Long before the Internet, the customer was said to be king. But the Net appears to spell certain, if slow, death for companies that don't act accordingly.

Sometimes, it's easy to forget that banks aren't the only corporations struggling to define what it means, in the early days of the 21st century, to be "customer focused." Many companies, in several industries, are re-examining their business models and asking important questions about how to evolve away from product-centered strategies toward a demand-driven model in which customer needs effectively determine both product and delivery.

The urgency of these questions stems from the altogether sensible premise that the answers to them have changed in recent years, that they are different in a digital economy than they were in the Industrial Age, and that the digital economy itself raises wholly new questions about running an enterprise.

Is it any wonder then that banks-perhaps the most inherently digital creatures in the business world-are devoting the lion's share of their strategic resources to the business discipline known as "customer relationship management"?

CRM is serious business for banks because what the consultants call their "strategic positioning" in the New Economy seems to grow more vulnerable by the day. Commercial banks' customers, retail and corporate, are being targeted by an ever-swelling chorus of Internet- enabled cherry pickers: non-banks that add insult to injury by winning away only the more profitable part of the customer's financial business. These interlopers, from the traditional bank's vantage point, are attacking from every direction and flying a variety of flags-from Charles Schwab to AAA, General Electric to AARP.

Clearly, the word is out: In a digital economy, you don't have to be a bank to deliver financial services.

Bill Bradway, a director of Newton, MA-based Meridien Research Inc., which specializes in banking, says financial institutions' efforts to manage relationships with customers are indeed more critical than ever. To maintain viable rates of revenue and profit growth-and thus produce shareholder value sufficient to remain well capitalized- banks will have to identify and attract profitable new customers steadily while capturing a substantially higher share of existing customers' spending for financial services, Bradway says.

In short, they need to get much better, very quickly.

Tom Richards, director of Meridien's CRM practice, says too many banks begin their CRM initiatives "in the middle, instead of at the beginning, because they are scrambling so hard to become customer- focused." Because technology is at the root of banks' focus on CRM, he adds, "many people think the way to get CRM is to rush out and buy software."

The first step, however, is knowing where the institution is today, including the current state of individual customer profitability and the performance of each line of business. Without that knowledge in place at the outset, Richards says, banks will never be able to derive true measures of the return on their CRM investments.

Even worse, perhaps, they will be unable to exploit a key strength of CRM technology. Given a solid baseline against which to make comparisons, Richards says, CRM can generate "the kind of decision- support data" bankers can use to anticipate customer needs and devise profitable strategies for meeting them.

Bradway, meanwhile, says this preliminary work is crucial for another reason. Banks simply have no business spending large sums of money on IT that is designed to help them implement ill-wrought strategy, Meridien's chief researcher says. The strategic thinking must come first, says Bradway, echoing a theme one hears from many industry analysts that "CRM is a strategy, not a technology."

Richards notes: "As a sales and marketing organization, a bank is essentially the set of customers who are on board today. Until you segment them and determine the kinds of behaviors in these segments that are low-cost behaviors and high-cost behaviors, you won't understand what you have to work with. And it's that baseline that dictates the limits of your strategic choices."

For even the largest institutions, the consultant says, these head- on assessments of current strategic position and customer relationships may be skewed by banks' traditional focus on products rather than customers. "Understanding that it's not your product that drives the business anymore is a pretty difficult concept for most financial services institutions," Richards says, even though most have watched the slow-but-sure commoditization of virtually all of their products and services.

A product-centered view carries a number of liabilities in today's business environment, he adds, not least of which is its propensity to make bankers see technology only in terms of its cost-cutting potential. "When you look at this closely," says Richards, "you begin to see that many of the costs they're trying to reduce are in conflict with customer retention and satisfaction."

For example, he says, banks typically want the duration of customer telephone calls to be as short as possible, and therefore cheaper. "But, looking at it from a customer-focused point of view, the shorter the call, the less time you've spent making the customer happy and selling them."

Typically, bank IT investments are aimed at "driving labor out of the process and thus lowering costs," Richards adds. "But CRM projects are not cost-cutting projects; they are revenue projects, and banks have no idea how to use IT to grow revenue."

The 20% of a bank's customers that represent the majority of its profit not only have more choices than ever before, he says, "the Web has put those choices a mouse-click away. Plus, the customer base is technically savvy and has no real loyalty to any company that isn't meeting its needs."

Done right, Richards says, CRM can help identify ways to hold the top 20% and, just as important, "provides the tools to help shape the behavior of the other 80% and develop more profitable relationships out of those segments."

