Home / Banking Strategies / Measuring the Payoff from Customer Service

Measuring the Payoff from Customer Service


Providing superior customer service has been a key differentiating strategy for many financial institutions. After all, we are in a service business and service quality matters. But measuring the payoff has been elusive. We know it’s the right thing to do but can we measure how our investments in customer service really translate into bottom line impact with the same discipline that we apply to other aspects of our business?

One problem is the way we describe service quality. “Wow,” “delight” and “Disney-style” are usefully descriptive adjectives but what do they really mean in a service context and how do they impact the bottom line? An even bigger issue, in our experience, is the lack of disciplined metrics and financial models that link these investments to financial return. How can management measure the return on investment (ROI) from the human, Information Technology (IT) and capital resources required to attain higher levels of service?

As with any other investment, management needs tools to quantify impact and prioritize service investments in a disciplined way. Without them, we are forced to navigate by touch and feel, responding by instinct and emotion to determine what customers want and value, rather than managing with facts and metrics.

Measurable Relationship

First of all, it is important to recognize that there is a strong, measurable relationship between service quality and financial return. As part of our analysis, we tabulated correlations between J.D. Power and Associates service quality scores and metrics of financial performance. For example, our analysis of Home Mortgage Disclosure Act (HMDA) data from 2010 and 2011 revealed that financial institutions with best-in-class J.D. Power scores also posted superior results when measured by loan closure rates, or the “book-to-look” ratio.

Here’s one clear example: top ranked QuickenLoans closed 65% of all mortgage applications in 2011 compared to median peer performance of only 42%. For every 100 loan applications, Quicken closed 55% more loans through better pipeline management and more efficient processing, which translated into higher customer satisfaction. At the same time, peers suffered from attrition in their pipeline, as customers canceled, transferred to competitors or just lost interest.

For further evidence, we identified banks with leading customer service scores and compared their performance on industry benchmark studies. We found that they consistently outperformed peers on customer retention (attrition significantly below average), relationship depth (number of products) and average total relationship balances. Furthermore, they were able to translate service quality into pricing power; in most cases, their pricing was in the bottom quartile as measured by competitive pricing surveys, leading to lower cost of funds and reduced marketing acquisition cost.

So no one would disagree that continually improving customer service is a good idea. But how do you make the leap from a gut-feel to business case? How do you decide precisely which improvement will create financial gain versus just nice-to-have?

Invert your metrics. Typically, customer service measures are reported as the percent satisfied, with a bar graph or timeline reporting, for example, that 90% of customers are satisfied with overall performance. Lost in this description is the real problem, that 10% are dissatisfied. Invert your numbers to show just the dissatisfied number and bring a laser focus to the improvement opportunity.

Dig for the cause. Don’t expect to find the fix in the customer’s expression of unhappiness. If you were to learn, for example, that you are afflicted with a high incidence of customers complaining about your slow loan process, several solutions might come to mind: adding processors, acquiring a new loan system or other costly fixes. A deeper investigation, however, might reveal that input errors were often caused by duplicate inputs to multiple systems. With this data, you can compare those problem loan applications with your error-free applications to determine the percentage of each that ended up closing, the financial value of those that closed and thus the lost opportunity cost of those that did not. Now you have a business case for investing in systems integration based on proven measurement of lost revenue.

Help set priorities. Your IT resources are stretched thinner than ever. Every customer service improvement you present to IT competes with demands from every other part of the bank. Because they can’t do everything right now, management chooses between, say, a new product initiative with a business case of “$x million dollars in new revenue,” a compliance project with a business case of “keeping us out of jail” and then your business case for “reducing complaints about call center transfers/dropped calls.” Not a tough decision to backburner the call center improvement, no matter how firmly committed the bank is to customer service.

But if, instead, your business case showed a detailed analysis of customer attrition or relationship diminishment caused by these problems, management would have the information they need to prioritize this project relative to other opportunities.

Determine which problems are detrimental. Wait times represent a stubborn customer service issue, but they don’t carry a candle to misapplied payments. The only way to truly understand the impact of different service issues is to quantify and measure changes in customer behavior under alternative scenarios. Do the math: do customers who go through the ordeal of discovering misapplied payments and sorting out the ensuing chaos attrite faster, carry lower relationship balances and have lower overall lifetime profitability than other customers? When you compile that information, you have what you need to make informed decisions about what process or technology changes can be justified. By the same token, those long wait times deserve the same analysis: at what point do those issues go from being mild problems to severe, actually causing attrition of valuable customers? The point is, these things are calculable. You don’t have to make your decisions on emotional grounds.

Invest where it counts. While every organization should aspire to provide the highest level of service, “quality” needs to be appropriate to the situation. Marriott Corp. owns both the Courtyard and Ritz Carlton brands. Both provide excellent – but different – levels of service. Service improvements require investments of human and financial capital and often involve tradeoffs in scarce resources such as IT. Best-in-class financial institutions build the models that enable them to invest smartly and prioritize service investments in the same way as they would any other investment opportunity.

Develop Return on Service Investment models and use them. Financial institutions need to balance the soft metrics, the brand promise, with Return on Service Investment financial models – call it ROSI. Your ROSI would include all the cost components of your request, all your predictions for balances retained and revenues predicted, along with the time frames. The key is to create for your service improvement project exactly what management is accustomed to seeing for justifying a new branch or a new system purchase. Only then will management have the tools they need to elevate service investments to an equal footing with other bank strategic decisions.

Mr. Kerstein is president of Austin, Tex.-based Peak Performance Consulting Group, which specializes in retail, community, and small business banking. He can be reached at [email protected].