From customer friendly to customer intimate
In any company, rigorous strategic planning is bound to cause discomfort as old assumptions and long-held mindsets are challenged and re-examined. This was certainly the case for Billings, Montana-based First Interstate, an $8.7 billion community banking organization operating over 80 offices throughout Montana, Wyoming and South Dakota.
Our strategic planning process explored new terrain and definitely shook things up. At first, senior members of the management team were reluctant to admit the need for improving customer relationships. After all, we enjoyed dominant market share in our territories and our lenders, tellers and service representatives knew many customers personally as neighbors and friends.
However, a fuller analysis of existing relationships and market penetration revealed vulnerabilities and opportunities, which led us to initiate the strategic planning process. To emphasize management commitment, the vice chairman sponsored the initiative. He assembled an executive steering committee, comprised of the CEO, chief banking officer and other officers and board members to provide oversight of the process. The steering committee established a strategy design team comprised of 10 bank leaders, including several regional bank presidents, the heads of wealth management, marketing, IT, risk and the controller. The goal was to have broad representation and a variety of perspectives.
With the mantra “One First Interstate, One Customer at a Time,” this team met every three weeks for a full day or more over the course of six months. Team members had the opportunity to look at the bank more broadly and better understand how their responsibilities fit into the institution as a whole. By being part of a participative process, they ultimately strengthened their individual capabilities as well as their readiness to lead implementation of the strategy.
Facing the Facts
The strategy design team’s first foundational step was to establish a fact-based assessment of First Interstate’s assumed competitive advantage and the depth of our existing relationships. We invited our high-value customers to participate in a survey that sampled 86% of all business deposits and 90% of all business loans. Ultimately, 18% of both borrowers and non-borrowers responded.
On the positive side, nearly 100% of the high-value respondents said they would recommend First Interstate to others. Only 4% were dissatisfied with the bank’s services, and most were highly satisfied working with their business relationship officers. However, 51% of borrowers and 59% of non-borrowers admitted they had accounts with our competitors.
Overall, the findings revealed that positive comments were masking the truth: many of our high-value customers were at risk and over half of them did not generate any loan fee revenue. Furthermore, the small fraction of short-term accounts and the long tenure of many accounts (and the corollary that those accounts are held by older customers who are heavy users of branch and drive-up channels) offered evidence that the bank might miss the opportunity for customer intimacy with younger generations.
Competition was another area highlighted by the survey. First Interstate’s strongest relationships are with middle-market commercial and retail customers, but competitors are chipping away at the bank’s share-of-wallet across the entire portfolio of services. Ultimately, albeit with some resistance, this initial phase of the strategic planning process produced a case for change. That’s when the hard work really began.
The strategy design team utilized the Treacy-Wiersema Value Disciplines model to evaluate their options. This model describes three value disciplines: operational excellence, product leadership and customer intimacy.
Operational excellence is already the purview of the largest national banks, while product leadership in financial services typically requires technology innovation and substantial ongoing investment in a continuous flow of market-leading innovations. The team concluded that neither option was tenable for First Interstate.
Customer intimacy, however, was aligned with our existing market position and core competitive strengths. The philosophy of ‘looking at a customer’s lifetime value, rather than a single transaction,’ fit well with the bank’s history of commitment to the communities it serves. Our bankers often serve several generations, acknowledge birthdays, and attend customers’ weddings and their kids’ soccer games. But fresh research into customer behavior yielded some uncomfortable insights. As one board member explained, First Interstate was living with a false sense of security.
Customer intimacy also seemed like a necessary and worthy area of focus because of the relative independence of the bank’s regional and branch offices. Bank officers wielded substantial leeway to make decisions about loans, overdraft fees and other policies. Unfortunately, those decisions also impacted profitability and, as a deeper analysis of customer behavior revealed, those decisions often did not have the desired effect of keeping customers loyal to First Interstate.
As the strategy design team and the rest of senior management became comfortable with the idea that improvements were needed, we embraced a framework to help guide the execution of a more customer intimate strategy. This “Customer Centricity Spectrum” consists of four stages and shows a range of ways a company can be oriented to its customers, as well as how business strategy, organizational design and go-to-market approach reflect that orientation:
Customer friendly. Companies in this category emphasize personal connections with customers, but differentiate on other value disciplines. They rely on after-the-fact evaluations of their efforts to meet customer needs, principally by gathering informal customer satisfaction data. Marketing is not segmented; products and services are presented as a broad array of offerings.
Customer focused. Business strategy hinges on proactively meeting customer requirements relative to the competition on a few key indicators. To maintain that focus, these companies gather formal and informal customer satisfaction data. Customer intelligence is leveraged primarily to inform one-off campaigns or initiatives.
Customer centric. At the customer-centric company, customer requirements are at the core of the business model. Aligning products and services with those requirements is of paramount strategic importance. Capturing current customer intelligence is a formal, ongoing process; insights gleaned from that research help drive the work processes and how the company is organized. Customer segmentation is an important factor in the go-to-market approach of customer centric companies, but the foundation of segmentation is basic demographic data.
Customer intimate. This fourth stage represents the deliberate alignment of strategies, objectives and execution capabilities with customer requirements. Customer-intimate companies capture a host of intelligence about current customers, but also seek to understand the needs of potential and defecting customers. That intelligence enables greater market segmentation. Information about profitability, loyalty, demographics and other factors help customer-intimate companies market with greater precision, resulting in higher profitability.
Using this spectrum, the team discovered the bank was somewhere between the first two stages – a far cry from the desired state of “customer intimate” that would truly differentiate First Interstate from other financial service providers.
Now, five years later, implementation of the strategic plan is driving major progress along the customer centricity spectrum. Delivery on service commitments across the bank is now regularly and carefully scrutinized through third-party assessments at the branch level. Net Promoter Score research is constantly uncovering opportunities to improve customer loyalty.
The one-size-fits-all market mentality has given way to a strategy of serving distinct customer segments in ways that fit those customers’ needs and process efficiencies have been found along the way.
- Loan processing for small business customers, for example, is more streamlined.
- The timeframe to establish new wealth management accounts has been halved.
- There is now a greater focus on understanding the needs of realtors and accelerating the mortgage loan fulfillment process.
- Our digital initiative aims to satisfy the requirements of current customers as well as anticipate needs of the next generation.
Furthermore, the bank has implemented a customer engagement process that spans the first 15 months of a new customer’s relationship with the bank. The focus is on building more consultative, long-term relationships, not pushing products.
In short, First Interstate is creating profitable customer relationships by going beyond “customer friendly” and progressing well toward “customer intimate.” By improving each customer’s experience, we are in turn able to measurably improve the company’s financial results by increasing the lifetime value of customers, reducing customer attrition and improving efficiencies, thereby increasing the value of the brand and enhancing customer acquisition in terms of volume and cost.