Customer Relationship Management

Finance Industry White Paper

Customer Relationship

Management

Customer Relationship

Management

Attracting and retaining profitable customers in an increasingly competitive market

3 Introduction

5 Benefits of customer relationship management

7 Major activities, functions, and components of CRM solutions

7 Data sources in a CRM solution

7 Householding and data cleansing

7 Data storage methods

8 Departmental functions and responsibilities

9 Extending CRM reach

10 Evolving to a customer-centric and marketing segment–based business

10 Householding—the first step toward understanding CRM

10 Creating the customer profile

10 Adding profitability to the equation

11 Creating meaningful market segments

11 Migrating customers between segments

11 Adding treatments to the marketing equation

12 Enabling CRM at customer touch points

12 Increasing quality of service

13 The Compaq approach to implementing CRM

13 Approaches to CRM

14 The Compaq solution

16 Solution partners

As customer dynamics have evolved

This evolution will be no small feat for retail banks, which have firmly

embraced “the product” as their primary organizational component. Product managers are the norm today, and they are supported by a legacy of product-specific systems, sales and marketing programs, and service channels. Multi-ple product pyramids have been created with very little integration, and they provide most bank managers with a limited view of their customer base.

In recent years, however, some banks have been able to access account-specific data, hold it, and answer the question: How profitable are my products and customers? The answer is helping drive the move to customer relationship management (CRM). Banks have learned that they lose money on more than 60 percent of their households. Banking analyst Donaldson, Lufkin and Jenrette reports that, in retail banking, the top 20 percent of bank customers contribute 100 percent to 200 percent of the profit.This wide variance in profitability is inconsistent with the product orientation of most

The Compaq Customer Relationship Management solution enables banks to shift from targeting every customer to identifying the most profitable— and therefore most likely to be targeted by competitors—portion of their customer base.The Compaq solution also enables banks to focus on expansion measured not by adding “any customer,” but by raising existing customers’ profitability levels by providing them with the right products, and by attracting new customers that match the high-profitability profile of existing customers. Finally, the Compaq solution provides the informa-tion necessary to manage costs by matching the customer’s profitability potential to the appropriate marketing, sales, and service delivery vehicles.

At the core of CRM is enterprise-wide access to information about current customers, their products, their product usage, and their sales and service behavior.This information must be available for analysis by customer contact points in the sales and service process.The difficulty comes from the histor-ical product silos—looking across legacy systems to view a customer’s entire relationship with the bank—and the inability to link into the bank’s multiple service delivery channels.The Compaq Customer Relationship Management solution is a cost-effective, risk-reduced answer to these issues.

As more banks and other financial services institutions invest in CRM programs and tools, they will achieve part or all of their goal—to dispropor-tionately attract and retain the more profitable accounts in the marketplace. This leaves the remainder to the financial services institutions without the resources to target, win, and keep the more profitable customers.

CRM programs offer many qualitative benefits, but the primary benefit of CRM is increasing profit. This comes from expand-ing the use of a sexpand-ingle product, extendexpand-ing the range of products used, retaining high-value customers for longer periods, and optimizing service delivery costs to sell to and support a customer.

A typical household uses 10 to 12 financial products, acquiring them from a variety of providers. Banks are facing increasing com-petition from nondepository institutions and are losing profitable market share at an accelerating rate. Today a high-value household may only use two or three of a bank’s products. The dilemma retail banks face is that services to consumers and small businesses represent the most attrac-tive growth opportunity. Yet, this segment presents the biggest challenge to a bank’s ability to access information and proac-tively manage their relationships. The benefits to be gained from CRM will only be realized by successful information-based program management and by devel-opment of a detailed understanding of the profitability of products, customers, and delivery channels. Once that profitability

is understood, the incentive to leverage CRM’s benefits becomes substantial. Increas-ing a household’s product use from two to three products of the right type, for example, can move a customer from an annual loss of US$600 to an annual profit of US$1,500. Channeling a marginally profitable cus-tomer to an interactive voice response (IVR) system rather than a teller to obtain account balances can save around $3.00 per trans-action. Moving only 1 percent of the low-value customer segment a year to a higher value segment can increase the profitability of an institution from 8 percent to more than 15 percent.

