The King of Benchmarks Rules the Realm of Averages
A mid-sized insurer recently approached our team for help. They wanted to understand how they fell short in making their case to their executives. Specifically, they proposed that fixing their customer data was key to supporting the executive team’s highly aggressive 3-year growth plan. (This plan was 3x today’s revenue). Given this core organizational mission – aside from being a warm and fuzzy place to work supporting its local community – the slam dunk solution to help here is simple. Just reducing the data migration effort around the next acquisition or avoiding the ritual annual, one-off data clean-up project already pays for any tool set enhancing data acquisitions, integration and hygiene. Will it get you to 3x today’s revenue? It probably won’t. What will help are the following:
Hard cost avoidance via software maintenance or consulting elimination is the easy part of the exercise. That is why CFOs love it and focus so much on it. It is easy to grasp and immediate (aka next quarter).
Soft cost reduction, like staff redundancies are a bit harder. Despite them being viable, in my experience very few decision makers want work on a business case to lay off staff. My team had one so far. They look at these savings as freed up capacity, which can be re-deployed more productively. Productivity is also a bit harder to quantify as you typically have to understand how data travels and gets worked on between departments.
However, revenue effects are even harder and esoteric to many people as they include projections. They are often considered “soft” benefits, although they outweigh the other areas by 2-3 times in terms of impact. Ultimately, every organization runs their strategy based on projections (see the insurer in my first paragraph).
The hardest to quantify is risk. Not only is it based on projections – often from a third party (Moody’s, TransUnion, etc.) – but few people understand it. More often, clients don’t even accept you investigating this area if you don’t have an advanced degree in insurance math. Nevertheless, risk can generate extra “soft” cost avoidance (beefing up reserve account balance creating opportunity cost) but also revenue (realizing a risk premium previously ignored). Often risk profiles change due to relationships, which can be links to new “horizontal” information (transactional attributes) or vertical (hierarchical) from parent-child relationships of an entity and the parent’s or children’s transactions.
Given the above, my initial advice to the insurer would be to look at the heartache of their last acquisition, use a benchmark for IT productivity from improved data management capabilities (typically 20-26% – Yankee Group) and there you go. This is just the IT side so consider increasing the upper range by 1.4x (Harvard Business School) as every attribute change (last mobile view date) requires additional meetings on a manager, director and VP level. These people’s time gets increasingly more expensive. You could also use Aberdeen’s benchmark of 13hrs per average master data attribute fix instead.
You can also look at productivity areas, which are typically overly measured. Let’s assume a call center rep spends 20% of the average call time of 12 minutes (depending on the call type – account or bill inquiry, dispute, etc.) understanding
- Who the customer is
- What he bought online and in-store
- If he tried to resolve his issue on the website or store
- How he uses equipment
- What he cares about
- If he prefers call backs, SMS or email confirmations
- His response rate to offers
- His/her value to the company
If he spends these 20% of every call stringing together insights from five applications and twelve screens instead of one frame in seconds, which is the same information in every application he touches, you just freed up 20% worth of his hourly compensation.
Then look at the software, hardware, maintenance and ongoing management of the likely customer record sources (pick the worst and best quality one based on your current understanding), which will end up in a centrally governed instance. Per DAMA, every duplicate record will cost you between $0.45 (party) and $0.85 (product) per transaction (edit touch). At the very least each record will be touched once a year (likely 3-5 times), so multiply your duplicated record count by that and you have your savings from just de-duplication. You can also use Aberdeen’s benchmark of 71 serious errors per 1,000 records, meaning the chance of transactional failure and required effort (% of one or more FTE’s daily workday) to fix is high. If this does not work for you, run a data profile with one of the many tools out there.
If standardization of records (zip codes, billing codes, currency, etc.) is the problem, ask your business partner how many customer contacts (calls, mailing, emails, orders, invoices or account statements) fail outright and/or require validation because of these attributes. Once again, if you apply the productivity gains mentioned earlier, there are you savings. If you look at the number of orders that get delayed in form of payment or revenue recognition and the average order amount by a week or a month, you were just able to quantify how much profit (multiply by operating margin) you would be able to pull into the current financial year from the next one.
The same is true for speeding up the introduction or a new product or a change to it generating profits earlier. Note that looking at the time value of funds realized earlier is too small in most instances especially in the current interest environment.
If emails bounce back or snail mail gets returned (no such address, no such name at this address, no such domain, no such user at this domain), e(mail) verification tools can help reduce the bounces. If every mail piece (forget email due to the miniscule cost) costs $1.25 – and this will vary by type of mailing (catalog, promotion post card, statement letter), incorrect or incomplete records are wasted cost. If you can, use fully loaded print cost incl. 3rd party data prep and returns handling. You will never capture all cost inputs but take a conservative stab.
If it was an offer, reduced bounces should also improve your response rate (also true for email now). Prospect mail response rates are typically around 1.2% (Direct Marketing Association), whereas phone response rates are around 8.2%. If you know that your current response rate is half that (for argument sake) and you send out 100,000 emails of which 1.3% (Silverpop) have customer data issues, then fixing 81-93% of them (our experience) will drop the bounce rate to under 0.3% meaning more emails will arrive/be relevant. This in turn multiplied by a standard conversion rate (MarketingSherpa) of 3% (industry and channel specific) and average order (your data) multiplied by operating margin gets you a benefit value for revenue.
If product data and inventory carrying cost or supplier spend are your issue, find out how many supplier shipments you receive every month, the average cost of a part (or cost range), apply the Aberdeen master data failure rate (71 in 1,000) to use cases around lack of or incorrect supersession or alternate part data, to assess the value of a single shipment’s overspend. You can also just use the ending inventory amount from the 10-k report and apply 3-10% improvement (Aberdeen) in a top-down approach. Alternatively, apply 3.2-4.9% to your annual supplier spend (KPMG).
You could also investigate the expediting or return cost of shipments in a period due to incorrectly aggregated customer forecasts, wrong or incomplete product information or wrong shipment instructions in a product or location profile. Apply Aberdeen’s 5% improvement rate and there you go.
Consider that a North American utility told us that just fixing their 200 Tier1 suppliers’ product information achieved an increase in discounts from $14 to $120 million. They also found that fixing one basic out of sixty attributes in one part category saves them over $200,000 annually.
So what ROI percentages would you find tolerable or justifiable for, say an EDW project, a CRM project, a new claims system, etc.? What would the annual savings or new revenue be that you were comfortable with? What was the craziest improvement you have seen coming to fruition, which nobody expected?
Next time, I will add some more “use cases” to the list and look at some philosophical implications of averages.