CRM Case Study: Optimizing Relationships at National Australia Bank, Ltd.

CRM Case Study: Optimizing Relationships at National Australia Bank, Ltd. 026:06R January 2001 Kathleen Khirallah Highlights The National, lead bank for the National Australia Bank, Ltd (NAB), has acted as the holding company s test-bed for methodologies and technologies related to customer relationship management (CRM) and has been pursuing a CRM business strategy for over 10 years. The National formally recognized a CRM business strategy as a core value of the bank in 1988 before acquiring CRM-related technologies. Since then, the bank has continually refined its vision of relationship management and how best to apply it at the customer interface. It has acquired technologies to realize this vision and integrated them into the bank s infrastructure. One key technology that has been instrumental in the National s success is from NCR. Within the National, serves as the communications gatekeeper, managing the frequency, content, and channel method for customer interactions. Through October 2000, the Leads program has produced over 1 million sales leads representing AUS$4 billion in sales opportunities for the relationship bankers of the National. Unlike the vast majority of banks around the world, NAB has actively begun to tailor its organization to its customer segments. At present, the NAB has defined six major customer segments for individuals and businesses and manages each of these segments as a global business. Few traditional banking organizations have even started to shift their management focus to a customer-centered organization. Introduction This TowerGroup Research Note traces the development of the customer relationship management (CRM) strategy within the National, lead bank of National Australia Bank, Ltd., and focuses on some of TowerGroup Research Notes are available to subscribers on the Internet at www.towergroup.com. ª 2001 TowerGroup, Needham, MA USA

the technologies the bank has adopted to support its business strategy. In particular, this Note investigates the role of, a solution from NCR, in the evolving execution of the National s relationship management strategy. For more information on, see TowerGroup Research Note 022:01RC, Pseudo-Suites: IBM and NCR Weigh in with Differing Approaches to Customer Relationship Management. National Australia Bank, Ltd. (NAB) is an international financial services holding company that committed itself to a CRM business strategy over 10 years ago and has witnessed significant growth and expansion in key customer segments as a result. At present, the holding company operates across four continents and 15 countries. Globally, NAB has an aggregated asset base of over AUS$250 billion, is ranked as one of the 50 largest banks in the world, and serves 9 million customers. The lead franchise for NAB is the National, a Melbourne-based bank offering a full range of financial services with over 4.5 million customers. It should be noted that the National operates in an environment that is relatively hostile to large banking institutions. In a recently completed study of corporate reputations in the Australian market, the four major banks were unable to score higher than 35th. While all the large Australian banks are recording steady profits, they are also working intently to move expensive transactions away from the branches and into cheaper, electronic channels. One result of this strategy is an outburst of protest against the closure of branch offices. Despite the harsh criticism directed toward all the Australian banks by consumers, the National continues to pursue an innovative, relationship-oriented business strategy. A fundamental business strategy for the National and all of NAB is a focus on providing individuals and small business customers with superior tailored financial solutions. In essence, the National has always been a business bank and thus a proponent of relationship management. Interestingly, the National chose a relationship orientation and became a very early adopter of CRM strategies. In recent years, the bank has embarked upon a variety of strategic initiatives that have led it to search out software solutions that would support this CRM philosophy. Exhibit 1 provides a historical overview of the initiatives that support relationship management at the National. ª 2001 TowerGroup 1

