Slides for Management Information Workshop, 1 November 2005

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Slides for Management Information Workshop, 1 November 2005

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Title: Slides for Management Information Workshop, 1 November 2005

1
Management Information Its impact on strategy,
resource allocation and
commercial value
Mungo Dunnett, Director Simon Chilvers, Senior
Analyst
2
Background

We are the main sales and marketing consultancy
operating in the UK mortgage market
We have worked with 7 banks and 9 of the top 20
lenders, on issues of
Cross-selling
Retention
Databases
Profitability
Sales management
Alignment of Sales, Marketing and Finance

3
Purpose of today

To explore
1) How the mortgage industry typically uses MI
2) The key MI the business needs and how to
assemble it cost-effectively
3) Creating insight into customer value and
behaviour
4) And using it mobilising MI for commercial
value
To position you more strongly to create value
from properly focused MI and a facts-based culture

4
My approach

What interests us are issues of strategic clarity
and commercial efficiency
The questions we ask are
How can you operate more efficiently?
How can you function more profitably?
How can you generate more profitable revenue?
Right now the greatest period of consumer change
in the history of lender/consumer relationships
Your ability to understand the trends, their
impact, and inform strategic decisions properly
is key

5
Your intention for this workshop

What would you like to get out of today?

6
What's going on? Overview of mortgage industry
usage of management information
7
Before we start what is MI?

Its Management Information
Thats the quantitative stuff stats, trends,
financials
But its also Market Intelligence
A better phrase? The retailers would say so.
It means the whole picture
Who is interacting with us?
What are they buying (or not)?
What are they worth to us?
And crucially why do they behave with us as
they do?
This is consumer insight the steer to
operations and finance, without which youre
flying blind

8
Attitude towards MI three categories of lender

(1) Full information users (honourable minority)
Investment has gone consistently into the
assembling of data
Adequate data quality and analytical platforms
are in place
Consumer research produces robust insights into
customer behaviour, and steers product and
service decisions
Crucially, the organisation expects this type of
information to be available to help in strategic
decisions and resource allocations
But this is not a defining characteristic of
retail FS

9
Attitude towards MI three categories of lender

(2) Spendthrifts (irritating minority)
Significant investment has gone into (usually)
technological information solutions
But the system never worked properly (CRM?
Datawarehouse?)
Or the information providers were never given a
chance
Or the corporate sponsor left
Or the information was too challenging to the
status quo
Tends to be (though not exclusively) the bigger
lenders
Tendency to revert to previous (generic)
behaviours

10
Attitude towards MI three categories of lender

(3) Firefighters (the remainder)
Access to data is limited messy systems, queue
for internal IT resource
No automated data extract procedure succession
of one-off requests to be individually
prioritised by IT
No adequate analytical platform enabling business
users to create fields, or run evolving queries
Research sporadic, inconsistent, and subject to
discretionary budget cuts
Often a characteristic of lenders with volatile
strategies, and historic commitment primarily to
market share and gross lending volumes

11
Frequent mistakes in mortgage strategy

Far too many big plans or tactical
initiatives are based on supposition and
misinterpretation
Not enough proper planning too few facts
Not enough time to think and execute properly
Plans are too often driven by a dangerous
combination of Treasury/Balance Sheet pressure
and the need for gross sales

12
Workshop moment
13
Workshop moment

Do you recognise these types of organisations?
Are these the factors you have seen?
What else tends to get in the way?

14
By contrast characteristics of focused
organisations
15
Unsuccessful companies are indiscriminately busy
Success is getting the right customers and
keeping them
Frederick Reichheld
16
You need facts who do you really want?

