Making the Most of Citigroup

By Peter Carroll and John Rosen

Cross-selling may not unlock the full potential of mega-providers, but shifting the customer approach to advice from products might.

An unprecedented wave of mergers is sweeping the upper reaches of the financial services industry, producing institutions of enormous size and diversity. Globally, however, nothing approaches the scale and complexity of Citigroup, the recently consummated union of Citicorp and Travelers Group.

This company has the widest array of products, services, geographies, brands and business cultures yet seen in financial services. Will such conglomeration make a difference for customers?

The challenge of cultural integration has already proved difficult on the wholesale and investment banking fronts. But the most significant question facing Citigroup relates to the all-important consumer side. Both parties to the transaction have explained its logic in terms of cross-sell, citing an enhanced ability to sell multiple types of financial services products to customers in each of the business units. Co-chief executive Sanford I. Weill said simply, "Cross-selling is key to this merger." And industry analysts back him up. For Citigroup to show meaningful gains in shareholder value, the company needs to go beyond merger-related cost cutting and realize powerful marketing synergies among its various operating units.

Unfortunately, the record of financial services firms in cross-selling to individuals is weak. Contrary to the wishes of mega-providers, consumers tend to compartmentalize their insurance, banking, investments and credit suppliers, according to Oliver, Wyman & Co. research. They do not, for example, automatically associate their checking account provider with other products, such as mortgages or mutual funds. This makes cross-selling almost as hard as de novo selling in many cases.

The problem is rooted in the product-centered approach of financial services companies, and in a relative lack of sophistication among consumers. Suppliers long have organized themselves around products, encouraging consumers to view financial services in terms of discrete components. Compounding the situation, consumers rarely understand the true nature and purpose of financial service products, our surveys show, and thus are inclined to make a series of somewhat disjointed decisions instead of purchasing within the context of an overall strategy. The result is a pronounced compartmentalization of consumer behavior towards suppliers that is then very difficult for putative cross-sellers to overcome.

But this need not be the end of the story. Consumer surveys also reveal a huge unmet need for advice in financial services. Consumers are looking for someone to help guide them through the maze of difficult decisions. This opens up a tremendous business opportunity for companies -- such as Citigroup -- that can offer integrated solutions. Any supplier that can convince consumers it is offering the right solution for their various financial needs should benefit from long-term, profitable customer relationships.

Charles Schwab & Co. and American Express Co. show that customers will respond well to an advice-centered business model. Though the two companies approach the task quite differently, they also demonstrate the possibility of advancing this strategy by developing an entirely new business model -- one that offers consumers both trusted advice and "best-of-breed" products.

In this hybrid approach to manufacturing and distribution, the financial services provider offers advice at the front end and a variety of internally- and externally-sourced products at the back end. Some products, for example, could be provided by corporate affiliates, while others are sourced elsewhere in the market. From the customer perspective, this approach has the added allure of brand competition. In other words, clients are not confined to the offerings of a single provider who also happens to be their advisor -- a situation that possibly could be construed as a conflict of interest.

Building such a hybrid business model would, of course, entail enormous cultural and organizational complexity. Enforced inter-unit cross-selling has not yet proved particularly effective. Add the complicating factor of brokering competing products, and the difficulty increases. In fact, it may be impossible to create the hybrid business model without clearly separating the responsibility for marketing, broadly defined, and product manufacturing -- an organizational precondition that is hard to effect.

Despite these difficulties, we believe such a new business model offers a better opportunity for exploiting the potential synergies in combinations such as Citigroup than does traditional cross-selling.

Pushing Product

Financial services providers are product-centered in their approach to consumers for three, strongly interlocking reasons. One is that the underlying information systems are product-centered, grounded, as they are, in account record-keeping. In turn, organizational structures have evolved around those core record-keeping systems, giving rise to strong product silos within organizations. Third and most important, financial services firms generally possess a deeply ingrained cultural assumption that they are product manufacturer/sellers and their customers are product user/buyers. It's this mechanistic, product-centered approach of suppliers that seems to have forced consumers to compartmentalize, which makes cross-selling more difficult.

Most consumers, meanwhile, say through market research that they really don't understand financial products. They don't understand the key terms that describe a product and the associated jargon. Nor do they understand how financial products, in combination, can solve or ameliorate real problems that they face, like providing for their children, coping with ill health, retiring happily, and reducing worry. Meanwhile, they are intimidated by and resentful towards marketers who pepper them with arguments that appear to presume that the role and purpose of each product is a given. People in this group include highly educated professionals, people of considerable accomplishment in their chosen walks of life. They are not intrinsically dim.

Such consumers are a clear majority. And, given these characteristics, they often are not comfortable when purchasing financial services, even though they are knowledgeable and self-confident when they buy other things, such as groceries, clothes and durable goods.

Why then does the industry persist in its overall product-centered approach? One reason is that there is a segment of consumers -- a relatively small segment -- which really does understand financial products. People in this group have the sophistication and understanding to select a portfolio of best-of-breed products from a range of high-quality product manufacturers. This segment reinforces the industry's biases out of all proportion to its size. Our research suggests that this sophisticated segment comprises approximately one household in six.

