RBC is lauded in books and articles as an example of a company that has put customers at the forefront. But that doesn’t mean the Canadian financial institution is putting profits aside for the sake of customers. RBC, the parent company of my organization, RBC Centura Bank, found a way to satisfy customers and the bottom line through value analysis.
The foundational analytics for RBC are in client value measurement—or more precisely, the client-value measurement application that leverages the comprehensive and detailed information derived from customer/ account behaviours and delivers multi-dimensional results that RBC has effectively applied for performance management and business monitoring. A colleague at RBC describes this capability as the “Swiss army knife” for management and the organization.
It has been many years since RBC first declared in its company credo in 1999 that “there is no such thing as an unprofitable customer; there are only unprofitable products and services.” This was because the company had obtained an unparalleled analytical view of profit drivers through revised profitability calculations that incorporated detailed transactions by channel, actual interest and non-interest revenue by transaction and account as well as risk expense allocations. In turn, these allowed RBC to evaluate both revenue and cost and then determine appropriate actions for needed adjustments to support its customer relationship management strategy.
Earlier calculations of client value were useful as initial segmentation tools; however, the profit numbers were “net income before tax” done in a black box. While the algorithms were well-documented, none of the underlying calculations or results were available for analysis once calculations were completed. This left little room for new insights.
But then a new application, co-developed by RBC and Teradata, was installed, and a new world of analytic potential opened up. The application is a rules engine that provides a disciplined methodology for assigning mathematic treatments to the transaction and account details, but it is flexible enough to support changes to the rules based on changes occurring in the business. And while there was significant value in enhancing the early client value measures based on greater precision in the detail of revenues and costs, the greatest benefits are derived from seeing the results of the interim calculations.
‘It puts customers and customer portfolios on at least equal footing to traditional product portfolios.’
The ability to answer questions previously unanswered and, more importantly, those that had gone unasked led to us to find value where we previously had not. In one case, a particular account had been analyzed as unprofitable, but because the customer relationships associated with the account tended to be higher value, we did not take the customary response and increase prices.
Similarly, as RBC performed further analysis of the data, we found particular transactions that carried high labor costs. Management was able to address the cost issues at the transaction level without a negative impact on clients: a win-win for the bank and clients.
We discovered, through similar analysis of a segment of unprofitable youth-owned accounts, that the cost-allocation methodologies were valid but misaligned and ineffective for relationship management support. In brief, the allocation of channel costs at the account level were not representative of actual client behaviors, which resulted in over-allocation of some costs, making certain accounts—and clients—appear unprofitable. Again, management could modify the allocation methodologies and adjust account features to restore profitability without a negative impact on the clients.
In effect, the application translates all activities—all transactions by channel and account level—into financial measures and standards for these analyses. The ability to evaluate the full range of details yields new insights that can support new levels of differentiation aligned to customer relationship management objectives.
Higher customer profile
And with a supporting organizational design, it puts customers and customer portfolios on at least equal footing to traditional product portfolios. Importantly, it goes beyond the measurement of the current and recent past contributions, as it can support evaluation of potential contributions as well. And the dimensions for the past, current and potential contributions expand from clients and accounts, to all facets from channels and networks to campaigns and activities and beyond.
It was this capability that provided RBC with the information and analyst insight to acknowledge that “channel profitability” in an multi-product/ service, multi-channel, financial services organization was inappropriate and certainly not achievable, or warranted, given the data available. In fact, the detailed transactions supported the necessary cost allocations, but the information needed for appropriate revenue allocations was simply not available because we didn’t capture the relevant details.
In sum, the assumptions required for a full P&L would render the results meaningless and potentially dangerous for decision-making. And in fact, the cost summaries would be more than sufficient to support investment decisions and other management needs. In turn, this insight had implications for future data capture opportunities, cost study priorities and even organization design.
RBC is now being lauded in books (see Don Peppers’ and Martha Rogers’ Return on Customer: Creating Maximum Value from Your Scarcest Resource, Currency, June 2005) for its innovation. RBC shows how the ability to measure customer portfolios with the same disciplines as product portfolios can support new performance standards based on new views of customer value and attendant relationship strategies.