Millennials have now overtaken the baby boomers as the largest generation in America. As millennials mature and become the next generation of banking customers, it’s inevitable that banks adapt to their technology needs. Social media engagement and mobile banking are already quickly becoming the standard and not the exception.
Knowing your customer is one of the key components of profitability. Understanding their behavioral tendencies allows you to better service their needs. Equally important is having insight into who your most valuable and least valuable customers are. Differentiating your services and offerings in relation to a customer’s value is key to maximizing profitability. Without this insight you may be mis-allocating resources and under-serving valuable customers while over-serving non-valuable ones.
Today, social media provides banks with a direct line to customers. You can gauge their interest in new services, receive feedback on customer service, and educate them on industry changes. The challenge, of course, is identifying your most valuable customers. Only then can you leverage social media to identify new potentially profitable customers like them.
While it’s easy to tout the numerous benefits of integrating social media into CRM, it’s important to carefully consider costs and risks associated with doing so. Obviously, additional resources will be required to manage content creation, customer engagement and social event coordination. These instantly become additional expenses associated with servicing customers. In addition, we’ve all seen the social backlash a poorly implemented social media plan can have. Just as effective messaging can improve customer retention and acquisition, poorly presented messages can be misinterpreted and enrage the social community resulting in a loss of valuable customers.
The ultimate goal, of course, is to gain valuable insight which maximizes resource allocations, attracts new high value customers and lowers the costs of other customer service activities.
This is why it’s so important to have a cost management system in place that allows a bank to effectively analyze the impact of social media on their cost structure. Customer profitability analytics must exist to properly assess budget allocations, resource allocations, and develop a strategic approach to social customer engagement. Remember, a social media profitability initiative should be based on facts, not instinct.
I recently had the pleasure of accompanying my daughters to a lecture given by Scott and Mark Kelly, the twin brothers who both led inspiring careers as astronauts. They emphasized that we should do things not because they are easy, but because they are hard. Their great advice was simple. When you find something that motivates you, to accomplish something meaningful, do a few basic things. 1. Have a goal, 2. Have a plan. 3. Focus on what you can control.
What does that have to do with technology costs? As it has with so many things, technology is transforming the banking industry. Paper checks are becoming relics, channel preferences (both the customer’s and the provider’s) are evolving, self-service is in high demand by some customers and being imposed on others, economic activity is migrating away from cash transactions, and a tremendous amount of data regarding customer behavior is being collected, analyzed and acted upon. Technology is also a contributing factor to the continued M&A activity throughout the industry. Economies of scale are increasingly critical. Many institutions have experienced (or soon will) one or more mergers. Combining entities inevitably brings significant change. In fact, change resulting in efficiency is usually the point. Dealing with the combination of technologically driven change and M&A activity is the managerial equivalent of hunkering through a hurricane during an earthquake. Understanding costs can be hard and financial institutions better be motivated to do so.
Managers who are serious about strategic cost management know Activity Based Costing methodology can offer shelter by providing valuable information about the nature of your costs and high potential savings opportunities. Whether your company is embarking on an ABC implementation or utilizing an existing one it’s time to take a fresh look at your costing methodology and ask the challenging question, do we have the transparency we need to successfully manage our IT costs? Building that transparency and understanding should be your goal.
When companies first implement costing methodologies, they often focus on the non-IT costs and defer a deep dive on the IT costs for some later date which often never comes. There’s a failure to launch. Why is that? There are many reasons. Managers tend to have a strong understanding of their direct expenses (resources) and how they are used. They tend to spend a large portion of their time managing people. So when it comes to completing cost studies for non-IT groups, they are focused on and comfortable with capturing the activities that people do. They can reasonably associate those costs with particular products or customers. Once that is done, it’s not hard to start digging into the ABC results and start identifying opportunities. This is the easy part. But what about the IT costs?
