Testing the Waters

by Steve Klinkerman

Even though the economics of online projects are highly uncertain, Wachovia Corp.'s Lawrence Baxter says progress is still possible.

Financial institutions are renowned for their meticulous attention to all the details that underlie their complex operations, and their executives are understandably obsessive about facts, figures, plans and measurements. But this fastidious mindset has proved wholly unsuited for the Internet, whose developmental throes are constantly upending assumptions about what works, what pays, and what's coming next.

It comes down to making reasonable judgments and staying alert in conspicuously fluid circumstances. And that's the aim of Wachovia Corp. executive vice president Lawrence Baxter. Head of the Winston-Salem banking company's eBusiness division, he's responsible for developing online strategy, orchestrating corporate e-commerce support, directing Wachovia's Web site and deploying new technologies such as smart cards, wireless and Internet payment systems.

During a recent interview with Banking Strategies, Baxter acknowledged the hopelessness of trying to precisely evaluate online business proposals and quantify their results. But he says strategists must recognize that the anticipatory nature of online development will keep forcing institutions to take action without the luxury of having airtight business cases.

Still, the former professor at the Duke University School of Law insists that many tools are available to help companies clarify their decision processes and measure the returns from online projects. He cautions, however, that the human factor ultimately figures strongly in selecting, managing and measuring online projects, with factors such as collaboration, diplomacy and communication exerting a huge influence.

The conversation took place at BAI's profitability and performance measurement conference, held last March in Orlando.

Banking Strategies: Online performance measurement is often portrayed in challenging terms. Why?

Baxter: It reflects, first of all, the extremely complex environment in which projects are being deployed. In customer-facing activities, for example, the Internet is but one part of an overall delivery structure that includes branches, call centers, automated teller machines, and so forth. It's difficult to isolate the revenues and expenses attributable to a particular facet of that system.

Fortunately, we have the benefit of years of diagnostic work done on traditional delivery channels, for example in activity-based costing, and that expertise can be transferred into the online environment. It is truly remarkable what we have learned, in terms of the comparative costs between Internet-based transactions and those conducted through other channels. Rich information is emerging that puts institutions in a position not only to evaluate installed Web capabilities, but also to start orchestrating the entire suite of delivery channels.

At the same time, much of the work we are doing is anticipatory in nature, meaning that we are basing investment decisions on hypotheses about future customer requirements and competitive conditions. Online ventures typically encompass multiple business units, moreover, introducing coordination challenges. We need to learn far more about the drivers of online customer behavior. And there's a greater obligation to reconfigure projects on the fly in response to changing technologies and business models.

For these reasons, the exercise is by no means precise. You can sit down and write up a capital expenditure plan for a new Internet-based project, and get lots of feedback from the relevant lines of business. But when you ask the line-of-business sponsor to try to come up with projected profitability or even projected revenue, it becomes almost an exercise in fantasy to put those numbers down on a page.

Banking Strategies: So how do you decide?

Baxter: There is still a lot of intuition involved — intuition guided by market trends; by the collective judgment and business instinct of people within the company; by feedback from the field; and by increasingly sophisticated metrics. Most of the time, we've made decisions to fund Internet initiatives even when it was clear that no one could say, with any degree of certainty, that there would be a payback.

You may ask, "Why is it that we feel so compelled to do something in the face of such uncertainty?" I think about this quite a lot. The analogy I would use is a major climatic change.

If the earth suddenly entered, say, a cycle of global cooling, then you would have to winterize your house. You can't show any return on investment for the winterization, but it becomes a condition for survival. Similarly, Internet delivery has become a condition for survival in financial services. You know you have to do it.

That said, there's a certain balance to be struck. Each time a new technology emerges — for example, electronic billing and payment, wireless and, most recently, account aggregation — there's a tremendous temptation to upend corporate priorities and charge after the very latest thing. That will lead institutions astray, especially those with limited research and development budgets.

One way to curb this tendency is to distinguish between what customers say they need and what they really value enough to pay for. If it were as simple as providing those capabilities that customers clearly are willing to pay for today, however, then you could manage by financial dashboard — everybody could go on autopilot and rely on survey results and financial metrics.

But it's not that simple. It took roughly 20 years before people fully incorporated ATMs into their financial lives, for example. And household adoption of the personal computer for banking purposes is still underway. So you have to be anticipatory, and steer in certain directions even before customers fully know what they will truly come to value. This requires good judgment and a steady hand.

Banking Strategies: How do you explain this to Wall Street?

Baxter: I think analysts are looking for two things in presentations about online activities. One is a plausible premise, an understanding of the environment, the competition, and the customer; and then, a reasoned thought process as to where you are going to take the business. They want to hear a coherent story that tells exactly why you're doing this, how it fits with your overall strategy, and why you think it will ultimately yield results.

I doubt that even the most demanding analysts expect complete certainty of success, or even a high degree of probability. But they do want to see a thoughtful institution that is serious about its strategy, steady under fire, consistent, and committed to executing.

