Jan U. Hagen
Ulrich Schürenkrämer
Client Centricity
Relationship Management in Banking
Foreword
Since the financial crisis, the role of banks has increasingly been called into question by the general public, and there have been doubts as to banks’ benefits to the real economy. The financial industry must take a proactive and constructive approach to this debate. After all, it cannot sustainably prosper while operating in a parallel world. Even more than industrial companies, banks depend on the trust of the societies they operate in.
In this light, the book’s authors make a very useful and welcome contribution to this debate. In a variety of articles, they clearly demonstrate that financial institutions must build their business around their clients, placing them at the center of what they do, whether in retail and commercial banking, wealth management or investment banking. They show that assessing, assuming, and diversifying risks are central to modern banking and that this is how financial institutions serve the real economy and create value.
Now is the right time to emphasize the importance of a client-centric approach. And this is the reason why the book should attract the widest possible attention and readership – not only in the financial sector, but also far beyond.
Frankfurt am Main, December 2014
Jürgen Fitschen
Introduction
The idea for Client Centricity emerged from our participation in the conception and implementation of an executive education program by ESMT European School of Management and Technology. Focusing on relationship managers in classic corporate banking for Deutsche Bank AG, the program encourages them to adopt a new mindset for embracing long-lasting customer relationships based on true partnership rather than specific products.
While defining and discussing the content of the program, we noted the lack of any comprehensive study examining customer relationships in the banking sector. As a result, we decided to compile some of the core program content and create a book providing an overview of fundamental aspects of the customer relationship. A crucial element of the program was shared experiences between managers from banks and medium-sized enterprises; therefore, it made sense to maintain this format in the book. Consequently, the authors featured in this book are all experts from the banking and academic sectors.
The articles in the first part of the book concentrate on theoretical aspects of the customer relationship. The relationship between advisor and customer is analyzed from a psychological perspective. A further article examines factors that limit the extent to which we can measure the success of customer loyalty activities. The significance of client business for long-term success in the banking sector is also highlighted in the context of risk factors. The theoretical section starts with an analysis of the strategic components of customer orientation.
The second part of the book focuses on putting customer orientation into practice. Numerous examples from various areas of banking reveal opportunities to build up a sustainable trusted partnership.
The focus here is on strategy, structure, and systems that consolidate customer loyalty across all sections of the business. Deutsche Bank is presented as an example of this. Features include an analysis of relationship management in corporate banking, an outline of how a relationship manager can develop into a client advisor, and how the quality of the relationship is a relevant aspect of management in corporate banking. In addition, we take a closer look at the success factors in retail banking. With the aid of several practical examples we explore the importance of emotional intelligence when dealing with customers. Lastly, we take a look at a special segment of the banking market, that is, microfinance.
Our thanks go first and foremost to the authors, who were prepared to share their extensive knowledge in this book. We must also thank numerous members of staff from ESMT and Deutsche Bank AG: Angelique Esnault for coordinating the project; Benjamin Didszuweit, who provided valuable encouragement particularly in the early stages of the project; and Andreas Schellenberg, Michael Kühn, and Rayk Heidamke, who each played a crucial role in shaping the ESMT program Certified Client Advisor.
Berlin and Munich, December 2014
Jan U. Hagen
Ulrich Schürenkrämer
Strategic Customer Orientation
Martin Kupp
Many banks are trying to intensify their focus on the customer. They are keen to find out as directly as possible from customers how they can improve their products and services and gain their customers’ trust. Whether Deutsche Bank, Commerzbank, or HypoVereinsbank, banks are making an effort to integrate customers early on in the product development process, get to know them better, and find out what they expect of bank products and services.
In response, Commerzbank set up a 40-member-strong Customer Advisory Council in 2009, elected for three years. It is the job of this council to integrate customers’ ideas and suggestions into the services offered by Commerzbank. This move generated a good response, with around 5,400 customers applying to be on the council in 2008. The council members report that their suggestions for possible new products or ways to resolve existing problems are very much welcomed. The Customer Advisory Council consists of private and business customers. The members were selected to ensure that the council represents a range of ages, professions, and regions.
