As bankers work to build winning strategies, they often call on one of the most important breakthroughs in management: the "value chain" concept first introduced about 20 years ago, and most recently embellished by Michael Porter, a professor at Harvard.

The value chain was originally designed for, and is best suited to, manufacturing businesses, but it is a widely used concept, and may have some appeal to bankers.

The purpose of a value chain is to break a business down into its individual steps, ascribe a value to each, and determine how well the company performs each.

The problem with using the manufacturing value chain on banking is that it assumes that productive operations are performed on some physical goods. But financial services do not feature such goods.

The "raw materials" used in financial services - money, information, transactions - are not as concrete.

In addition, the definition of supplier is a little more amorphous in banking. For example, when a customer has both a checking account and a credit card, he acts as a customer and a supplier at the same time.

Financial services needs a radically different kind of value chain. The following is a walk through what that chain should look like.

All financial services begin with a customer's financial need, whether that need is for a checking account, a loan, or pension or estate planning. Identifying the need creates the value in this step.

In some cases the customer can identify the need for himself, but there are many cases where he needs help.

Insurance agents work to create value when they design tax-based estate packages for households or complex risk management offerings for corporations, and investment bankers do this in the capital markets all the time.

If the customer identifies his own financial needs, he will not likely attribute much value to the financial institution. Whether the need is identified by the customer or the institution, this step creates the demand.

Customer needs appear as problems, and this step constitutes identifying the solutions.

For the simplest needs, this step might have little or no value. If I need a new car, there is not much expertise needed to deduce that I need financing, but there is some expertise needed to determine if I need a loan or a lease, and for what term.

More complex needs will require more expertise to solve. What kind of savings vehicle is the best way to prepare for my child's college education? What is the best use of the $500 million our company received from the sale of a division?

Sometimes what looks like a simple need may in fact be much more complex. What are the tax implications of financing my car through a margin loan against a profitable stock position, or by increasing my home mortgage?

In the customer's eyes, the value comes from the expertise that is applied to his specific problem, which often implies knowledge about the customer as well as the possible solutions. Many banks do not have enough expertise internally to answer all their customers' needs, so they are learning to find it externally.

Solving customers' needs and making a profit require that the customer buy a product or service. This step constitutes fitting the product or service to the problem.

Here again, simple needs and simple solutions don't need much tailoring, so this step may not have much value in those cases.

Obviously, more complex needs give this step more value. American Express Financial Advisors has built this step into a thriving business, as have the merger and acquisition departments of the big Wall Street houses.

This is another area in which a bank can create value where there might not appear to be much. Making enhanced transaction information available to merchants through the point of sale system is an example of creating significant value by tailoring a product.

Product tailoring will not lead to problem solution unless the tailored products are available to the customer. This step identifies what products are available.

Banks have long operated on the assumption that producing or "owning" the product was an advantage, but the new banking paradigm says that making another institution's products available to your customers has significant value.

How much value? Take a look at the American Airlines Saabre reservations system. When American first made all its competitors' flights available on its proprietary system, some people, including many inside American, thought they were crazy. Today American makes more money from Saabre than they do flying airplanes.

Banks that see the logic of this approach, and execute well, will create a lot of value in this step.

Product availability only has value for the customer when the product is actually delivered.

In a loan product this happens when the bank delivers the funds and the customer obligates himself to repay. Depending on the complexity of the loan, that event can happen in a conference room full of lawyers or when the customer hands over a credit card.

It is on this step that many banks have focused a lot of their efforts and resources. What they seem not to understand is that much of the value that is perceived to be in this step is really dependent on the previous steps.

The current heavy emphasis is on delivering most of their value through the telephone - a channel which they neither own nor control. But it is what they deliver - investment advice - that creates the value, not the channel.

On the other hand, many brokerage firms are learning that the ability to deliver that valuable investment advice through a variety of channels has value by itself. If all the steps before delivery have value, delivery can enhance it.

In banking, as in manufacturing, the stepchild of the value chain is often post-delivery services.

The fact is that bankers never seem to know the value of this step, but customers know the value very well. The primary reason people and corporations switch banks is dissatisfaction with post-delivery services.

Although this step is last on the chain, it is often first in the mind of the customer.

When we look carefully at the finance value chain, we draw certain conclusions:

*As it is presented here, it has a decidedly internal focus.

The separation of the expertise and product availability steps into internal and external components is an inside-the-bank view of things. Customers don't care where the expertise and products come from, so their view of the chain would only have one box there.

It is presented this way because sourcing expertise and products are significant issues for bank managements, and the value of those things can be quite different if they are externally acquired.

We just need to keep in mind that the customer's version of this chain looks a little different.

*Perhaps more than in manufacturing chains, the values here are cumulative. One can argue with the order of the steps in the manufacturing value chain. For example, many people believe that putting marketing after production is a clear case of the horse after the cart.

Nonetheless, it is very clear that in the financial services value chain each step is heavily dependent on the ones that go before. However valuable the available expertise, its value to the customer is totally dependent on proper identification of the need.

I have already pointed out that the delivery channel value is a function of the product being delivered. We can see that this relationship is true throughout the chain.

*The chain is only as valuable as its weakest link. If all the steps in the chain work well except servicing, customers will be dissatisfied, and will regard the whole chain as having little value.

If the needs identification is terrific, and the expertise is top notch, but the product tailoring is weak or unavailable, the customer will use the valuable parts of the chain but not but the product.

Thus, management needs to use the chain as a measurement and diagnostic tool to identify where the weak links are, how weak they are, and how to bring them up to snuff.

*All the bank's competitors have similar value chains. Bankers need to construct and evaluate this kind of chain for themselves and all their competitors.

Such an exercise will identify areas where the bank needs work, and may point out "best-of-breed" competitors who can teach you how to improve your own chain.

It will also identify links where your bank leads the pack. When the rest of the chain is up to standards, those links can become the basis of a marketing campaign, as well as a winning strategy.

Mr. Bollenbacher is an engagement manager in Unisys Corp.'s financial market sector.

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