Leading Research Paul Hyde

Frank Ribeiro
Ashish Jain
Kumar Kanagasabai

Building a Customer-Centric Operating Model

Aligning Segments, Products, and Channels
Financial Institutions can expect to compete in a difficult, low-
growth environment for the foreseeable future

Continued reduction in consumer debt (~$120B since
Less Leverage mid-2008)
New Normal

Significant decline in business borrowing

Subdued balance sheet

Increased savings rates for consumers (from -0.2% to 4%
growth
Higher Savings since 2008)
Rates Reduced consumer spending
Increased retail funding for banks

Higher cost of funding

Increased regulation
Government Limited risk taking
Regulation Increased cost of operations
Regulation driving higher
Negative impact on fee revenue costs and lower fee
revenue

Continued consolidation of smaller banks (e.g., MB
Financial Bank and Corus Bank), facilitated
Consolidation predominantly by FDIC

Opportunistic consolidation by larger banks

Lower return on equity

New, higher level of baseline unemployment

Higher Levels of
Marginal increase in income levels
Unemployment More nonperforming assets compared to past

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Competition will be intense as players focus on attractive
segments
Segment Trends 20092015 Profitability

Future income stream hit by unemployment and flat/falling wages

Mass
Demand for lending products contracts as customers seek to reduce leverage and increase savings rate

Majority of assets tied up in home, with flat outlook for home prices

Income and home assets hit by downturn but recovering quicker than mass as earning power more
Mass resilient and wealth more diversified
Affluent
Debt servicing capacity recovering, along with balance sheets and income, leading to some lending
growth

HNW segments wealth is recovering along with the stock market
High Net
Demand for investment advice from banks increases with newfound appreciation for potential investment
Worth risks and less appetite for do-it-yourself investing

Demand for debt recovers slowly as incomes and asset values rise

Population ages 65 and older to grow by 30% to almost 50 million by 2016

Retirees
Deferrals of retirement in 20082010, due to collapse of equity wealth, will reverse as market recovers

Demand increasing for investment products to supplement uncertain Social Security payments

Generation Y and younger (ages 1631) to grow from 26% to ~40% of the workforce by 2015
Gen Y
Comfortable using lower cost-to-serve channels such as online as their main interaction method

Appetite for, and access to, debt will recover slowly, and banks and businesses will continue to reduce
Small
debt
Business
Small business profits to recover slowly, in line with the economy and consumer spending

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Building wallet share with existing customers will be a major
driver of growth
Growing Customer Relationship.

From the customers perspective, the new normal 2.0X
means consolidating relationships with one bank 1.5X
1.0X
Build trust and relationship with an institution
they believe did not fail them
Access scarce credit lines # of months 0-5 11-15 21-25
Get better pricing for risk

From the banks perspective, this consolidation Results in Higher Balances
5X
offers the best way to build sustainable earnings
Growth through increased share of wallet 3X
Deeper relationships make it easier to 1X
understand risks
Growth through wholesale channels/shadow # of months 0-5 11-15 21-25
banking system no longer feasible/desirable and Higher Customer Profitability
3.0X

Implications: Banks need to focus their core assets
on the existing customer base 2.0X
Deeper customer insights 1.0X

More tailored value propositions

Better understanding of risk # of months 0-5 11-15 21-25

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For many, winning in this environment will require moving from a
transactional to consultative relationship model
Financial Services Relationship Models
To

Life Stage

Financial Solutions that

Consultative
anticipate Customers
Consultative Services that changes in life stage
From Product Bundles identify customer needs
and provide tailored Our bank helped us save
Product-Led Cross-Sell Product Bundles that solutions for a home, got us our first
Cement a Customers mortgage and is now
When I went in to roll over
Cross-Sell at point of Relationship with the bank working with us as we save
my retirement account, the
sale to maximum products banks officer also helped for retirement.
per customer I make one payment per me rethink my life insurance
month, that covers my needs.
When I opened my mortgage and my line of credit
checking account, I - and if I avoid late payments
automatically got a free for a full year, my savings
savings account and credit account interest rate goes up.
card.

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However, many organizations are structured by product and
therefore not able to deliver a consultative customer experience

Typical Operating Model Issues Sample Questions to Address

No single accountability for defining the client
What is the role of segment vs. product vs. channel?
experience and value proposition

Who owns client insights and the ultimate customer

Capabilities duplicated across the organization value proposition?
resulting in excess cost and sub optimal
experience
What is the difference between a product and a
business?

Product silos driving acquisition independently
not holistically approaching customers

How much local market tailoring of offerings is

No accountability for the end to end customer appropriate?
experience

How should segments, products, and channels work

Channels aligned with products - not together?
integrated into a single experience

Who owns the P&L, revenue, and cost of

Legacy IT infrastructure not supporting a manufacturing?
single customer view

What should be the performance metrics for segments,
products, and channels?