Benefits of customer

relationship management

Customer relationship management is aimed at bringing the right product to the right customer, through the right channel, at the right time.

Financial services used by a typical household

Services Often provided Often provided by Provided with active by a bank other institutions competition between

banks and other institutions

Checking account X Savings account X

Money market fund X X X

Mutual funds X X X Credit card X X X Stocks X Bonds X Life insurance X Standard loan X Mortgage X

Given this profit potential, it is predicted that more than US$40 billion will be spent by financial services institutions in 1999 to pursue CRM solutions. This investment is aimed at the strategic imperative of mov-ing from a product-based organization to a customer-based organization. The Compaq Customer Relationship Management solu-tion offers a way to make this transisolu-tion using a predefined process that incorpo-rates predictable results.

Benefits of customer relationship management

■ _{Sell additional products and services} ■ _{Develop new products}

■ _{Increase product utilization} ■ _{Reduce marketing costs}

■ _{Identify and retain profitable customers} ■ _{Optimize service delivery costs}

■ _{Retain high lifetime value customers}

■ _{Enable personal and relevant communications} ■ _{Improve customer loyalty}

■ _{Improve response rates to direct mail} ■ _{Increase product profitability}

■ _{Respond quickly to market opportunities} ■ _{Acquire new, profitable customers}

Data sources in a CRM solution Traditionally, CRM users spend an inordinate amount of resources obtaining, cleansing, and building storage for customer data. Several types of data sources are included in a CRM solution:

■ _{Legacy data—the information in the} financial institution’s legacy systems, including customer account, billing, and usage data (for example, credit card usage and payment history). Often an individual has several different accounts that are not linked by personal identifi-cation. These accounts are viewed as belonging to separate customers. ■ _{Acquired lists—qualified lists of}

pros-pects that meet a variety of criteria. These lists are often placed in data warehouses for use in direct mail or outbound-calling campaigns.

■ _{Demographic data—data that provides} information based on demographics (for example, postal code–based quali-fiers, number of children, home owner-ship, or mortgage status), which is used to narrow the selection of marketing program recipients.

■ _{Psychographic data—data that provides} hints about interests and possible buying patterns of a household based on maga-zine subscriptions, lists of commercial accounts, job roles, and other information.

Householding and data cleansing Householding and data cleansing are proc-esses used to transform product-based legacy system information and marketing lists into a customer-based or household view. Householding pulls together all the data on any given customer, creating a single view of that customer. Related individuals and accounts are linked, creating a logical entity for direct marketing and analysis. Data cleansing resolves conflicting data elements (for example, multiple addresses or spellings) about an individual or household.

Data storage methods

An evolving set of techniques has been applied to the problem of holding and making large amounts of data available for CRM. The most common are

■ _{Data warehouse—a large SQL database or a} flat file that accepts queries, either of which holds all of a financial institution’s information about its customers from the many legacy systems across the business. The creation of data warehouses using SQL technologies has been difficult and expen-sive. Also, the data warehouse is rarely designed to support real-time queries.

Major activities, functions, and

components of CRM solutions

The goal of the most advanced banks is to extend the benefit of CRM beyond traditional marketing programs. To do this, CRM results must be available to various groups throughout the institution.

■ _{Data mart—a function-specific database,} holding a selected set of data in SQL for-mat, which is culled either directly from legacy systems or from the data ware-house. Data marts usually support a particular product group’s marketing programs. There may be many data marts across a financial institution. ■ _{Customer data repository—a large}

infor-mation repository that holds detailed household account information, contact history, profitability information, and marketing program scores for each cus-tomer and household. The cuscus-tomer data repository is a valuable resource for vari-ous departments for processing or analysis. ■ _{Data analysis software—specialized}

statis-tical and pattern recognition software products and techniques that analyze customer buying patterns, help create defined groups (such as market segments), and attach scores to each customer’s pro-file. The scores may identify likelihood to buy, channel preferences, spending goals, or a range of other qualifications.

