Today more than ever, financial services (FS) firms are operating in a dynamic, highly complex business environment. Globalization, new products and services, and advances in technology the Internet, knowledge management/data warehouse systems, portals and wireless communications such as personal digital assistants, mobile phones, and others are just a few of the "drivers" that are changing the competitive landscape. As a result, the FS industry continues to experience:
Increasing competition as new, diverse competitors continue to emerge.
- More demanding customers who can obtain relevant real-time information, empowering them to make more informed business decisions faster.
- Changing business models designed to improve how firms attract, service and interact with their customers.
- Exciting, new channels for communicating and delivering products and services to customers.
In response to these dynamics, we have observed two key macroeconomic trends that are becoming prevalent throughout the FS industry. The first trend is that firms are moving away from mergers, consolidation and scale strategies. Instead, these companies are focusing on the expansion of products and services, most notably within the capital markets, investment banking and retail investment areas. The second trend is firms are suddenly viewing information as both an important corporate asset and a competitive weapon.
Focusing on the Retail Sector
The retail sector of the FS industry refers to financial services organizations and the products they offer to consumers rather than businesses. For instance, personal banking, mutual funds, investment advisory, retail brokerage, insurance, credit cards and others comprise the FS retail sector.
Within the retail sector of FS, firms are facing increased competition from nontraditional financial services companies. At the same time, there continues to be customer interest in migrating to integrated financial instruments such as investment accounts and brokerage vehicles. The downward pressure on traditional accounts, related balances and spread compression is causing many organizations to develop new methods of attracting and retaining customers to ensure their "share of wallet" grows relative to that of their competitors.
To effectively address these market dynamics, we believe that the leading retail FS organizations will have to redesign their business models according to three fundamental strategies:
- Component-Based Business Model (CBBM) A component is a group of tightly coupled business activities supported by the appropriate information systems, processes, organizational structures and performance measures. Each component serves a unique purpose and collaborates with other components within the business model, using established cost and service-level agreements. Some examples of components in the retail sector of the FS industry are distribution, manufacturing and operations.
- Multichannel Capabilities Improving customer service and multichannel integration by better understanding customer preferences and channel dynamics, including "cost to serve"; using this information to develop channel strategies that improve customer service and profitability.
- Customer Segment Organization Transforming retail operations, from being product- centric to being more customer-centric. Most firms will start with broad meta- segments rather than the micro-segments used for marketing purposes.
To effectively implement these three strategies, organizations must have integrated information across the entire value chain that is readily accessible throughout the enterprise.
The Growing Need for Relevant, Actionable Information
Integrated analytics, or what we at PwC Consulting call iAnalytics, refers to the integration of information across a company's complete value chain. This includes data stored in customer relationship management, human resources, financial management, supply chain, e-business and enterprise resource planning systems. This information is further enhanced with advanced analytics that offer forward-looking, integrated, actionable data that can be used in everyday operations.
The concept of integrated analytics within the FS industry includes five key segments: financial analytics, customer analytics, workforce or human resources (HR) analytics, strategic sourcing and balanced scorecard. While focused on a specific analytical area, each of these offers the most value when they are integrated with each other.
Financial analytics within the retail FS industry must go beyond merely satisfying the need for regulatory and statutory information; it must be expanded to include integrated, granular, event-based profitability data that supports day-to-day business decisions.
With integrated financial analytics, the finance function becomes an important enabler of the company's business strategy. As the role of finance continues to evolve to support future retail FS business models, financial analytics will be actively used throughout the organization. Transformation into component-based business models and managing along customer segments will rely on better, more flexible financial analytics. We will see leading organizations integrate not only financial and nonfinancial data, but also use profitability results for performance measurement (financial data used to motivate and measure the performance of business units, product segments and individuals, often including internal profit sharing across divisions) and economic evaluation (the measurement of economic, risk-adjusted return on multidimensional views used for business decisions).
From a technology perspective, the data warehouse is crucial for realizing this powerful new environment as substantial amounts of data from multiple sources, combined with powerful analytic tools, are required.
The emergence of new business models (component-based architecture and customer segments), the changing role of the traditional finance department, modifications to customer- related processes (multichannel delivery) and advances in technology all present the finance function with tremendous opportunities and challenges. Financial analytics are paramount to meeting the ongoing pressures of the external and internal environment of retail FS. Understanding the economic profitability of businesses, products, customers, channels, geographies, partnerships and joint ventures is a fundamental ingredient to ensure competitive growth and the continued effective use of a company's business intelligence.
