Customer demand centricitypdf

Relationship Banking: Demand Centricity—Closing The Partnership
Performance Gap

This article has been written for bankers and their customers with an emphasis on building
customer or demand-centric relationships. By way of illustration, it references a number of
critical success factors (CSFs) that remain a challenge to the customer. For example, CSFs such as
finance people wanting to play a larger role in strategy formulation, facilitating business support
activities and improving organizational-wide decision-making. In this regard, the article suggests
a number of conversational areas bankers should be having with their customers to
demonstrate a prioritization of these needs over their own product-push agendas. The article
seeks to demonstrate that one’s competitive advantage in the future is likely to be found not in
emphasizing the supply chain of the bank but instead in embracing the demand chain of the
customer. A version of this article—written largely for non-bank financial executives--was
published in the Financial Executive International magazine (June 2011).

Introduction

Bankers have focused on selling products—not on understanding customer needs. But, products are not
the needs of the customer. Value is embodied in meeting the unsatisfied wants of a customer; namely,
its needs or demand profile—the latter being a function of business circumstances and the pain of the
customer. In a world of ever increasing supply—focusing on the needs (both implicit and explicit) of the
customer becomes the critical competitive differentiator. For banks to win in the coming decade there
must be a shift in thinking away from the bank’s supply chain toward an emphasis on the customer’s
demand chain.

This article focuses on just one area where bankers can achieve such a competitive shift. Specifically, in
my decades-long work and discussions with top business/financial executives—the increased role of
finance in organizational strategy, related internal business-support activities and organizational
decision-making processes themselves are together perhaps one of the greatest needs expressed by
both CFO’s and CEOs alike. As such, this article suggests that it is in this very space of unsatisfied
wants—or needs—where bankers should begin there conversational journey into the world of demand-
driven competition.

__________

Let’s start our journey with some customer perspective.

Specifically, over the years, financial professionals have sought a seat at the business table of their
companies. CFOs want to play a larger role in decisions impacting the strategy of their organizations.
Moreover, they see the finance function as a critical source of business decision-support. By helping to
facilitate more effective decision-making it is believed that finance can make a contribution toward
enabling the creation of business value. Unfortunately, as we shall discuss, most finance departments
have failed in making these desires a reality for their organizations. This is the bad news.

But there is potentially good news here as well—especially for bankers. Specifically, rather than
continuing to sell products—and meeting their own supply agendas—there is an opportunity here for
bankers to make a contribution to the achievement of these critical success factors (CSFs) of their
customers. And, this is no implicit or latent demand we are speaking of. It’s one that has been explicitly
expressed time and time again; but, remains unsatisfied for a decade or more.

Copyright 2011, Future Change Management LLC

Performance Gap

Sadly, however, bankers do not appear to be latching on to this performance gap. Instead they insist on
focusing on their own supply chain of products; failing to recognize and respond to this challenge of
unsatisfied customer demand.

In addressing this gap, on the customer front, there are a number of factors that bankers should be
cognizant of. They have all contributed to the failure of finance people to play a larger role in the
business affairs of their organizations. Conversationally, they all have their empathetic value for building
customer-centric relationships. Specifically:

First, there have been the “distractions” of recent financial and economic turmoil—not to mention a
plethora of increased regulatory/compliance challenges. Second, with tighter budgets and reduced staff
there is only so much the finance organization can accomplish. In challenging times, less measurable
actions—like business partnering—are lost sight of; giving an impression of inconsistent prioritization.
Finally, and perhaps most importantly, this finance/business performance gap has been exacerbated by
decision-making support itself. This latter point will be discussed shortly.

But importantly, bankers can help in closing this internal performance gap—thus, helping their
customers to achieve these business CSFs; however, to do so they must focus on having the right
conversations. Specifically, not those focused on product supply but instead those focused on real
customer demand; namely, unsatisfied needs that encompass both the tangible and psychological
arenas of the customer.

For example, if strategy and related business decision-support activities are CSFs of the customer—then
what conversational points should bankers be highlighting in their interaction with customers? How do
bankers become part of this important conversation—rather than remain outliers? How do they
become facilitators—catalysts—in helping to achieve these CSFs? In addressing these questions, let’s
start from some fundamental observations.

Conversational Point #1

First, bankers must address the fact that decision-making (and decision-support activities) often suffers
from short-sightedness. Part of this short-sightedness is caused by the fact that finance people are most
comfortable with cognitive decision-making models, i.e., those that focus on making trade-off decisions
and which appear to bring objectivity into the decision-making process.

Bankers must step out on the ice and discuss the fact (perhaps based on their own failures) that
decision-making processes are not always driven by an understanding and/or accurate articulation of
business needs—and especially when those needs involve emotional elements. In fact, the more
complex decisions tend to become the more they tend to rely on experience, intuition and emotions.
Recognizing it or not, business people are invested emotionally in almost everything they seek to
accomplish from the management of business risk, to the impact that their pricing decisions have on
customer relationships to the restructuring or disposition of their organizations.