Exhibit 1 CRM Initiatives at the National 1988 1989 1990 1994 1998 Architected a formal system for Relationship Banking that was universal. This became as a core strategy for NAB. Developed relationship management & profitability system linking all customer and banking products. Implemented relationship banking system & platform for business banking. Extended relationship management & profitability systems to cover investment products. Implemented relationship banking system & platform for premium customers. 1999 Implemented customer relationship data warehouse linking all customer information (products, channel usage, profitability) in Australia, New Zealand, & US. Implemented sales lead system using relationship data. 2000 Commenced global implementation of Siebel CRM solution. Sources: The National, TowerGroup Unlike most financial organizations that claim a commitment to CRM, the National has been investing in CRM methodologies and related technologies for well over 10 years. This span of time has allowed the National to refine its thinking and customer strategies while continuing to invest in relationship-fostering technologies. While the National has not mastered CRM, it has made significant progress along the learning curve. One technology that has had a serious impact on the National s CRM initiatives is the solution from NCR. Background The entity now known as NAB was established in the state of Victoria in 1858 as The National Bank of Australasia. Throughout most of the 20th century the bank grew as a result of numerous mergers with regional banks in Australia. In 1981, the bank merged with the Commercial Banking Company of Sydney to form the National Australia Bank, Ltd. Since then, the bank has continued to grow aggressively, albeit primarily through a series of mergers with both regional and international banks. At present, National Australia Bank, Ltd. has major bank holdings in Australia, New Zealand, the UK, Ireland, and the US. Although the geographic span of National Australia Bank, Ltd. is extensive, the choice of institutions to add to the group have been anything but random. The acquisition of banks in the UK, Ireland, the US, ª 1999 TowerGroup 2

and New Zealand was based on a conscious decision to diversify both income streams and risk. Of equal concern to NAB has been that these geographies are English speaking and known as being attractive retail banking markets. Exhibit 2 provides an overview of the banking organizations held by National Australia Bank, Ltd. Exhibit 2 Acquisitions Expanding National Australia Bank, Ltd. Geography Bank Year of Acquisition United States Michigan National 1995 HomeSide Inc. 1998 Australia The National 1858 MLC 2000 New Zealand Bank of New Zealand 1992 Ireland National Irish Bank 1987 Northern Bank 1987 United Kingdom Yorkshire Bank 1990 Clydesdale Bank 1987 Source: TowerGroup Global Franchise Strategy at NAB Just as the acquisition of banking companies has been anything but random, the management of such a diverse set of holdings has been extremely disciplined. NAB has implemented the global franchise model for managing its far-flung banks. Within NAB, a global franchise executive, or franchiser is responsible for the growth and performance of the customer segments across all geographies. The CEO for the bank in each geography acts as a franchisee for NAB and is responsible for performance management, brand promotion, and regulatory compliance at the regional level. Simply put, the country CEO must manage the franchise for regional performance and work with global heads of Business & Personal Segments to assure that each customer segment is receiving appropriate investment and focus. The extent of NAB s commitment to the global franchise model is evident in its well-published list of strategic initiatives. The following are the five core strategies that govern NAB s global business: 1. Drive performance and growth in businesses that rely on relationship management and tailor financial services to win at the customer interface. 2. Accelerate the growth of selected global businesses where NAB s capability, efficiency, and service give the bank an competitive advantage. 3. Stake out positions in areas key to the evolution of financial services. ª 2001 TowerGroup 3

4. Manage the bank s other businesses for value. 5. Build diversified income streams. This global franchise model is fairly unusual in that corporate performance can easily be assessed on two dimensions the ability to improve the performance of specific customer segments as well as franchise stores in each geography. While the majority of financial services institutions (FSIs) around the world talk about CRM, few organize their management ranks so clearly around customer segments. Arguably, until FSIs create a customer segment management infrastructure, any discussions of customer relationship management at most FSIs will lack real substance. And yet, the importance accorded to customer segments and relationship management within NAB is clearly spelled out by its first core strategy winning at the customer interface. History of CRM at the National As the lead franchise for NAB, the National has served as the group s test-bed for CRM strategies and technologies and has been actively experimenting with CRM strategies since 1988. Once strategies and technologies are proven within the National, plans are developed to export the learning and techniques to other banking subsidiaries of NAB. National Australia Bank, Ltd. is able to leverage the work done within the National to improve and maximize customer relationships and then engages in a global technology transfer process that facilitates the implementation of customer strategies at all of its franchises. CRM at the Customer Interface As an early step in the process of implementing a CRM business strategy, the National focused on defining the elements and attributes of a successful customer contact. The bank clearly understood that customer contacts are both proactive and reactive. Often the contact is reactive: the customer initiates the contact and has a specific agenda to which the bank can only react. Once the National accepted the reality of proactive and reactive customer interactions and their different demands upon the FSI, the bank was able to begin articulating its vision or definition of successful customer interactions. Within the bank, the following characteristics are viewed as integral to successful customer contacts: Anytime, anywhere access and navigation to friendly, capable, proactive resources that have organizational memory and can execute a streamlined, personalized, secure process to create a consistent and totally satisfactory customer experience while demonstrating a track record of continuous improvement and superior profitability This vision of successful customer interactions is the foundation upon which the bank built its CRM strategy. The acquisition and implementation of technologies were predicated and justified by how well they allowed the bank to achieve its vision for CRM. ª 1999 TowerGroup 4