For Paul Cole, global director of Cap Gemini Ernst & Young's CRM business unit, bank executives needn't wonder why they occasionally feel lost in discussions of CRM, in part because it implies that virtually every element of a business can-and should-be governed by customer relationships. "The fact is, CRM is very ambiguous," Cole says. "It can mean everything and nothing to different people. So you really have to use a starting point that is fact-based, that looks across the entire enterprise and that allows the institution to sort of step back and decide where it wants to go."

The CGE&Y consultant agrees that strategy must come first in assessing how CRM can be deployed to build better relationships with customers. (He defines "better" as more profitable or potentially more profitable.) And from the beginning of such an initiative, Cole says, banks should be diligent about measuring results. These encompass profits and cost of sales, of course, but also "the people side," including resolution of customer service problems, loyalty rates and lifetime value, as well as links between customer-satisfaction levels and bank employees' compensation.

Speaking in broad terms, Cole points to assessments of bank processes as the next major step in the CRM journey. In every case, he says, those processes must be consistent with an operations environment that generates the best "customer experience" possible.

A fourth major area of concern in building a CRM framework is one Cole labels simply "knowledge." Large banks have spent tremendous amounts of money on data warehouses and the like, he says, and CRM can move this data-often used solely for planning purposes today-closer to the point of customer contact. For instance, data that is seldom, if ever, tapped directly in serving customers might be of real value on the desktop of a customer service representative in a bank's call center, Cole says.

Despite CGE&Y's expertise in financial services technology, Cole sounds much like his peers among the bank consulting and research firms in describing IT as an enabler of CRM rather than CRM itself. Nonetheless, he believes the "technology that supports efforts to focus on the customer has improved enormously-really dramatically"-in the past couple of years.

"I've been at this for more than 20 years," Cole says. "Of course we didn't call it CRM 20 years ago, but customers have always been the source of revenue and profit, with the greatest impact on both the top and bottom line."

He adds, "The irrefutable premise here is that if you do a better job of managing customer relationships, it's going to be positive for both your top and bottom line."

Cole believes bankers' disappointment with some of their customer- focused initiatives in the 1980s and into the '90s are easy to explain in hindsight. "At that time, there was very little 'C' in the CRM these companies were doing," he says. "It was all about improving the processes-and profitability-of the bank and not about customers' needs."

In 2001, bankers know better, Cole declares. "With all kinds of financial services companies nipping at their heels, with their products becoming commoditized, and technology replacing them in some instances, they know customers are becoming less tolerant of a lousy experience." Bank customers will simply move their business elsewhere- never more easily, or with more options, than today-unless bank strategies "support customer experience, not just the efficiency of the organization," Cole says.

Dick Lee, head of St. Paul, MN-based High-Yield Marketing and author of The Customer Relationship Management Survival Guide, says banks feel the urgency to embrace CRM, "and they feel it acutely."

The greatest barrier they face at the outset is normally psychological, Lee says. He explains that "where banks fall down is in their capacity for change, because everyone in financial services has grown up with this picture of the relationship between the institution and the customer, and CRM radically changes that mindset."

Lee worries, too, that bankers often confuse cross-selling initiatives with CRM. The former, he says, are a staple of "push marketing" and consequently are antithetical to CRM principles, which he characterizes as "pull" marketing-or, put another way, a relationship in which the customer truly does the talking.

"That's not to say that CRM won't result in higher customer penetration," Lee adds quickly. "If it is done right, it does. It just means those higher rates of customer penetration don't come from sales pressure, but rather from the bond you've formed with your customer. That trust you've created encourages the customer to do more business with your bank."

That may sound a little warm and fuzzy for the traditional banker, but the economic power behind it is real, says Lee, who also has written training guides for corporations implementing CRM. "The customer is only going to gain more power over time. We have moved quickly into a situation in which financial services customers have a wide and workable choice of companies to use, and they are going to take advantage of that choice."

Lee believes the economic forces that account for this "customer empowerment" pre-date the Internet by a number of years. "What the Net did," he says, "is make a fast-developing trend go even faster."

Lee thinks bank chief executives should take a lesson from the late Sam Walton, founder of Wal-Mart. "He never stopped walking the floor at his stores. He wanted to see what was happening there, to sort of feel the pulse of the business and the way the customer relationships were playing out at the stores. I don't know of a major bank CEO who is doing that routinely."

Like every consultant contacted for this story, Lee thinks talking with a consultant about CRM is a good idea. But, also like the others, he stresses that customer relationship management-and all that it has come to mean-will never take hold in a corporation unless it's the boss's baby.

"You cannot 'job' this out to consultants," he says. "There must be fierce ownership within the organization to make this fly."

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