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Contents
03 Introduction
04 Methodology
05 Summary of who responded
06 Areas within the organisation’s control
06. Overall Company Approach
07. Understanding of costs, across five areas of the supply chain
11. Cost-to-Serve Management, and Correlation of High Performance
with Customer Experience
14 Areas outside the organisation’s controll
14. Regulatory
14. Market Conditions
15 List of Responding Organisations
16 Descriptive Statistics of Respondent Organisations
18 About Us
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Introduction
The world of business is becoming ever-more competitive.
Understanding Cost-to-Serve and correctly managing Customer
Loyalty are key tools in staying competitive. This study aims to find
the extent to which different activities in these areas have a bearing
on business success. The study uses two metrics as proxies for
commercial success – for our banks they are
• the growth in market capitalisation 2006-2011
• the June 2011 Cost-Income ratio
Cost-to-Serve is a tool to calculate the profitability of a customer
account, based on the actual business activities and overhead costs
incurred to service that customer. Cost-to-Serve understanding covers
three main areas, one within an organisation’s control and two
without. The first area is the firm itself. Outside the organisation’s
control are the Regulatory Environment and prevailing Market
Conditions. This report will use the structure below as a framework
for a discussion of the findings.
COST TO
SERVE
FIRM REGULATOR MARKET
CONDITIONS
R& D Production Sales & Distribuion Customer Economic Competition
marketing Service cycle
INSIDE OUTSIDE
Fig. 1: Key areas of Cost-to-Serve
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Methodology
A questionnaire was devised by Kurt Salmon which invited
respondents to place their organisations’ behaviours on attitudinal
scales. The behaviours were assessed at three successive levels of
detail:
• overall company approach
• understanding of costs, across five areas of the supply chain
• granular assessment by subject area
For each question, textual descriptions were provided to describe
the extremes of the scale. For some questions, textual descriptions
were also provided to illustrate intermediate points on the scales, to
maximise the likelihood that respondents would rate their companies
to consistent standards. The questionnaire was distributed by EFMA
to a selection of their member organisations, chosen according to
Kurt Salmon criteria. Responses were gathered in April – May 2011
by EFMA and the data were forwarded in anonymous form to Kurt
Salmon, for analysis. In November and December 2011 some of
the issues highlighted in the survey data were investigated further
via interviews with staff from some of the respondent organisations.
To preserve confidentiality, quotations from these sources will not be
attributed to named individuals or banks.
Respondent organisations were split into quartiles for the two metrics
above, and the un-weighted mean attitudinal scores for each quartile
were plotted for each survey question. The study aims to demonstrate
that organisations with different outcomes (commercially successful
/ not successful) demonstrate different behaviours. The hypothesis
is that the different behaviours have lead to the different outcomes.
For some questions, the four quartiles were further aggregated to
above- 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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Summary
of who responded
105 individuals from over 70 organisations around Europe responded (see
Appendix 1). 22 countries were named as respondents’ work locations. Full
descriptive statistics of those who responded are given in Appendix 2. Nearly
a third came from companies describing themselves as ‘global’, and half from
organisations with more than 10,000 employees. Over a quarter of all
responses come from businesses with more than 5m customers, over half came
from Marketing/Sales, Strategy or Operations. 10% came from Country Heads
or higher; two thirds came from Directors or Managers. There was no bias in
responses to low or high market-cap-growth companies, but 30% of responses
were unclassified / unclassifiable by market cap growth. Respondents from the
higher quartiles were more likely to be in Marketing; Quartile 4 had the most
Product Development respondents. Very senior respondents were more likely
to come from 3rd or 4th-quartile organisations.
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Areas within the
organisation’s control
Overall Company Approach
In 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 customer
strategy rather than geography or product; they are more likely to have clear customer
segments 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 into
Netherlands, Scandinavia, Other Western Europe, Central Europe and Balkans.
Scandinavian organisations scored better, on average, on the following categories in
this section of the survey: Customer Strategy, Organisational Focus and Performance
Management. On Cost-to-Serve Understanding, Scandinavian banks were equal first,
with Netherlands respondents. This raises two possibilities: either Scandinavian
organisations rated themselves more generously than other regions, or there are
genuinely different behaviours happening. The author has tried to interview Scandinavian
organisations to investigate this more deeply, but at the time of writing this has not been
possible.
The analysis also revealed that very small or very large organisations tended to score
less 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 resource
to have deep cost understanding (or are more likely to running an ad-hoc or batch
environment rather than a process environment) and the largest organisations are
hampered by the complexities of scale. Interviews during this study confirm that scale
can cause difficulties – “Yes, things get harder [as an organisation gets bigger]. There
is a tension to balance capacity and complexity. The organisation is like a ship – as it
gets larger, the extra inertia makes changes of direction slower”1. However, another
organisation 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 their
experience] to close the deal”2.