You cannot possibly be effective in acquiring and
handling customers profitably without being fully
conversant with the facts about your own customer
base
Some of the most expensive failures in mortgage
marketing have been by organisations going on
hunch and ill-informed decisioning
Do not treat customers the same
Understand the differences between customer
groups what they want, how they buy, and
whether they are worth your precious resource

17
The impact of increased competition and churn

The net interest margin of the Building Society
sector has almost halved in the last 10 years
And the banks are generally declining also,
though protected by issues of brand and
cross-holdings
Margin decline on this scale is usually a sign of
an oversupplied and/or struggling sector
The impact is causing strategic tactical change
Acquisition no longer covers all ills
Product niches are being sought
Distribution channels remain of huge importance
Management information is now key

18
Assembling analytical data Pragmatic and cost
effective approaches
19
1) The corporate dashboard

Familiar as part of the annual planning process
or the strategic review
The purpose create an overview of the businesss
performance, set within the context of the market
Common issues
No consistency of approach
Multiple sources of data without legitimacy
Building from scratch each time

20
Lack of data consistency

Who owns data?
Finance? Marketing? IT? All
three?
An agreed central source is essential
Silo data systems and carefully hoarded techie
resource is unacceptable
Methodological agreement essential
Data quality concerns generally overstated
Critical decision to utilise data that is not
100 correct but is adequately robust for
organisational decisions
This need not tie back to formal outputs such as
annual reports and members roll
Pragmatic decisions are key or nothing will get
done

21
Common themes in regularly reported information

There is no universally accepted series of
metrics but the stronger MI lenders tend to
generate robust information in similar areas
Two themes consistency and relevance
Consistent tracking of the same things, carried
out and then represented in the same way
Allowing like for like comparisons
Relevant to the current activities and commercial
priorities of the organisation
Evaluation, tracking, futures based on clear
trends
Used for activity tracking, Board summaries,
annual plan

22
Essential reporting areas

The levers to commercial performance tracked
monthly to the bottom line wherever possible
Customer, product and channel performance
Tracking of stock, new and closed customers and
accounts
Across a range of fields age band, length of
connection, location, channel
Too frequently simply an overview of total
balances, products sold
The MI must carry commentary, and allow execs to
evaluate tactical activities and identify
strategic issues which most overview data cannot

23
Example reports (anonymised, without commentary)
24
Mortgage account openings and closures
New Vs Closed - Jan to Dec
Opened Acs
Closed Acs
Stock - Calc
35000
30000
25000
New / Closed Acs
20000
Stock Acs
15000
10000
5000
0
Jan
Feb
Mar
Apr
May
Jun
Jul
Aug
Sep
Oct
Nov
Dec
Month
25
Average mortgage account balances
Ave balance of New Accounts 80,000 Ave
balance of lost accounts 45,000 Current Ave
balance of stock accounts 50,000
Totals Stock and Average Balances
Stock Balance (000's)
Ave Bal
Total Stock Balance (000's)
Average Balance
Month
26
Profile of mortgage customers by age band
Stock Ave Balance by Age band
of Mortgage Customers by Age Band
2.6
5.4
10.2
27.7
12.0
Average Balance
15.5
23.3
TOTAL
Age Band
27
New vs. lost mortgage customers by age band
Age Band - New Vs Lost Mortgages
Average Balance of New and Closed Accounts by Age
Band
120,000
100,000
80,000
Percentage of Customers
Average Balance
60,000
40,000
20,000
0
0
18-25
26-35
36-41
42-46
47-51
52-56
57-61
62-66
67
Ave Bal New
New
Ave Bal Clsd
Closed
Age Band
Age Band
28
Profile of customers by length of connection
Ave Balance By LOC Band
Mortgage Customers by LOC
12.9
5.2
4.0
13.3
10.6
17.4
Average Balance
24.0
12.7
0
LOC Band
29
Profile of customers by geodemographic segment
Mortgage Customers by Mosaic Group
Average Balance by Mosaic Group
80,000
30
70,000
25
60,000
20
50,000
Percentage
Average Balance
15
40,000
30,000
10
20,000
5
10,000
0
0
A
B
C
D
E
F
G
H
I
J
K
A
B
C
D
E
F
G
H
I
J
K
Mosaic Group
Mosaic Group
30
Profile of customers by product mix
of Mortgage Customers by Product Mix
Average Mortgage Balance by Product Mix
70,000
9
60,000
39
19
50,000
40,000
Average Balance
30,000
33
20,000
10,000
0
Total
Mortgage /
Mortgage
Mortgage /
Mortgage /
Investment
Only
Insurance /
Insurance
Investment
Mortgage / Insurance
Mortgage Only
Mortgage / Insurance / Investment
Mortgage / Investment
Product Mix
31
New vs. lost mortgage customers by product mix
of New Closed Customers by Product Mix
Average Balances of New Closed accounts by
Product Mix
70
120,000
60
100,000
50
80,000
40
Ave Balance
Percentage
60,000
30
20
40,000
10
20,000
0
Mortgage Only
0
Mortgage /
Mortgage /
Mortgage /
Mortgage /
Mortgage /
Mortgage /
TOTAL
Mortgage Only
Insurance
Investment
Insurance /
Insurance
Investment
Insurance /
Investment
Investment
New Cust
Closed Cust
Product Mix
Product Mix
Ave Bal New
Ave Bal Closed
32
Profile of mortgage customers by area
Average Mortgage Balance by Area
0
Out of Area
Unknown
In Area
TOTAL
Area
33
Branch performance new vs. closed accounts
34
New mortgage customers by area
Percentage of Mortgage customers within each LOC
band by Area
100
90
80
70
60
Percentage of Customers
50
40
30
20
10
0
0-6 mths
7-12 mths
1-2 yrs
2-5 yrs
5-8 yrs
8-12 yrs
12-15 yrs
15 yrs
In Area
Secondary
Out of area
LOC Band
35
And be careful the metrics sometimes shift

