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Cost to serve

  1. 1. Cost-to-serveJanuary 2012 Best practices in retail financial services more information on
  2. 2. Costtoserve_study#4 24/01/12 16:28 Page2 Contents 03 Introduction 04 Methodology 05 Summary of who responded 06 Areas within the organisation’s control 06. Overall Company Approach 07. Understanding of costs, across five areas of the supply chain 11. Cost-to-Serve Management, and Correlation of High Performance with Customer Experience 14 Areas outside the organisation’s controll 14. Regulatory 14. Market Conditions 15 List of Responding Organisations 16 Descriptive Statistics of Respondent Organisations 18 About Us
  3. 3. Costtoserve_study#4 24/01/12 16:28 Page3 C O S T - T O - S E R V E Introduction The world of business is becoming ever-more competitive. Understanding Cost-to-Serve and correctly managing Customer Loyalty are key tools in staying competitive. This study aims to find the extent to which different activities in these areas have a bearing on business success. The study uses two metrics as proxies for commercial success – for our banks they are • the growth in market capitalisation 2006-2011 • the June 2011 Cost-Income ratio Cost-to-Serve is a tool to calculate the profitability of a customer account, based on the actual business activities and overhead costs incurred to service that customer. Cost-to-Serve understanding covers three main areas, one within an organisation’s control and two without. The first area is the firm itself. Outside the organisation’s control are the Regulatory Environment and prevailing Market Conditions. This report will use the structure below as a framework for a discussion of the findings. COST TO SERVE FIRM REGULATOR MARKET CONDITIONS R& D Production Sales & Distribuion Customer Economic Competition marketing Service cycle INSIDE OUTSIDE Fig. 1: Key areas of Cost-to-Serve 3
  4. 4. Costtoserve_study#4 24/01/12 16:28 Page4 Methodology A questionnaire was devised by Kurt Salmon which invited respondents to place their organisations’ behaviours on attitudinal scales. The behaviours were assessed at three successive levels of detail: • overall company approach • understanding of costs, across five areas of the supply chain • granular assessment by subject area For each question, textual descriptions were provided to describe the extremes of the scale. For some questions, textual descriptions were also provided to illustrate intermediate points on the scales, to maximise the likelihood that respondents would rate their companies to consistent standards. The questionnaire was distributed by EFMA to a selection of their member organisations, chosen according to Kurt Salmon criteria. Responses were gathered in April – May 2011 by EFMA and the data were forwarded in anonymous form to Kurt Salmon, for analysis. In November and December 2011 some of the issues highlighted in the survey data were investigated further via interviews with staff from some of the respondent organisations. To preserve confidentiality, quotations from these sources will not be attributed to named individuals or banks. Respondent organisations were split into quartiles for the two metrics above, and the un-weighted mean attitudinal scores for each quartile were plotted for each survey question. The study aims to demonstrate that organisations with different outcomes (commercially successful / not successful) demonstrate different behaviours. The hypothesis is that the different behaviours have lead to the different outcomes. For some questions, the four quartiles were further aggregated to above- and below-median groups, for graphical presentation. Respondents were also aggregated by a number of attributes in turn, including size of organisation and geographical region. 4
  5. 5. Costtoserve_study#4 24/01/12 16:28 Page5 C O S T - T O - S E R V E Summary of who responded 105 individuals from over 70 organisations around Europe responded (see Appendix 1). 22 countries were named as respondents’ work locations. Full descriptive statistics of those who responded are given in Appendix 2. Nearly a third came from companies describing themselves as ‘global’, and half from organisations with more than 10,000 employees. Over a quarter of all responses come from businesses with more than 5m customers, over half came from Marketing/Sales, Strategy or Operations. 10% came from Country Heads or higher; two thirds came from Directors or Managers. There was no bias in responses to low or high market-cap-growth companies, but 30% of responses were unclassified / unclassifiable by market cap growth. Respondents from the higher quartiles were more likely to be in Marketing; Quartile 4 had the most Product Development respondents. Very senior respondents were more likely to come from 3rd or 4th-quartile organisations. 5