Departmental functions and responsibilities

Marketing and product management groups are usually responsible for creating detailed marketing programs with a set of goals, messages, collateral, and advertise-ments or other communications tactics. When planning a marketing program, these groups use the data repository to select the customers and prospects to address.

The next step is to execute a set of marketing campaigns, collect the results, and analyze each campaign to determine how to improve on the results. This process—called adaptive refinement—allows a financial institution to obtain better predictive results over time. The effectiveness of adaptive refinement increases with the use of modeling tools, which provide pattern recognition and statistical analysis. Modeling tools can be used to predict such things as the profit potential of customers, what products a customer is most likely to need, and which behaviors indicate likelihood to buy. Modeling provides feedback to help the marketing group further refine the next step in targeting the marketing program.

Extending CRM reach

The goal of the most advanced banks is to extend the benefits of CRM beyond direct mail, advertising, and bill stuffing to every contact a customer has with the bank. This can be accomplished by enabling CRM results to be made available via real-time links to each production system supporting customer contacts. These systems include ■ _{Customer service center systems. Customer}

service centers have taken over most of the service-driven contacts with banking customers. Interactive voice response (IVR) system interactions represent 70 percent to 80 percent of these contacts. Service representatives handle questions that cannot be handled by the voice response system.

■ _{Routing software. Using a customer} pro-file, routing software directs a customer to the skill set needed for marketing or fraud prevention. The customer profile database is queried, in real time, for data and instructions. The routing script uses this information to instruct the call center telephone system how to route the customer.

■ _{Voice response applications.The most} advanced banks are experimenting with customer-specific scripts and messages. They are finding that the quality of ser-vice is significantly improved and that costs actually decline because the callers receive what they need in less time. ■ _{Customer service representatives.}

Provid-ing service representatives with customer profile and marketing information—in addition to account information—enables them to focus on supporting a customer’s needs, while advancing the relationship goals identified by CRM.

■ _{Direct mail and bill stuffing.Direct mail} and bill stuffing are the focus of most current CRM programs since they can be managed and executed by a single marketing department and the results are easy to measure.

■ _{Website.Financial services institution} websites have become very complex, making it difficult for a customer to pur-sue particular needs without dedicating an inordinate amount of time to brows-ing the information. The goal of linkbrows-ing CRM customer profiles to the Web is to guide customers to the information most pertinent to their needs.

■ _{ATM network. One of the dominant} con-tacts with customers is the ATM transac-tion. By linking CRM customer profiles to the ATM, this contact can be used to deliver customer-specific information. The link is provided between the main-frame ATM software and the customer profile database.

■ _{Branch offices. By providing branch} per-sonnel with better information about the marketing goals for a customer, bank employees can pursue these goals more specifically.

CRM goals are best achieved by follow-ing a set of steps, each step improvfollow-ing the financial institution’s understanding of its customers and prospects. The most impor-tant steps along that path are outlined in the sections that follow.

Householding—the first step toward understanding CRM To move beyond product-based marketing, it is necessary to understand the scope of a customer’s relationship with the financial services institution. In most institutions, each division has its own production sys-tems, customer IDs, and other resources that equate a customer with a product. Linking separate divisions’ product data together through “householding” creates a single view of the buyer. This enables a financial services institution to understand how to move customers from two or three products to four or five products.

Creating the customer profile With householding, it is possible to create an enriched view of the overall customer relationship with the financial services institution and the data needed by the vari-ous departments. Each hvari-ousehold view may hold

■ _{A map of the customer’s relationship} with the institution

■ _{Product and usage summary data} ■ _{Demographic and psychographic data} ■ _{Profitability measures}

■ _{Contact history summarizing the} cus-tomer’s contacts with the institution across most delivery channels ■ _{Marketing and sales information}

con-taining programs received by the cus-tomer and the cuscus-tomer’s responses

Adding profitability to the equation

As the data about a financial services insti-tution’s market expands, the addition of profitability measures to each prospect or customer data record enables a marketing group to focus on customers who will reap the greatest return on investment. The measure of profitability is best when based

Evolving to a customer-centric and

marketing segment–based business

CRM enables a financial services institution to better understand its customers and prospects by using its significant information resources to develop a fact-based marketing strategy, detailed to the individual customer level.

on the specific products purchased by a customer and the customer’s use of those products. Broad-based (divisional), fully allocated average cost methodologies do not provide the quality of results that are available from activity-based costing, since the impact of channel usage and customer behavior is not obvious.