Chronology of Major CRM Technology Adoption As the National began the build out of its CRM infrastructure, a critical piece in the architecture was the Teradata data warehouse from NCR. The National has been using the data warehouse since 1993 and has specifically built or licensed applications for that particular platform. Soon after implementation of the Teradata data warehouse, the National contracted with Customer Potential Management to license its Target system for relationship management. While Target provided increased marketing flexibility to the National, it wasn t long before the marketing needs of the bank overtaxed the Target system. By 1996 the National was attempting to run 30 concurrent marketing campaigns and the Target system had clearly reached its full capacity. As the National sought to increase marketing velocity particularly through the addition of insurance and securities products, it became clear that a new marketing capability would be required. The National has been experimenting with customer profitability information since the late 1980s. It has used a proprietary system to inform the marketing process, first interfacing to the Target system and now working in conjunction with. Currently the customer profitability system resides within the bank s corporate data warehouse. In 1996, the National entered into joint application development (JAD) efforts with NCR to create a breakthrough marketing application. From the start of the JAD process, the National sought to build an application that would support a high volume of concurrent marketing and sales campaigns for numerous customer segments. The National had been committed to relationship management for eight years when the JAD sessions began understanding and serving the needs of diverse customer groups was imperative. The resulting application,, was operational in March of 1999. NCR formally released the product to the market in July of that year. As evidence of the increased marketing velocity that the National has achieved since the adoption of, the bank initiated close to 100 distinct campaigns during the first six months of 2000. Exhibit 3 provides an overview of the current relationship management system in place at the National. As can be seen in the diagram, is the key to the National s Leads program and provides critical contact management capabilities to the bank. ª 2001 TowerGroup 5

Exhibit 3 CRM Architecture at the National Operational Channel Services CRM/Siebel Customer Touch Points Prod. Admin. Prod Systems Transaction Systems Gateways Insight Engines Channel Services Architecture CRM Front End Interaction Management System Cross Channel Architecture Physical Outlet Mobile Personal Banker Master Customer Database Customer Response Centre Data Warehouse Data Mining Relationship Optimizer National Leads Leads Third Party Internet ATM Kiosks Mail Facsimile Analytical Contact Management Sources: The National; TowerGroup A relatively recent technology acquisition for the National involves Siebel Systems. The bank has contracted with Siebel to implement a global platform for relationship management that will be installed in call centers and provide Internet access to all NAB customers. The initial implementation will be for sales force automation. However, other relationship management tools from Siebel are already scheduled for deployment. While the adoption of CRM technologies began with the analytical and data management capabilities at the National, the execution capabilities that enhance customer interactions are also part of the technology infrastructure. CRM Strategies As the National was busy building and implementing technology applications to support a CRM business strategy, the bank was also refining its understanding of customer financial needs and desires. Even before the technology pieces were fully implemented, the National was experimenting with sales management methodologies, schemes for segmenting the customer base, and targeted messages. Since 1983, the bank has used the sales training and sales management methodologies of Cohen Brown to refine the sales skills of customer contact personnel. Sales training occurs on three levels by Cohen Brown trainers using their materials, by sales coaches deployed to cover all the regions of Australia, and by the bank s Learning and Performance Improvement staff. In concert, these three training vehicles have allowed the bank to make good progress in its quest to refine its sales culture. ª 1999 TowerGroup 6