However, customer councils are by no means a new idea in banks or, indeed, commercial and service companies. Deutsche Bahn, the supermarket chain Penny, and the airport operator Fraport all have such councils. For around 20 years, Volksbank Freiburg has been using customer councils for market research and gathering feedback about new products and services. Postbank set up its customer council “60plus” back in 2005 to give greater weight to the needs of older customers. In addition, the Easy Credit customer council was launched at the end of July to make consumer credit even more user-friendly for customers.
Before any targeted discussion on strategic customer orientation, we must first clarify what we understand by customer orientation, what it is to achieve, and which operative and strategic measures can be used to encourage it.
Mechanisms of customer orientation
Companies can apply measures for boosting customer orientation to try and achieve a whole range of goals. Put into rough categories, we can identify three separate areas associated with this:
This all revolves around the idea that increased customer orientation can also increase customer satisfaction and loyalty. Since the mid-1990s, numerous analyses, including those by Manfred Bruhn, University of Basel, and Christian Homburg, University of Mannheim, have shown that customer satisfaction and loyalty play a central role in a company’s success. At the heart of these studies lies the confirmation/disconfirmation paradigm (C/D), which states that customer satisfaction results from a comparison between the actual experience of using a service and a specific standard. If the service meets expectations, we talk about confirmation. If the service exceeds expectations, the customer experiences positive disconfirmation and his satisfaction levels are higher than with confirmation. If the service does not meet expectations, however, we talk about negative disconfirmation, which goes hand in hand with lower levels of satisfaction. It is important to note here that the comparison is based on the customer’s perception of the service, not on an objective assessment. This can cover various dimensions of the product or service, such as functionality, form, services accompanying a product, interaction between customer and provider, delivery process, or direct customer contact during the purchasing process.
While customer satisfaction puts a bank on the road toward profitability, it is not enough in itself. Customer satisfaction is simply an appropriate means of increasing customer loyalty and influencing customers’ price behavior. It has a positive effect on customer loyalty, which is then reflected in repurchases, additional purchases, and positive word-of-mouth advertising.
There are three main ways to explain the loyalty of satisfied customers:
While we can assume a fundamentally positive correlation between customer satisfaction and customer loyalty, there is also evidence that the effect satisfaction has on loyalty varies with different customers, products, and markets. There are certain products and customer segments where we can see a progressive relationship between customer satisfaction and customer loyalty. This is often true of products with a high level of customer participation. For example, we can assume that additional services offered in the private wealth management sector lead to greater customer satisfaction and also greater customer loyalty.
Figure 1: Relationship between customer satisfaction and customer loyalty (Source: based on Homburg/Giering/Hentschel 1999, p. 185)
Figure 2: Relationship between customer satisfaction and customer loyalty (Source: based on Homburg/Giering/Hentschel 1999, p. 185)
With other products (often commodities, or products that can be compared easily), there is a zone of indifference within which an increase in customer satisfaction has no – or only very little effect – on customer loyalty. It has been shown that additional services, such as discounts when paying for gas with a debit card issued by a specific provider, do increase customer satisfaction. Yet they actually have very little influence on customer loyalty. Outside this zone of indifference, customers react more strongly to efforts to increase customer satisfaction. In this situation, we talk about a saddle-type curve between customer satisfaction and customer loyalty. Figures 1 and 2 show examples of these two relationships between customer satisfaction and customer loyalty.
Customer orientation in developing new products and services
For some years now there have been claims that companies should orient their innovations more strongly to customers. In 2002, the INSEAD business school in France evaluated 100 new product innovations from 30 international companies. Three types of innovation were identified:
While 86 percent of the innovations fell into the “me too” and “marginal improvement” categories, the “real innovations” generated 38 percent of the additional sales achieved and as much as 61 percent of the profits gained from all innovations. These innovations stood out due to their high degree of customer participation. They were able to pick up on real or latent customer needs and transform these into new products and services. The important thing here is to identify customer needs and communicate these within the company.
