Cost to serve

Best practices in retail financial services

more information on www.efma.com

Cost-to-serveJanuary 2012

03Introduction

04 Methodology

05 Summary of who responded

06Areas within the organisation’s control

14 Areas outside the organisation’s controll

15 List of Responding Organisations

16 Descriptive Statistics of Respondent Organisations

18 About Us

Contents

06. Overall Company Approach07. Understanding of costs, across five areas of the supply chain11. Cost-to-Serve Management, and Correlation of High Performance

with Customer Experience

14. Regulatory14. Market Conditions

Costtoserve_study#4 24/01/12 16:28 Page2

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C O S T - T O - S E R V E

The world of business is becoming ever-more competitive.Understanding Cost-to-Serve and correctly managing CustomerLoyalty are key tools in staying competitive. This study aims to findthe extent to which different activities in these areas have a bearingon business success. The study uses two metrics as proxies forcommercial success – for our banks they are• the growth in market capitalisation 2006-2011 • the June 2011 Cost-Income ratioCost-to-Serve is a tool to calculate the profitability of a customeraccount, based on the actual business activities and overhead costsincurred to service that customer. Cost-to-Serve understanding coversthree main areas, one within an organisation’s control and twowithout. The first area is the firm itself. Outside the organisation’scontrol are the Regulatory Environment and prevailing MarketConditions. This report will use the structure below as a frameworkfor a discussion of the findings.

Introduction

Fig. 1: Key areas of Cost-to-Serve

COST TOSERVE

MARKETCONDITIONS

REGULATORFIRM

R & D Production Sales &marketing

Distribuion CustomerService

Economiccycle

Competition

INSIDE OUTSIDE


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MethodologyA questionnaire was devised by Kurt Salmon which invitedrespondents to place their organisations’ behaviours on attitudinalscales. The behaviours were assessed at three successive levels ofdetail: • overall company approach• understanding of costs, across five areas of the supply chain • granular assessment by subject areaFor each question, textual descriptions were provided to describethe extremes of the scale. For some questions, textual descriptionswere also provided to illustrate intermediate points on the scales, tomaximise the likelihood that respondents would rate their companiesto consistent standards. The questionnaire was distributed by EFMAto a selection of their member organisations, chosen according toKurt Salmon criteria. Responses were gathered in April – May 2011by EFMA and the data were forwarded in anonymous form to KurtSalmon, for analysis. In November and December 2011 some ofthe issues highlighted in the survey data were investigated furthervia interviews with staff from some of the respondent organisations.To preserve confidentiality, quotations from these sources will not beattributed to named individuals or banks.Respondent organisations were split into quartiles for the two metricsabove, and the un-weighted mean attitudinal scores for each quartilewere plotted for each survey question. The study aims to demonstratethat organisations with different outcomes (commercially successful/ not successful) demonstrate different behaviours. The hypothesisis that the different behaviours have lead to the different outcomes.For some questions, the four quartiles were further aggregated toabove- and below-median groups, for graphical presentation.Respondents were also aggregated by a number of attributes in turn,including size of organisation and geographical region.


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Summaryof who responded 105 individuals from over 70 organisations around Europe responded (seeAppendix 1). 22 countries were named as respondents’ work locations. Fulldescriptive statistics of those who responded are given in Appendix 2. Nearlya third came from companies describing themselves as ‘global’, and half fromorganisations with more than 10,000 employees. Over a quarter of allresponses come from businesses with more than 5m customers, over half camefrom Marketing/Sales, Strategy or Operations. 10% came from Country Headsor higher; two thirds came from Directors or Managers. There was no bias inresponses to low or high market-cap-growth companies, but 30% of responseswere unclassified / unclassifiable by market cap growth. Respondents from thehigher quartiles were more likely to be in Marketing; Quartile 4 had the mostProduct Development respondents. Very senior respondents were more likelyto come from 3rd or 4th-quartile organisations.