Within the retail bank, the National developed a matrix of five universal customer financial needs for a relationship with the bank. While some customers might exhibit several of the financial needs concurrently, every customer would exhibit at least one of the following: 1. Funding (all loans) 2. Risk Management/Insurance (P&C, life) 3. Payments/Transactions (deposits, withdrawals, transfers) 4. Investments (depository services, custodian services, securities, bonds, etc.) 5. Information (single statement, portal) As the National develops new products or marketing campaigns, it uses the five universal needs to underline its communication strategy with customers. The bank strives to recognize which of the universal needs each customer exhibits at any given time and to design products and communications appropriate to the customer. Segmentation Schemes At present the National has six major customer segment types within the retail bank. Customers (both retail and small business) are assigned to one of the segments based upon a financial needs analysis and profitability assessment. Exhibit 4 provides an overview of the customer segments at the National. Exhibit 4 Major Customer Segments at the National and NAB Tailored Customer Value Propositions Global Personal and Business Financial Services Custom Business Packaged Business Agribusiness Private Premium Retail Business Business solutions solutions management Partnership Partnership management Cost-efficient Cost-efficient tailoring Transaction Transaction migration Specialist services Specialist services Bespoke specialist Bespoke specialist Expert advice expert Tailoring Tailoring Any Anyplace, any Any time time Low-cost tailoring LowCost Tailoring Transaction migration Transaction Migration Source: The National ª 2001 TowerGroup 7

Creating these supersegments allows the National to categorize customers broadly into easily defined targets. Within each of the major segments, further refinements are pursued regarding current profitability, the customer s share of wallet potential, and demonstrated financial needs. Therefore, the bank has taken each of the six supersegments and has refined them further to define their customers more accurately. After the additional refinements are complete, the bank has a few hundred subsegments for highly targeted marketing purposes. As noted earlier, NAB uses these customer segments across all of its franchises and assigns a global segment manager to maximize the performance of each segment on a global basis. Thus, one individual is responsible for a customer who has been assigned to the premium segment, regardless of where the customer happens to live. The similarities of financial needs exhibited by all premium customers makes this segmentation scheme manageable. Products are developed around these major segments and communications are tailored appropriately. When first introduced into the market in the summer of 1999, was a dynamic strategy and communications tool that allowed financial services institutions to manage all communications with customers at the customer level. was radically different from existing campaign management solutions in that it encouraged FSIs to move beyond communications for segments and to focus on individual customers. In classic campaign management solutions, campaigns are built around target segments. FSIs identify groups of customers that they wish to communicate with and build campaigns with targeted messages to those customer groups. enabled FSIs to change that communications paradigm. Propensity Scoring and Event Detection has two primary components: Event Detective Manager, which searches for clues and triggers of changed customer behavior, and Communications Manager, which manages the planning, development, prioritization, and control of customer communications across delivery channels. Taken together, these two components enable FSIs to react quickly (albeit not in real time) to changes in customer behavior and to mount statistically reliable proactive customer communications campaigns. depends upon transaction-level, behavioral data in the data warehouse to be effective. The system first scores customers for a propensity to respond to a comprehensive series of offers based on a financial needs profile. On a periodic basis (weekly, monthly), it assesses all customers, assigning probabilities as to whether a customer will respond positively to a particular communication. Since all customers are scored, all customers will have a probability assigned. Probability scores are then prioritized for follow-up by the FSI. is then used to scan all customer transactions on a nightly basis to search for customer behaviors that indicate a new opportunity to communicate with the customer. This eventdetection capability allows FSIs to react quickly to changes in customer behavior that signal an opportunity to enhance or maintain a relationship. As with the Communications Manager, all output from Event Detective Manager is prioritized for appropriate follow-up by the FSI. ª 1999 TowerGroup 8

