It's Time to Rationalize the Channels

By Kenneth Cline

Wachovia seeks to align its commitment to customer service, support for customer segments and an evolving understanding of the cost-to-serve.

In their efforts to satisfy every customer demand for convenient access, banks have saddled themselves with enormous distribution systems that sprawl across multiple channels — branches, call centers, ATMs and the Internet.

The now burgeoning expenses related to supporting these systems are forcing the need to coordinate and rationalize customer service and cost.

Wachovia Corp. began addressing this challenge head-on last February when it hired Jonathan Witter as head of General Bank distribution. A former McKinsey & Co. consultant, Witter's brief was to determine how the Charlotte-based bank could extract the maximum performance and efficiency from one of the country's largest retail distribution systems (3,200 branches, 5,300 ATMs and 34,500 employees). His mission was formalized in March 2004, when Wachovia created an Office of General Bank Distribution.

So, how's it been going? In a December interview with Banking Strategies, Witter said he was about eight months into a three-year program. While it's still too early to access bottom-line impacts, Witter can point to encouraging results in two areas: improved coordination in Wachovia's small business banking program and a more analytically rigorous approach to branch refurbishment.

Yet the tough decisions clearly lie ahead. The crux of the problem is that customers have been embracing all delivery channels while abandoning none. As Witter explains, customers may be increasing their online banking activities, but they continue to patronize branches, ATMs and the call center. "The absolute number of transactions in each channel is increasing year over year," he says.

Faced with rising overall distribution costs, institutions like Wachovia have realized they need to do a better job of matching the services they offer to discrete customer segments. More specifically, the institution's cost-to-serve must be better aligned with the economic value contributed by each particular segment. At the same time, Witter is adamant that service quality levels must not be degraded.

How to square this circle? Wachovia's approach is to focus on delivering to each customer segment the products and services they care about most. "This process is all about asking the tough questions around what drives customer service," Witter says. "We need to over-invest in the things that matter and not worry as much about the rest."

Easier said than done. Ascertaining the true drivers of customer service and satisfaction requires applying a rigorous methodology of analysis, testing and measurement to key issues that affect customer service. As Witter demonstrates in the following discussion, Wachovia is taking the first steps down that path.

Banking Strategies: What are you trying to accomplish with your distribution efficiency project at Wachovia?

Witter: In general, our goal is to create the most effective distribution system that we can for our customers. That means making sure our individual channels are working well together, not necessarily from just a systems perspective, but from a business perspective as well. Our processes, incentives and systems should encourage customers to naturally shift between branches, contact centers, ATMs and online. And these channels should work well together.

It also means we will have deployed our people in a way that fits best with the underlying work to be done. Our service people need to be deployed in the best way for meeting customer needs, and our sales people should be deployed where there's the greatest opportunity.

It also, quite frankly, means taking a hard view of the efficiency of our various channels and questioning some of the traditional operating norms. We need to figure out places where we're doing things that don't really benefit the customer and where we can reinvest that money better to serve those folks going forward.

One big problem we've discovered in our own research at Wachovia is that while channel usage may be shifting over time on a relative basis — more Internet and less branch usage, for example — the absolute number of transactions in each channel is increasing year over year.

Banking Strategies: So, overall distribution costs keep going up?

Witter: That's right.

This gets at the core of what we're trying to do here. Banks have assumed that as they continue to add functionality, sales and services options, customers would shift from more expensive channels to less expensive ones. That's how they justified the investments.

But the reality is, we've been only half right on that. While customers have definitely made use of the new channels, they have rarely abandoned the old ones. In fact, they have shown a real propensity to interact with their financial services providers more frequently rather than less.

In a world where growth rates are increasing like that, you face some painful choices. You can become more efficient in providing the services or try to get more business from existing customers or be prepared to make less money. I don't think Wall Street would give us a lot of latitude on that last option. So, I think the real challenge for us is providing good if not better customer service while still doing a better job of managing the costs.

Banking Strategies: One of the implications of what you're saying seems to be that, at some point, you would have to start treating customers a little differently in order to better match your cost-to-serve against the economic value of the customer segments. Can you do that without alienating customers?

Witter: It all starts with where you ground yourself, your "true north." At Wachovia, there's no doubt that true north is customer service. We will always start from that point.

This process is all about asking the tough questions around what drives customer service. We need to over-invest in the things that matter and not worry as much about the rest. The way you get there is through a lot of careful work, a lot of small steps. It's a very gradual and evolutionary process.