The key measurement used to be Average Mortgage
Life
It was seen as a driver of profit the longer the
life, the greater the profit (Customer Lifetime
Value)
But this is now heavily corrupted
Lenders have lengthened mortgage life by churning
their own SVR book
And spinning customer back onto low-margin
products
This is increasing mortgage life but
sacrificing profit
Plus its another entirely generic measurement
The message watch what you measure!

36
Dashboard data summary

The component parts are less important than the
consistency and relevance to key decision-making
Though most lenders ought to know
Products held per customer
Average balances held (inc by sub-segment)
Customer numbers per segment and sub-segment
Product penetration per segment
Open, closed and new accounts (inc trends)
Customers, products and sales per channel
(sub-segmented)
Market share over time (if accessible)
And (of course) profit attached to each element

37
Workshop moment
38
Workshop moment

How good is the provision of dashboard data?
What gets in the way?

39
2) More advanced MI propensity and profitability

Establishing the likelihood of certain customers
to buy, or leave and the actual profitability
of customers is generally done only by the top
15 lenders (with some surprising exceptions)
And yet these are vital activities for any lender
Given the critical strategic importance of
retention, you must know who to focus your
efforts on
And given the profit importance of cross-selling,
you must know who is most likely to buy
The single most important aspect for any company
is profitability without which you cannot make
robust decisions at exec level

40
Propensity analysis

At the heart of sales and marketing inefficiency
is an overly generic approach to customers and
products
All customers deemed of equal importance
Any product sale is a positive step
and staff are incentivised accordingly
Instead of which customers vary in their
likelihood of wanting any given product
And there are very good reasons for this being
the case
Governing principle it is bad business (for you,
and for them) to focus equally on all customers

41
Propensity methodology

Analytical work is a business of diminishing
returns
For the largest organisations, with the biggest
customer bases, significant value results from
intensive (and expensive) effort
E.g. Cards and some of the biggest lenders
However there are many impediments to commercial
value besides the lack of a state of the art
analytical platform
Relatively simple approaches (and investment) is
often entirely adequate if the rest of the
machine is working

42
Commercial implications cross-selling

Cross-selling often seen as the answer to
diminishing profitability and loyalty
And yet efforts often stymied by lack of staff
engagement (multiple failures of CRM investment)
Or effort is simply not put into cross-selling
Or receives such low investment that low
unit-cost approaches kill customer response
However organisations that know which customers
are most likely to buy (and understand why, and
how to approach them) focus their sales,
marketing and servicing activities accordingly

43
Purchase propensity geodemographics (example)
44
Commercial implications retention

The commercial benefit applies more strongly to
the burning bridge of retention
There is close correlation between certain
factors and attrition
Balance
Channel
Product type
The ability to identify customers at highest risk
of leaving is central
To maturity management (comms and/or pricing)
To ongoing servicing (even pre-drawdown!)

