Granular Metrics,Granular Metrics, Feedback and ExperimentationFeedback and Experimentation

Arnoldo HaxAlfred P. Sloan Professor of Management

Contributions of the Delta ModelContributions of the Delta Model

Opening theOpening the The BestThe Best Three Strategic Options:Three Strategic Options:mindset to newmindset to new Product doesProduct does zz Best ProductBest ProductThe TriangleThe Triangle strategic positionstrategic position not always winnot always win

zz Total Customer SolutionsTotal Customer Solutionszz System LockSystem Lock--inin

Linking StrategyLinking Strategy Execution is notExecution is not with Executionwith Execution the problem,the problem,

AdaptiveAdaptive linking tolinking toProcessesProcesses strategy isstrategy is

Execution is captured through ThreeExecution is captured through Three Adaptive Processes:Adaptive Processes:zz Operational EffectivenessOperational Effectivenesszz Customer TargetingCustomer Targetingzz InnovationInnovationwhose roles need to change to achievewhose roles need to change to achieve

different Strategic Positionsdifferent Strategic PositionsMeasuringMeasuring Good financialsGood financials successsuccess do not alwaysdo not always

AggregateAggregate lead to goodlead to goodMetricsMetrics resultsresults

Aggregate performance metrics need toAggregate performance metrics need to reflect each of the Adaptive Processes andreflect each of the Adaptive Processes and their role based upon the strategic positiontheir role based upon the strategic positionzz Product performanceProduct performancezz Customer performanceCustomer performancezz Complementor performanceComplementor performance

DiscoveringDiscovering Managing byManaging by Business is nonBusiness is non--linear. Performance,linear. Performance,GranularGranular performanceperformance averages leadsaverages leads particularly bonding, is concentrated.particularly bonding, is concentrated.Metrics andMetrics and driversdrivers to belowto below Granular metrics allow us to focus onGranular metrics allow us to focus onFeedbackFeedback averageaverage underlying performance drivers, to detectunderlying performance drivers, to detect

performanceperformance variability, to explain, to learn, and to act.variability, to explain, to learn, and to act.

The Delta Model and Granular MetricsThe Delta Model and Granular Metrics

Select Performance Indicators

Explain Variability

• Identify performance drivers

• Correlate drivers with variability

Detect Variability

• Drill down to detailed segmentation

• Isolate variability

• Define program • Define structured tests • Rollout

• Hypothesize cause and effect

• Evaluation

Act from Variability

Learn from Variability

Drivers of variability for selected performance indicatorsDrivers of variability for selected performance indicatorsPerformance indicatorsPerformance indicators Drivers of variabilityDrivers of variabilityProduct cost and qualityProduct cost and quality zz ScaleScale

zz DensityDensity--e.g. concentration of servicee.g. concentration of servicezz LocationLocationzz Labor productivityLabor productivity-- practices and trainingpractices and trainingzz Equipment productivityEquipment productivity-- designdesignzz Process designProcess designzz And so onAnd so on

Customer profitCustomer profit zz Customer sizeCustomer sizezz Customer revenueCustomer revenuezz TenureTenurezz Acquisition costAcquisition costzz Channel mixChannel mixzz Customer care supportCustomer care supportzz Customer investments in relationshipsCustomer investments in relationshipszz And so onAnd so on

Complementor contributionComplementor contribution zz Size of relevant complementor productsSize of relevant complementor productszz Complementor investment in businessComplementor investment in businesszz Relative size in customer value chainRelative size in customer value chainzz Complementor contribution to customer economicsComplementor contribution to customer economicszz Exclusivity of relationshipExclusivity of relationshipzz And so onAnd so on

Business segment economic valueBusiness segment economic value zz ROI (return on investment)ROI (return on investment) –– profitabilityprofitabilityzz RiskRisk-- volatility and covariancevolatility and covariancezz Option valueOption valuezz Investment baseInvestment basezz CashflowsCashflows

Experimentation as the basis for effective changeExperimentation as the basis for effective change

LargeLarge

Size ofSize of ChangeChange

SmallSmall

The middle road:The middle road: lower returns, orlower returns, or

unacceptable whenunacceptable when first mover advantagefirst mover advantage

is highis high

Unacceptable risk, asUnacceptable risk, as a starting point.a starting point.