By adding the profitability measures to the data about each customer, it is possible—especially with the use of model-ing tools—to sort through the prospect base to better target those that are most likely to meet profitability goals.

Creating meaningful market segments

A financial services institution may effec-tively define customer segments if it has householded customer profile data, includ-ing products and product usage summaries, revenue and profitability measures, demo-graphic and psychodemo-graphic data, contact his-tories, and responses to marketing programs. These segments can be defined to focus on business goals, such as optimizing

■ _{Profitability levels, either percent or} amount

■ _{Number, types, or usage of one or} multiple products

■ _{Total revenue, as long as profit is greater} than a specified amount

■ _{The anticipated length of the} relation-ship of the customer with the financial institution

■ _{The likelihood that the customer may be} managed from a low profit and revenue relationship to a high-quality relationship ■ _{The likelihood that a customer will}

acquire a new product the financial institution is introducing

Migrating customers between segments

With the combined approaches of adaptive refinement, customer profiles, and market segmentation, marketing groups may begin to address how to move customers into one segment, serve them, and as the customer’s needs change, migrate them to the next market segment. Each market segment provides bundles of products and services, with associated revenues and profitability, that match the customer’s needs at a particular stage in their financial-needs life cycle.

Adding treatments to the marketing equation

The effectiveness of marketing campaigns is often determined by the way the message reaches each customer. Some people throw away all junk mail, others don’t. Some peo-ple dislike receiving telemarketing calls, others respond to them. Some people call the service center to obtain service and are

pleased to talk about their account and other options, others are not. Some will spend time on the Internet, browsing and learning about opportunities, others never will. These different methods for deliver-ing messages and marketdeliver-ing campaigns to different individuals are called “treatments.” With the customer profile resource and modeling tools, a financial services institu-tion can determine which customers respond best to various treatments. These can then be added to their individual records or can support the creation of different market segments.

Enabling CRM at customer touch points

Financial services institutions have active touch points with their customers. Many of these touch points, such as ATMs, IVR applications, or websites, are used several times a month to obtain account balances. Others, such as account, loan, mortgage, and credit card statements, are monthly. Some customer contact, such as visits to the branch office or calls to the service cen-ter, is occasional.

For a financial institution to take utmost advantage of multiple touch points with its customers, the customer profile holding this information needs to be available, in real time, to the systems and processes sup-porting every customer contact. Treatment analysis helps determine which touch points work best for what messages.

Increasing quality of service With the customer profile that includes information about the range of products and services used by a customer, the cus-tomer touch points—such as IVR applica-tions and websites—can be modified from a general-purpose interface that supports all customers to an interface that presents information specific to individual customers. The advantages of such customer-specific touch points are many. In particular ■ _{Quality of service improves significantly.} ■ _{Productivity increases dramatically. For}

instance, an IVR application using only the menus specific to a caller takes half the time—typically saving a financial institution US$0.30 per IVR conversa-tion. For a financial institution with 100,000 IVR conversations a day, this will save US$9 million per year. ■ _{The customer is more likely to listen to}

marketing messages within the session, since nonessential information

Approaches to CRM

CRM projects are often complex, risky to cost and schedule, and fraught with hard-to-quantify business benefits. The primary challenge is assembling relevant, accurate, and complete customer information. Until now, two approaches have been used. The first is to create a single, large, corporate-wide SQL data repository. This approach promises to link selected corporate infor-mation about a customer into a single SQL data resource to support a multiproduct CRM set of business goals. Though occasion-ally successful, this approach has the poorest track record.

The second is the department- or product-specific data mart. Under this approach, the marketing group chooses a particular focus on the customer, such as selling home

equity lines of credit, and does not tackle the wider ranging opportunities available from CRM. The advantage of data marts is that they can be implemented in reason-able time frames and tied to specific business benefits and goals.

