management, sales and marketing -- and found that organizations that were very effective in utilizing customer metrics, regardless of strategy, were unsurprisingly the best performers. Organizations that considered their management effective at using customer metrics had a 40 percent to 50 percent higher ROA, and organizations with above-average marketing effectiveness in using customer data had a more than 200 percent increase in ROA. Also not surprisingly, innovative banks were more effective than banks pursuing other strategies.

Even more details support the growing importance of the effective use of customer metrics. We looked at the utilization rates for different metrics, the metrics banks want to enhance, and the technologies and tools they are buying to improve their customer-metric infrastructure. Needless to say, we found a positive outlook for customer metrics.

We expect that financial institutions will continue to spread the use of customer metrics across their enterprise. How an institution accomplishes this will depend on its executive leadership, organizational culture and the level of transparency of the customer metrics across the lines of business and associated business applications. As we noted earlier, we found management's effectiveness in using metrics to achieve high returns particularly important.

Clearly, a business needs to incorporate the role of metrics, both business-centric and customer-oriented, into how it manages its performance. Customer metrics use has moved beyond the curiosity factor into a position of importance. Some financial institutions now consider customer metrics to be highly significant, representing a long-term outlook on their part.

We believe that an institution that ignores the use of customer metrics will be hard-pressed to succeed in the future. The management team of a financial institution that doubts this outlook or believes that the pursuit of developing customer metrics to manage business performance is too hard or expensive should consider one of two options: Get a good price before the franchise declines or retire and let someone else deal with the pain before the outcome becomes obvious.

We have some specific suggestions and comments for all institutions, including the most committed ones.

  • The use of customer metrics is a never-ending journey. Empower your institution to continuously seek improvements.

  • Embrace the use of customer metrics in performance reviews, incentive plans and management development and recruiting programs. Find the champions inside the institution who "get it" and nurture discussions about how to spread the use of customer metrics.

  • Consider engaging in an ongoing discussion about customer metrics with a trusted supplier for your institution. Make sure the supplier, which could be a consultant, a services firm or a solution vendor, has similar aspirations and has the talent to help your institution improve on its customer metrics.

  • Consider budgeting for customer metrics for both revenues and costs. This approach would lead to a return on operations, and not just on the investment.

    James Beams, Research Director, Consumer Banking and Credit
    jbeams@financial-insights.com
    508-935-4489

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