A new movement is quietly stirring in the banking industry that will dramatically change how banks do business.

The movement is local market management, and it is championed by some of the most innovative and profitable financial institutions. It is a direct response to one of the most disturbing trends challenging retail banks today: the loss of deposits in the high-value customer segment.

The more enlightened banks understand that this trend dictates the future of retail banking and recognize the need for local market management - yet they are still struggling to find a way to make it work.

Within the consumer and small-business customer base, the relative profit contribution varies greatly across customer segments. Typically, 3% to 5% of the customers account for more than 40% of the deposits, and 10% contribute 80% to 90% of the profits.

In fact, in a 1991 American Banker commentary, Sanford Rose asserted that as little as a 10% shift in the customer mix in a local branch can have a 60% impact on profitability.

Further, the current environment of bank mergers, name changes, and low interest rates has put a number of these high-value customers in play. However, the ability to retain such customers is being undermined by reductions in branch staff and a decline in service.

At What Cost?

Meanwhile, as banks compete heavily with nonbanks and cost-conscious banks, the pressure to become a lower-cost producer has never been greater. Yet many of the measures for across-the-board cost reduction are further eroding relationships with high-value customers.

And quality initiatives designed to improve in-branch service generate little value for many of the best customers, who never come into the branch.

The critical question for bank management is, "What are we doing to protect our franchise?"

Management must have a more effective set of practices for managing high-value "A" customers while lowering the cost of serving unprofitable or marginal "C" customers.

These practices define a strategy called local market management, which focuses on four critical tactics throughout the branch system:

* Retaining high-value customers.

* Accumulating high-potential customers through cross-selling and upselling.

* Attracting the most profitable prospects in order to optimize the customer mix.

* Reducing cost or reallocating resources for serving unprofitable customers.

Coherent Message

Key to this strategy is communicating a coherent message to the front line about providing the right sales effort, with the right service delivery, to the right customer at the right cost. The difficulty is making this strategy work in highly diversified local markets.

For example, the strategy for retaining high-deposit seniors in one market may be quite different from the strategy needed two miles away for accumulating young, dual-income couples. To borrow from Sam Walton's first principle of retailing at Wal-Mart, "We must think one store at a time."

The incongruity between what enlightened management would like to do and what is actually occurring day in and day out in the branches stems from the fact that most banks do not have a working model for competing at the local level.

Yet the battle is being won or lost in each market against the local independent bank, credit union, brokerage office, or branch of another large bank.

My firm recently surveyed retail executives of 35 commercial banks, each with more than $1 billion in assets, to assess their level of interest in local market management and their rate of progress toward a market-focused, segmented strategy.

As anticipated, some interesting trends surfaced. Of all respondents, 88% stated they believed that local market management is critical, and yet of that group:

* Only 15% said they tier their customers by relationship profitability.

* Only 5% said they set growth goals by market segment, identified and managed at the local level.

* Only 35% said they provide market segmentation training as part of their sales and service strategy.

* Only 17% said they provide managers with training to analyze market data and develop a market plan.

* Only 18% said they augment their competitive profiles with locally gathered market data.

* Only 29% said they have a strategy for enhancing service quality for their best customers while lowering the cost of service delivery to their least profitable ones.

These findings, published in a report titled, "Local Market Management - Assessing the Need," clarify the problem.

A local market management strategy depends on the ability of local units to analyze market potential, assess competitive encroachment, evaluate customer profitability, identify means for lowering cost against key segments, establish better service for targeted market groups, and merchandise and promote based on priority segments.

It is important to ask, "What have we done locally to equip our people for these tasks?"

Management Model Needed

For branches to succeed, there must be a model for local market management, and employees must be trained in the critical skills they need to build a fence around their "A" customers and to lower the cost of serving to their "C" customers.

Everyone is doing something, but little has been done to install a learning system that institutionalizes the critical practices of winning the local market. These, market management practices fall into three broad areas:

* Market Analysis. Assessing the market potential and competitive forces; evaluating and tiering existing customers, and targeting key local markets.

* Market Planning. Determining the desired mix of customers for the branch, then aligning sales, service, cost, facilities, merchandising, promotion, and staffing to support the plan relative to retention, conversion of high potentials, attraction, and cost reduction.

* Market-management Implementation. Setting market-specific goals, training, coaching, and measuring, and then providing an automated customer management system for retaining and increasing "A" customers.

Talk, Not Action

Many banks have proclaimed the strategy of local market management for several years, but in bank after bank, the same old practices persist. Talk is about retaining the "A" customers while time is spent managing lines full of "C" ones.

Service hogs and squeaky wheels get the "service" grease while preferred customers don't get preferred service. Branch renovations and openings aren't based on market analysis, and cross-selling efforts aren't focused on growth opportunities.

An average branch invests 20,000 to 30,000 man-hours each year managing a trade area. Too often it is reactively managing the noise, rather than proactively managing the market potential.

The shift to local market management is the single most critical challenge facing retail and small business bankers.

However, it is misguided to initiate a bold cultural change without providing an effective system to make it happen. Where a market management system has been implemented, cultural change does occure and there is a potential for 8% to 10% profit improvement in the first year.

In "The Fifth Discipline," Peter Senge writes that "success depends on what we as an organization learn." Learning to profitably win local markets - where to sell and service in a more focused way as well as where to reduce costs - is the key.

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