In a slower economy, with fewer opportunities to increase revenue, banks are once again taking a close look at profitability. One way is through software applications that endeavor to calculate exactly how much money an individual, product or business unit contributes to, or drains from, the company's bottom line. Of course, keeping tabs on costs and making the most from customers' dollars is always smart business practice, but such diligence may prove even more vital in a sluggish economic climate.
One approach flogged by banking consultants repeatedly in the past ten years-starting around the time the economy last went sour-is to measure profitability at the most fundamental level: by customer. Any number of big technology companies and consulting firms offer banks customized applications to measure and predict profits by customer.
Now, sensing new opportunities from a bearish economy, a year-old company has stepped into the customer-profitability game. CoreProfit Solutions Inc., based in West Chester, PA, claims it offers a new approach to helping banks get a better handle on where the money lies. The privately held company caters to "the big three" of financial services-banking, capital markets and insurance, according to Joe Prunty, chief executive officer. "When banks start not making money, that's where we come in."
Says TowerGroup senior research analyst Kathleen Khirallah, companies like CoreProfit might have something to gain from peddling profitability fixes, since she has "never spoken to a banker who has said his profitability is so terrific."
CoreProfit takes a two-pronged approach to managing financial institutions' costs. Its software, eProfit, is a Web-based application designed to gather data on profitability and analyze it. EProfit analyzes a number of parameters, including revenue, fees, channels used by customers and what is done at each channel, and cost. "We look a lot at cost because there's a direct correlation between revenue and the cost to make revenue," says Prunty.
Customers come first
Of course, information gathering and analysis is the function of all profitability software. But where eProfit differs, according to Prunty, is that it can zero in and calculate profitability at the transaction level for each customer or account. Most competing software begins at the organizational or product level and then works down to the customer level, he says.
Prunty considers the traditional approach backwards because it does not look at what the customer wants. He blames banks' attitudes in part for this lopsided way of thinking. "Banks have historically focused on their profitability goals by business unit. They're not focused on what customers need or what's good for the institution." That has largely prevented most banks from attaining their profitability goals, he says.
Consequently, CoreProfit's older competitors have designed their products to match the business unit/product approach. But do not fault the vendors, says TowerGroup's Khirallah. "Today's systems come from different heritages built around organizational profitability instead of customer profitability. It's not a matter of other vendors ignoring this. They just built their applications to solve different problems."
CoreProfit also provides a consulting service to banks, called Profitwise, to complement eProfit. However, explains Prunty, Profitwise consulting is available regardless of whether an institution is using CoreProfit's profitability application. "There's always more work after implementation, like business process re-engineering, channel migration and product pricing."
Khirallah says consulting services among profitability vendors is not unusual. Profitability is a complex beast, and often times the worth of an implementation depends on the bank itself, whether its data belongs
to different product management or bus-iness units or resides in huge legacy systems. But she thinks CoreProfit approaches the profitability issue from a different angle than most, since the company's founders are primarily former bankers.
"Because of this we are very niche-focused and understand profitability from banks' perspectives better than others," Prunty says.
Hudson White, executive vice president and chief financial officer of Wilmington, DE-based ING Direct, part of the Netherlands financial giant ING Group, gives a nod to CoreProfit's management. "They have real breadth of experience within the financial services sector."
ING Direct has been a CoreProfit customer since last June. The $1.4 billion-asset financial institution had previously used its own profitability models but wanted to streamline them better. "We felt the need to refine those models with a focus on both internal management and customer behavior and the impact of that behavior on the goals-both profitability and business-of ING Direct," White says.
So far, ING has used CoreProfit for profitability modeling and technology infrastructure assistance, third-party vendor analysis for ensuring the best price, cost development and business process re- engineering, data management assistance, product development and expected ROI modeling.
Little company, big punch
CoreProfit is fairly small, with only 19 employees. So how does it take on such huge customers as ING Direct, especially considering that among CoreProfit's competitors are such heavy-hitters as Oracle, NCR and PeopleSoft? Focus, says analyst Khirallah. "To these big companies, profitability is just an application within a whole suite of different applications."
Calculations and algorithms used to analyze banks' data are built into the eProfit application. CoreProfit will custom design a profitability analysis system based on what banks of similar size require. "Others don't do this," claims Prunty. "They make the bank think about what to do with the math. We take the onus off the banks."
He says the CoreProfit approach allows for speedier implementation. The design of eProfit permits it to be integrated into banks' existing systems, including customer relationship management applications.
"We tell our clients if they want to buy a CRM system they should do so after they understand who is profitable and who isn't," Prunty says. "Between 30% to 50% of assumptions about profitable customers are wrong."
The CEO likes to think of profitability analysis in terms of a triangle. At the top, traditionally, is the business unit. After that comes products, and at the bottom is the customer/account level. "Turn this triangle upside down so the customer comes first. There's enough good technology out there to start at this level, but to do this, there needs to be a cultural change at banks," he says. Once customer profitability is understood, customers can be narrowly segmented according to products, accounts, geography, etc.
"Profitability is like the keys to the kingdom," says Khirallah. "If you have a good engine to calculate your most profitable customers and the professional services to back it up, banks can target their most profitable patrons and market appropriately to them." Organizations will simply run smarter and be capable of making better decisions.
Banks are going to have to really crack down on costs because other banks aren't the only competition they face. "There's so much disintermediation going on because anyone can set up a bank. Look at the retailer Nordstrom," says Prunty.
Additionally, he predicts government agencies will start viewing banks with a more critical eye. "The examiners, like the FDIC and OTS, are starting to catch on and ask banks to tighten up management exposure and know their customers better," he says.
Bankers say they don't need regulators to tell them they need to know their customers-and their own business-better. It makes sense, especially when the economy makes it harder to find new customers.
"Understanding customer and internal management behavior on our profitability metrics is a key underpinning of our strategy and success going forward," says ING's White. "With this in mind, if anything, (customer profitability) products and services become more important in a slowing economy."
That's good news to Prunty, who likes to think his company "recession-proof."