Alternative and integrated views of financial information and economic performance are "must haves" for retail FS.
The intense competition for top customers is now the single biggest challenge for retail FS companies. Customers now have better access to information about available products, services and channels than ever before. Organizations that thrive in tomorrow's environment will realize the benefits associated with understanding current and prospective customers from both economic and behavioral perspectives.
Customer analytics embodies the people, processes, data and technologies required to integrate customer information across all channels and analyze and better understand customer information. More importantly, it involves using these analytical results to anticipate, influence and measure profitable customer behavior. As more retail FS organizations begin to manage their businesses based on a customer segmentation model, the inclusion of customer analytics will become a necessity.
With an integrated customer analytics strategy, financial institutions can:
- Develop long-term profit and growth strategies using analytics such as customer lifetime value.
- Analyze household and individual customer information.
Develop fact-based strategies for more effectively targeting, interacting with and serving customers.
- Predict which customers may be considering moving their business to the competition prior to the closing of their accounts.
- Proactively identify profitable and nonprofitable customers.
- Measure and tune the effectiveness of their customer segment strategies and tactics.
Develop more accurate customer channel strategies to facilitate more effective, noninvasive marketing programs.
Improve productivity and effectiveness of employees across multiple channels.
Optimize operating costs by identifying which customers to transition to less costly channels.
Proactively manage churn and growth by identifying who to target for acquisition and retention, and who to cede to the competition.
- Develop more effective pricing strategies, moving to customer or consortium-based pricing.
- Operate more profitably by deploying better risk management, hedging, actuarial and other programs.
Customer analytics offers organizations:
- One view of the customer across products and business units.
- Consistent and accurate customer information across the enterprise.
- Closed-loop customer interaction.
- Multichannel integration.
- Understanding of the customer value chain both current and future.
Workforce or HR Analytics
In today's retail FS companies, it is more important than ever to understand the performance of human assets and of the human resources infrastructure and support organizations. In spite of this, most FS firms have only sporadic and simplistic workforce analytics in place. Mergers and acquisitions in FS companies further degrade the ability of companies to gain a consistent view of their human capital. As competition increases and more emphasis is placed on both direct and technology-supported customer contact staff, it will become more important to understand the characteristics of valuable staff as well as the effectiveness of related HR processes.
HR analytics provides these capabilities to line managers in a form and timing that allows them to make informed decisions on the performance of their teams and processes. The emergence of CBBMs increases the need for new types of analytics and metrics, including:
- Workforce Planning: Integrated supply and demand modeling; workforce transitions and deployment.
- Workforce Acquisition: Cost and time to hire; impact of open positions on productivity and cost; new-hire performance and retention.
- Employee Performance and Productivity: Performance distribution; correlation with training and career path; alignment with compensation.
- Compensation and Benefits: Alignment with performance; total compensation; pay equity and regulatory compliance, market- rate compensation.
- Employee Development: Training costs and return on investment (ROI); training impact on performance, productivity and retention; workforce competencies; career and succession planning; employee mobility.
- Employee Satisfaction: Correlation to customer satisfaction and revenue; attrition rates and turnover analysis.
While this analytical area has historically been viewed as an HR-dominated silo, companies are realizing the benefits associated with integrating human resources with other types of information across the company. Following are some examples:
- Linkage to Financial Performance Measures: HR measures of individual performance should be both aligned and integrated with the balanced scorecard measures described later in this article.
- Shared Data: HR analytics shares data, primarily reference data, with financial analytics.
- Customer Analytics: Workforce analytics that measure employee performance, productivity and effectiveness are an important measure as they relate to customer service and other customer-facing activities.
While HR analytics is an emerging area in retail FS firms, there is strong evidence from other industries of the value and returns from these investments. At the same time, the other analytical areas need to incorporate employee information and metrics to increase the ROI and the effectiveness of the information.
During the past 18 months, as the FS industry focused more attention on operating efficiency and cost containment, strategic sourcing analytics have provided tremendous value and ROI.
Just as customer analytics leverages and integrates a holistic view of each customer and applies analytical techniques and tools to better understand and predict customer behavior, strategic sourcing is similar, but focuses on a company's suppliers.
Through strategic sourcing analytics, a company is able to analyze procurement spending across the enterprise. As a result, companies are achieving immediate and significant savings by:
Negotiating better terms and discounts with suppliers as they have new access to "total global spending by vendor" information.