Banking Strategies: Within the company, however, there's bound to be a lot of different project options and points of view. How do you make e-business investment decisions systematically?

Baxter: At Wachovia, we've developed an underlying set of focal points that are in keeping with the philosophy of the balanced scorecard, which measures success factors such as internal development and customer satisfaction — factors beyond traditional financial metrics.

Translating these into more concrete decision-making led us to develop a set of criteria, or filters, through which every online project is evaluated. They are quite recognizable concepts, such as, "Will this project add revenue? Will it reduce expenses? Will it retain current customers and acquire new ones? Does it align with the overall strategy of both the company and the relevant lines of business?"

This is even more complex than it might sound, because on any given project, the overall enterprise's weightings of the decision criteria might vary from that of the sponsoring business unit. We may take a paternalistic view and redirect project resources "for the good of the company." But the denied line of business will turn around, justifiably, and say: "Wait a minute, we have a mission to accomplish. Explain why you put us number 10 on the list instead of number two." It becomes a complex exercise in diplomacy.

Compounding the challenge, business conditions are now more volatile, in terms of the pace and magnitude of change. You can reach agreement through complicated negotiations in February, only to find by June that a business unit is very upset because the competition is rolling out a particular product that the unit's managers wanted to develop. It's one of the truly difficult challenges in a diverse company.

Banking Strategies: How do you handle mid-course corrections?

Baxter: We divide projects into logical phases. At the inflection points, we'll assess whether a venture should proceed to the next stage as planned, be modified to reflect changing conditions, or perhaps even be suspended. To get the depth of business unit feedback necessary for these evaluations, we've worked to de-stigmatize failure. It's better to find out early about reversals and re-deploy resources into more productive uses.

If I may add, this underscores the need for a more flexible mindset. If you're not comfortable with the fact that you may have to revisit something every few weeks and re-discuss or re-negotiate it, then it is going be very difficult. Business dynamics are especially fluid in the online space, and they likely will remain so.

That leads to another skill that I think is escalating in importance, and that is the interpersonal skill. It's somewhat of a paradox that in an age of technology, people matter more than ever before. I don't mean to diminish the technology, but ultimately you can get it installed. The harder issue is managing the interactions among the people involved, dealing with their expectations and, in particular, creating a sufficient level of trust so that when things change, they remain open to discussions and don't feel that you are double-crossing them.

There's a temptation to think that you can solve a problem by broadcasting e-mail messages to a throng of people and declaring, "It shall be thus." But in fact, the only way you can really deal with complicated problems is to invest face time — and not only when urgent matters necessitate such interaction.

You need a continuous dialogue. Electronic messaging technology, though good for certain basic communicative functions, is not good for managing this kind of complexity. I sometimes think that if we occasionally declared a moratorium on e-mail and voicemail for a week and spent more time talking directly to each other, we might be better off.

Banking Strategies: How do you measure the success of an online venture?

Baxter: We're developing a post-initiative metrics system that's intended to illuminate project economics and foster accountability for results. But it's far easier said than done.

People are more enthused about moving on to new projects than pausing to measure the success of old ones. Also, care must be taken that people don't overreact to negative findings. It's in the nature of business that we must continue to take on new projects, even when prior results are mixed. Hold people accountable, certainly, but don't punish them for undertaking justifiable risk.

Banking Strategies: Are there any other informational tools that you use to measure and manage online projects?

Baxter: We're vitally interested in customer information, behavior and feedback. We're investing a lot of energy in understanding market trends, and we pay serious attention to the output of research organizations.

Like most big institutions, we've worked at length to build a data warehouse replete with the analytics and metrics needed to illuminate issues such as segmentation and customer profitability. We also use focus groups and surveys, especially with the Internet.

We also pay attention to employees. We've instituted a company-wide performance management process that's based on the sincere belief that people are the real enduring asset, and that managers must play an active role in developing them.

Banking Strategies: How does all of this translate into specific project priorities at Wachovia?

Baxter: One corporate priority is what we call "simplified sign-on," or a process that allows customers to enter their user names and passwords only once in order to access all of the different facilities available online.

We know this is urgent, not only because customers tell us that they find it irritating to have to re-enter their passwords multiple times, but also because various business lines have premised their strategic initiatives on this. For example, financial planning can only be effectively discharged if the full view of the customer's relationship with the institution is available.

Certain cost-saving initiatives have also quickly risen to the top of the list. Some fall under the heading of process digitization. Here's what I mean. Once a critical mass of customers embraces the fundamentals of Internet banking, then you have further opportunities to scale back paper-based activities. You introduce things to customers in stages.

That's very clearly the case with electronic statements. For customers still operating primarily on paper-based media, it can be unthinkable to do without that monthly envelope in the mail that contains last month's processed checks and a statement of account activity. Once people get comfortable online, however, they reach a point where they welcome electronic statements and the accompanying relief from paper clutter.

