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Page last updated
February 15, 2003




CRM- taking a more critical look at investments and returns!


According to Uwe Kalyta, Sales Director for Financial Services at NCR's TSG Division in Germany, "CRM was a vision but is now a necessity for every company, especially for the banks in Germany who now treasure the value of their customers. Customer profitability solutions and risk management solutions are becoming increasingly important in the banking scene". The clear link between the investment in, and a Return On Investment (ROI) from, such CRM solutions explains why attention has increasingly turned towards them.

It similarly explains the importance attached to software solutions such as Peoplesoft's Profitability Management now in place at the Prudential in the US, AMP, and CSAA (California State Auto Association). Wolfgang Wengefeld, Sales Director at Peoplesoft in Germany, believes that "During the last 6 months we have seen that particularly the German retail banks are increasingly looking at CRM applications. The reasons for that are multi-layered and exceed the recognition and retention of 'valuable' customers: On the one hand via the usage of an CRM application they hope for a better and targeted structuring and management of their sales force, on the other hand they hope for the possibility to offer their 'profitable' target customers more 'higher commission' products (ie an upselling factor), which will lead short- to medium-term to a higher overall profitability and therefore to a higher 'Shareholder Value'.

Linking this 'Shareholder Value' to CRM initiatives and projects has become a hot topic but where little seems to have been implemented at this point in time. During July this year in the UK, in an independent survey undertaken by INFACT Research and commissioned by Fiserv, in the financial services sector of 35 senior executives at banks and insurance companies the majority said that they have no initiatives underway at this time to measure any such link between Shareholder Value and CRM but 50% will be doing so in the future.

Nonetheless, and irrespective of the growing interest in linking Shareholder Value to CRM initiatives, it is becoming increasingly important to measure and manage customer profitability. In the June survey described above the vast majority of interviewees believe that managing and measuring customer profitability is either 'very' or 'extremely' important.

Various theories exist as to the best way forward. Concepts like 'Life Time Value' (LTV) and 'Net Present Value' (NPV), 'Value Based Management' (VBM) and others, both have their proponents and critics and it is increasingly the case that banks are taking the view that a current valuation alone that does not also take into account the POTENTIAL value of clients, both in the short-term and also long-term, is insufficient.


According to Joe Prunty, President and CEO of CorePROFIT Solutions, customer transaction and channel choices are the key profit drivers for most banking products. "Customer profitability is behavior-based," "If a bank truly wants to understand customer profitability, it must be ready and able to report the profitability of each customer account by product by channel at the transaction level. Because the costs associated with many banking products can vary significantly from customer to customer, understanding cost is especially critical to understanding customer profitability."


It is clear that a number of financial institutions are focusing on customer profitability. Some examples from the UK include: Abbey National, which has placed a strong emphasis on managing customer profitability by focusing on local markets. Action Systems (now a part of Xchange) have been working with them to implement appropriate solutions; a system introduced by Barclays called the 'Pre-Approved Mortgage Limits' (PAMS) uses software from SAS Institute to deliver a quick decision because it offers a more accurate profile of a customer's financial standing than had been the case previously. Barclays is also reported to be now introducing something called 'Value Based Management' (VBM), which LloydsTSB has been using for some years now, which aims to align management decisions with the interests of its shareholders where they will possibly cut savings rates while also boosting mortgage rates. The goal is to align the culture and day-to-day behaviour with the principles of maximising value creation for its shareholders. But can this shareholder-centric view lead to increased customer satisfaction and retention in the long-term or are they at odds with one another? Does a 'Customer Focused Management' model not fit better with the desired goals of CRM?

Elsewhere in the world some examples of banks implementing profitability measurement campaigns include: the Canadian Imperial Bank of Commerce which is using customer profitability to guide its investment and customer relationship management strategy, and the Royal Bank of Canada which has implemented NCR's Value Analyzer and seen real benefits gained. In terms of results the bank points to differences of 100's of millions of Canadian dollars.

The same is also true in the insurance sector: systems integration firm Valoris Abram Hawkes in a recent project with one of the UK's top five insurance companies discovered that 40% of that insurer's customers had a current value of £5 and a potential future value of £31. Further, nearly one-third of customers had a combined value of over £240. Armed with such insight into current, latent and potential profitability it starts to become possible for an insurer to view each customer as an investment and determining how much to invest in a customer based on the expected return in terms of revenue and profitability. At the very least groups of customers can be targeted for different levels of investment according to their profitability potential. This means investing in customer groups appropriately in terms of systems, new or re-engineered business processes, and in new skills and employee behaviour to retain customers, achieve repeat purchasing and to maximise cross selling and up selling opportunities as and when they occur. In particular, cross selling and up selling is best done by identifying the best timing according to major relevant events and life stages in a customer's life requiring a deep understanding of the customer's current and future needs and aspirations that could can be met with financial services products. In the Valoris example it was discovered that there were differences by age and income that effected the ongoing value of different customers. With some further analysis into attitudes, age and income which were then overlaid onto the current and potential value quadrants it was found that it could be decided immediately where resources should be allocated but also where different personal needs could be motivated by different propositions and communications.

Other insurance companies are tackling their challenges in different ways. At Liberty Life Association of Africa, Alistair Dry, Business Strategy Consultant, described a situation where his insurance company had effectively lost the relationship, and the potential for further profit with the customer, due to the fact that the intermediaries had become the principal point of contact. To retain profitable customer relationships for life Liberty is now addressing the problem by putting in place a new relationship where Liberty owns the customer but the intermediary owns the relationship and through new, more intimate knowledge, can increase customer sales and retention. Liberty has been working with Customer Analytics and has had a pilot project in place now for the past 3 months. This is a difficult and finely balanced task if a win-win is to be achieved for both insurer and intermediary and that a clear line is drawn between defining owning the customer and owning a particular relationship.

The expectation at Liberty is that the present and potential profitability of a customer will be based on true customer-centric aspects rather than the 'policy-flogging' methods of old and that the high-advice, long-term policies like life insurance, investment, etc. which they sell will lead to cross-sales opportunities, particularly when lifestyle changes happen which Liberty can now track through new customer analytical/behavioral aspects, data mining /warehousing solutions being put into place.

So much for the success stories but very few are willing to talk about their 'secret of success' and all those working in today's financial services markets must be skeptical of the current outpourings of customer relationship management rhetoric and, when assessing potential initiatives, whether or not they depend on IT, financial institutions should as far as possible avoid opinion and make their decisions based on facts and with precise focus. For many this will almost certainly mean making measured investments targeted on profitable customers - measured so they don't become unprofitable customers - and targeted on best service, best value for money, and maintaining trust.

Finally, in the words of Dr Joachim Schue, Profit Center Manager for Banking at Heyde AG, "The developments which have been taking place in the US and the UK are now starting to become debated and also implemented here in Germany. We expect to see more emphasis being placed on the link between Shareholder Value and CRM initiatives here by us in an era where increasing accountability is required."

Iain Campbell





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