One company that is regarded as highly innovative because of its focus on customer orientation is 3M. Founded in 1902 in Two Harbors on Lake Superior as the Minnesota Mining & Manufacturing Company (3M), it initially focused on manufacturing sandpaper. After a fairly modest start, the company underwent rapid growth thanks to two customer oriented innovations for the automotive industry – waterproof sandpaper (1921) and masking tape (1925). Following the Second World War, 3M opened a series of production facilities in the U.S. before expanding into Canada, Mexico, France, Germany, Australia, and the U.K. in the 1950s. In 1951, the American Institute of Management named 3M “one of the five best-managed companies in the United States.” Nowadays, the company employs more than 7,000 technicians and engineers worldwide, working on 45 different basic technologies for six business sectors. 3M holds over 25,000 patents. Over 30 percent of its global sales come from products developed in the last four years.
In a bid to create new products based on customer requirements, the research and development department of 3M focuses on customer needs instead of working mainly on research into new materials, technologies, or processes. The company systematically identifies and utilizes lead users in its development of “breakthrough” innovations. Lead users are those individuals whose needs exceed the requirements of the mass market. These users expect an innovative solution to deliver particularly high benefits, no matter what form these come in. They also tend to be discerning potential purchasers interested in the technical aspects of the solution. 3M worked closely with the Massachusetts Institute of Technology (MIT) to develop a process in which teams consisting of four to six members of a company’s research and development, production, and marketing departments worked on such innovations.
The team members began by identifying important trends in their market, then used these to derive potential new markets and, finally, the associated innovations. For example, a team representing an automotive supplier might be tasked with developing a new braking system for passenger cars. They would start off by identifying technological trends for brakes and thinking about potential technical solutions.
In the next step, they would broaden their focus and speak with external experts to complement the knowledge already present within the company with additional sources.
This information forms the basis for the third step – identifying the lead users. When identifying this group, it is important for the team to look beyond its own sector, preferably using experts from their own industry as intermediaries. Discussions with car brake experts could, for example, reveal that other sectors, such as the truck and aviation industry or the military, are also examining the subject of rapid braking. As the demands made on brakes in these sectors will be disproportionately higher than for cars, we can assume this might throw up some interesting proposals for solutions.
The fourth and final step involves developing market-ready concepts. At 3M, this usually starts with a two- or three-day workshop that brings together the lead user team from the company’s own industry, industry experts, and lead users from other sectors. The aim is to filter out and refine three or four of the many options available, choosing ones that, based on the company’s own challenges, promise a high level of customer acceptance at a reasonable cost.
At 3M, the company’s own experts and its customers thus serve as the starting point for identifying lead users who will help to develop innovative products. This concept has become so successful that 3M has now set up a Lead User Process Center of Excellence that shares knowledge about the process with all units.
Another example of new products and services designed to fulfill customers’ wishes is Q110, Deutsche Bank’s “branch of the future” in Berlin. Since opening in September 2005, Q110 has attracted more than one million customers and visitors. The branch is a sort of central laboratory for innovations. It is a place for testing innovations for products, processes, technologies, or marketing strategies. The tests take place in a controlled environment so that customers’ reactions can be observed and evaluated, and products can be developed and adapted. The customer lies at the heart of this laboratory of innovations; ideas that are tested successfully here can then be implemented in over 1,000 other branches.
One such innovation is the new “VorsorgeApp” pension app for the iPad, which is used in customer consultations. Customer information is entered directly while the customer is present. This is then used to calculate the customer’s own personal pension needs. This process raises awareness of any potential gaps in pension provision and can open the door to further consultation.
“Digital signage” is another innovation being tested in the Q110 branch. Customers use this “interactive shop window” to source their own information using a labeling system for Deutsche Bank’s investment products, for example. Seven simple symbols provide clear guidance for customers on the risk and investment grade of a specific product. Customers can navigate their own way through the app. Integrating smartphones allows customers to transfer the selected information to mobile end devices.