We're not looking to radically change things overnight. Rather, we're trying to understand how our customers use our various channels today. And we're trying to understand in a very granular way the kind of service we're providing. Using customer data, we'll try to understand how attitudes and preferences change over time.

So at Wachovia, you'll see an evolutionary process. On the margin, each year, we'll slightly change our priorities and focus. But I would not anticipate something that's jarring to customers. As we make these small changes, we will then monitor them very closely. If it looks like we're doing something that adversely affects the customer, we'll stop.

The more likely scenario is that we'll realize we're providing things to customers that they don't really value, and they'll appreciate that we're over-investing in the areas that count to them. That's the paradigm shift we're after. This is not about reducing costs or cutting customer service. This is about making sure we're investing heavily in the things that matter most to customers.

Banking Strategies: But banks still have the problem of ever-increasing costs in their distribution channels…

Witter: That challenge is certainly out there. At Wachovia, for example, distribution costs in the General Bank represent about 25% of the total cost basis of the company.

But I think banks will get into trouble much more rapidly if they start to do things that cause a lack of new customer acquisition or an increase in customer attrition.

It's easy to take an initiative like this and assume it's all about cost containment. And banks do need to do a better job of managing that area. But doing it to the detriment of customer acquisition and service will put you in a worse spot than if you hadn't tackled it at all. I can't stress enough the importance of getting this right while keeping a strong focus on service.

Banking Strategies: How far along are you in this project and how long will it take for some of these programs to show results?

Witter: I would expect the entire journey to last about three years, start to finish. We're now about eight months into that journey. On the other hand, you don't have to wait until the end to see real benefits for your customers, employees and shareholders. There are some things we're doing today that have shown benefits right away, such as our branch refurbishment program and the effort to elevate our small business banking effort.

Banking Strategies: Which of those two projects best exemplify what you're trying to do?

Witter: They're both great examples. The small business effort is probably more illustrative of the type of coordination and cooperation that banks really need to achieve when they start thinking about operating across channels. It represents a difficult organizational and cultural change because of the number of silos you're breaking down.

The refurb program, on the other hand, demonstrates the degree of science, discipline and rigor that we need to bring to our processes. This constitutes a different type of challenge — a more analytical challenge.

Banking Strategies: Let's take small business first. What were you trying to do there?

Witter: About four or five months ago, we sat down and took a hard look at how we were doing in small business — at what was working well and what wasn't.

During the course of that work, we sought to understand our small business customers in a very different way. For example, we tried to understand how they viewed each of these channels and used them. We also looked at how different channel capabilities and offerings influenced their choice of providers. And we tried to understand how all that equated to that customer group's overall profitability, which then told us what we could afford to spend to better serve those customers.

In doing all that, we recognized some very important truths, such as how important the branch is to small business customers. We also recognized that having a high degree of service was important. From an economic perspective, we understood that customer acquisition was the real challenge when it came to this segment and we needed to think about a strategy that had a much greater focus on that.

And so, for the first time, we pulled together around one table the head of our small business segment, myself, representatives from our call center and people responsible for our Internet, Intranet and Voice Response Unit capabilities. We asked: What is the role each of us should play, and what are the points of connection that have to happen?

We decided to focus our small business bankers very heavily on the acquisition of new small business customers. We teamed those bankers with remote bankers who could be a more regular source of contact for customers and who could help with things like scheduling appointments and doing research for customers. So, we gave customers what we thought was the best of both worlds: a local face and local contact along with someone they could reach literally around the clock if that banker was out with other customers or on other calls.

We also teamed those folks with particular branches, because we knew that for our small business customers being able to walk into the branch and get good service was quite important. And we developed a short list of Internet and Intranet capabilities to support the strategy.

There wasn't one magic thing that we did here. But by bringing all those different decision makers and channel owners to the table, we were able to get incredible alignment in execution against a common strategy and real cooperation across the bank.

Banking Strategies: Can you report any revenue gains from this?

Witter: The strategy is still very new, so it's probably premature for me to comment on specific results. We're still in the process of implementing some of this. But I will tell you that anecdotes from the field and other research tells us it's been received very well by customers. And, preliminary results show impressive growth.

Banking Strategies: How does the branch refurbishment project exemplify some of the other principles you've mentioned, such as analytical rigor?

Witter: If you think about the challenge of branch refurb — where should I be spending money to change in some way the physical appearance and functionality of my branch? — it's actually not one problem or issue but six or seven different issues. There are different types of things that I could spend those refurb dollars on.