Highly desirable asHighly desirable as endpointendpoint

Ineffective: lowerIneffective: lower returns, orreturns, or

unacceptable whenunacceptable when first mover advantagefirst mover advantage

is highis high

Testing: the relevantTesting: the relevant area for experimentsarea for experiments

leading to largeleading to large changechange

SlowSlow FastFastSpeed ofSpeed of ChangeChange

Cost DeCost De--Averaging:Averaging:Using Granular Metrics ToUsing Granular Metrics To

Drive PerformanceDrive Performance

The drivers of the cost of orderThe drivers of the cost of order--fulfillmentfulfillment

Cost of order fulfillment

EquipmentLocation of work centers

Activities of order fulfillment

Manpower productivity

The behavior of cost by type of defectsThe behavior of cost by type of defects

ClientClient

% of% of % of% of % of% of % of% of

Business Data Service Orders

Business Data Service Orders

Business Data Service Orders

Defect-free

Average

71%71% $100$100 5 Days5 Days 18%18%

5.0%5.0% $1,800$1,800 45 Days45 Days 22%22%

24.0%24.0% $900$900 25 Days25 Days 60%60%

1 $395 12.3 Days

ordersorders ordersordersordersorders ordersorders

Focus ofFocus ofprogramprogram

developmentdevelopment

Profit DeProfit De--Averaging:Averaging:Using Granular Metrics ToUsing Granular Metrics To

Drive PerformanceDrive Performance

The drivers of customer profitability in the credit card businesThe drivers of customer profitability in the credit card businesss

Profit by customer

Months of tenure

Revenue per customer

Number of customers

Balance level per month

Customers’ targeting behaviorsCustomers’ targeting behaviors

BehaviorsBehaviors Typical competitorsTypical competitors Capital OneCapital Onezz OfferOfferzz Test/yearTest/yearzz Service tierService tierzz Key metricKey metriczz TargetsTargetszz Solicitations/yearSolicitations/yearzz Segmentation frequencySegmentation frequencyzz Risk orientationRisk orientationzz Data sourcesData sourceszz Staff analystsStaff analysts

75 products75 products303044ROE, DelinquencyROE, DelinquencyHigh response likelihoodHigh response likelihood50 million50 millionBiannualBiannualRisk averseRisk averse80802020

5,000 products5,000 products15,00015,0001313NPVNPVHigh NPV potentialHigh NPV potential400 million400 millionOngoingOngoingPrice for riskPrice for risk50,00050,000150150

Capital OneCapital One-- achieving a Total Customer Solutions through Customerachieving a Total Customer Solutions through Customer TargetingTargeting

FurtherFurtherimprovementimprovement

Select Offers

•• Interest ratesInterest rates•• FeesFees•• PromotionPromotionss

MassMass marketingmarketing

Screen for profitability

•• Full lifeFull life cycle customercycle customer profitabilityprofitability

Variation 2

Variation 1

Test cells

Offer Creation

Variation 2

Variation 1

Core offer

Collect customer response

Success metricsSuccess metrics

Typical competitorTypical competitor Capital OneCapital One

zz Customer NPVCustomer NPVzz Acquisition costAcquisition costzz ActivationActivationzz Percent with revolving balancesPercent with revolving balanceszz Fee income per accountFee income per accountzz ChargeCharge--off per accountoff per accountzz TenureTenure

$62$62$77$7758%58%25%25%$55$55$71$71

4 years4 years

$427$427$67$6779%79%40%40%$73$73$54$54

6 years6 years