Further, the industry's own market research often misses the point. As the financial services sector has imported marketing talent and techniques from the world of fast-moving consumer goods, it has often unwittingly imported the assumption that consumers already know what the product is and what it is used for. Too many research questionnaires in essence ask: "What products do you have and why did you buy them?" The answers that one gets to such questions are exercises in rationalization. If the research methodology unconsciously assumes the market is product-centered, its findings will drive towards product-centered recommendations.

It is infinitely more revealing, in qualitative interviews, to ask: "What important events or changes have occurred in your life over the last five to seven years, and how have they affected your financial position?" This approach will tease out the consumer's background and illuminate his thought processes far better.

Unmet Needs

The majority of consumers don't want products per se; they want help. They express this desire for help in many different ways, variously asking for a "trusted advisor," "personalized service," "someone who understands my needs" and "integrated solutions." However consumers articulate their feelings, it is clear that there exists a huge unmet need that is more closely related to advice than to products. This unmet need also presents a business opportunity.

The opportunity is very large. We anticipate a revenue growth rate in financial services of 6% to 7% per annum through 2002, with investment-sector revenues growing fastest, at a 12% clip. Meeting consumers' real needs could result in significant market share gain in a sector with attractive underlying growth rates. These market growth estimates are conservative, moreover, predicated on a continuation of today's limited methods of doing business.

In some ways, the more intriguing aspect of the opportunity lies in new approaches. In a recent analysis, we found that almost all consumers suffer a large opportunity cost as a direct result of the fact that they do not know how to purchase financial products and match their purchases to their situation.

We took a sample of consumers and compared the actual pattern of their asset and liability holdings with a pattern created by an independent financial planner. In every case, consumers were worse off with their own plans. In other words, there was a difference between the expected annual return of the optimized holdings and the expected returns of the actual holdings. This difference always worked against the consumer. The opportunity cost can be expressed in different ways, and it varies by segment, but it comes out to foregone returns of between 100 and 300 basis points annually.

This is a huge opportunity indeed. It offers large rewards to the provider who can boost the productivity of the consumer's financial services outlays within the context of an advisory relationship that encourages the consumer to direct more business to the provider. The question is whether the kind of cross-selling anticipated in large multi-line manufacturer/distributors such as Citigroup constitutes the new business model that meets unaddressed customer needs.

Clearly, simple cross-selling is not the answer. Having product silos work more effectively to push their individual products at existing customers in other silos does not address the need for advice, personalized service and an integrated solution. Indeed, aggressive cross-selling only makes the underlying problem worse, even if it temporarily "works" in the limited sense of raising the product-per-household ratio.

Providing Advice

What is called for is a new approach. Instead of a product-push business model, what is needed is an advice-pull model -- at least for some major consumer segments. It is interesting to note that some of the most intriguing and successful emerging business models have important advisory elements. Charles Schwab, for example, has a business model in which advice plays a key role.

In some ways, Schwab is a classic product provider. Its discount brokerage business appeals directly to the small segment smart enough to be able to take proper advantage of direct, low-cost execution of equity trades. But Schwab's lesser-known business model is oriented to consumers who want and need an advice-centered service. In this model, Schwab's immediate customer is the independent financial planner who works with the consumer to structure a customized solution.

Schwab's OneSource account, which provides access to a huge selection of mutual funds, is a key vehicle that enables the planner to compile and deliver the solution. Schwab, by all accounts, is planning to extend the range of products for which OneSource can act as the "integrating" vehicle. The emergence of this utility has vastly empowered independent planners, who have historically lacked the muscle to attract and retain the most profitable clients. Schwab's OneSource and other emerging "utility accounts" may gradually become the basis for an integrated solution for the majority of consumers.

Schwab's planner-oriented business model is agnostic with respect to product. It has an open-architecture back end. American Express Financial Advisors takes a different approach. AEFA is one of the gems of the Amex portfolio, with annual profits, now over $700 million, growing near a 20% rate. While its value proposition is advice-based, as is the case at Schwab, its financial planners are not independent. Amex hires, trains, and manages financial planners in a network of branch offices. Also unlike Schwab, the Amex model is not open-architecture at the back-end. Most of the products that make up the "solution" arising from the planning process are made and delivered under the blue-box brand.

Whether these two firms will be the ultimate winners in the race to meet the financial services needs of most consumers remains to be seen. They do provide evidence, however, that advice-centered approaches are possible and already achieving some success.

Meanwhile, many highly successful product-centered firms are now trying to reverse-engineer advice into their value propositions. This kind of advice still begins with an assumption that the consumer is a product-buyer who needs a few facts about the relevant products in order to make a better purchase decision.

But the most fundamental advice -- call it "situational advice" -- is the kind that a good financial planner can deliver. It begins with a discovery process to understand the client and his or her situation, before proceeding to a product set that is the foundation of the ultimate solution. It is very hard, if not impossible, to reverse-engineer this type of advice into a product-centered business model.