1. Customer Experience Research Consultant
2. Director of Sales
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Understanding of costs, across five areas of the supply chain
Participating organisations were asked to assess their understanding of costs across
the following five areas of the supply chain:
• Research and Development
• Production
• Sales and Marketing
• Distribution
• Customer Services
Organisations were split into above- and below-median groups for each of the two
success metrics, market capitalisation growth and cost-to-income ratio. For each area
of the supply chain, the distributions of the survey scores for the two groups were then
compared. Kurt Salmon propose that if the ‘successful’ and ‘unsuccessful’ organisations
score significantly differently on an attribute, then that attribute may be a driver of
that commercial success.
What was striking was the difference in results across the various areas of the supply
chain. For depth of understanding of Research & Development costs, there was little
difference between ‘successful’ and ‘unsuccessful’ organisations. The same was true
for depth of understanding of Marketing / Sales costs. However, granular cost
knowledge correlates with success to a much greater extent for Production, Distribution
and Customer Services. The graphs for cost understanding of Research & Development
and Customer Service are compared in Figure 2, p8.
Studies show that this population remits a substantial share of their salary under family
support. 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 for
migrants 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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e.g. company e.g. by e.g. by e.g. per
or country product product, customer
average channel & per channel
region
e.g. company e.g. by e.g. by e.g. per
or country product product, customer
average channel & per channel
region
Fig. 2: Cost Understanding across the Supply Chain, and Correlation with Commercial Success
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This latter result cannot be because Marketing staff are under-represented in the survey – by job function they make up
the largest proportion of respondents. We believe it is because Marketing / Sales costs are such a mature area of study
that every organisation either is, or has already, looked into this area in detail. Hence even poor-performers have a
detailed knowledge of their Marketing costs. Two things that even more strongly differentiate lower- and higher-performing
companies are the ease of movement of cost-to-serve information and the importance attached to it (see
Figure 3). One organisation surveyed had a simple method to keep information current and relevant: “all approvals had
expiry dates, so reviews were forced, at least annually”3.
Impeded: Cost information Fluid: Cost information
remains within silos,is hard to can be accessed and analysed
access and rarely crosses across departemental and functional
departemental/functional boundaries lines with ease
3. Head of Consumer Lending
Insignificant: The information Valuable: The inforamtion forms a key part of
is gathered but rarely impacts customer analysis and is regularly used to
customer strategy refine customer strategy and implementation
Fig. 3: Effects of how Cost-to-Serve Information is moved around and acted upon
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The survey also gives a strong indication that the larger an organisation is, the more
it matters to get certain corporate behaviours right. The banks in the survey were
divided into those with fewer than 10,000 employees and those with 10,000 or
more. The mean scores for above-median (by Cost-to-Income ratio) organisations were
compared to the scores for the lower-performers. For small businesses the scores
looked very similar, except for understanding of Research & Development costs. In
short, for smaller organisations, a greater understanding of Production, Sales /
Marketing or Distribution costs simply doesn’t make much difference. That is certainly
not the case for the larger organisations, where conversely, understanding Research
and Development costs is the least important differentiator and, by a long way, the
greatest differentiator is Understanding of Customer Service and Claim Management
costs (see Fig. 4).
Sophistication of customer
services makes much more
of a difference in the larger
organisations
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, then
for large organisations, the greatest benefit (choosing from the five supply chain areas
of our classification) is derived from understanding the costs of Customer Service and
Claim Management. Therefore understanding these should be the highest priorities.
There are also differences around Europe regarding what behaviours (or levels or
areas of understanding) differentiate between high and low performers. By comparing
the mean survey scores of the above- and below-median performers (in this case using
the Cost-to-Income ratio metric) we can infer that understanding of some supply chain
areas 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 greatest
differentiators were the understanding of R&D and Customer Service and Claim
Management costs. Possible reasons for these differences include cultural influences,
or differences in business models. One interviewee from a Greek bank, whose
experience 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 independent
managers’4, the inference being that greater local autonomy lead to greater
responsiveness to local customers’ needs. Another interviewee opined that regulation
could 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 Service
parts of the business: “Our understanding of Customer Services costs is not very
granular... there is always a slight battle going on between Sales and Service. We in
Service believe that power is in the customer’s hands... Sales can sometimes get too
aggressive and short-termist”6.