There are other projects that, though important in the long term, are not universally perceived as requiring action within the next three months. And you tend to find that things get complicated when only one section of the company views a project as being important.

That's where the need for diplomacy enters. I don't think it's unhealthy to have disagreements about project priorities, but I do think it would be unhealthy to deal with them in a dictatorial or authoritarian way. The business units have their own momentum and convictions. Unless their managers understand and trust that it's safe for them and constructive for the company to wait, they will try to accomplish their online goals by other means. So the interpersonal skills become much more important.

Banking Strategies: What about account aggregation? Is that a priority for Wachovia?

Baxter: Customers certainly seem to appreciate the convenience of having all of their information in one place. But if you stop and think about the depth of functionality required to make aggregation truly meaningful, the picture becomes more complicated.

It's not enough to provide account balances. The next level of functionality requires the rapid compilation of rich, deep customer information from a variety of sources. It takes time to develop a system that can do this.

We've started with the wealthier clients because the cost to provide aggregation in their case is justified. They may not necessarily pay for the service outright, but they implicitly value it by saying, "We will put our assets under your management if you can provide this kind of reporting and planning facility."

As the economics improve, we'll certainly want to roll out such capabilities to a wider circle of customers. On the retail end, we'll probably introduce screen-scraping as an initial means of satisfying the expectations of customers who have gotten pumped up by all the announcements.

Ultimately, banks will have to make some serious decisions about the level of account aggregation services that will be permanently offered to customers. The payoffs certainly are not clear at this point. If banks don't keep their heads on this issue, they'll end up giving away an expensive service and finding that it doesn't sufficiently increase revenue.

Banking Strategies: What are your risk management priorities?

Baxter: The single biggest risk is the security of customer data and transactions. I think that the essence of a bank is safekeeping the customer's assets: whether it's putting yesterday's bags of gold in a vault or protecting today's digital code on a server.

The second is operational risk. The more dependent upon online channels customers become, the higher the visibility and impact of any operational outages. If you're going to digitize customers, you'd better honor their expectations.

Now, how do we manage these risks? One way is by adopting more of a network consciousness. The old idea of trying to confine vital data at the mainframe level and protect it with ferocious firewalls is giving way to a much more subtle, complicated assessment of the growing circles of risk, which extend all the way out to application service providers and external data warehouses.

Operationally, we're developing a better understanding of what it takes to provide robust online service on a 24/7 basis. It's a delicate blend of automation and human capital.

For example, we couldn't cope with our e-mail volume without a good software management system. But automated responses, no matter how sophisticated the algorithms and filters, will never substitute for a concrete answer from a representative in certain situations. So we have to develop the human side, and help the business units understand that it's not simply a case of hiring call center operators. Rather, it's a case of transforming bankers and investment advisors into people who also know how to handle complex e-mail questions.

Certainly, there's the risk that a new business model won't work out. But the experimentation involved in Internet-related projects is not that far removed from what goes on in other areas of the corporation. After all, banks are constantly entering and exiting various lines of business.

Banking Strategies: What's your attitude when you walk in to work each day?

Baxter: Sometimes I'm absolutely ebullient. I can get really excited about the possibilities that technology provides for our business. Many of these moments come when I hang out with the younger people at the company, because most of them are technology optimists.

Sometimes I'm defensive because it is clear that, if pressed, I cannot fully justify some of our investments to hard-nosed questioners who might ask, "Yes, but what is this going to mean for profits next year?"

But in the balance, I end up mostly being cautiously optimistic. I believe that the Internet has already had a profound effect on financial services and that it will continue to change the complexion of the industry, if not its fundamental ground rules. The companies that persevere will find they will have, in essence, transformed themselves to compete in the 21st century.

Banking Strategies: What advice do you have for others who are managing e-businesses in financial services?

Baxter: You need a disposition that leaves you comfortable with a fairly high level of uncertainty — comfortable not only with yourself, but also in knowing that others know that you don't have all the answers.

You also have to be willing to look outside the company and recognize when the market is changing. It's quite easy to become buried in the day-to-day operations, and the moment that happens you are in serious trouble. You have to challenge cherished assumptions and, most important of all, you have to reserve time to think — not just react.

It's easy to become complacent — to think that the established way of doing things remains the right way. It has always been important to rise above the demands of the moment to gain strategic perspective, but the urgency of doing so increases in conditions of rapid change. Being willing to ask questions that might seem ignorant or uninformed is essential. Technology and business models are evolving so fast that you can't assume your knowledge remains current for long.

Another thing that I think is very important is the ability to inspire, because you're going to be working with a lot of people who are going to have to make a leap of faith. You've got to constantly talk with people face-to-face, articulate and explain the vision, hear the concerns, and have a candid dialogue. There has to be a shared level of trust and passionate commitment if complex and risky initiatives are to be successful. This element of leadership seems to be more critical than ever.

Mr. Klinkerman is editor-in-chief of Banking Strategies.

Copyright © 2003 by Banking Strategies, published by BAI.

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