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Overall Company ApproachIn the first section of the survey, ‘Company Approach’, organisations with better-than-median 2011 Cost-to-Income ratios are more likely be organised according to customerstrategy rather than geography or product; they are more likely to have clear customersegments for targeting and are more likely to reflect customer segment and channel,rather than just product or geography, in their P&L breakdowns. The analysis revealed regional differences. The organisations were grouped intoNetherlands, Scandinavia, Other Western Europe, Central Europe and Balkans.Scandinavian organisations scored better, on average, on the following categories inthis section of the survey: Customer Strategy, Organisational Focus and PerformanceManagement. On Cost-to-Serve Understanding, Scandinavian banks were equal first,with Netherlands respondents. This raises two possibilities: either Scandinavianorganisations rated themselves more generously than other regions, or there aregenuinely different behaviours happening. The author has tried to interview Scandinavianorganisations to investigate this more deeply, but at the time of writing this has not beenpossible. The analysis also revealed that very small or very large organisations tended to scoreless well on the four areas than mid-size organisations of 10,000 to 49,999 employees.Kurt Salmon hypothesise that this is because the smallest organisations lack the resourceto have deep cost understanding (or are more likely to running an ad-hoc or batchenvironment rather than a process environment) and the largest organisations arehampered by the complexities of scale. Interviews during this study confirm that scalecan cause difficulties – “Yes, things get harder [as an organisation gets bigger]. Thereis a tension to balance capacity and complexity. The organisation is like a ship – as itgets larger, the extra inertia makes changes of direction slower”1. However, anotherorganisation seems to have found a happy medium, at least with respect to purchasing:“Size isn’t a problem. Bank departments have autonomy to choose their own suppliers,provided agreement is obtained from a central Supply function, who also [use theirexperience] to close the deal”2.

1. Customer Experience Research Consultant2. Director of Sales

Areas within theorganisation’s control


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Understanding of costs, across five areas of the supply chainParticipating organisations were asked to assess their understanding of costs acrossthe following five areas of the supply chain:• Research and Development• Production• Sales and Marketing• Distribution• Customer ServicesOrganisations were split into above- and below-median groups for each of the twosuccess metrics, market capitalisation growth and cost-to-income ratio. For each areaof the supply chain, the distributions of the survey scores for the two groups were thencompared. Kurt Salmon propose that if the ‘successful’ and ‘unsuccessful’ organisationsscore significantly differently on an attribute, then that attribute may be a driver ofthat commercial success. What was striking was the difference in results across the various areas of the supplychain. For depth of understanding of Research & Development costs, there was littledifference between ‘successful’ and ‘unsuccessful’ organisations. The same was truefor depth of understanding of Marketing / Sales costs. However, granular costknowledge correlates with success to a much greater extent for Production, Distributionand Customer Services. The graphs for cost understanding of Research & Developmentand Customer Service are compared in Figure 2, p8.Studies show that this population remits a substantial share of their salary under familysupport. It has been estimated that remittances represent over the long term 15 to 20%of migrant income. These transfers might reach 40% of disposable income, such as formigrants from sub-Saharan Africa.Aside from the special case of Switzerland with remittances outflows close to €14 billion,Germany and Italy are European countries with the highest amount of remittances.


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Fig. 2: Cost Understanding across the Supply Chain, and Correlation with Commercial Success

e.g. companyor countryaverage

e.g. byproduct

e.g. byproduct,

channel &region

e.g. percustomer

per channel

e.g. companyor countryaverage

e.g. byproduct

e.g. byproduct,

channel &region

e.g. percustomer

per channel


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This latter result cannot be because Marketing staff are under-represented in the survey – by job function they make upthe largest proportion of respondents. We believe it is because Marketing / Sales costs are such a mature area of studythat every organisation either is, or has already, looked into this area in detail. Hence even poor-performers have adetailed knowledge of their Marketing costs. Two things that even more strongly differentiate lower- and higher-performingcompanies are the ease of movement of cost-to-serve information and the importance attached to it (seeFigure 3). One organisation surveyed had a simple method to keep information current and relevant: “all approvals hadexpiry dates, so reviews were forced, at least annually”3.


Fig. 3: Effects of how Cost-to-Serve Information is moved around and acted upon

Impeded: Cost informationremains within silos,is hard toaccess and rarely crossesdepartemental/functional boundaries

Fluid: Cost informationcan be accessed and analysed

across departemental and functionallines with ease

Insignificant: The informationis gathered but rarely impactscustomer strategy

Valuable: The inforamtion forms a key part ofcustomer analysis and is regularly used to

refine customer strategy and implementation

3. H

ead

of C

onsu

mer

Len

ding


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The survey also gives a strong indication that the larger an organisation is, the moreit matters to get certain corporate behaviours right. The banks in the survey weredivided into those with fewer than 10,000 employees and those with 10,000 ormore. The mean scores for above-median (by Cost-to-Income ratio) organisations werecompared to the scores for the lower-performers. For small businesses the scoreslooked very similar, except for understanding of Research & Development costs. Inshort, for smaller organisations, a greater understanding of Production, Sales /Marketing or Distribution costs simply doesn’t make much difference. That is certainlynot the case for the larger organisations, where conversely, understanding Researchand Development costs is the least important differentiator and, by a long way, thegreatest differentiator is Understanding of Customer Service and Claim Managementcosts (see Fig. 4).