Cost-to-Serve Management, and Correlation of High Performance with
Customer Experience
Single Customer View
Having a consolidated view of the customer, across an organisation, certainly
correlates with better-than-median Cost-to-Income ratios. Similarly, companies reporting
that their data collection is in silos, and not analysed regularly or connected to all
customer-facing applications, they are much more likely to have worse than average
Cost-to-Income ratios. Organisations’ abilities to see a single view of the customer vary
enormously. Some are pragmatic: “We are a 2nd-tier bank, at an early stage of
4. Head of Consumer Lending
5. CEO
6. 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 fully
understand the customer”7. Others are confident: “[We have] very strong product information – for
example 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 of
8] reflects the survey respondent’s frustration. We know we need a single view, to keep up with our
8. Customer Experience Research Consultant
9. Customer Experience Research Consultant
competitors. We know it will cost hundreds of millions, but the bank is run by auditors and investment
ideas are killed by ‘the 3 Toxic Questions’“8.
Data Collection
Higher-performing organisations are more likely to have comprehensive data collection to develop
customer 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 the
bank – a mountain of data – but the architecture is wrong – it’s not aligned to finding customers’ true
needs. The data on the customer as an account is brilliant. The data on the customer as a person is
terrible.”9 Useable data is vital because above-average performing companies generate their leads
7. CEO
from a data-driven needs basis (see Fig. 5).
Subjective: Leads generated through Objective: Leads generated through
subjective selection process lead by rigorous analysis of future customer
senior marketing executives. Some and business needs, data driven se-
filtering into predictive models based lection process and event triggers
on these subjective criteria
Fig. 5: Above-average performing companies generate leads from a data-driven needs basis
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Segmentation, Lead Generation and Campaign Frequency
Data and insight are starting points for campaigns. The survey finds that higher-
performing organisations are more likely to have many clearly-defined needs and
behavioural segments with strategy and propositions for each. For example one
interviewee reported that their organisation was “trying to identify the most critical
segments. Within Affluent, we have four tiers of segmentation. We have designed a
segment called ‘Personal Banking’ at the lower end of Affluent, below Private
Banking”10. The survey also finds that higher-performing organisations have, on
average, smaller, more frequent and targeted campaigns. Whilst the nature of
campaigns will always be influenced by the nature of the products to be sold – one
bank stated “we do both approaches: large and infrequent, small and frequent – big
programs for the whole organization, small stuff for niche products”11, they may also
be a consequence of an organisation’s maturity: “we did two big campaigns in our
first two years. In our third year they are getting smaller, more targeted. It depends
on where you stand in the development path”12 . One high-performing bank describes
its marketing activities as a mix of institutional campaigns, fronted by a nationally-
known figure, and retail campaigns. The retail campaigns are “in cycles of duration
about two months, with two products per campaign. Only two or three products are
put in front of each customer per year”13 , to minimize offer fatigue.
Centralisation versus Autonomy, Reduction of Complexity
Above-average performing organisations are more likely to have many channels,
whose costs are transparent and therefore well understood. In some cases technology
has made possible changes to business models, resulting in centralisation and greater
cost transparency. At one bank in the study there had been “transformation in the last
decade, starting from very decentralized, branch-centric – now a complete reversal.
Many back-office processes are being centralized at present, cheque-clearing was
done 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 same
organization stated “We’re trying to rationalise our product offering – that’s the main
driver of complexity. Also we’re trying to reduce infrastructure architecture, taking a
holistic approach”. For another bank, the goal was to “simplify the relationship with
the client. Try to make it as easy as possible for the client to buy the product, whether
that 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 has
tried to avoid complexity in the first place…”We tried to design things…very
standardized and kept products simple. We don’t try to provide everything”16.
10. Head of Consumer Lending
11. Customer Experience Research Consultant
12. CEO
13. Director of Sales
14. Head of Consumer Lending
15. Director of Sales
16. CEO
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Areas outside the
organisation’s control
Regulatory
All the organisations interviewed are concerned that impending regulation will
increase costs. One says “internal calculations concluded that up to 6% more time
would be spent as result of the Consumer Protection Act” . Another sees the future of
banking as “fewer products; banks currently have too many. More outsourcing
(perhaps only in Operations), like the automotive model… a modular approach, with
mass customization” . Initiatives like Basel III, MiFID, FATCA and Treating Customers
Fairly are likely to make the regulatory burden and the pace of regulatory change
increase.
Market Conditions
Between the collection of the survey data and the interviews, the global economy and
the Eurozone situation have changed. As one interviewee said, in answer to a question
on distribution costs: “[Our country] is in a special situation – there are other things
on the CEO’s mind”. Kurt Salmon also recognise that international issues potentially
make comparisons difficult.