For example, I could try to maintain the basic functionality of the branch or improve it to some brand standard. I could also spend money to get top-line growth, for example, by expanding the branch to accommodate more customers. I could also see some improvement with preventative maintenance. Caulking windows and fixing roofs is a simple way to prevent rot and mold damage, all of which are very costly to fix. So the first complexity is that all of these types of spend are very different.

The second complexity has to do with understanding the return you're getting from these activities. When you refurb a branch and then track the results, lots of other things happen to that branch during that same period of time. For example, new competitors move in, you launch pricing promotions, and local management changes. So from a tracking and evaluation perspective, it's very hard to distinguish what portion of the result comes from the refurb program and what is caused by something else.

The third problem is how you decide what branches to refurb at all. You might decide you want to refurb some branches because they're not in great condition and you feel they're somehow offensive to your brand. Refurbishing other branches might provide a real opportunity to do better with your customers.

So you need to design a program around all these complexities. At Wachovia, we have developed very strict guidelines and protocols that determine our scope of work within each branch vis-à-vis each of those categories of spending that I mentioned earlier. We know what factors have to be present for us to spend on that particular category. For example, we know when it makes sense for us to add another drive-through line or increase our exterior signage.

We also have in place a methodology to prioritize branches that need work in a given year. And we're in the process right now of putting in place a statistical methodology for assessing the impact the improvements will have on each of these branches. What we literally do is compare the branches that we refurbish against a sample of offices that we didn't refurbish but that are alike in many other respects. And we'll be able to statistically tease apart the impact of the refurbishment program in terms of things like top-line growth, customer satisfaction or employee satisfaction. Then we'll be able to adjust or modify our program going forward.

Every branch doesn't need the exact same treatment, after all. You might improve the performance of a branch by spending on exterior signage, exterior visibility, façade improvements, or adding teller lines or drive-through lines. But you certainly wouldn't want to do all of those things at every branch. You would only do those activities where the local market factors lead you to believe you'll see a positive return.

We think the effects can be powerful. Just applying the more rigorous standards around scope of work during the last six months has reduced the overall cost of the program by 10% to 20%. And that's not even getting to the whole question of whether we can actually increase the return or better spend the money. It just means there was probably 10% to 20% waste in the system before.

Banking Strategies: Is Wachovia's approach to this branch refurbishment issue unique in the financial services industry?

Witter: Within the broader retail industry, there are companies that do pieces of this. When we think about best practices at Wachovia, we try not to limit ourselves to just other banks. In terms of branch refurbishment, I haven't heard of a lot of banks pursuing this with the same rigor as us. But I do know that these kinds of things are common among the best-in-class retailers, in the food and convenience store industries, for example.

When it comes to cross-channel integration, you can look at Charles Schwab & Co., which has given a lot of thought over the years to how physical, online and telephone distribution channels fit together and how to break down the barriers between them so customers can access the company in a seamless manner.

Banking Strategies: Since you embarked upon this project, have you encountered any major surprises or revelations?

Witter: One thing I expected but still underestimated was the degree of communication and change management required to drive this kind of program. There are a lot of folks who have thought about what it means to be a great distributor and what it means to integrate across channels. But oftentimes, their individual perspectives and experiences bring preconceived notions. They might think it's all about systems, for example. Or they might insist on what I call "channel parity," i.e., every channel being able to offer everything.

At Wachovia, by contrast, we center everything around the branch because that's currently the point of greatest customer contact and new customer acquisition. That could change over time, however.

So for me, the biggest challenge has been engaging with leaders throughout the bank in a discussion of what multi-channel distribution means and, more importantly, the right and balanced way to pursue it. Conceptually, people might agree, but the real devil is in the details of how you get there. And that's a hard thing to communicate and talk about in an organization as big and complex as any of the large financial services companies.

Banking Strategies: How then should other institutions approach this issue? How should they get started down this road?

Witter: The first thing I would do is ask the tough questions to identify what in my organization gets in the way of real distribution excellence. The right path forward has a lot to do with which roadblocks give you the greatest pain.

If your company has a lot of trouble with what I'll call the customer insights and customer behavior, for example, you should focus on developing a clearer sense of what your customers are all about and how they interact with your company. If you have problems with organizational silos, then you've got more of a change management challenge.

After that, I would devise a program that fits those needs. The one constant, however, is the need for real support for the effort at the top of the house. If the most senior leaders of the company do not understand and support the goals, any effort will likely fail. This is not something that can be done from the grass roots.

Questions or comments about this article? Post them at the Banking Strategies blog.

Mr. Cline is senior editor of Banking Strategies.

Copyright © 2005 by Banking Strategies, published by BAI.

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