  6. 6. Costtoserve_study#4 24/01/12 16:28 Page6 Areas within the organisation’s control Overall Company Approach In the first section of the survey, ‘Company Approach’, organisations with better-than- median 2011 Cost-to-Income ratios are more likely be organised according to customer strategy rather than geography or product; they are more likely to have clear customer segments for targeting and are more likely to reflect customer segment and channel, rather than just product or geography, in their P&L breakdowns. The analysis revealed regional differences. The organisations were grouped into Netherlands, Scandinavia, Other Western Europe, Central Europe and Balkans. Scandinavian organisations scored better, on average, on the following categories in this section of the survey: Customer Strategy, Organisational Focus and Performance Management. On Cost-to-Serve Understanding, Scandinavian banks were equal first, with Netherlands respondents. This raises two possibilities: either Scandinavian organisations rated themselves more generously than other regions, or there are genuinely different behaviours happening. The author has tried to interview Scandinavian organisations to investigate this more deeply, but at the time of writing this has not been possible. The analysis also revealed that very small or very large organisations tended to score less well on the four areas than mid-size organisations of 10,000 to 49,999 employees. Kurt Salmon hypothesise that this is because the smallest organisations lack the resource to have deep cost understanding (or are more likely to running an ad-hoc or batch environment rather than a process environment) and the largest organisations are hampered by the complexities of scale. Interviews during this study confirm that scale can cause difficulties – “Yes, things get harder [as an organisation gets bigger]. There is a tension to balance capacity and complexity. The organisation is like a ship – as it gets larger, the extra inertia makes changes of direction slower”1. However, another organisation seems to have found a happy medium, at least with respect to purchasing: “Size isn’t a problem. Bank departments have autonomy to choose their own suppliers, provided agreement is obtained from a central Supply function, who also [use their experience] to close the deal”2. 1. Customer Experience Research Consultant 2. Director of Sales 6
  7. 7. Costtoserve_study#4 24/01/12 16:28 Page7 C O S T - T O - S E R V E Understanding of costs, across five areas of the supply chain Participating organisations were asked to assess their understanding of costs across the following five areas of the supply chain: • Research and Development • Production • Sales and Marketing • Distribution • Customer Services Organisations were split into above- and below-median groups for each of the two success metrics, market capitalisation growth and cost-to-income ratio. For each area of the supply chain, the distributions of the survey scores for the two groups were then compared. Kurt Salmon propose that if the ‘successful’ and ‘unsuccessful’ organisations score significantly differently on an attribute, then that attribute may be a driver of that commercial success. What was striking was the difference in results across the various areas of the supply chain. For depth of understanding of Research & Development costs, there was little difference between ‘successful’ and ‘unsuccessful’ organisations. The same was true for depth of understanding of Marketing / Sales costs. However, granular cost knowledge correlates with success to a much greater extent for Production, Distribution and Customer Services. The graphs for cost understanding of Research & Development and Customer Service are compared in Figure 2, p8. Studies show that this population remits a substantial share of their salary under family support. It has been estimated that remittances represent over the long term 15 to 20% of migrant income. These transfers might reach 40% of disposable income, such as for migrants from sub-Saharan Africa. Aside from the special case of Switzerland with remittances outflows close to €14 billion, Germany and Italy are European countries with the highest amount of remittances. 7