Sophistication of customerservices makes much moreof a difference in the largerorganisations

Fig. 4: Which Areas of Cost Understanding Matter Most?


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Kurt Salmon therefore conclude that if supply chain costs are not fully understood, thenfor large organisations, the greatest benefit (choosing from the five supply chain areasof our classification) is derived from understanding the costs of Customer Service andClaim Management. Therefore understanding these should be the highest priorities. There are also differences around Europe regarding what behaviours (or levels orareas of understanding) differentiate between high and low performers. By comparingthe mean survey scores of the above- and below-median performers (in this case usingthe Cost-to-Income ratio metric) we can infer that understanding of some supply chainareas are more important than others, or at least penalised less if they are absent.For Central European organisations, understanding of the Production and Marketing/ Sales areas were the greatest differentiators, but for the Balkan regions, the greatestdifferentiators were the understanding of R&D and Customer Service and ClaimManagement costs. Possible reasons for these differences include cultural influences,or differences in business models. One interviewee from a Greek bank, whoseexperience included banking in Bulgaria and Romania, suggested that ’in the past,Bulgarian branches had a much stronger business model than Greek branches,because the Bulgarian branches were independent legal entities, with independentmanagers’4, the inference being that greater local autonomy lead to greaterresponsiveness to local customers’ needs. Another interviewee opined that regulationcould have an effect: “Deregulated markets have better customer understanding.Switzerland is a very regulated market”5. The survey also revealed, in one organisation, a tension between the Sales and Serviceparts of the business: “Our understanding of Customer Services costs is not verygranular... there is always a slight battle going on between Sales and Service. We inService believe that power is in the customer’s hands... Sales can sometimes get tooaggressive and short-termist”6.

Cost-to-Serve Management, and Correlation of High Performance withCustomer Experience

Single Customer ViewHaving a consolidated view of the customer, across an organisation, certainlycorrelates with better-than-median Cost-to-Income ratios. Similarly, companies reportingthat their data collection is in silos, and not analysed regularly or connected to allcustomer-facing applications, they are much more likely to have worse than averageCost-to-Income ratios. Organisations’ abilities to see a single view of the customer varyenormously. Some are pragmatic: “We are a 2nd-tier bank, at an early stage of

4. Head of Consumer Lending5. CEO6. Customer Experience Research Consultant


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development – a start-up phase. Right now we have a reduced product range. We don’t try to fullyunderstand the customer”7. Others are confident: “[We have] very strong product information – forexample which accounts the customer has. We try to see the customer holistically, with only one contact[i.e. relationship manager] per client”. Another interviewee was jaded: “The survey score [of 2 out of8] reflects the survey respondent’s frustration. We know we need a single view, to keep up with ourcompetitors. We know it will cost hundreds of millions, but the bank is run by auditors and investmentideas are killed by ‘the 3 Toxic Questions’“8.

Data CollectionHigher-performing organisations are more likely to have comprehensive data collection to developcustomer insights. However, merely having large amounts of data does not in itself lead to insight –the information must be in a useable form. One respondent was candid: “There’s a lot of data in thebank – a mountain of data – but the architecture is wrong – it’s not aligned to finding customers’ trueneeds. The data on the customer as an account is brilliant. The data on the customer as a person isterrible.”9 Useable data is vital because above-average performing companies generate their leadsfrom a data-driven needs basis (see Fig. 5).

7. C

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Cus

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ience

Res

earc

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nsult

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9. C

usto

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Exp

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ce R

esea

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Cons

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Subjective: Leads generated throughsubjective selection process lead bysenior marketing executives. Some filtering into predictive models basedon these subjective criteria

Objective: Leads generated throughrigorous analysis of future customer

and business needs, data driven se-lection process and event triggers

Fig. 5: Above-average performing companies generate leads from a data-driven needs basis


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10. Head of Consumer Lending11. Customer Experience Research Consultant12. CEO13. Director of Sales14. Head of Consumer Lending15. Director of Sales16. CEO

