From 1994 through 1997, First Commerce's profitability from its commercial business doubled. While the bank grew profits at more than 18 percent per year, our immediate competition could only manage 12 percent profit growth, and our national competitors could only sustain seven to eight percent growth.

First Commerce pulled ahead of the competition by abandoning a traditional product-driven approach, electing to implement a real relationship strategy. While many banks talk about relationships with their commercial customers, most fall back on volume as the determinant of their success. Conversely, First Commerce embraces a true relationship approach, with customer retention and share of wallet as measures of our success.

breaking new ground

A successful relationship strategy requires leadership and focus on a system that stands out from the competition. The organization must embrace the risk of doing business differently, at times ignoring the latest management trends and competitors' moves.

It began with a vision. Led by First Commerce CEO Ian Arnof, the bank, working with Bain & Company, gathered empirical data, gave form to the vision and executed in what would become its Marquis Client Group. These were our best, most desirable customers who found value in a relationship within an advisory framework, could afford this more customized level of service, had broad and varied financial needs and were of superior credit quality.

While every bank talks relationship, we believed that if we actually delivered on that strategy, it would not be necessary to be the lowest priced provider. We targeted our best customers and worked first to retain and deepen our positions with them; only after this would we seek to acquire new customers.

We established a commercial segmentation analysis group populated by our best First Commerce associates. While most segmentation is based on demographics or psychographics, we opted for needs-based segmentation. We focused on understanding the needs and behaviors of our customers, their ability to afford financial services, where they saw value and their profit potential to the bank. While multi-dimensional segmentation is more complicated, it provided more powerful insight into customers.

Our analysis told us that 95 percent of our commercial customers were private companies with sales between $5 and $50 million. Almost 65 percent of these businesses were still run by their founders. They were successful and had complicated needs beyond standard borrowing requirements. When they needed funds, however, they needed them quickly and expected to pay a fair price, though not necessarily the lowest price. They also expected reasonable credit provisions. And five percent of our clients provided 80 percent of First Commerce's commercial segment's profitability in 1994.

These findings had significant implications to our business and suggested that success was contingent upon an in-depth understanding of the broad needs of customers through their companies' and their families' lifecycles. Specifically, they needed more than loans and deposits. These clients have issues distinct from those of public companies, such as succession and generational issues, personal and corporate tax planning, family considerations, as well as psychological issues surrounding money.

Competitors' databases do not easily track private companies. For the most part, regional banks are the sole owners of the company's financial information. Owners are reluctant to talk to outsiders who they perceive as appearing in town only for a deal-an initial public offering, or company sale or investment of funds after such deals create liquidity-and not in the relationship for the long haul. A financial services provider builds loyalty with a private client by being there throughout the company's and the owner's lifecycle, especially during important transition events and decision points.

Based on our experience, there are very few financial services firms that do business this way, the notable exception being J.P. Morgan's private client group. The skewed profitability numbers also made it clear that we could not afford to service all of our customers in the same way. We needed to differentiate.

What sounds straightforward is in reality difficult. Information systems and market research-which are organized around the bottom line-represent a substantial investment, the gratification from which is not immediate. Banks' traditional training programs, which focus on teaching credit skills, also require new content and focus. Relationship managers have been taught the art of making a loan and are lenders more than real relationship managers. Entry-level management trainees through senior managers who rose through the relationship management track possess credit as their core skill. Changing this dynamic requires a fundamental shift in attitude. The discomfort of leaving the known creates fear, confusion and uncertainty. The cultural turmoil and training needs of shifting an organization's focus to a new core skill set are immense and should not be underestimated.

We mobilized the organization behind the strategy. Over the course of 12 months, we made investments in information systems, market research and training to organize our business around clients. We bought and adapted information systems to provide profitability data by customer relationship, not product line. Attaining revenue and profitability data for the entire customer segment and having the ability to drill down, in detail by customer relationship, was a goal that we reached in steps. Our market research group expanded its mandate to identifying and defining opportunities for the segment. We made an investment in training outside the traditional banking sphere.

serving as advisors

Our training program aimed to create relationship managers who really serve as financial advisors (FAs), not typical relationship managers solely supplying credit. The disciplines taught included estate planning, tax planning (individual and corporate), insurance (commercial and personal), retirement planning, negotiation, and corporate finance, in addition to credit training. We also launched a debt capacity model, which is a tool to facilitate the gathering of knowledge about clients' businesses. To run the model, an FA has to possess a deep understanding of the customer's business and industry. This knowledge focuses the FA on anticipating the customer's needs and enabling him or her to lead a team of specialists to meet those needs.

We also made changes to organizational structure. We streamlined the credit process, centralizing it for faster response time and realistic pricing, and freeing the FA to spend more time with customers. We created a client relationship review meeting to share knowledge and identify business opportunities. We provided appropriate products and services to clients, which we built or outsourced. When neither was optimal, we formed alliances, such as that with Stephens Inc., to meet customers' investment banking needs.

The key is to recognize that new directions require tenacity and, often, outside help. At times, investments were controversial. We chose to postpone Internet banking, for example, because positioning ourselves as the technology leader in our marketplace was not a point of differentiation for First Commerce. We mined the existing client base when competitors aimed their resources, largely through advertising, at attracting new clients. Upgrading the lead relationship manager to a FA mandated a new compensation scheme to retain them long term. Each FA managed a smaller number of customers and was accountable for incremental activity in his or her portfolio (increasing the profitability of a fixed group of customers versus new product sales or new customers). In addition, we created a pool to be divided among the players regardless of individual contribution. This was to foster a team dynamic aimed at impacting First Commerce's bottom line through cooperation rather than competition.

How do we assess the success of a strategy? The impact on financial performance is one element in judging success. From 1996 through 1997, the profitability per Marquis client relationship increased 40 percent. The retention rate of Marquis clients has been virtually 100 percent; all customers, excluding those affected by merger, acquisition or bankruptcy, are still our clients.

During the latter two-year period, the number of Marquis clients increased by 80 percent, with half of this coming from deeper relationships with First Commerce clients previously serviced through other channels. Many of our Marquis clients expanded product usage from primarily credit and deposit products to advisory, evaluation, brokerage, trust, investment management and 401(k) plans.

A survey of companies in the New Orleans market ranked First Commerce first among our competitors in quality of senior management, operations performance, relationship manager evaluations and credit policy responsiveness. The survey also found that our importance to these customers increased significantly, and a high proportion use us as their only bank.

Grace Frisone is executive vice president, First Commerce Corp., New Orleans, and Charles Farkas is director, financial services, Bain & Co., Boston.

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