Advice-centered approaches call into question the importance of even being a product manufacturer. There is already a noticeable shift in the division of revenues between manufacturers and distributors of financial services. Mutual funds, for example, have gradually offered more and more of the fee they collect as a percentage of assets under management to those who bring them the account and supervise the relationship over time. This is partly just competition for AUM, but it is also a de facto recognition that distributors increasingly do far more than just distribute. In many cases it is the distributor who adds the most value, often by providing advice. In fact, the term "distributor" itself reflects the product-centered assumptions of the business at large and implicitly, but wrongly, tags distributors as low value-added players.

Segregated Roles

As the distinction between product manufacturing and distribution becomes clearer, and as distribution's role as a high-value front end to manufacturing's increasingly commodity-like back end comes into sharper relief, a more arm's-length relationship between the two will emerge. In some cases, firms will opt to be manufacturers only, selling their products wholesale. Others will be distributors only, buying their products from the wholesalers. Where the two types of unit operate within one firm, the customer-facing units will increasingly seek the latitude to offer products other than those made by their corporate affiliates. Those same in-house manufacturers will increasingly seek alternative sources of distribution.

As this segregation of roles occurs, the basis of competition in each chunk of the business will become clearer. The manufacturers will offer performance, low cost and feature flexibility. They will compete on price. Volume and scale will be important to them. They will try to stay on top of product development trends. By contrast, the distributors, or customer-facing units, will compete on advice, trust, responsiveness and clarity of exposition. They will be educators. They will be centers of excellence in developing ways to design customized solutions that are cost-effective.

The implications of this differentiation between manufacturing and distribution are not trivial. And for mega-firms attempting to accomplish both, the implications could be decisive. Organizing to achieve the desired cross-sell level between units seems like the priority today, but hardly any institution in recent experience has been able to bust silos effectively. Maybe the answer lies in a clearer separation of the manufacturing and distribution responsibilities.

Even in the world of "real" manufactured products -- automobiles or household appliances, for example -- the division of labor between manufacturers and specialized distributors is well-established. Manufacturing firms are typically organized around products and the factories that produce them. Distribution firms organize around customers and markets. Few firms try to do both because the economics -- the sources of value -- are too strikingly different.

Manufacturers make money by squeezing costs out of increasingly efficient factories and inbound logistics systems. Distributors make money by targeting and exploiting market segments with relatively customized solutions and increasing the efficiency of outbound logistics. Recognizing this, the major beverage firms -- Coca-Cola Co. and PepsiCo -- have actually moved to spin off their distribution businesses. It will be a critical challenge for large bank management to manufacture and sell products effectively under the same corporate organization and avoid arriving at the Coke solution of spinning off half the company.

This segregation of roles will be accelerated in financial services by the recognition that an objective advisor is potentially compromised if he or she asserts that the "right solution" just happens to consist of the products made under the same brand. Conflicts of interest -- both real and apparent -- undermine trust, which is the basis for all that universal providers hope to accomplish with consumers. The dilemma for a large, integrated, multi-line company, therefore, is how to respond to this transition.

New Business Model

Cross-sell programs appear not to be the answer. At least not cross-sell programs in the limited sense of sharing customer lists across silos. Nor even in the broader sense of establishing data-based marketing programs to raise high-probability cross-sale opportunities between units, and providing the appropriate incentives to cooperate across the product silos. These programs can be very effective and may well be right for a certain segment of customers, but they do not address the needs of the large, advice-oriented customer segment.

It is more likely that management needs to go back to the drawing board and design a whole new business model. Well-designed market research can reveal what consumers really need -- and what they really want. Segmentation analysis can then show just how many people, representing how much revenue potential, are true product purchasers, and how many are not. The product purchasers deserve a very different approach and a wholly different value proposition than the others. And to a large degree, the product purchasers already have such a proposition. The market today is designed for them.

"The others" are the ones seeking help in an advice-centered relationship. This segment is not monolithic: further segmentation may reveal a sub-segment that is both advice-centered and insistent on building the solution from best-of-breed product manufacturers. Others may be advice-centered but more concerned that the solution arrived at through the advisory process be correct rather than that the products used to build the solution be the best available. Indeed, this is probably a reasonable point of view: the right solution built with adequate products almost certainly is preferable to the wrong solution built with the best products.

If so, a hybrid business model may be a real possibility. Such a model could have an advice-centered front end and a combination approach to product sourcing at the back end, with some products provided by corporate affiliates and others obtained on the outside and integrated into the overall package. This hybrid will call for a new activity that might be termed "vendor management," in which a reasonable balance is struck between internal and external product sourcing.

Citigroup may actually be able to build all of these hybrid business models and operate them in parallel. If so, Citigroup executives can increase the odds of achieving their audacious goals of serving a billion customers in the year 2010, up from 200 million today, and delivering a 20% per annum revenue growth rate through that date. If those goals are achieved, revenues per customer will rise by 80%. Cross-sell will then have been achieved as much by way of better business design as by direct, product-push assault.

Mr. Carroll is a managing director and head of the consumer financial services practice at Oliver, Wyman & Co.; Mr. Rosen is a director in the firm's consumer practice.

Copyright © 2003 by Banking Strategies, published by BAI.

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