45
Attrition propensity by channel (example)
46
Attrition propensity by product mix (example)
47
Profitability analysis

The single most cost-effective element of
analytical work
Without it, the organisation cannot make robust
decisions
And there us a high likelihood that all
discretionary activities (sales, marketing,
servicing) are inefficient
Plus the likelihood that effective activities
cannot be proven and ineffective ones cannot be
identified being the case
And yet this area is enormously controversial
and often gets utterly stuck in circular argument

48
Lack of profit analysis is very costly

For example it is fatal to attempt to manage
attrition without being fully conversant with the
facts about your own customer base
Some of the most expensive failures in mortgage
retention have been organisations going on hunch
and ill-informed decisioning
Do not treat customers the same
Understand the differences between customer
groups so that you can protect yourself

49
The gearing effect on the bottom line (example)

A 10 improvement in the retention of the top 10
customers, together with a 10 reduction in the
retention of the bottom 10, creates a 70
increase in the long-term value of the entire
customer base
Whereas lifting all customers retention rate by
10 only creates a 20 increase in value
Advisory Board

50
You must understand your own profit dynamics

Typical situation relatively poor understanding
of actual profit drivers
Pricing decisions based on broad Treasury
assumptions
Acquisition and servicing costs usually deemed
too hard to determine or too political
Basic costing to 80 robustness will quickly
identify key margin issues
Determine all basic costs
This is not Activity Based Costing hell!
Track customer behaviour retention levels are
key
Revenues balance x margin x longevity

51
Typical profitability profile of customer bases
of total profitability
Deciles most profitable to least profitable 10

Pareto efficiencies nearly always manifest
themselves within a customer or product base.
The top 20 produce 80 of profit.

52
Cutting through the murk

It needs to entail, at a detailed level, the
profitability of existing and recently acquired
business
Needs to be accessible at customer, account and
channel level (e.g. branch, introducer)
Based on income and directly attributable costs
Need not include ambiguous areas (buildings,
staff)
But includes all costs than can be reasonably
allocated
Not on Customer Lifetime Value (spurious)
Not a 100 accurate figure tying back to PL
But a workable tool to identify and rank
customers and product holdings
And attribute a profit figure to specific
business activities

53
Example reports (anonymised, without commentary)
54
Pareto skews will appear at each level of detail
55
Comparative profit of new and closed accounts
56
Effect of mortgages on customers profitability
57
Comparative profit of different mortgage types
58
Comparative profit on identical balance size
59
Comparison between balances and profitability
60
Profit by channel (new, closed, stock mortgages)
61
Profit by area (new, closed, stock mortgages)
62
Customer profit deciles by area
63
Altering profit value of mortgage book in 12
months
64
Typical result of mortgage book analysis
of New Closed Customers by Channel
Average Balances of New Closed accounts by
Channel
New Acs
Ave Bal New
Ave Bal Clsd
Clsd Acs
70
90,000
80,000
60
70,000
50
60,000
40
Percentage
50,000
30
40,000
of total profitability
20
30,000
10
20,000
0
10,000
Branch Direct
Introduced
Telesales
Unknown
0
Channel
Branch Direct
Introduced
Telesales
Unknown

Your mortgage book will show substantial skews
By channel
By customer location
By product type and price competitiveness

Deciles most profitable to least profitable 10
65
Typical result of mortgage book analysis
Account Profitability - New Vs Closed
1,200
1,000
800
600
Average Profit
400
200
0
Jul-03
Apr-03
Oct-03
Jan-04
May-03
Jun-03
Aug-03
Sep-03
Nov-03
Dec-03
Feb-04
Mar-04
Avg New Profit
Avg Clsd Profit
Month

The trends will be there to see
Relating to the changes in your acquisition
strategy
And also to your increasing exposure to high-risk
customers

Deciles most profitable to least profitable 10
66
Typical result of mortgage book analysis
Percentage of Mortgage customers in each Mortgage
Customer Profit decile by
Area
14
12
10
8
Percentage
6
4
2
0
1
2
3
4
5
6
7
8
9
10
Profit Decile
Cust In Area
Cust out of area
Deciles most profitable to least profitable 10

The commercial damage and the correct route to
take will become quickly evident

67
Workshop moment
68
Workshop moment

How accessible is this sort of information?
What have been the impediments to getting hold of
it?
What have been the impediments to actually using
it?

