The Battle of Hastings in 1066 changed the fate of a nation. King William of France challenged King Harold of England on the battlefield. Both leaders needed one great victory.
The English troops were armed mostly with battle-axes, and many were raw country recruits, unskilled and untrained. The French, however, were a heavily armed, well-disciplined force that included trained archers - a first in 11th-century warfare.
The battle turned when William directed his archers to shoot their arrows high into the sky, where they rained down on the tightly massed English soldiers, whose weapons were useless.
Better technology, better strategy, and better competence. A Frenchman was crowned King of England, and warfare was forever altered.
Today kingdoms are not at stake, but bank profits are.
Headlines about acquisitions are followed by bank analysts questioning whether investors will see payback. What they really want to know is:
* Do you know how to extract sufficient value from your customer income streams that Wall Street now values at a premium?
* If not, can you learn - quickly? And can you enlist your war-weary front line to sustain the value?
In the last 25 years, acquisitions have reduced the total number of banks in the United States from 14,000 to 10,000.
The average annual contribution of a retail customer is about $100, according to 5,000 local-market analyses ActionSystems has performed for clients.
If customers are valued at 10 times income, then we're really saying our average customer is worth about $1,000. Beyond the cost savings that acquisitions promote, how do we make the average customer pay off?
Four scenarios are possible, only one attractive:
1. The customer stays, and it takes us at least 10 years to break even.
2. The customer stays, but diminishes in value so it takes us much longer than 10 years to break even.
3. The customer defects within a year (as do about 20% of all retail customers, acquired or not) and we have to spend even more to replace that loss.
4. The customer stays and grows - perhaps to the top tier of profitability in a year or so, contributing more than $1,000 annually, returning $3,000 to us by the fifth year.
Should we be confident that we can actually achieve the fourth scenario? For many banks, the answer has to be "no."
Further, all customers are not created equal. So what happens if we refine our scenario to accommodate the extremely wide range of customer profit contributions?
We get an even starker picture. For example, a bank's best customers - "A" customers - might average an annual profit contribution of about $1,200. Its "B" customers might average $200, and its "C" customers around $40 or less. At 10 times earnings, these customers represent about $12,000, $2,000, and $400. It's easy to see why bank analysts are asking us:
* Are you looking to your own franchises to find customers who can, for a lot less than the $12,000 and $2,000 acquisition prices, be converted to "A" and "B" customers?
* If you find them, do you know exactly how to retain and convert them?
The questions become more pointed in light of the fact that 50% of a bank's profits are typically lodged in the top 3% to 5% of its customers. If we have a 500-branch network with 2.5 million customers valued at $2.5 billion (based on that average $100 customer valued at $1,000 on Wall Street), half our value - or $1.25 billion - is concentrated in as few as 150 to 200 customers per branch. We then have to ask ourselves:
* With value so heavily concentrated in so few customers, how competent are we to manage this risk?
* Do we all know, in our own banks, exactly who these top few customers are?
* Do we have specific, targeted plans for retaining and expanding these relationships, whether we are in an acquisition situation or not?
If we fail there, we'll find (as some are already finding) that we have sent our troops into battle with half a strategy, old weapons, and insufficient training. We've got them battling bows and arrows with battle- axes - fighting hard, but doomed to lose to more market-competent competitors.
Mr. Hall is CEO of ActionSystems Inc., a Dallas-based customer and market management company. Ms. Bird is chief operating officer of Roosevelt Financial Group.