  8. 8. Costtoserve_study#4 24/01/12 16:28 Page8 e.g. company e.g. by e.g. by e.g. per or country product product, customer average channel & per channel region e.g. company e.g. by e.g. by e.g. per or country product product, customer average channel & per channel region Fig. 2: Cost Understanding across the Supply Chain, and Correlation with Commercial Success 8
  9. 9. Costtoserve_study#4 24/01/12 16:28 Page9 C O S T - T O - S E R V E This latter result cannot be because Marketing staff are under-represented in the survey – by job function they make up the largest proportion of respondents. We believe it is because Marketing / Sales costs are such a mature area of study that every organisation either is, or has already, looked into this area in detail. Hence even poor-performers have a detailed knowledge of their Marketing costs. Two things that even more strongly differentiate lower- and higher-performing companies are the ease of movement of cost-to-serve information and the importance attached to it (see Figure 3). One organisation surveyed had a simple method to keep information current and relevant: “all approvals had expiry dates, so reviews were forced, at least annually”3. Impeded: Cost information Fluid: Cost information remains within silos,is hard to can be accessed and analysed access and rarely crosses across departemental and functional departemental/functional boundaries lines with ease 3. Head of Consumer Lending Insignificant: The information Valuable: The inforamtion forms a key part of is gathered but rarely impacts customer analysis and is regularly used to customer strategy refine customer strategy and implementation Fig. 3: Effects of how Cost-to-Serve Information is moved around and acted upon 9
  10. 10. Costtoserve_study#4 24/01/12 16:28 Page10 The survey also gives a strong indication that the larger an organisation is, the more it matters to get certain corporate behaviours right. The banks in the survey were divided into those with fewer than 10,000 employees and those with 10,000 or more. The mean scores for above-median (by Cost-to-Income ratio) organisations were compared to the scores for the lower-performers. For small businesses the scores looked very similar, except for understanding of Research & Development costs. In short, for smaller organisations, a greater understanding of Production, Sales / Marketing or Distribution costs simply doesn’t make much difference. That is certainly not the case for the larger organisations, where conversely, understanding Research and Development costs is the least important differentiator and, by a long way, the greatest differentiator is Understanding of Customer Service and Claim Management costs (see Fig. 4). Sophistication of customer services makes much more of a difference in the larger organisations Fig. 4: Which Areas of Cost Understanding Matter Most? 10
  11. 11. Costtoserve_study#4 24/01/12 16:28 Page11 C O S T - T O - S E R V E Kurt Salmon therefore conclude that if supply chain costs are not fully understood, then for large organisations, the greatest benefit (choosing from the five supply chain areas of our classification) is derived from understanding the costs of Customer Service and Claim Management. Therefore understanding these should be the highest priorities. There are also differences around Europe regarding what behaviours (or levels or areas of understanding) differentiate between high and low performers. By comparing the mean survey scores of the above- and below-median performers (in this case using the Cost-to-Income ratio metric) we can infer that understanding of some supply chain areas are more important than others, or at least penalised less if they are absent. For Central European organisations, understanding of the Production and Marketing / Sales areas were the greatest differentiators, but for the Balkan regions, the greatest differentiators were the understanding of R&D and Customer Service and Claim Management costs. Possible reasons for these differences include cultural influences, or differences in business models. One interviewee from a Greek bank, whose experience included banking in Bulgaria and Romania, suggested that ’in the past, Bulgarian branches had a much stronger business model than Greek branches, because the Bulgarian branches were independent legal entities, with independent