- Reducing the number of authorized suppliers, thus reducing administrative costs and also negotiating better terms with fewer suppliers.
Improving quality by actively monitoring supplier quality, timelines of delivery, etc.
- Minimizing inventory levels by consolidating purchasing and inventory of commonly used items.
Through the enhanced visibility and analytics applied to strategic sourcing, some FS firms have achieved project payback in as few as six months, with recurring annual savings often measured in the millions of dollars.
The balanced scorecard is a focused set of performance measures derived directly from the business strategy of an organization. Strategic objectives are translated into performance measures that are categorized into four dimensions: innovation, process, customer and financial. These dimensions are designed to align with strategy, reflect performance across the entire enterprise and represent cause- and-effect relationships across each dimension.
Retail FS firms have used balanced scorecard concepts such as branch scorecards, call center metrics, private banker scorecards and others for many years. Generally, they have been deployed within a single branch function where the family of metrics is representative of the range of activities for which a unit or individual is responsible. As the retail FS business adapts over time and becomes more component-based, we anticipate there will be a resurgence in executive-level performance measures. This will form the nucleus of future balanced scorecard applications. These executive measures will then be cascaded through the business units and functions to ensure consistency, proper alignment and accountability at all levels throughout the enterprise.
Implementing balanced scorecards for business components will not be a luxury as they are sometimes viewed today. They will be an absolute requirement, both to understand functional performance and to serve as the basis of component management incentive compensation. As an example, managing along customer segments and understanding the performance of multichannel delivery will require balanced scorecard measures linking operational events to strategic objectives.
Developing performance measures that reflect your business strategy and the causal relationships impacting these measures provides a powerful basis for linking a data warehouse to important business requirements. This linkage ensures the data warehouse is an effective and valuable tool for supporting business decisions and actions throughout the enterprise.
Developing an effective and integrated balanced scorecard solution offers the following benefits:
- Links the company's strategy with performance measures and cascades these measures and analysis throughout the enterprise.
- Delivers role-based business intelligence to the information users in a timely and personalized manner.
Integrates a company's information assets across the value chain, including customers, partners and suppliers.
- Combines advanced technologies and analytics with key processes to positively affect individual behavior.
Thus, the information that individuals receive is both relevant and actionable.
Best Practices for Success
With the changing environment, and new requirements for more sophisticated and timely analytics, FS firms must know how to invest intelligently to build their analytic capability. While data warehousing and technology continue to provide the foundation for integrated analytics, the integrated nature of new business models is forcing organizations to think about their analytic needs and solutions more holistically requiring IT professionals to bring together diverse populations of users and data sets into a holistic, yet flexible architecture.
Based on our experience and the observations of numerous FS clients, we have identified the following four best practices that have proven to be successful when implementing an integrated analytics solution:
- Use an iterative approach: Attempting to address the comprehensive analytic information requirements for the entire organization at one time is too daunting a task unless the work is divided into manageable work streams.
- Assess enterprise data architecture: Once the individual requirements are understood, the organization should assess and establish an enterprise data architecture strategy. The strategy inherently differentiates the value and characteristics of analytic information and its differences from online transaction processing (OLTP) data.
- Invest incrementally with a long-term strategy: To manage risk and realize early benefits, successful organizations will invest gradually, building momentum and support for the modern analytics environment, and they will do so in a manner that is consistent with the enterprise strategy.
- Establish strict control points for shared data: This is perhaps the most difficult of our recommended best practices because it will come into play only in response to conflicts. Strict controls must be enacted from the outset to ensure that appropriate and consistent organizational responsibilities, processes, standards and infrastructure are in place throughout the implementation program.
Preparing for the Future
The ability to capture, integrate, analyze and deliver information will be the single biggest differentiator for FS firms during the next decade.
Retail FS organizations that develop and execute a long-term strategy for integrating and delivering the inherent power of information will experience the rewards of high growth, profitable customer relationships, efficient operations, optimal returns on capital, minimized risk, etc. The leading retail FS organizations will learn how to adapt to an information-based management philosophy that enables three main strategies: component-based business models, multichannel capabilities and customer segment organization. Realizing this vision will be challenging, but the rewards are enormous.
To this end, one thing is clear: retail FS organizations must effectively leverage information to better serve their current and prospective customers in order to excel in today's business environment and better meet and exceed shareholder expectations.
PwC Consulting refers to the management consulting and technology services businesses of the member firms of the PricewaterhouseCoopers network of firms.
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