Compaq offers a new approach, which incorporates the benefits of both the corporate-wide data warehouse and the departmental data mart. Under the Compaq approach, allof the corporate data is made available in a compressed data repository, from which departments or corporate marketing programs decide what data is needed and have it exported to the appro-priate data mart platform.

The Compaq approach to implementing CRM

Employing an innovative approach to assembling customer data, Compaq reduces this task to a manageable effort, accomplished in months rather than years.

Factor to consider Central SQL database Departmental data marts Compaq solution

Need to predetermine data elements Yes Yes No, holds all legacy data

and structure to create data repository

Flexibility to address unanticipated Poor Poor Excellent

questions from business users

Ease of implementation Very difficult Moderate Easy

Time frame for production 1–3 years 6–12 months 3–6 months

Cost to implement system High; difficult to control Moderate; cannot be leveraged Moderate; can be leveraged

Accessing data from legacy systems Moderately difficult Easy Very easy

Real-time support for customer Poor to moderate Good Good

delivery channels

Extracting and creating data marts No No Yes

for special purposes

The Compaq solution

The Compaq Customer Relationship Management solution is designed to enable a financial services institution to take advan-tage of leading-edge CRM tools quickly and cost-effectively.

Compaq, with its partners, offers a CRM information architecture that accelerates benefit from analysis of customer data. The diagram, which is an example of the Compaq solution, focuses on two major parts of a financial services institution. At the top are the customer touch point systems, which can link into the CRM resources and take advantage of the additional information to modify every contact with the customer. The CRM resources include links to legacy systems, the data warehouse, spawned SQL servers, and the management and reporting facilities.

A unique approach to CRM

Many CRM projects collapse under the massive effort required to predefine the data warehouse content required to feed all CRM analyses, now and in the future. They also have been known to fail to provide the breadth of data necessary for fact-based decision support.

Compaq’s CRM architecture incorporates

allof a financial services institution’s internal and external data, merged and householded in a compressed data reposi-tory. It supports production of purpose-built data files, data sets, or data marts for application-specific analysis. Marketing departments can quickly decide what data they need and have it exported to the appropriate platform in the appropriate format.

Accessing essential data when needed Experienced project managers know that business requirements change as a project moves forward and as participants begin to understand their needs. SQL database design requires that the data elements be prede-termined in order to implement the data warehouse. The need for flexibility in data warehouse and data mart content may be even more demanding, especially when adaptive refinement and data mining activities determine whether data is useful or not. New data from legacy systems or external sources must be added continu-ally if a financial services institution is to move quickly in learning how to increase marketing effectiveness.

The Compaq Customer Relationship Management solution does not require data elements to be known before establishing the data warehouse. All legacy and external data source information is placed in the warehouse.Due to the solution’s high performance, data extraction methods, and data compression, a complete customer data repository—with all the financial institution’s data—can be created in several weeks. It can then be updated periodically, or re-created overnight to keep data current. As a result, business and technical managers do not need to guess what data elements will be important to them in several months. It will all be there, ready to use within sev-eral hours of the decision to select a differ-ent set of data for analysis and execution.

Householding and creating unique customer IDs

As part of the acquisition of data from the legacy system, householding is performed across all of the data sources. The house-holding extends beyond several comparisons such as names, postal codes, and social security numbers. It can compare multiple data elements to increase reliability. A unique customer ID, household ID, and product ID are assigned. Tables are then established to link individual products to product divisions for summary. Queries on the system may use any of these IDs to obtain information.

Making data available to users The Compaq Customer Relationship Management solution holds all corporate data in a compressed, non-SQL format. Any part of this data may be extracted and made available as an SQL data mart, a flat file, or even a spreadsheet. The business analysts determine what data they need and use the query language to specify how the data should be extracted. The actual extraction can occur in several hours, enabling analysts to use their favorite environment and data structure to accom-plish their work.