The innovations in Q110 also include specially developed applications for the Microsoft Surface presentation medium. With these applications, financial topics can be presented concisely and managed intuitively in customer consultations. Customers also have access to the new “Mein Zukunftsplaner” application, a planner that helps them visualize their hopes for the future, such as acquiring real estate, and develop an implementation timeline for these plans. At the same time, customers are given information about the financial implications their decisions could have on the potential time of implementation or interest rates, for example. At Q110, the main aim is to start talking with customers. Because this is one way to reveal customers’ existing and latent needs and ultimately transform these into customer-oriented products and services.
Increasing the repurchasing rate is a further element of customer orientation. The aim here is to increase customer satisfaction and loyalty to consolidate internal customer orientation.
Fashion label Zara is one company that is well ahead of the game in this respect. The first Zara shop opened in 1975 in La Coruña, northwestern Spain. By the end of 2010, there were over 1,400 branches in 77 countries with total sales of more than 6 billion euros.
All the branches worldwide have a similar design, with large sales floors, a predominately white color scheme, excellent lighting, and plenty of mirrors on the walls. While competitors like Gap, Benetton, or H&M spend an average of 3 to 4 percent of their sales on advertising, Zara spends just 0.3 percent. Instead, Zara invests in dressing its shop windows and changing them at frequent intervals, sometimes as often as weekly.
Zara describes itself as a fashion follower, not a designer or trendsetter. Rather than predict or even create fashion trends, the company focuses on understanding which fashions and pieces customers want and on supplying them as quickly as possible. The key here is the speed at which Zara collects the relevant information from customers in its branches, processes it, and translates it into fashion garments. Over 200 designers at the company’s headquarters in La Coruña keep a very close eye on the fashion industry, particularly the trendsetters. They go to the big fashion shows, focusing intently on materials, colors, and trends that can be adapted quickly by the mass market.
Just how quickly Zara reacts is illustrated by the announcement of the engagement between Spain’s Crown Prince Felipe and Letizia Ortiz Rocasolano several years ago. The bride-to-be appeared in a white trouser suit. Just under four weeks later, very similar suits were on the racks in Zara. Two years prior to that, Zara stocked pieces inspired by Madonna’s stage costumes. In Europe, these were on sale by mid-July, a mere four weeks after the Drowned World tour started in Barcelona and before it even moved on to the U.S. In the fashion industry, this is an incredibly short reaction time.
From developing a collection to getting it into the shops, the competitors mentioned earlier need a period of up to twelve weeks. That is due in no small part to the fact that these companies manufacture their clothing almost exclusively in low-wage countries in Asia, while Zara’s production operations for the European market are located mainly in Spain and Portugal.
More than 40,000 templates are created annually for the different Zara collections. Because this process is supported by IT, the templates can be rapidly transformed into patterns. Designs are often available in just three colors and sizes. With more than 10,000 new designs each year, Zara manages to change its collection up to 14 times annually. This is significantly more often than its competitors H&M or Gap, which introduce a mere 2,000 to 4,000 new designs into their shops and change their collections only seasonally.
The fact that Zara’s collections change constantly affects customer satisfaction and repurchasing rates in various ways. For one thing, customers visit Zara shops an average of 17 times per year, compared to an average of five visits to H&M, Benetton, or Gap. For another, Zara customers make purchases much more often because they know that the garment will very probably be sold out by their next visit. Frequent changes to the window displays support this trend.
Naturally, data about the garments bought is also evaluated to establish which items were purchased where and when, and in which combinations. But Zara does not rely solely on IT-based data. It also involves employees in the data collection process. There are regular round tables with designers, sales staff, and employees from the production side. Observations made by the fashion-conscious sales staff are particularly useful in helping the design team pinpoint trends from other brands that very fashion-forward customers are already picking up on.