Performance Gap

, there tends to be a retreat of business people from their financial counterparts and a widening of the
performance gap between partnering and its organizational realization. Here it is important to share
stories and experiences of other companies—remembering that
there is no greater credibility that one can bring to the table than
what other companies are doing to address similar quandaries. This
The Fundamental Truths is a real value-added opportunity.
No. 1 - All decisions are derived
from diagnosed needs or
prescriptive responses to those Identify
needs Relevant
Decisions
No. 2 - Unsatisfied needs give
rise to pain Understand the Apply Requisite
Needs of the Decision-Making
No. 3 - Decisions are our Business Framework
response to pain Finance
Provides More
No. 4 - All pain is not equal
Effective
Strategy and
No. 5 - All decisions are not
Decision-
equal Support
Activities
No. 6 - Some decisions are more
cognitively-focused

No. 7 - Some decisions are more Closing the Performance Gap
emotionally-focused
No. 8 - Making good decisions is
about goal achievement Bankers can point out that there are two benefits of closing the
performance gap—supported by empirical evidence and some good
No. 9 - Making good decisions is
old fashioned story telling:
about process outcomes

No. 10 - Making the best First, closing the gap is critical for bringing finance closer to the
decisions is about needs business. It is the only way that a partnership of equals can be
assessment and “intelligence” achieved. (This is true for banking relationships as well).
alignment—the performance
gap closers! Second, closing the gap is essential for increased business value.
Specifically, in many cases, decision-making requires we go beyond
cognitive skills.1 Goal achievement is not the single test of success or
failure. Rather the creation (or destruction) of value is part and parcel of the process of decision-making
itself and how that process embraces emotion, intuition and experience.

1
Here cognition and cognitive skills refer to the mental skills of knowing, reasoning, recognizing, etc. Frequently, cognitive abilities are equated
with one’s IQ and are referred to as “threshold competencies”—those necessary to get you in the door but not necessarily sufficient for
personal growth and development; especially as one rises in the organization. Competencies beyond the threshold are frequently described as
“emotional competencies” or EQ. See Frederick C Militello and Dr. Michael Schwalberg, Leverage Competencies: What Financial Executives
Need to Lead, Financial Times/Prentice Hall, pp. 7-21.


Performance Gap

However, in order to address the performance gap, there are a number of fundamental truths to be
discussed. They are both cognitive and emotional—covering both the logical and behavioral dimensions
of decision-making (see side bar). Bankers must not be afraid to discuss emotional needs. There is no
competitive advantage in product knowledge—supply-based thinking. The competitive advantage of
the future is in facing the complexity of demand.

Needs and Decision-Making


Bankers need to point out (perhaps a sign of their new enlightenment) that it is demand rather than
supply that encompass needs and that it is needs (those that are unsatisfied) that drive decisions.
Again, noting their own experiences—successes or failures—it is critical for bankers to express such for
building credibility and trust. Bankers need to point out that if we don’t get the needs of the business
right, or if we express them incorrectly, then it is only reasonable to assume that decision-support
efforts will miss the mark—resulting in a widening of the performance gap. Bankers can play an
important role in this needs assessment process. It is probably safe to assume, that just as supply was
overrated by banks—the same has probably been true for corporate customers as well? In serving their
internal customers—corporate financial executives require a demand-based approach as well.

Looked at another way, and putting on the hat of a psychologist, bankers need to point out (and
demonstrate with their own behavior) that caring about the needs of others is critical to partnering. This
is part of the process of building empathy, which is essential for mutual trust, influence and
collaboration. Effective decision-support is always built on the premise that one must make an
investment in diagnosis (demand) before prescription (supply). In other words, a shift from the supply
equation to the demand equation is an expression of empathy toward the needs of others. But as simple
as this may seem, there are shortfalls in practice.

Decision-Making Shortfalls and Reflections


One such shortfall—practiced by bankers themselves—is the tendency to immediately express needs as
products or solutions. For example, a banker may say your business needs more equity and/or a more
aggressive hedging policy. But these are not needs from the perspective of the company. Needs are
determined by business conditions/circumstances—not product solutions. Bankers need to turn the
focus of attention to business conditions/circumstances—and away from product specifications. In so
doing, they will facilitate such changes in customer thinking as well.

For example, consider a case where a company wishes to increase its credit standing—but perhaps it’s
too small or carries too much leverage? Moreover, it might not be able to increase prices to offset rising
costs. Consequently, this company has both limited funding access and is also experiencing pressure on
operating margins. The company clearly lacks flexibility in its cash flows, e.g., smaller size perhaps


Performance Gap

makes for less diversification,2 debt—unlike equity—must be repaid, and prices are inflexible. This lack
of flexibility is the company’s pain—its unsatisfied needs.