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At the core of the issue, financial institutions need to clarify how
segments, products and channels interact to deliver the experience
Segments
I

Roles and Responsibilities
What are the distinct roles

Responsibilities
of segments, products
channels

Roles and
II

Capabilities
What differentiated, non
duplicative capabilities must
each build

III

Interaction Model
Governance How should these groups
interact in key processes like

ties In
product development
li ter
a bi IV
p Mo acti
Ca

Governance
de on How should they be measured
l To reinforce appropriate
behavior

Products Channels

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I Roles and Responsibilities

Segments must take on a lead role to set the value proposition,

while products innovate and channels manage the experience
Example - Roles and Accountabilities

Segment Product Channel

Role Develop Client Insights Design, Implement, and

Manage Customer
and Relationships Support Products
Relationships

Develop segment strategy and
Generate ideas for new products and
Collect local market insight and
Product programs enhancements dynamics
Development
Set client value proposition
Make product build-vs.-buy decisions
Disseminate client point-of-sale
and detail specifications feedback

Define pricing strategy (e.g., market
Manage tactical pricing (e.g., rate
Structure deals based on client
positioning, relationship/exception resets, fee repricing) relationship and willingness to pay
Pricing
pricing guidelines)
Gain understanding of competitive
Manage exception pricing within
rates guidelines

Define client experience (e.g., targeted
Support sales process (e.g.,
Deliver sales and service to clients
Sales and treatments, coverage model) identification of opportunities)
Ongoing relationship management
Service
Develop content for online training,
field calls, sales guides

Integrate risk management into overall
Integrate risk impact and regulatory
Deliver sales and service within set
segment strategy requirements into product and pricing risk management framework
Risk
strategy

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II Capabilities

Capabilities must support roles - e.g. Segments own client insights

Building Blocks for Client-Insight-Driven Relationship Model

Segment

Segment Strategy
Voice of
Research and Value
Customer
Proposition

Client Insights Initiative and Lead Marketing Brand and

and Analytics Management ROI Communication

Centralized Competitive Product and Pricing Product

Product

Channel Support Intelligence Strategy Analytics

Vendor Performance Product Sales and Product

Risk/Compliance
Management Reporting Service Support Design/Architecture

Knowledgeable Online Research,

Segment-Specific Warm Handoff Smart
Relationship Origination, and
Channel

Branch Network across Channels Virtual Response

Managers Servicing
Client Education ATM as
Teaming and Trained Segment-Driven
(Channel Extension of
Collaboration Branch Staff Call Center
Capabilities) Branch

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III Interaction Model

The planning process is key to ensuring the appropriate level of

collaboration is occurring across the organization
New Interaction Model ILLUSTRATIVE

Corporate
Objectives
Annual
Strategic Planning
Planning (current year outlook)
(3-to-5 year outlook)
Sell and
Plan Align Develop Price
Service

Quarterly
Planning

Improve up-front (Initiatives)
Prioritize product
Redefine segment,
Employ a cost-
planning with development and product, and channel effective go-to-
partners to reflect
Align strategic enhancement role in pricing market model
corporate objectives objectives to annual projects within Segment sets and Coordinate sales
and gather insights segments, across reviews pricing and support of
planning programs
segments, and strategy quarterly core products
and quarterly Product owns

Include: Segment, planning initiatives across lines of through segment
tactical pricing
Product, Channel, business Establish
Channel manages
Risk, Treasury,
Collaborate to make relationship pricing guidelines for
Finance, Marketing, decisions product specialists
Sourcing,
Partners, etc.

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IV Governance

The performance management process, including KPIs, must

support the desired customer-centric behaviors
Performance Management Example

Corporate
Performance Review Detail

Facilitate performance management

Segments Functions conversations with all segments and functions
as part of the performance review process
Performance evaluation trends and outlook
Mass Retirees Operations Risk Performance issues, risks, and
opportunities
Mass
Gen Y IT Treasury Recommended actions
Affluent
High Net Small Recommended changes to plan (as
Marketing Compliance needed)
Worth Business
Proposed focus for next quarterly business
Product Product Finance Legal
review

Channel Channel Tax HR
Function-related topics can be raised in

segment reviews as needed

Products and channels are embedded in the segment reviews

Channels can have separate reviews as needed (geographic, division, etc.)

Review Review
Quarterly Semiannually

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Finally, delivery platforms must be in place to successfully deliver
on the promise
Enablers Description

Streamline end-to-end processes by taking a customer-back view to meet customer needs

Create accountability and ownership for end-to-end processes to deliver desired customer experience
Operations

Build process utilities (e.g., for consumer lending) by leveraging common processes to build scale and
expertise

Build customer management capabilities that enable relationship strategy (e.g., end-to-end workflow)

Simplify current application complexity to deliver superior customer experience
Technology

Create consistent data architecture to enable creation of client insights (e.g., 360-degree customer
view)

Build robust risk management governance aligned to lines of business (LOBs)

Embed process to set risk appetite and respective risk tolerances/targets/limits on LOBs and also at
Risk the department and product level

Enhance capabilities to manage risk across the organization

Create strong support and business partnership aligned to the new operating model
Support

Build support function shared services to capture scale and expertise required to deliver services
Functions
efficiently and effectively

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The result is a much more flexible operating model that delivers a
consultative client experience
Integrated Relationship Driven Operating Model
Segments
Business
Build client insights and develop
Consumer Commercial Wealth Corporate the value proposition
Banking

Channels
Branch RM Online Call Center

Manage the client experience

Products

Credit Deposit Payments

Capital Asset
Mortgage

Innovate products and solutions
Markets Mgmt.

Market Mechanisms

Shared Services

IT and Operations

Lowest cost fit for purpose delivery
Support Functions Variable Supply

Enterprise-wide Risk Management

Corporate Center
Set the direction of the bank

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For more information,
please contact:
Chicago
Ashish Jain
Principal
+1-312-578-4753
[email protected]

New York
Paul Hyde
Partner
+1-212-551-6069
[email protected]

Frank Ribeiro
Partner
+1-212-551-6677
[email protected]

Kumar Kanagasabai
Principal
+1-212-551-6455
[email protected]

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