managers’4, the inference being that greater local autonomy lead to greater responsiveness to local customers’ needs. Another interviewee opined that regulation could have an effect: “Deregulated markets have better customer understanding. Switzerland is a very regulated market”5. The survey also revealed, in one organisation, a tension between the Sales and Service parts of the business: “Our understanding of Customer Services costs is not very granular... there is always a slight battle going on between Sales and Service. We in Service believe that power is in the customer’s hands... Sales can sometimes get too aggressive and short-termist”6. Cost-to-Serve Management, and Correlation of High Performance with Customer Experience Single Customer View Having a consolidated view of the customer, across an organisation, certainly correlates with better-than-median Cost-to-Income ratios. Similarly, companies reporting that their data collection is in silos, and not analysed regularly or connected to all customer-facing applications, they are much more likely to have worse than average Cost-to-Income ratios. Organisations’ abilities to see a single view of the customer vary enormously. Some are pragmatic: “We are a 2nd-tier bank, at an early stage of 4. Head of Consumer Lending 5. CEO 6. Customer Experience Research Consultant 11
  12. 12. Costtoserve_study#4 24/01/12 16:29 Page12 development – a start-up phase. Right now we have a reduced product range. We don’t try to fully understand the customer”7. Others are confident: “[We have] very strong product information – for example which accounts the customer has. We try to see the customer holistically, with only one contact [i.e. relationship manager] per client”. Another interviewee was jaded: “The survey score [of 2 out of 8] reflects the survey respondent’s frustration. We know we need a single view, to keep up with our 8. Customer Experience Research Consultant 9. Customer Experience Research Consultant competitors. We know it will cost hundreds of millions, but the bank is run by auditors and investment ideas are killed by ‘the 3 Toxic Questions’“8. Data Collection Higher-performing organisations are more likely to have comprehensive data collection to develop customer insights. However, merely having large amounts of data does not in itself lead to insight – the information must be in a useable form. One respondent was candid: “There’s a lot of data in the bank – a mountain of data – but the architecture is wrong – it’s not aligned to finding customers’ true needs. The data on the customer as an account is brilliant. The data on the customer as a person is terrible.”9 Useable data is vital because above-average performing companies generate their leads 7. CEO from a data-driven needs basis (see Fig. 5). Subjective: Leads generated through Objective: Leads generated through subjective selection process lead by rigorous analysis of future customer senior marketing executives. Some and business needs, data driven se- filtering into predictive models based lection process and event triggers on these subjective criteria Fig. 5: Above-average performing companies generate leads from a data-driven needs basis 12
  13. 13. Costtoserve_study#4 24/01/12 16:29 Page13 C O S T - T O - S E R V E Segmentation, Lead Generation and Campaign Frequency Data and insight are starting points for campaigns. The survey finds that higher- performing organisations are more likely to have many clearly-defined needs and behavioural segments with strategy and propositions for each. For example one interviewee reported that their organisation was “trying to identify the most critical segments. Within Affluent, we have four tiers of segmentation. We have designed a segment called ‘Personal Banking’ at the lower end of Affluent, below Private Banking”10. The survey also finds that higher-performing organisations have, on average, smaller, more frequent and targeted campaigns. Whilst the nature of campaigns will always be influenced by the nature of the products to be sold – one bank stated “we do both approaches: large and infrequent, small and frequent – big programs for the whole organization, small stuff for niche products”11, they may also be a consequence of an organisation’s maturity: “we did two big campaigns in our first two years. In our third year they are getting smaller, more targeted. It depends on where you stand in the development path”12 . One high-performing bank describes its marketing activities