Segmentation, Lead Generation and Campaign FrequencyData and insight are starting points for campaigns. The survey finds that higher-performing organisations are more likely to have many clearly-defined needs andbehavioural segments with strategy and propositions for each. For example oneinterviewee reported that their organisation was “trying to identify the most criticalsegments. Within Affluent, we have four tiers of segmentation. We have designed asegment called ‘Personal Banking’ at the lower end of Affluent, below PrivateBanking”10. The survey also finds that higher-performing organisations have, onaverage, smaller, more frequent and targeted campaigns. Whilst the nature ofcampaigns will always be influenced by the nature of the products to be sold – onebank stated “we do both approaches: large and infrequent, small and frequent – bigprograms for the whole organization, small stuff for niche products”11, they may alsobe a consequence of an organisation’s maturity: “we did two big campaigns in ourfirst two years. In our third year they are getting smaller, more targeted. It dependson where you stand in the development path”12 . One high-performing bank describesits marketing activities as a mix of institutional campaigns, fronted by a nationally-known figure, and retail campaigns. The retail campaigns are “in cycles of durationabout two months, with two products per campaign. Only two or three products areput in front of each customer per year”13 , to minimize offer fatigue.

Centralisation versus Autonomy, Reduction of ComplexityAbove-average performing organisations are more likely to have many channels,whose costs are transparent and therefore well understood. In some cases technologyhas made possible changes to business models, resulting in centralisation and greatercost transparency. At one bank in the study there had been “transformation in the lastdecade, starting from very decentralized, branch-centric – now a complete reversal.Many back-office processes are being centralized at present, cheque-clearing wasdone two years ago, we now know costs per channel, per point of sale.”14

Reduction of complexity is a theme that is mentioned time and time again. The sameorganization stated “We’re trying to rationalise our product offering – that’s the maindriver of complexity. Also we’re trying to reduce infrastructure architecture, taking aholistic approach”. For another bank, the goal was to “simplify the relationship withthe client. Try to make it as easy as possible for the client to buy the product, whetherthat means the internet, a tablet, an iPad solution… However, Audit Office rules[regulations] are getting more complicated all the time”15. A relatively new bank hastried to avoid complexity in the first place…”We tried to design things…verystandardized and kept products simple. We don’t try to provide everything”16.


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Areas outside theorganisation’s controlRegulatory All the organisations interviewed are concerned that impending regulation willincrease costs. One says “internal calculations concluded that up to 6% more timewould be spent as result of the Consumer Protection Act” . Another sees the future ofbanking as “fewer products; banks currently have too many. More outsourcing(perhaps only in Operations), like the automotive model… a modular approach, withmass customization” . Initiatives like Basel III, MiFID, FATCA and Treating CustomersFairly are likely to make the regulatory burden and the pace of regulatory changeincrease.

Market ConditionsBetween the collection of the survey data and the interviews, the global economy andthe Eurozone situation have changed. As one interviewee said, in answer to a questionon distribution costs: “[Our country] is in a special situation – there are other thingson the CEO’s mind”. Kurt Salmon also recognise that international issues potentiallymake comparisons difficult.

ConclusionsThe most successful companies are organized by customer need, not just product orgeography. Extremes of size cause problems. The greatest differentiators betweengood and poor performers are distributing and acting upon Cost-to-Serve information.Amongst the five supply chain areas of R&D, Production, Sales and Marketing,Distribution and Customer Services, it is understanding Distribution and CustomerServices costs thoroughly that appear to make the most difference. The common thread amongst successful organisations appears to be the ability tomanage granular information. One consequence of this is that effective IT architectureswill become even more critical than at present, with ever-expanding numbers ofchannels for product distribution, ever-smaller and more frequent marketing campaigns.Some players think that banks may outsource many operational aspects and evolveinto relationship managers. However, what is certain at this stage is that overall,sophistication in cost management is the dominant theme amongst the behaviours thatmost closely correlate with success.

Henry MorrisSenior ConsultantFinancial Services & Industries PracticeKurt Salmon


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1. ABN Amro2. Absa3. ACCBank, Ireland4. AIB5. Alpha Asset Management A.E.D.A.K6. Alpha Bank7. AXA Bank Europe8. Banc Sabadell9. Banca Monte dei Paschi di Siena

10. Banca Nazionale del Lavoro11. Banca Popolare Emilia Romagna12. Banco Espírito Santo (BES)13. Banco Popolare14. Banco Santander15. Bank Austria16. Bank Austria, Hypovereinsbank17. Banque Cantonal Vaudoise18. Banque Invik19. BBVA20. BCP21. BCR22. BNP Paribas23. BZ WBK SA24. Caixa Geral de Depósitos25. Cariparma26. Citibank27. Compass28. Credit Europe Bank (Romania) SA29. CRIF30. ČSOB31. Danske Bank32. DELTA LLOYD BANK33. DenizBank34. Deutsche Bank PGK AG35. Dexia Bank 36. Die Mobiliar Versicherungen & Vorsorge