But a trade-off must be faced; namely, the attainment of flexibility comes at a higher cost—the explicit
cost of hedging, issuing equity or becoming larger. Trade-off models are an example of cognitive
decision-making. They appeal to our sense of knowing, reason and judgment. They appeal to our desire
to make decisions less complex—or at least appear to be. However, as bankers we can add to this
cognitive decision-making process and, thus, help our customers develop more effective decision-
support activities.

Cognitive Decision-Making in Perspective


The above example is a cognitive approach to decision-making. Such decision-making approaches have
their appeal especially when one is:

1. Looking at less complex decisions—those that are believed to lend themselves to explicit
tradeoffs, are subject to repetition and are largely devoid of emotions;
2. Seeking to quantify—making more objective—the importance of relative needs and the
responses to those needs;
3. Justifying or legitimizing decisions that initially may have be made by emotions, intuition or
experience but where there is reluctance to admit that was the case;
4. Attempting to demonstrate that the inexperienced can make decisions of equal value to those
with experience; and,
5. Attempting to make complex decisions look less complex and straight forward.

People still tend to trust numbers—what appears to be objective and quantifiable. After the last
financial debacle—and its reliance on more quantifiable models of potential loss exposure—one would
think organizations would begin to place more trust in decision-making based on emotions, intuition and
experience. While this is certainly the case in many professions3 there is no clear evidence that this is
equally true for the financial community. Bankers need to point out both the truths and illusions of
cognitive decision-making. In the end—bankers must go further and bring the human element into the
process of strategy formulation and decision-support. It’s hard to believe, that an industry—that for
years always focused on the importance of relationships—is today failing to embrace the human
element.

2
Studies have shown that when it comes to credit ratings, company size is a more important determinant than even leverage. Company size is
equated with risk concentration.
3
There are many studies which clearly show that more complex decision-making is not based on cognition or cognitive decision-making
frameworks; but, instead almost totally rely on experience and derived intuition. This is consistent with the findings that the higher one moves
up in an organization the more important emotional intelligence is over cognitive skills. In short, as decisions become more complex, the more
we rely on our emotions, experience and intuition to make those decisions and move out of our Comfort Zone.


Performance Gap

Cognition versus Emotion


The above observation takes us to another cause for the performance shortfall between partnering and
its organizational realization, namely, the importance of not recognizing emotions—or the entirety of
human needs—in the decision-making process. Bankers can bring this realization to the forefront of
conversation.

For example, in the flexibility/cost example, an appealing cognitive model, its strength is one of
prescription before diagnosis; and, there was trade-off clarity. However, decision-making is more than
demonstrating quantifiable trade-offs or cognitive skills—even when needs-based. Most decisions are
far more complex and rely on their sorting out by emotional competencies and behaviors. Decision-
making involves human needs and with that understanding comes emotions, intuition and experiential
learning—all behaviors essential for partnering initiatives. In this regard, bankers willing to go back to
their relationship roots can once again lead the charge in bringing back the importance of emotions and
emotional intelligence.

Decision-Making Zones


Another way to view cognitive versus complex decision-making is by embracing the relative nature of
human needs—here adapted from the behavioral work of psychologist Abraham Maslow.4 Here human
needs become more complex as we ascend the pyramid. Corporate executives love to talk about
Maslow and here are some talking points:

First, there are the two bottom rungs of the pyramid, namely, Survival and Safety. This is our Comfort
Zone. Survival and Safety are needs all financial professionals are familiar and comfortable with.
Moreover, business circumstances driving these needs can readily be deciphered. The same can be said
of the responses to those needs. In other words, on the rungs of Survival and Safety, diagnostic and
prescriptive decisions can be made largely within the context of cognitive decision-making parameters.
(It’s important to note here, that this Comfort Zone is fairly universal to financial people—whether they
are business executives or providers of financial services).

4
Maslow’s Hierarchy of Needs is a theory in psychology conceived by Abraham Maslow in 1943. The theory first appeared in his paper, “A
Theory of Human Motivation.”


Performance Gap

Actualization
The Partnership
Zone of Decision-
Recognition
Making

Belonging

Safety The Comfort
Zone of
Decision-
Making
Survival

Second, as we leave our Comfort Zone, and ascend the pyramid, needs get more complex. This is our
Partnership Zone. We now face needs such as Belonging, Recognition and Actualization. These needs
seem more ambiguous, more emotional and more tacit5 in their informational requirements. These
needs also tend to take on different shapes and meanings—they are more interpretive and intuitive and
less repetitive in nature. Nevertheless, it is here—in these three top rungs—where we have the greatest
performance opportunities and possibilities to narrow the partnership gap.