as a mix of institutional campaigns, fronted by a nationally- known figure, and retail campaigns. The retail campaigns are “in cycles of duration about two months, with two products per campaign. Only two or three products are put in front of each customer per year”13 , to minimize offer fatigue. Centralisation versus Autonomy, Reduction of Complexity Above-average performing organisations are more likely to have many channels, whose costs are transparent and therefore well understood. In some cases technology has made possible changes to business models, resulting in centralisation and greater cost transparency. At one bank in the study there had been “transformation in the last decade, starting from very decentralized, branch-centric – now a complete reversal. Many back-office processes are being centralized at present, cheque-clearing was done two years ago, we now know costs per channel, per point of sale.”14 Reduction of complexity is a theme that is mentioned time and time again. The same organization stated “We’re trying to rationalise our product offering – that’s the main driver of complexity. Also we’re trying to reduce infrastructure architecture, taking a holistic approach”. For another bank, the goal was to “simplify the relationship with the client. Try to make it as easy as possible for the client to buy the product, whether that means the internet, a tablet, an iPad solution… However, Audit Office rules [regulations] are getting more complicated all the time”15. A relatively new bank has tried to avoid complexity in the first place…”We tried to design things…very standardized and kept products simple. We don’t try to provide everything”16. 10. Head of Consumer Lending 11. Customer Experience Research Consultant 12. CEO 13. Director of Sales 14. Head of Consumer Lending 15. Director of Sales 16. CEO 13
  14. 14. Costtoserve_study#4 24/01/12 16:29 Page14 Areas outside the organisation’s control Regulatory All the organisations interviewed are concerned that impending regulation will increase costs. One says “internal calculations concluded that up to 6% more time would be spent as result of the Consumer Protection Act” . Another sees the future of banking as “fewer products; banks currently have too many. More outsourcing (perhaps only in Operations), like the automotive model… a modular approach, with mass customization” . Initiatives like Basel III, MiFID, FATCA and Treating Customers Fairly are likely to make the regulatory burden and the pace of regulatory change increase. Market Conditions Between the collection of the survey data and the interviews, the global economy and the Eurozone situation have changed. As one interviewee said, in answer to a question on distribution costs: “[Our country] is in a special situation – there are other things on the CEO’s mind”. Kurt Salmon also recognise that international issues potentially make comparisons difficult. Conclusions The most successful companies are organized by customer need, not just product or geography. Extremes of size cause problems. The greatest differentiators between good and poor performers are distributing and acting upon Cost-to-Serve information. Amongst the five supply chain areas of R&D, Production, Sales and Marketing, Distribution and Customer Services, it is understanding Distribution and Customer Services costs thoroughly that appear to make the most difference. The common thread amongst successful organisations appears to be the ability to manage granular information. One consequence of this is that effective IT architectures will become even more critical than at present, with ever-expanding numbers of channels for product distribution, ever-smaller and more frequent marketing campaigns. Some players think that banks may outsource many operational aspects and evolve into relationship managers. However, what is certain at this stage is that overall, sophistication in cost management is the dominant theme amongst the behaviours that most closely correlate with success. Henry Morris Senior Consultant Financial Services & Industries Practice Kurt Salmon 14