Unlike the cost of personnel resources which are easily identified (in the general ledger, job class salary midpoints, etc.), capturing the cost of particular IT resources requires some work. The costs of PC support and the like are reasonably straight forward, but what about the dozens or hundreds of systems and applications they provide, how much does each one cost? Once we know that, how can we reasonably assign the costs to the appropriate products and customers? The IT folks have to model the costs of their resources (storage, processing, programing, maintenance, licenses, etc.) just to estimate the cost of each application they provide. Once the inventory of IT applications and their costs is complete, work can begin on assigning the IT application costs to products and customers. People with the knowledge to make informed judgements about how particular applications enable activities or support products/customers are harder to come by. Often there is not one person who has the knowledge to accurately assign the cost of a given IT application; a combination of IT and business folks are required. Multiply that complication by many dozens of applications and the task of assigning the costs of IT resources can seem daunting. Last but not least, companies implementing strategic cost management are usually doing so as a response to urgent pressure. Managers are often tasked with identifying cost savings opportunities with quick paybacks and create savings to, at a minimum, self-fund the costing project. That’s not great incentive to put the deeper effort into the IT costing. They want to get started on the most visible and obvious savings initiatives.
So is your strategic cost management effort doomed to provide less value than it could or in fact should? For some companies, yes. They may get stuck doing the easy part over and over. Change is hard. Others will find the motivation to do the hard thing. Break the project down into manageable pieces, and make a plan.
The incentives to make the effort are crystal clear. Technology is uprooting processes and driving change in the cost structure of financial institutions. Processes that were labor intensive have likely been impacted by automation in some way. New processes are emerging, some are fully automated. Many redundant systems and applications survive the merger process or even organic growth. You can’t control the industry dynamics but you can control the investment you make in your costing methodology and the quality of your costing information. IT costs as a percentage of total costs are substantial and growing. They are fertile ground for strategic cost savings which are there for the taking. Take the Kelly brothers advice and do the hard thing. Have a goal, make a plan, and focus on what you can control. Get motivated to upgrade your IT costing methodology now. After all, it’s not rocket science.
BI, or business intelligence, started out as a term that was broad and hard to define but has come to mean tools like Tableau, Qlikview, or even PowerPivot (Microsoft’s pivot tables on steroids) used to crunch big data into pretty reports or dashboards. Every industry is benefiting from these tools thanks to their ability to rapidly sift through huge sets of data from social media outlets like Facebook or Twitter using keywords and hashtags, the cloud, publicly-available sources, and proprietary corporate servers. You can drag and drop BI dashboards almost like you’re making a playlist to see exactly what you need on-the-fly. It was not that long ago that reporting meant waiting for IT to run an overnight batch. Systems would spit out reports that were static and standard with no flexibility. If you wanted something custom, you had better be prepared to wait awhile. And nevermind aesthetics back then.
For as long as Activity-based Costing has existed there has been a power struggle between complexity vs “directional accuracy”, the tradeoff in optimal cost model design required to ensure sustainability and the ability to actually use output data. Despite best efforts to keep complexity in check, costing projects consistently end up producing models with data sets much larger than the likes of Excel can handle. Without tools to easily distribute or interact with the data, often it is not leveraged to its fullest. Horror stories of months and sometimes years long projects to produce data that sits around unused are common. Meanwhile, cost management decisions that could benefit from this treasure trove of data are being made based on misleading or irrelevant existing data, heuristics, or worse: gut feel.
Why has this been happening? Because up until recently, cost modeling tools produced big data, but big data reporting tools didn’t exist.
But with today’s BI tools we can shift that frustration and difficulty with delivering ABC data to successful cost information deployment. This is where BI shines. These mountains of data can now become useful reports and dashboards that are actively used by stakeholders. The information can actually do what it was intended to do 30 years ago. That is to drive change within an organization and help manage costs in an effective way and put an end to the haphazard targeting of the largest expenses in the GL for cuts, the knee-jerk reaction hiring freezes, or less than strategic reductions in force. Keep in mind, getting the full value out of this data will require some information consumer education and an embrace of a proper cost management culture. Accessibility and interactivity improvements delivered through BI will make that task much easier than it has been in the past though.
Information must be accessible to drive wide-scale change. Partnering these two concepts of BI and ABC make that possible. Activity-based Costing had great promise when it was devised, but it wasn’t until recently in the BI lifecycle that it has become possible for cost management to reach its potential.