Specifically, one knows they are in the Partnership Zone when one is:

1. Making decisions more about the needs of others than one’s self;
2. Facing decisions that can’t be made by simple trade-offs;
3. Dealing with decisions that are less subject to quantifiable expression;
4. Relying more on emotions, intuition and experience to make decisions;
5. Going beyond professional credibility/reliability and moving into the realm of reflecting the values of
others; and/or,
6. Evaluating decisions less on whether they achieve goals than on the robustness of the decision-
making journey itself.

Let’s look at some examples that clearly fall within the Partnership Zone:

5
Tacit knowledge refers to more implicit (below the surface) knowledge. It focuses on our ability to deal with complex situations. It’s like
trying to explain how to ride a bicycle as opposed to having to construct one—the latter being more explicit or transactional so-to-speak.
Experience and intuition are highly correlated with tacit knowledge.


Performance Gap

First, there is Actualization: Your client wants to sell his/her business. He/she wants to leave a legacy.
He/she wants to be remembered in his/her community. He/she wants his/her children to run the
business after he/she is gone. How shall he/she make this a reality?

This is a complex decision. You are in the Partnership Zone. There are no simple trade-offs here—like
those found in our earlier cognitive model of decision-making.

Second, there is Recognition: There are few companies, or individuals, that don’t get caught up in
rankings of one sort of another. We love recognition. Recognition comes in all shapes and sizes.

Sometimes we want recognition for ourselves, e.g., Fortune’s 100 Best Companies to Work for in
America. Sometimes it’s the recognition of others that has decision-making appeal, e.g., covering one’s
own decisions by selecting a top-ranked originator, distributor or advisor. Here there may be clear goals
but the selection process is fraught with emotions, intuition and experience. There are no clear trade-
offs and the decision-making process (e.g., what we do to be the best company in America to work for)
may yield more value than the actual goals achieved (becoming that company). This too is a complex
decision. You are in the Partnership Zone.

Third, there is Belonging—everyone loves to belong. Remember one’s high-school days and trying to fit
in—a seat at the lunch room table? It’s not much different than being a financial professional—a seat at
the business table?

Belonging is not easy. It requires an element of servant or service leadership. Demonstrating empathy
toward others is the key to trust, influence and collaboration—in other words the realization and
essence of belonging. Decisions surrounding servant leadership are fraught with emotions, intuition and
experience. Here too we are dealing with complex decisions. We are in the Partnership Zone.

Conversational Closing Summary

In short, we cannot utilize a cognitive decision-making framework when high emotional intelligence is
called. This is important for bankers to discuss with their customers. Specifically, relationships are more
than a cost/flexibility tradeoff—they are (or should be) based in emotions; namely, the human element.
(A table to facilitate and focus such conversations is provided below).

For financial executives to be successful in partnering they must move beyond cognitive decision-making
models. Bankers can provide valuable input here—especially if they return to their roots of relationship
banking. With an ever increasing emphasis on the demand side of the equation (and in a world of
increasing oversupply) differentiation will only be achieved by those bankers who are willing to go
beyond cognitive decision-making and enter into the world of applying their experiences, intuition and
emotions to support the business objectives of their (or their customer’s) organizations. The successful
banker of the future will be the one that understands and relates to both the fundamentals and deeper
intricacies of demand-based differentiation.


Performance Gap

Framework Elements Emphasis: Cognitive Decisions Emphasis: “Complex” Decisions

Requisite Intelligence (1) Focus on knowing, reasoning, Focus on emotions, experience
recognizing, etc. and derived intuition

More repetitive and routine Changing shape and scope
Requisite Intelligence (2) Focus on Intelligence Quotient Focus on Emotional Quotient
(IQ) (EQ)

Mental skills (Threshold) Behavioral competencies

Analytical Experiential

Respect intelligence Respect experience
Information and knowledge Emphasize (explicit) Emphasize (implicit) tacit
transactional knowledge knowledge
Collaboration Gain power by possessing Gain power by sharing
Trust Focus on credibility and Focus on the identification of
reliability similar values
Evaluation Focus on goal achievement Focus on process outcomes
Zones Know if you are in the Survival Know if you are in the Belonging,
and/or Safety modes Recognition or Actualization
modes
The Comfort Zone-Supply Focus The Partnership Zone-Demand
Focused

This article was written by Frederick C. Militello, Jr. He is GBS adjunct professor of finance at NYU’s Leonard N.
Stern School of Business. Frederick is also CEO and senior thought leader at Future Change Management, LLC.
Over the years, he has written many books on financial leadership and organizational change. He was large-
corporate division executive and managing director at the Chase Manhattan Bank responsible for
business/financial strategy consulting, advisory and merchant banking activities. He has consulted and advised
financial organizations (and numerous leading corporations) around the world in a wide variety of strategy and
decision-support activities. Frederick can be reached for discussion at www.fcm@futurechangemanagement.com.


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