Integration with Ceres In April 2000, NCR purchased Ceres Integrated Solutions, a privately held CRM focused company based in Raleigh, North Carolina. NCR s stated intention was to merge the software with Relationship Optimizer to create an enriched CRM suite of functionality. Ceres had been providing retailers and cataloguers with strong analytical capabilities for CRM but was largely unknown in the financial services realm. The integration of the Ceres capabilities with strengthens NCR s CRM solution and complements its existing Communications Manager and Event Detection Manager capabilities. Exhibit 5 provides a listing of the current customers of in financial services. Exhibit 5 Financial Institutions Using or Implementing /Ceres Customers, by Region CRM System The Americas Wells Fargo Bank Ceres Europe, Middle East, and Africa Sparebanken NOR CTIR CEAL CSS Versicherung Luzern / Ceres Asia-Pacific National Australia Bank Group ICICI (Virtual Universal Banking) Dongwon Securities Co. Shindonga Fire & Insurance Japan Higo Bank Sources: NCR; TowerGroup Aside from the integration of with Ceres, NCR has entered into a development cycle that will include: A personalization wizard for the e-mail channel (9/2000) Integration of optimization technology into all CRM Solution modules (9/2001) A contextual interaction module able to capture customer interactions and dialogs in real time (9/2001) A template writer for the capture and efficient re-use of modeling and analytical tools (3/2001) ª 2001 TowerGroup 9

Exhibit 6 provides an overview of the CRM Solutions modules that will be available in late-2001, once the integration between and Ceres is complete. Exhibit 6 NCR s CRM Solution Modules (Integrating and Ceres) Analysis Modeling Personalization Optimization Interaction Customer Behavior Product/Affinity Percentile Spatial Standard Reports Cross-Segment Percentile Profiling Email Response Event/Threshold Statistical Response Forecasting Response Modeling Product Sequencing Analytical Datasets Contact Simulation Media Mix Personalization epersonalization Wizard Personalization Rules Mass Media Personalization Communication Communication Director Communication Rules Optimization Email Merge Touchpoint Server Contact Management Broadvision Adapter Siebel Adapter Real-time Personalization Analysis Analysis Templates Templates Communication Manager Event Detective Manager Enterprise Rules Campaign Manager Real-time Dialogue Source: NCR at the National and the Teradata data warehouse have formed the cornerstone of the National s CRM initiatives for marketing campaigns and sales leads. Within the National, is used for two distinct types of campaigns, proactive, for sales leads vs. reactive, event driven (i.e., when the bank is reacting to an action or change in customer behavior or status). While the proactive sales leads are developed through predictive modeling techniques to understand customer propensity to purchase products and propensity to respond to a variety of product offers (testing both content and channel preferences), the event-driven campaigns follow a different process. The National uses the following process to detect events and behavioral triggers: ª 1999 TowerGroup 10

Source (transaction) systems record daily activities (e.g., deposits, home loan repayment inquiries). A continuous historical transaction pattern/profile for each customer is kept in a database. Queries trawl this database every night to search for any unusual changes. Any significant changes in a customer's transaction pattern are detected (e.g., a very large deposit today relative to the average over the previous six months). Best events are prioritized and sent every morning to bankers for action managed by Relationship Optimizer. Essentially, is used to manage the customer interface. It determines how often the bank communicates with customers, the appropriate channel, the timing of the customer interaction, and the nature of the offer. serves as the communications gatekeeper to ensure that customers are contacted with meaningful opportunities at appropriate times. Interestingly, the vast majority of campaigns (over 70%) are specifically for expanding share of wallet among existing bank customers. Although attracting new customers to the National is important to the bank, the bank has consciously chosen to focus its main effort on mining opportunities with current customers. Managing Customer Portfolios Every customer of the National, both business and personal, is assigned to a banker. Bankers are required to actively manage their portfolios according to: volume of business, interest margin spread, fee income, profitability, customer retention, and the acquisition of new customers. The size of each banker s portfolio varies according to the segment being served. A banker responsible exclusively for private banking clients might have a portfolio of 200 customers, while a banker responsible for customers in the general retail segment may have a portfolio of 1,000 customers. Although the bankers are accountable for their books of business and are rewarded for performance, their incentive plans have not yet evolved to a pure performance basis of salary and commission. Marketing Resources at the National The marketing resources of the National have been divided into three separate functional areas. A small group of marketing professionals handles the branding and media positioning of the bank. A second group is responsible for market research, analysis, and pricing recommendations. The third group is the operational, day-to-day team responsible for customer knowledge management. This last group has five PhDs who model and mine statistical data on the bank s customers. Tangible Results of the Impact on Business Unlike most FSIs, the National has been able to quantify many of the benefits of its CRM business strategy. Objective, third-party resources such as Greenwich Industry Report and the Roy Morgan Industry Survey provide assistance to the bank with external measures such as share of wallet, customer satisfaction, and customer retention. These external sources augment the internal measurements kept by the bank and provide an enhanced view of how well the bank is performing in its CRM strategy. The following results are derived from a combination of internal and external sources: ª 2001 TowerGroup 11