69
Cost-effective IT investment some thoughts
70
It depends on where you are

The larger lenders generally have the data
technology issues sorted out
Ready access to all core data
Stand-alone analytical platform
Analytical software
Single customer view
Availability of techie resource
The issues here tend to be around focus and
mobilisation
For the others getting a basic platform is key
A working analytical marketing database is
essential

71
Common misconception its too expensive

It is often believed to be prohibitively
expensive
Figures of 200k or more for necessary IT
platform
Expensive modelling packages
Impossibility of assembling robust data to feed
in
Ongoing dependence on consultant techies
In order to assemble the information you need
The data can be analysed on Microsoft Access!
(Standard analytical tool for professional
services firms handles up to 1m records)
The issue is not size or technology its skill
and experience

72
The basic functionality necessary

A simple database will allow much of the
functionality of far more expensive systems, at a
fraction of the cost (and complexity)
Feeds off pre-agreed monthly extracts from the
core systems
Reducing IT time required on an ongoing basis
Once the extract code is written, it is the same
each month
Set up to produce a regular suite of MI reports
Automatic queries that extract required data for
regular or monthly reports across the type of
dashboard fields mentioned)

73
Typical table view shown in Access
74
Example query mortgage customers by age band
75
Result of query exported into Excel charts
76
What it allows

Ready access to the data, without tortuous
prioritisation of IT resource
Often the biggest single organisational benefit
Flexibility in viewing data
Basic knowledge of Access allows sales or
marketing staff to run queries
Easy to add flags or fields to the established
structure
Ability to implement direct marketing activities
Extracting of target customers for sales
programmes
Evaluation of respondents
A no-frills solution is easier than you think

77
Consumer insight
78
The poor relation in financial services

Huge investment has gone into quantitative,
IT-driven analytical work
But far less sustained effort goes into
qualitative understanding of the customer base
Very often, research work entails
Customer Satisfaction tracking (unfocused)
Brand tracking (exposed to budget cuts)
Ad-hoc focus group work
Research being seen as a librarian function
without an obvious linkage to commercial value
Compare with Retailing FMCG motor industry

79
Some thoughts on typical FS knowledge gaps

Retail financial services does not have a strong
track record of applied consumer insight
Product innovation despite leanings towards
High Street Retail is not strong
An industry under threat of commoditisation on
price
Systematic search for consumer feedback
especially from other peoples customers is
largely absent
Major organisations have relatively little
understanding of their own customers experience
And often become bogged down in customer
profiling and segmentation without real
commercial application

80
Consumer insight Some reflections from the
Retail sector
81
Segmentation in attitudinal groupings
82
Customers are not what they used to be

Demise of traditional forms of values and
consumption who or what do we learn from?
Customer learning a critical challenge
Implication where do future generations learn
about your organisation?
And who do customers now trust?
Tesco more than the government, the police or
the Church
I have had a longer relationship with my
toothpaste brand than I have had with a person

83
Example values of the under-30s

Self at the centre of their world
Because Im worth it (LOreal)
Let you entertain me
Immediate gratification
Uncertainty is a fact of life
Corporate promiscuity
Consumption as a basis of self-definition

84
How retailers get to know

I would rather see whats lying about their
bedroom than know anything about their age,
gender or ethnicity
It means more to us if we can find out which
other brands they have used in the past three
months than knowing where they live and what job
they have

85
Essential customer research generics

The research function needs to be asking the big
organisational questions
Preferably ongoing though usually only
occurring at major strategic review time
The first step is done the least frequently
Ask what business are we really in?
What do we want to be known for?
Unless you think radically at this stage
You will never be different
You will always be chasing the market leaders
You will probably have to cut price (again)
You are strategically exposed (compelling
reason..?)

86
Essential customer research specifics

Can you be sure you know what your customers,
prospects and lost customers think about your
service from first enquiry to redemption?
This is phone interview work
Dont do it yourselves, or you will not hear the
truth
A small amount of customer research is guaranteed
to reveal uncomfortable insights about your
business
Why people like your organisation and dont
like it
How you compare against other lenders
And what you need to change to increase results

87
For example the customer experience

No amount of fancy marketing can conceal an
unsatisfactory customer experience
Its worth putting yourself in your clients
shoes what would you think of the contact you
have from your own organisation?
How fragmented is it?
Does it feel like one company, or many?

