There is a huge difference between developing a customer data base and taking action in a way that produces more income. Banks are starting to do a lot of the former but not yet much of the latter.

A potential stumbling block on the road to what we call customer knowledge-based management is the lack of line involvement. This needs to start at the top and extend throughout the senior and middle ranks, all the way to branch level.

It isn't that line personnel are apathetic or incapable. Rather, the customer insights being generated by marketing need to be portrayed in a way that is both relevant to line personnel and capable of being acted on by them.

At a recent meeting of the top 15 retail staff and line officers at a major regional bank, top management was surprised that marketing's customer insights did not cause regional line executives to change directions.

But it is one thing to learn, for example, that as many as 75% of new accounts sold are unprofitable and that the top 20% of retail customers account for most of the profits. It is quite another thing to figure out how to use these insights to increase returns.

Line officers heard what marketing was saying, but they could not immediately figure out what to do. Their understanding of ramifications was cerebral, not visceral.

To empower the line-turn it on, in effect, to the potential for improvement-the chasm between staff and line must be bridged. Customer insights and the actions required must become owned by staff and line.

What is required is a process whereby the insights derived by an upgraded marketing function are immediately shared with line personnel.

By becoming involved in the early refinement of these insights, the line can better understand and use them to formulate tactical sales and distribution initiatives that lead to earnings improvements.

Ultimately, as the process takes hold, the line will become involved in generating hypotheses that will drive data base inquiries and play a key role in generating both insights and action steps.

In more advanced banks, representatives of staff and line serve together on multidisciplinary teams, usually headed by a senior line executive.

These teams, which can include people from marketing, product management, regional sales management, distribution, human resources, finance, and technology and operations, debate how best to use data to serve the needs of both customers and shareholders.

The team approach helps facilitate line and staff interactions, uniting the bank in the drive to work smarter than before and smarter than banks are alleged to be capable of working.

They develop competencies we call customer knowledge-based management, the science of making tactical and strategic decisions and aligning resources and incentives based on knowledge of customer profitability, behavior, and values and the bank's cost elements.

First Manhattan Consulting has found that using the team approach to work smarter can have impact in three key customer-focused programs:

Enhancing profitable sales.

Retaining profitable customers.

Turning around unprofitable customers.

Improving sales performance begins with the realization that most branch-based selling initiatives destroy value. Our case studies reveal that as much as 75% of branch sales turn out to be unprofitable accounts. This results from three factors: broken products, sales processes, and incentives.

Broken products are those in which the features offered and the pricing structure are misaligned, creating a situation in which the cost to serve far exceeds the revenues provided by most customers.

Savings accounts are such a product at most banks today; costs can exceed revenues by five times. The line must understand why selling savings accounts with $400 in balances doesn't make sense. Revenues are often less than $20; costs can exceed $100.

In terms of sales processes at the average institution, marketing organizes a sales effort by developing a list of products to be promoted, instituting promotion programs to achieve the stated objectives, and forecasting sales.

This forecast is then imposed on the distribution system, starting at the bankwide level and penetrating down to individual branch and nonbranch channels.

Since the entire process is undertaken without reliable information on which products- when sold to the right prospects- afford the highest returns and without cooperative consultations between line and staff, one can readily see why results are so often disappointing.

Broken processes are reinforced by broken incentives. Usually the more volume one sells, the more one gets paid. But since the easiest product to sell is usually the least profitable, the resulting scramble for volume compromises the bottom line.

In banks with a customer knowledge-based management sales approach and a commitment to line and staff interaction, processes and incentives are structured differently.

The approach starts with the use of the data base to hypothesize which are the right customer prospects for each product.

Then marketing conducts research to assess needs and preferences before refining- in concert with the relevant line personnel- the appropriate combinations of product and distribution features and the correct pricing structure.

This type of effort, emerging now at a few institutions, can raise the ratio of profits to total sales.

The second work-smart program, retaining profitable customers, starts with an appreciation of the seriousness of the customer attrition problem. At many banks, 20% to 30% of the core deposits present at the beginning of any given year will depart by yearend. Four-fifths of this deposit loss is concentrated among households in the top two profitability deciles. Banks are losing profitable revenues from their best households.

However, some solace can be taken from the fact that most of these customers are not leaving the bank altogether. About 80% of the balance loss comes from diminishments rather than outright customer defections-a circumstance that gives banks the time to mount a counterattack, if they can figure out why deposits are hemorrhaging.

Such a counterattack in-cludes the following elements:

Understanding attrition by profit tier. This is essential because the loss in the top two profitability deciles is about 10 times as painful as attrition in the lower tiers.

Distinguishing between controllable and uncontrollable attrition, for example, losses because of relocation or death.

Developing hypotheses about the causes of controllable balance attrition by product.

Researching formerly high-profit customers who have recently left to determine where the lost funds were deployed.

Getting lists of profitable and attrition-prone customers out to branches and other channels where personnel take responsibility for preemptive strikes-actions designed to forestall attrition.

Establishing goals for shrinking attrition that are relevant to the line, and measuring and granting incentives accordingly.

This type of program has become a top priority at some banks that have been sensitized to the economic importance of addressing the attrition problem.

The third initiative, turning around unprofitable customers, involves three steps: designing new accounts and pricing structures, curbing discretionary fee waivers, and aligning costs to serve the revenue potential of customers.

Savvy line executives can be a great source of product design ideas once they are exposed to the situations that lurk inside product portfolios.

The line is also key to attacking the fee-waiver problem. Best practice benchmarking suggests that a bank can collect 98% of all fees. This happens faster when the line understands that most waivers are given to unprofitable customers.

In order to better align distribution costs to revenue, banks need to use their data bases to develop new profitability models that attribute revenue credit to individual branches in accordance with the actual profitability of customers served.

In recent analyses, we found that very few branches in any given network have negative net present value because of the powerful revenue contributions of the best customers.

This finding reinforces the need to move gingerly and with full knowledge of the facts before shutting branches.

For example, on average, 20% of branch labor is earmarked to serve highly profitable customers, 40% is devoted to serving unprofitable ones, and the remaining 40% is unused capacity. However, these figures vary considerably by branch.

Armed with an activity analysis of branch traffic, regional and branch line personnel can reduce the cost of serving unprofitable customers, while upgrading branches that cater to a disproportionate number of high-value types. The line can establish action items and goals for each branch.

Thus, a work-smart, knowledge-based effort that engages the hearts and minds of both the line and staff, comprising sales rationalization, focused retention, and creative turnaround initiatives, has the potential to raise pretax income by more than 50% in the intermediate term.

This is the bottom-line result the investment community is looking for and the result an empowered line is capable of delivering. Mr. McCormick is president and Mr. Kuenne, vice president of New York City- based First Manhattan Consulting Group.

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