Business Clients. Starting in 1990, the relationship banking system was rolled out for business banking clients in Australia. Market share within this segment increased from 13% to 20% over a five-year span (1990 1995). High Net Worth Customers. In 1998, the relationship management learning from business banking was brought to the high net worth market. As of June 2000, the National has the highest share of wallet, customer satisfaction, and retention rates for high net worth clients in Australia. Specific statistics for the high net worth segment show: Customer retention rates have improved to a market leading 98.4%. 88% of premium customers would recommend the National to friends and family. Premium sales of banking products are up 25% on the prior year, and wealth management product sales are up 40%. Generating Sales Leads. In 1999, the National implemented a sales leads program using Relationship Optimizer. Through October 2000, the program sent more than 1 million leads and AUS$4 billion in growth opportunities to the relationship bankers of the National. Middle Market. The National is the largest primary agribusiness lender in Australia. The National has the highest customer penetration in the small business sector at 31%. The bank is the market leaders in deposits and loans to small businesses and the highest share of wallet at 77%. In the middle-market business segment, the National has been the top-rated bank for the past three years and demonstrated the highest share of wallet at 54%. Based upon the continuous improvement that the National has experienced among key segments of its customer base, NAB will export CRM programs and technologies to the other geographies that NAB serves. A pilot is currently running in New Zealand. Conclusion NAB clearly understood the value of a relationship management strategy to a banking franchise at a relatively early point. Adopting a relationship management strategy as far back as 1988 has allowed the National to experiment with and refine its methodologies over time. The bank has served as a testing ground for the holding company strategies and technologies that are successfully implemented within the National are then transferred to other holdings of NAB around the globe. Perhaps the most striking aspect of the National s CRM business strategy is that it does contain a balance between people, processes, and technology. While the acquisition and implementation of technology is critical to a CRM business strategy, the bank also clearly understands the need to change reporting structures and business processes. Unfortunately for most FSIs, the importance of relationship management philosophy, strategy, and tools working together is not obvious. All too often banks invest in sophisticated technologies without having considered how the new tools will integrate into existing business processes. ª 1999 TowerGroup 12

To its credit, the National evolved its understanding of CRM metrics to include external as well as internal measures. When evaluating the success of its relationship management strategies the bank will look to external measures such as share of wallet, customer satisfaction, and customer retention to complement its understanding of customer profitability, marketing efficiency, and cross-sell ratios. This diversified group of CRM metrics assures the National that customers are being served and that the bank s interests are also being addressed. One critical aspect of CRM that the National has not addressed widely is the requirement to balance sales and service initiatives. To date, the bank has explored sales issues more than it has service issues. governs the communications process with customers and provides the backbone of the bank s successful Leads program. While the bank is actively concerned with migrating customers to appropriate channels, it has not yet addressed the concept of using CRM-related technologies such as to make decisions on the appropriate level of service for each customer. Other banks that have risen to the forefront as practitioners of CRM use technologies to assist customer contact personnel with providing appropriate and consistent service to customers. As an example, a small number of FSIs will provide service cues to contact personnel as to whether fees should be waived for customers. Using customer-level profitability information for decisioning ensures that customers are treated appropriately regardless of the contact channel or the employee providing the service. ª 2001 TowerGroup 13