ZIFFPAGE TITLECarrot and StickBy Mel Duvall | Posted 2005-01-13 Email Print
First Union was a star at sales, but not customer service. Wachovia excelled at service, but sales lagged. Could technology make the merged bank better at both?
Carrot and Stick
First Union had long employed a system of providing incentives to its branch employees to drive new business. This is not uncommon among banks, but First Union had proved especially adept at using the technique to increase sales. Gilbert would not reveal exact dollar figures, citing competitive reasons. But, tellers might, for example, be awarded a $25 commission for each client successfully referred to an investment adviser. Such incentives were leveraged throughout the bank's retail operations to increase new account openings, credit card applications, loans and other lines of business. The incentives also worked up the chain of command. Branch managers, for example, were compensated based on their branch's ability to generate new business, and regional managers' pay was tied to the results for their territories.
First Union was managing its incentive and compensation programs on a 19-year-old application called Nomad, essentially a spreadsheet financial application that had been jury-rigged to handle compensation. While it logged transactions, such as when a teller referred a client to an investment adviser, and calculated employee commissions or bonuses based on plans in place, Nomad was difficult to reprogram and had virtually no modeling capabilities. That meant incentive programs could not be crafted on the fly to meet competitive threats or executive orders, such as a demand to create an incentive plan that would help the bank generate 100,000 new checking accounts by the end of the fiscal quarter.
Gilbert also knew that the system was prone to errors because it relied heavily on manual reporting. A manager could plug a figure into the wrong incentive plansay, a plan that rewarded $50 for an investment referral as opposed to $25 for a new account opening. The best estimate was an error rate of roughly 5%, representing about $7.5 million a year, in calculating commissions because sales could be keyed incorrectly. Because employees complain when they don't receive commissions they know they're entitled to, the error rate was almost entirely at the bank's expense.
"It was little more than a big, 20-year-old calculator," Gilbert recalls. "One person was basically holding it all together, and that represented a significant risk."
Gilbert says the merger accelerated the inevitable decision to implement a new incentive management system. The bank looked at offerings from traditional vendors such as Oracle, PeopleSoft and SAP, as well as from a newer breed of enterprise incentive management (EIM) vendors. Companies in this category include Synygy, Incentive Systems, Motiva (acquired by Siebel in October 2003) and Callidus Software. In the summer of 2003, the bank selected Callidus' TrueComp system, partly based on its track record in the banking and insurance industries with customers including Aetna and JP Morgan Chase.
TrueComp allows Wachovia to automate and more effectively manage its compensation programs. The software is directly integrated into Wachovia's general bank sales application, called SOLD, so that as new accounts are opened or other banking products sold, the informationincluding the name of the employee entitled to a rewardis flowed directly into TrueComp. A cost analysis determined that if the bank can eliminate 5% of overpayments, the system will more than pay for itself in one year.
A more important factor, however, was TrueComp's extensive modeling capabilities, Gilbert says. These allow Wachovia to perform a number of what-if scenarios, based on historical information and analysis, to determine the best way to reach its business goals.
"A bank's biggest controllable cost is labor," he says. "If you are going to spend certain dollars on incentives, the outcome has to be very succinct."
What if, for example, the bank stops giving tellers incentives for referrals to investment advisers? Gilbert can model what is likely to be saved in incentives versus the amounts to be gained from increased investment activity. Or, what if the bank takes away incentives for referrals, but raises the amounts based on customer service ratings at branch or individual levels? Software can simulate whether the likely influx of new customers and a lower customer turnover rate will provide a bigger bang for the buck than if those incentives were directed toward investments.
Wachovia isn't alone in deploying this new class of software. When most software categories have been experiencing single-digit or stagnant growth, sales of EIM systems are expected to reach about $300 million in 2005, up from just $88 million in 2001. "The trend is not so much that companies are using a new application, but that they are moving away from homegrown applications to industry standards," says Craig Symons, a Forrester analyst.
As in Wachovia's case, the key benefits, Symons points out, are the ability to more accurately control and report costsa requirement that has gained importance under Sarbanes-Oxleyand to better align incentive programs with company goals. "If sales are lagging in the middle of a quarter, you can start doing simulations to figure out how to drive sales, and tweak your incentives quickly to get there," he says.
Wachovia went live with the Callidus system in June 2004. It ran the system in parallel with the existing Nomad software for three months to be sure there was no disruption in business, before turning Nomad off. Gilbert says the bank had no difficulties integrating the software into the bank's SOLD application. However, the bank did underestimate the number of servers it needed to dedicate to the systemthree, instead of eightand had to pony up roughly an additional $30,000 per server.
Wachovia originally calculated its server needs based on its definition of a transaction. When a customer is referred by a teller to an investment adviser, for example, Wachovia deemed that a single transaction. The Callidus software, however, interprets it as five transactions. Though the initial interaction with the customer is one transaction, incentives must also be calculated up the line to an investment adviser, the head of investment services, the manager of the branch where the sale was originated and the regional manager. The TrueComp software automatically calculates those commissions, and considers each a transaction.
"We just didn't have the horsepower to handle the transactions," Gilbert says.
The software currently keeps track of 31 different incentive plans, for items such as customer satisfaction, investment referrals, loan referrals and credit card sign-ups, on behalf of more than 25,000 eligible employees. That number is expected to expand in the coming months as Wachovia brings more of the bank's business units onto the platform, such as mortgages.