Ability To Identify Profitable Customers Key to CRM Success

The vast number of customer relationship management (CRM) projects are being undertaken with little understanding of what they are trying to accomplish. As a result, observers say, billions of dollars are being squandered on process improvements that deliver short-range benefits but do little to advance organizational goals.

Some $6.8 billion will be spent this year on CRM by retail financial institutions, according to Meridien Research. Yet most of these projects will proceed without a baseline measurement of customer value, according to Tom Richards, research analyst at Meridien. Instead, organizations will justify their spending based on narrow measures of cost savings (such as shifting customers from branches to electronic channels), process improvements (such as shorter call durations) or revenue enhancements (such as cross-sell opportunities).

In an industry where products and services are virtual commodities, a strategy based on squeezing a few nickels of overhead from branch or call center operations is bound to fail. "The real challenge isn't costs. The real challenge is, how do I measure increases in customer value?" said Richards.

Ultimately, shareholder value is driven by customers, not cost reductions. The goal of CRM, experts say, is not only to attract and retain profitable customers, but also to convert marginal customers-typically the majority of customers-into profitable ones. "Unlike the case with product cost reduction, where there is a theoretical end point, the opportunity to grow profitable customer relationships is virtually limitless," noted Joe Charlebois, vice president of product management at PMG Systems, a manufacturer of profitability measurement software.

Prerequisite to any successful CRM implementation, though, is the ability to accurately identify profitable customers, and to measure changes in profitability on an individual basis. Sandy Spring National Bank of Maryland is wrapping up a three-month project using PMG's TruABC software to analyze usage of its retail channels see story, page 56. The goal is to gain a better understanding of the relationship between costs and revenues, and thereby be able to pinpoint profitable customers, said James H. Langmead, chief financial officer at $2 billion Sandy Spring.

But for a lot of institutions, identifying profitable customers is next to impossible because back-office costs are assigned to products and services on an across-the-board or "allocated" basis, which obscures the true cost of providing services and leads to faulty decision-making.

The only way to understand a customer's true profitability is by using activity-based costing (ABC). ABC recognizes that the cost of processing a transaction, such as obtaining an account balance, is highly dependent on customer behavior (i.e., whether the customer uses the branch, telephone, ATM, or the Internet). By tracking patterns of customer usage, ABC enables firms to get a much truer sense of who their profitable customers are today, and which ones are likely to become profitable in the future.

Armed with this baseline, banks are in a position to develop programs for converting marginal customers into profitable ones by changing their behavior (such as getting them to save more). Unfortunately, too many institutions ignore the first step of CRM (developing the baseline) and focus only on the second-buying into quick-fix technology solutions and regretting the decision later. "For many, it was easier to buy CRM than to plan for it," said Meridien's Richards. "Many are still waiting for software to produce the benefits."

Some software providers are starting to get the message. e-Bank, a Columbus, Ohio-based software firm, offers a real-time, channel-independent data warehouse that provides a snapshot of a customer's entire relationship with the bank. Huntington National Bank-from which e-Bank was spun off-has used the solution to integrate 17 core legacy applications and gain a single, enterprise-wide view of the customer.

Because the platform updates all channels in real-time, customers receive accurate account information any time of the day or night. "e-Bank allows us to act upon the total picture of our customer, not just view them as separate accounts," according to Bill Randle, executive vice president at $29 billion Huntington.

e-Bank's real-time capability distinguishes it from other solutions, said Paul Jameson, president and CEO of e-Bank. "When Huntington brings down Hogan Systems for batch processing, their customers have a zero impact. We update through the day, and then we just synchronize back to them what they need to do their batch processing."