Conclusions
The most successful companies are organized by customer need, not just product or
geography. Extremes of size cause problems. The greatest differentiators between
good 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 Customer
Services costs thoroughly that appear to make the most difference.
The common thread amongst successful organisations appears to be the ability to
manage granular information. One consequence of this is that effective IT architectures
will become even more critical than at present, with ever-expanding numbers of
channels for product distribution, ever-smaller and more frequent marketing campaigns.
Some players think that banks may outsource many operational aspects and evolve
into relationship managers. However, what is certain at this stage is that overall,
sophistication in cost management is the dominant theme amongst the behaviours that
most closely correlate with success.
Henry Morris
Senior Consultant
Financial Services & Industries Practice
Kurt Salmon
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Appendix 1: List of Responding Organisations
1. ABN Amro 37. DnB NOR
2. Absa 38. DWS Schweiz GmbH
3. ACCBank, Ireland 39. EFG Eurobank
4. AIB 40. Emporiki Bank S.A.
5. Alpha Asset Management A.E.D.A.K 41. Erste Group Bank AG
6. Alpha Bank 42. EUROBANK EFG SA
7. AXA Bank Europe 43. FCE Bank plc
8. Banc Sabadell 44. FINA cash service LTD
9. Banca Monte dei Paschi di Siena 45. Finansbank, Turkey
10. Banca Nazionale del Lavoro 46. Garanti Bank S.A
11. Banca Popolare Emilia Romagna 47. Halkbank
12. Banco Espírito Santo (BES) 48. Helvetia Versicherungen
13. Banco Popolare 49. ING
14. Banco Santander 50. Intesa Sanpaolo
15. Bank Austria 51. Işbank
16. Bank Austria, Hypovereinsbank 52. KBC Bank
17. Banque Cantonal Vaudoise 53. Komerchni Banka
18. Banque Invik 54. Länsförsäkringar Stockholm
19. BBVA 55. Liberty Seguros
20. BCP 56. Lloyds Banking Group
21. BCR 57. Mashreq Bank
22. BNP Paribas 58. Millennium bcp
23. BZ WBK SA 59. Montepio
24. Caixa Geral de Depósitos 60. National Bank of Greece
25. Cariparma 61. Nordea
26. Citibank 62. OTP Bank
27. Compass 63. PlanetHome AG
28. Credit Europe Bank (Romania) SA 64. Rabobank Nederland
29. CRIF 65. raiffeisen banca pentru locuinte
30. ČSOB 66. Raiffeisen Bank International
31. Danske Bank 67. Raiffeisen Bank Romania
32. DELTA LLOYD BANK 68. Santander UK Plc
33. DenizBank 69. SEB
34. Deutsche Bank PGK AG 70. TEB
35. Dexia Bank 71. UniCredit Bank
36. Die Mobiliar Versicherungen & Vorsorge 72. Yapi Kredi
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Appendix 2: Descriptive Statistics
of Respondent Organisations
This survey was carried out through the electronic completion of a questionnaire by
105 senior executives of around 70 banks and financial institutions operating in 22
European countries.
The diagrams below show key attributes of the
Geographical Distribution of Respondents
4%
7% Western Europe
11% Balkans
40%
Mittel Europe
Netherlands Area
14%
Scandanavia
Not specified
24%
Respondants:
Scale Distribution of Respondents’Organisation
Organisations Scale Distribution of Numbers of Employees
3% 4% 3% 2%
5%
More than 100,000
9%
50,000 - 100,000
Global 6%
32% 10,000 - 49,999
Regional 18%
2500 - 9999
37% National
500 - 2499
Local
34% 100 - 499
Not specified
23% 0 - 99
24%
Not Specified
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Respondents’ Organisation: Distribution by
Organisations: Distribution by
Customer Bases
Customer Bases
Marketing / Sales
2%
> 25m Strategy / Corp. Dev.
3% 11%
6% 7% 10m - 25m 23% Operations
4%
15% 13% 5m - 10m Product Development
7% General management
2.5m - 5m
7% 8% Cust Satis. / Quality
1m - 2.5m
9% 19% Risk
0.5m - 1m
21% Finance
23% 0 - 0.5m 10%
12% IT
Not specified Not specified
3% 3%
4%
11% Global or Board Level
Head of Region
12% Head of Country
32% Director
Manager
Other
35%
Not specified
Responses, By Market Cap Growth Quartile Responses, By Cost-Income Ratio Quartile
12% 9%
Quartile1 23% Quartile1
30%
Quartile2 Quartile2
24%
23% Quartile3 Quartile3
Quartile4 Quartile4
19%
Unclassified Unclassified
21% 14% 25%
Note: this is the count of individual responses, not the count of responding organizations
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