88
What you need to know

It is essential to know the value of the various
customer-oriented options you could take
i.e. Who is going to respond in certain ways?
What do you offer, compared to the competition?
What is the cost of beating the competition?
What, therefore, is the cost-effective strategic
route?
This applies to customers service experience,
product preferences, loyalty triggers
E.g. Who leaves you and why?
Who doesnt buy from you and why?
What do customers think of the way you handle
them?
And for instance what about introduced
customers?

89
Again, it depends on where you are

The larger firms will have large research budgets
The issues may be more to do with the
mobilisation of commercial value
Or with the consistency of the research approach
For other organisations as with the Access
database example it is a question of having to
at least have the basic information
It would apply to any local business
What do my customers prefer?
What do they like better about my competitors?
What ought I to focus my efforts on?
The alternative is invariably the generic and
inefficient

90
Workshop moment
91
Workshop moment

How strong is the commitment to developing strong
customer insight?
What are the issues here?

92
Turning MI into commercial value Mobilising
activities
93
The message

Focus! Focus! Focus!
Sales, Marketing and Customer Service must focus
on the customers that count, and the activities
that matter to them
But its how you do it that makes the difference
And indeed whether you do it

94
Linking the three key functions

It is essential to link all three activity areas
Failure to do so is at the heart of CRM failure
These are the key drivers of incremental revenue

95
Applies to large and small but especially large

Repeated picture within retail FS organisations
Analytical data is available but is not being
used to steer activities
Activities that do occur are not evaluated
robustly or evaluated at all
Activities are launched without adequate customer
knowledge or in the face of research findings
Firefighting and sales pressure mean reversion to
historic activities and behaviours
The result insufficient focus, differentiation
and commercial impact
Resources poorly allocated and ROI poorly
understood

96
The hardest step of all integration, and
implementation

Getting sales, marketing and service teams to
work together is critical and desperately
difficult
All the tools can be there analytical work
research salesforce marketing budget call
centre multiple contact channels
And yet the customer experience continues to be
fragmented and unsatisfactory
And sales efforts are not properly integrated
with market intelligence and marketing activities
Because people work in silos!
The cultural issues are a massive impediment

97
Workshop moment
98
Workshop moment

Does this sound familiar?
How good is your organisation at linking
departments together?
What tends to get in the way?

99
Creating a facts based culture
100
The massed ranks of inertia

It would be acceptable to our Board if we were
to do a u-turn on our acquisition strategy
Often the best natural advocate for information
and evaluation is Finance
Not Sales (bonuses under threat?)
Or Marketing (unreliable witness rightly or
wrongly)
Essential to have senior support
Or the usual prioritisation will perpetuate

101
Key measure return on investment

Success is determined by
Incremental profit over time (or incremental
surplus to protect and grow solvency)
Generated by a combination of product holdings,
margin and longevity
Sales, marketing and servicing decisions ought to
be driven by these factors
But are they understood?
Must track the responsiveness of customers to
different activities
Are activities properly evaluated?
Do they drive incremental profit?

102
Runs on the board and appetite for learning

Financial Services is awash with pilots
Low-investment test culture
Or a cunning means to incremental implementation?
Execution of pilots often flawed
And subsequent evaluation often missing
It is essential to trial information-driven
activities
They justify both the information-gathering
And the ROI from the sales and marketing activity
But the successful organisations tend to adopt
analytical and evaluative approaches as standard
Robust justification is expected
Failure is acceptable as part of iterative
learning

103
Summary thoughts
104
Summary some themes to consider

Commercial strategy is dependent on robust
insight and evaluation
Must identify the key targets for resource focus
Must understand what makes these customers tick
Must track the financial effect of different
activities
It is vital that you do whatever you can to avoid
taking margin straight off your bottom line
As the industry compresses, the dynamics around
sales volume and market share are changing
Sustainable profit now depends on cost-effective
targeting of specific customers, through defined
contact processes, with specific messages
Cannot be done with generic approaches

105
Management Information more important than ever