  15. 15. Costtoserve_study#4 24/01/12 16:29 Page15 C O S T - T O - S E R V E Appendix 1: List of Responding Organisations 1. ABN Amro 37. DnB NOR 2. Absa 38. DWS Schweiz GmbH 3. ACCBank, Ireland 39. EFG Eurobank 4. AIB 40. Emporiki Bank S.A. 5. Alpha Asset Management A.E.D.A.K 41. Erste Group Bank AG 6. Alpha Bank 42. EUROBANK EFG SA 7. AXA Bank Europe 43. FCE Bank plc 8. Banc Sabadell 44. FINA cash service LTD 9. Banca Monte dei Paschi di Siena 45. Finansbank, Turkey 10. Banca Nazionale del Lavoro 46. Garanti Bank S.A 11. Banca Popolare Emilia Romagna 47. Halkbank 12. Banco Espírito Santo (BES) 48. Helvetia Versicherungen 13. Banco Popolare 49. ING 14. Banco Santander 50. Intesa Sanpaolo 15. Bank Austria 51. Işbank 16. Bank Austria, Hypovereinsbank 52. KBC Bank 17. Banque Cantonal Vaudoise 53. Komerchni Banka 18. Banque Invik 54. Länsförsäkringar Stockholm 19. BBVA 55. Liberty Seguros 20. BCP 56. Lloyds Banking Group 21. BCR 57. Mashreq Bank 22. BNP Paribas 58. Millennium bcp 23. BZ WBK SA 59. Montepio 24. Caixa Geral de Depósitos 60. National Bank of Greece 25. Cariparma 61. Nordea 26. Citibank 62. OTP Bank 27. Compass 63. PlanetHome AG 28. Credit Europe Bank (Romania) SA 64. Rabobank Nederland 29. CRIF 65. raiffeisen banca pentru locuinte 30. ČSOB 66. Raiffeisen Bank International 31. Danske Bank 67. Raiffeisen Bank Romania 32. DELTA LLOYD BANK 68. Santander UK Plc 33. DenizBank 69. SEB 34. Deutsche Bank PGK AG 70. TEB 35. Dexia Bank 71. UniCredit Bank 36. Die Mobiliar Versicherungen & Vorsorge 72. Yapi Kredi 15
  16. 16. Costtoserve_study#4 24/01/12 16:29 Page16 Appendix 2: Descriptive Statistics of Respondent Organisations This survey was carried out through the electronic completion of a questionnaire by 105 senior executives of around 70 banks and financial institutions operating in 22 European countries. The diagrams below show key attributes of the Geographical Distribution of Respondents 4% 7% Western Europe 11% Balkans 40% Mittel Europe Netherlands Area 14% Scandanavia Not specified 24% Respondants: Scale Distribution of Respondents’Organisation Organisations Scale Distribution of Numbers of Employees 3% 4% 3% 2% 5% More than 100,000 9% 50,000 - 100,000 Global 6% 32% 10,000 - 49,999 Regional 18% 2500 - 9999 37% National 500 - 2499 Local 34% 100 - 499 Not specified 23% 0 - 99 24% Not Specified 16
  17. 17. Costtoserve_study#4 24/01/12 16:29 Page17 C O S T - T O - S E R V E Respondents’ Organisation: Distribution by Organisations: Distribution by Customer Bases Customer Bases Marketing / Sales 2% > 25m Strategy / Corp. Dev. 3% 11% 6% 7% 10m - 25m 23% Operations 4% 15% 13% 5m - 10m Product Development 7% General management 2.5m - 5m 7% 8% Cust Satis. / Quality 1m - 2.5m 9% 19% Risk 0.5m - 1m 21% Finance 23% 0 - 0.5m 10% 12% IT Not specified Not specified 3% 3% 4% 11% Global or Board Level Head of Region 12% Head of Country 32% Director Manager Other 35% Not specified Responses, By Market Cap Growth Quartile Responses, By Cost-Income Ratio Quartile 12% 9% Quartile1 23% Quartile1 30% Quartile2 Quartile2 24% 23% Quartile3 Quartile3 Quartile4 Quartile4 19% Unclassified Unclassified 21% 14% 25% Note: this is the count of individual responses, not the count of responding organizations 17
  18. 18. Costtoserve_study#4 24/01/12 16:29 Page18 About Us Kurt Salmon, formed by the merger of Kurt Salmon Associates and Ineum Consulting, is a global management consultancy of more than 1,600 consultants in 15 countries across five continents. Our clients are industry leaders who benefit from our deep industry and functional expertise. As trusted advisors, Kurt Salmon partners with clients to design, and then drive, strategies and solutions that make lasting and meaningful impact. We are committed to delivering measurable results for our clients through executional excellence. Kurt Salmon is a company of Management Consulting Group Kurt Salmon 650 Fifth Avenue, 30th Floor New York, NY 10019 USA Efma, a not-for-profit association formed in 1971 by bankers and insurers, specialises in retail financial marketing and distribution. Today, more than 3,000 brands in 130 countries are Efma members including over 80% of Europe’s largest retail financial institutions. Efma offers the retail financial service community exclusive access to a multitude of resources, databases, studies, articles, news feeds and publications. Efma also provides numerous networking opportunities through work groups, online communities and international meetings. Efma 8, rue Bayen 75017 Paris France Copyright © 2012 Efma. All rights reserved This report should not be reproduced or redistributed, in whole or in part, without the written permission of Efma. Efma accepts no liability whatsoever for the actions of third parties in this respect. 18
  19. 19. COST-TO-SERVE JANUARY 2012Best practices in retail financial services more information on