37. DnB NOR38. DWS Schweiz GmbH39. EFG Eurobank40. Emporiki Bank S.A.41. Erste Group Bank AG42. EUROBANK EFG SA43. FCE Bank plc44. FINA cash service LTD45. Finansbank, Turkey46. Garanti Bank S.A47. Halkbank48. Helvetia Versicherungen49. ING50. Intesa Sanpaolo51. Işbank52. KBC Bank53. Komerchni Banka54. Länsförsäkringar Stockholm55. Liberty Seguros56. Lloyds Banking Group57. Mashreq Bank58. Millennium bcp59. Montepio60. National Bank of Greece61. Nordea62. OTP Bank63. PlanetHome AG64. Rabobank Nederland65. raiffeisen banca pentru locuinte66. Raiffeisen Bank International67. Raiffeisen Bank Romania68. Santander UK Plc69. SEB70. TEB71. UniCredit Bank72. Yapi Kredi

Appendix 1: List of Responding Organisations


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Appendix 2: Descriptive Statisticsof Respondent Organisations

This survey was carried out through the electronic completion of a questionnaire by105 senior executives of around 70 banks and financial institutions operating in 22European countries.The diagrams below show key attributes of the

Respondants:

40%

24%

14%

11%

7%

4%

Geographical Distribution of Respondents

Western Europe

Balkans

Mittel Europe

Netherlands Area

Scandanavia

Not specified

32%

24%

37%

3% 4%

Organisations

Global

Regional

National

Local

Not specified

9% 6%

34% 23%

18%

5% 3% 2%

Scale Distribution of Numbers of Employees

More than 100,000

50,000 - 100,000

10,000 - 49,999

2500 - 9999

500 - 2499

100 - 499

0 - 99

Not Specified

Scale Distribution of Respondents’Organisation


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7%

13%

8%

23% 21%

7%

15%

6%

Organisations: Distribution by Customer Bases

> 25m

10m - 25m

5m - 10m

2.5m - 5m

1m - 2.5m

0.5m - 1m

0 - 0.5m

Not specified

12%

23%

14% 21%

30%

Responses, By Market Cap Growth Quartile

Quartile1

Quartile2

Quartile3

Quartile4

Unclassified

23%

19%

25%

24%

9%

Responses, By Cost-Income Ratio Quartile

Quartile1

Quartile2

Quartile3

Quartile4

Unclassified

23%

19%

12% 10%

9%

7%

4% 3% 2%

11%

Marketing / Sales

Strategy / Corp. Dev.

Operations

Product Development

General management

Cust Satis. / Quality

Risk

Finance

IT

Not specified

3% 3% 4%

32%

35%

12%

11%

Global or Board Level

Head of Region

Head of Country

Director

Manager

Other

Not specified

Note: this is the count of individual responses, not the count of responding organizations

Respondents’ Organisation: Distribution byCustomer Bases


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About Us

Efma, a not-for-profit association formed in 1971 by bankers andinsurers, specialises in retail financial marketing and distribution. Today,more than 3,000 brands in 130 countries are Efma members includingover 80% of Europe’s largest retail financial institutions. Efma offers the retail financial service community exclusive access toa multitude of resources, databases, studies, articles, news feeds andpublications. Efma also provides numerous networking opportunitiesthrough work groups, online communities and international meetings.

Efma8, rue Bayen75017 ParisFrancewww.efma.com

Kurt Salmon, formed by the merger of Kurt Salmon Associates andIneum Consulting, is a global management consultancy of more than1,600 consultants in 15 countries across five continents.Our clients are industry leaders who benefit from our deep industryand functional expertise.As trusted advisors, Kurt Salmon partners with clients to design, andthen drive, strategies and solutions that make lasting and meaningfulimpact. We are committed to delivering measurable results for ourclients through executional excellence.Kurt Salmon is a company of Management Consulting Group

Kurt Salmon650 Fifth Avenue, 30th FloorNew York, NY 10019USAwww.kurtsalmon.com

Copyright © 2012 Efma. All rights reservedThis report should not be reproduced or redistributed,

in whole or in part, without the written permission of Efma.Efma accepts no liability whatsoever for the actions of third parties in this respect.


Best practices in retail financial servicesmore information on www.efma.com

COST-TO-SERVEJANUARY 2012

Cost to serve

Economy & Finance

Transcript of Cost to serve