The Dual Track
By
Thomas P. Johnson Jr.
Leadership in financial services depends on a joint pursuit of differentiation and efficiency.
One of the great quests in banking over the past decade has been to find distinctive approaches to the customer that build relationships and minimize price competition. Customer relationship management can be seen as an attempt to actualize this vision through technology.
The good news is that a significant portion of the customer base is willing to deepen relationships. According to a recent consumer study by BAI Research, for example, roughly two-thirds of depositors are receptive to consolidating their accounts with a single provider.
The catch, however, is that the financial resources that can be brought to bear by certain customer groups may not be sufficient to justify the cost to serve them. A relationship-intensive approach entails outlays for highly-trained reps, sophisticated information systems, customized products and packages, and extensive personal interactions with customers. Underscoring the peril of taking an overly broad approach, BAI Research findings indicate that only one-sixth of total customers possess both the receptivity and the resources that warrant intensive relationship building.
Conversely, perhaps five-sixths of the customer base does not strongly lend itself to this type of treatment, which provides another indication of why cost reduction is a continuing theme in the industry. After all, only the low-cost providers can come out on top when customers view offerings as commodities and base decisions largely on price.
In that light, it makes sense that cost reduction was the prime rationale cited in the recently-announced merger between Bank of America Corp. and FleetBoston Financial Corp. The banking industry still has more capacity than it can profitably deploy, a point driven home by Bank One Corp. chief executive Jamie Dimon at BAI's Retail Delivery conference last November. "Waste is a disease that will cripple companies," declared Dimon, who estimated that half of the industry's back office capacity is redundant.
As institutions strive to apply high-touch resources where they will do the most good with customers, therefore, they must also strive to streamline the commodity aspects of the business.
This is not to say that mergers are necessarily the only answer to cost reduction. One emerging efficiency avenue, for example, is offshore outsourcing, also known as "offshoring." As shown in this issue's cover story, consultant A.T. Kearney estimates that the U.S. financial services industry potentially can save $30 billion a year in operating costs by shifting functions overseas, although security and political risks certainly must be kept in mind.
There will never be a perfect answer to the dual strategic obligation of differentiation and efficiency. Yet those institutions that do the best job of mastering this dual track will surely parlay that expertise into industry leadership.
Mr. Johnson is publisher of Banking Strategies and president and chief executive officer of BAI.