All of this makes Zara a perfect example of how a company can take customer needs – in this case, the desire for fashionable-yet-affordable clothing – and make them the starting point for its own value creation.
Customer orientation for encouraging changes in internal culture
The third objective of increased customer orientation is to initiate and encourage changes to the internal corporate culture. By setting up customer councils and bringing executives closer to the customers, companies can create a culture that is firmly centered on the customer.
One company that has been very successful in this respect is DSM. DSM (Dutch State Mines) was founded in 1902 as a state coal mining company. Over the years, it developed or acquired additional fields of business, expanding into fertilizer production in the 1930s and polymer manufacturing in the 1950s, for example. The focus increasingly shifted to material sciences in the 1970s, fine chemicals in the 1990s, and, as of the millennium, biotechnology.
DSM has been listed on the Amsterdam stock exchange since its privatization in 1989. By embracing new technologies and products – some internally and some through acquisitions – DSM has grown enormously and numbered over 23,000 employees by 2009. Just under a third of those were Dutch. Now there are over 200 branches in 49 countries. In 2009, DSM had sales of a good 10 billion euros, with profits of nearly one billion euros.
In the years leading up to the millennium, innovations were the most decisive factor in this success and the rapid growth of DSM. Most of these were generated in the central research and development (R&D) department and then launched on the market by the various business units. R&D was traditionally led by a scientist or technician who, as Chief Technology Officer (CTO), was a member of the board of management. The company’s activities in this field focused primarily on process innovations and ways to improve the efficiency of production. While the decentralized business units were customer-oriented, the culture in central research and development was focused inwards and removed from the customers.
In the period from 2000 to 2006, the central R&D department produced fewer and fewer innovations and the innovations portfolio of some business units threatened to dry up. Among other things, management believed that the problem was attributable to the R&D department’s culture. The CEO at the time, Peter Elverding, set out to slowly change this. To boost customer orientation in the entire organization, and in R&D in particular, he established an Innovation Center (IC) and appointed a Chief Innovation Officer (CIO). By doing so, Elverding made it clear that customer and market orientation were a priority at DSM, and that innovation meant more than just new technologies and materials. Rob van Leen was named CIO. He had joined the company from Gist Brocades, where he was in charge of a business unit. Gist Brocades was acquired by DSM in 1998. Rob van Leen had completed a PhD in molecular biology and a business management degree.
DSM’s central R&D department became part of the Innovation Center, and the existing CTO now reported to van Leen. In addition to central R&D, the Innovation Center was also home to the Corporate Venturing, Intellectual Property, Licensing, Incubator, Emerging Business Areas, and Innovation Services departments.
The new Innovation Center intensified cooperation with the six business units to bring the central research department even closer to customers. There were now regular meetings between staff from sales and R&D, while open innovation processes created opportunities for intensive collaboration with external groups, such as universities, research institutes, and customers.
All of this resulted in tremendous changes in the innovation culture at DSM. An insular, bureaucratic culture with a pronounced focus on technology was transformed into an outward-looking company that put the customer’s needs center stage. Based on products or services developed in each preceding three-year period, sales generated by innovations increased considerably. In 2010, it reached almost one billion euros, accounting for a good 10 percent of the overall sales. The company now launches an average of 60 innovations on the market annually, compared to 25 per year on average before the IC was established. What is more, the intensified focus on customer orientation has seen the success rate of the innovations increase by 160 percent. In 2009, these efforts earned DSM the Outstanding Corporate Innovator (OCI) Award presented by the Product Development and Management Association (PDMA).
Promoting customer orientation within the marketing mix
Customer orientation is achieved through consistent use of the tools in the marketing mix (i.e., product, price, sales, and communication policies) on openly expressed and latent customer demands. As a part of product policy, efforts to customize the portfolio, additional services, and service guarantees present opportunities to increase customer satisfaction. Cars are one example of a high level of customization. In Europe at least, cars in the mid and upper ranges are made according to customer-specific requirements. Each car that rolls off the assembly line has been commissioned by the customer. Because of the large number of different models, virtually no two are identical. The Apple iPhone is another example of achieving customer orientation through customization. Thanks to small programs called apps, users can tailor their cell phone to suit their own specific requirements. As Apple finds out a lot about the user behavior of its customers, it can ensure the next generation of the iPhone delivers what customers want.