This approach enables different depart-ments and marketing groups to quickly obtain the information they need, popu-lated in their own data environment on their platform of choice. It also means that individual CRM applications do not have to be selected in advance, based on their file structure or data requirements. One type of data mart is the marketing data mart, a prepackaged SQL database extracted from the compressed customer data repository. This specialized data mart holds summary information about the customer available for producing lists, storing responses to campaigns, and sup-porting queries from real-time customer-contact production systems, such as call centers. The contents of the marketing data mart may include

■ _{Household summary data} ■ _{Data mining scores}

■ _{Products used by the customer} ■ _{Market modeling scores} ■ _{Product usage summaries} ■ _{Profitability scores} ■ _{Sales and revenue history} ■ _{Potential value ratings} ■ _{Contact history}

■ _{Customer issues or problems}

Solution partners

Compaq’s partners have provided expertise and software to complete the Compaq Customer Relationship Management solu-tion. Each of these components is available to “plug in” to the CRM architecture. ■ _{Norbert Technologies supplies the}

foun-dation for a complete, enterprise-wide customer information repository by providing extraction, aggregation, and householding of detailed customer transaction histories. The repository enables financial services institutions to hold all internal and external data from across the enterprise in a central-ized, compressed database.

■ _{Profit Management Group specializes} in the design and implementation of profitability systems and methodologies for the financial services industry. PMG provides actionable profitability analysis, including product contribution and development of segmentation and behavior modification strategies based on customer value.

■ _{Cogit Corporation provides predictive} modeling software products and exper-tise. Cogit products perform micro-segmentation based on propensity to respond, matching the most effective treatment to each audience segment, and automatically adapting to changing mar-ket conditions and consumer preferences. ■ _{Exchange Applications delivers campaign}

management software and services to help financial services institutions maxi-mize the profitability and value in all of their customer relationships. Their mar-keting automation software automates campaign planning, execution, and assessment and refinement.

Summary

Compaq has assembled a set of products, skills, and expertise that changes CRM solutions from complex, expensive, risky projects to manageable projects with break-even returns on investments available in 6 to 18 months. Compaq has done this by prepackaging the most problematic and risky elements of CRM, eliminating the risks, and compressing the implementation time.

Compaq CRM feature Benefits to the customer

Compressed data repository holding all legacy data. All customer data, from internal legacy systems and external Can be populated overnight and updated regularly. data sources, is held in a large compressed data warehouse, Technology provided by Norbert Technologies ready to use. Business users do not need to decide what

data they need before beginning data warehouse imple-mentation. Householding is included in this process. Prepackaged demographic and psychographic data If a customer does not already have outsourced data about households, this may be made available as part of the solution.

Packaged integration with specialty tools from Cogit, Integrated leading-edge applications supporting CRM Profit Management Group, and Exchange Applications analyses are available. This accelerates users’ ability

to take advantage of CRM technology and reduces implementation costs.

CRM SQL data marts “spawned” quickly to support Departments and managers determine what information departmental applications and corporate data mining they need using an interactive point-and-click interface. analysis and list creation This results in a purpose-built data extract of the data

elements and table structures needed to support produc-tion systems or data mining/list creaproduc-tion software. Predefined data extracts for CRM applications The CRM solution includes predefined extracts to analyze

profitability and to create the initial marketing data mart. This helps a financial services institution to get started faster and realize results in a reduced time frame. Application programming interface (API) to production APIs are available, enabling customers to link customer systems supporting real-time customer contacts profile databases to call centers, voice response units

(VRUs), Web pages, ATMs, branch offices, or any other contact point. This makes the CRM technology more valu-able to the organization.

Reports Prepackaged reports focus on generic issues (e.g.,

profitability results, market segment descriptions). Predefined configurations, based on different database Compaq is benchmarking production system examples sizes, tested to ensure that they perform well and can and providing preconfigured solutions to support CRM. be managed easily

For more information Access the Compaq website at http://www.compaq.com.

For sales offices worldwide, access Compaq’s website at http://www.compaq.com.

Compaq and the names of Compaq products referenced herein are either trademarks and/or service marks or registered trademarks and/or service marks of Compaq Computer Corporation.

©1998 Compaq Computer Corporation. All rights reserved. November 1998 98-0684 2K ARBN 002 588 347 Order number 110072