Online sales of the 2007 album In Rainbows by British band Radiohead represent an interesting experiment in using satisfaction to determine price. Following the expiry of its contract with EMI, the band took it upon itself to sell the new album online and let customers decide what to pay for it. Although the band never released figures, newspaper reports claimed that the album was downloaded 1.2 million times within 24 hours. In surveys, two thirds of customers said they had paid for the album. The average price cited was 6 pounds, around 40 percent less than the normal price of a CD at that time. In addition, the band received data about the people who downloaded the album, such as age, location, and listening habits. The band used this data and additional surveys to compile the discbox they later released on the market.
This high quality box was special because it contained two additional tracks, a vinyl record, a photo book about the band and the production of the album, concert photos, and a booklet with song lyrics. In this case, the unconventional pricing policy and sales concept helped to launch an innovative product, the discbox, onto the market. This also achieved a higher repurchasing rate. In a subsequent survey, discbox customers said they had downloaded and paid for the album beforehand.
Customer orientation can also come in the form of direct deliveries, customer clubs, inviting customers to visit production facilities, subscriptions, or choice of site. For example, some vineyard owners deliver their wines personally to customers’ cellars. Apart from the fact that customers welcome this service, the vineyard owner also gets a chance to see which other wines are in the cellar, in which volumes, and from which regions. This is all important information that can be used to create customized offers by putting together specific wines or special vintages. It can also be used to develop new wines. This boosts the repurchasing rate.
Customer orientation can also be achieved using the customer councils, the forums, and clubs mentioned earlier, complaints management, and personal communication. Figure 3 shows a selection of options within the marketing mix.
Promoting customer orientation via structures, processes, and systems
Alongside the tools and instruments in the marketing mix, companies can also use structures, processes, and systems to promote customer orientation.
If we return to our previous example of DSM, we see that appointing a Chief Innovation Officer (CIO) and deciding that the Chief Technology Officer (CTO) must now report to this CIO sent out a clear message to the company: Innovation is more than just technology, and it must always be focused on the customer. The company also redefined the processes that are driven by innovation. Some were centralized, such as patenting and corporate venturing, while others were decentralized, such as information gathering and early innovations testing. Processes that require close customer interaction, such as information gathering and testing, were decentralized, while processes requiring no major customer interaction were centralized.
Figure 3: Ways to promote customer orientation within the marketing mix (Source: based on Bruhn 2001, p. 145) policy
Process blueprints are one way to ensure internal company processes are consistently focused on customers. With these blueprints, it is possible to present the entire process and individual process steps chronologically. In addition, they are categorized based on whether the customer is directly involved (line of customer integration), whether the process is visible to the customer (line of visibility), and whether management is involved (line of internal interaction). The aim of such blueprints is to check the efficiency of processes. They can also be a means of initiating communication with the customer or informing customers and employees about individual process steps. As the processes are presented concisely, they can also be checked for customer orientation.
In addition to all this, corporate systems for information, planning, and controlling, must be designed to support customer orientation. Information systems are often the hub of a company’s customer-oriented activities. In the case of Zara, the close links that state-of-the-art information systems create between customers, sales staff, and suppliers are largely responsible for the company’s speed in developing, producing, and distributing new collections. Similarly, at Q110, the primary focus is on rapidly evaluating the customer response to innovations. For that reason, customer-oriented information systems have to fulfill at least three basic conditions. Specifically, these systems must:
In terms of communication systems, it is important that both internal and external communication focuses on the customer. Most companies concentrate mainly on external communication and neglect the internal side. However, as the examples of DSM and Zara showed, internal communication is crucial, especially when it comes to promoting customer orientation.