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Winning the "moneyball" game

Businesses could learn a thing or two from baseball's Oakland A's. Namely, money doesn't drive success but good analysis does.

As Michael Lewis powerfully demonstrates in his recent best seller "Moneyball: The Art of Winning an Unfair Game," organizational success is not, essentially, about the amount of money you spend. It's about the return you generate on that money. How else might one explain the ability of one of baseball's lowest payroll teams -- the Oakland A's -- to consistently win games and secure a position in the post-season playoffs?

While other teams paid top dollar for top stars, Oakland crunched the numbers and analyzed the statistics to determine which players were undervalued, and therefore, knew who to draft and who to trade. The team even reexamined conventional baseball statistics and learned how such stats entice others to make irrational, ineffective and financially reckless decisions.

With a payroll less than one-third the size of many unsuccessful teams in the league, the A's have reached the playoffs for the past four consecutive years -- an incomprehensible feat to all those who think money rules the game. "At the bottom of the Oakland experiment," writes Lewis, "was a willingness to rethink baseball: how it is managed, how it is played, who is best suited to play it, and why."

Oakland General Manager Billy Beane, the story's hero, proves that organizations with rigorous analytical capabilities, actionable intelligence and a willingness to defy conventional wisdom can outmaneuver the entrenched, established and well-financed. But this knowledge is not merely for the Davids who wish to slay the Goliaths. Even successful, league-leading teams, or market-leading companies, can secure their standings by investing in initiatives that promise the highest payoff. Statistical analysis -- the numbers, in another words -- can tell us what our own gut, our intuition, our rules of thumb, our experiences and our conventional wisdom cannot.

It's not enough, however, to simply compete on one's smarts. In the realm of business and other fields, it's also critical to leverage that intelligence. "This is really a game, if you will, not only about how much you know about your customer, but how well you can act on what you know," says Scott Nelson, VP and research director with Stamford, Conn.-based Gartner. "If you can develop valuable insights about your customers, and then act on them, you are going to beat a rival that doesn't really know its clients in the first place or even one that can do the analysis but can't turn it into actionable advice. Put those two pieces together and it doesn't really matter what your size is, what your brand is. You'll be in a position to make intelligent decisions that your rivals cannot."

While the value of truly intelligent decision-making can be expected to become more clear and pronounced in the coming years, there are a number of companies that stand out now. There is something different-something powerful, yet not fully appreciated-about their strategies and their cultures.

These companies analyze customer opportunities to determine where the highest returns lie, but they also have the processes, resources, metrics, incentives and technology to act on this insight. They actively measure the impact of their actions and then, improve or optimize their approaches. They are willing to listen to the numbers and act on them. These low-key powerhouses offer a glimpse of where business is headed-just as the A's offer a window on the future of baseball.

Who's winning at "Moneyball"?

Another organization that knows how to win even when everyone else is expecting defeat is Harrah's Entertainment. It became an underdog when it steadfastly refused to join the recent building boom that filled the Las Vegas skyline with imaginative, eye-catching and tremendously expensive new hotels and casinos.

How, wondered its critics, could homely Harrah's compete against the captivating experiences at Treasure Island, Bellagio and New York, New York? The answer, was through an, analytical focus on customer relationships. Driven by this strategy, Harrah's posted more than $4 billion in revenue and $235 million in net income last year, rising more than 50 places on the Fortune 500.

In years past, Harrah's has launched a set of loyalty programs known as "Total Gold" and "Total Rewards," enabling it to provide deeply personal service to customers and track their behavior in extremely sophisticated ways. In fact, the company can track individual casino and hotel guests across all of its properties (26 casinos in 13 states). This enables the organization to actively monitor individual levels of play (and other activities), analyze preferences and interests, assess lifetime customer values, and provide personal offers or services based on what has been learned.

Through such efforts, Harrah's learned that its most profitable customers were not necessarily the high rollers to which all the other casinos attentively catered. They turned out to be "former teachers, doctors, bankers and machinists-middle-aged and senior adults with discretionary time and income who enjoyed playing slot machines." Instead of rewarding these clients with steak dinners and stage shows, Harrah's found they typically were more inclined to appreciate a $60 stack of chips. Many also valued the luxury of being expedited through lines or receiving differentiated customer service, and took steps to achieve Platinum or Diamond status.

In an article last year in Harvard Business Review, Harrah's CEO Gary Loveman stated that the company has strengthened customer loyalty and profitability in two key ways: "First, we use database marketing and decision science-based analytical tools to widen the gap between us and casino operators who base their customer incentives more on intuition than evidence. Second, we deliver the great service that consumers demand. In short, we've come out on top in the casino wars by mining our customer data deeply, running market experiments and using the results to develop and implement finely tuned marketing and services strategies that keep our customers coming back."

Financial services scores big

Several other examples of analytically rigorous, knowledge-driven business success can be found in the financial services arena.

Capital One, which posted revenue of more than $9.6 billion and net income of nearly $900 million last year, conducts more than 80,000 tests a year in order to thoroughly focus and refine its marketing efforts. Indeed, it tests everything from marketing copy to price points to credit lines in order to ensure that it is matching customer priorities and preferences.

"As a statistician, I love this because it gives us the rigor of testing appropriately and doing predictive modeling [to ensure success] going forward," said Dave Jeppesen, VP of Capital One's Direct Marketing Center in a recent keynote speech at the National Center for Direct Marketing winter conference in Orlando. "We are going after the holy grail of direct marketing to get the right product on the right terms to the right customer at the right time through the right channel. We believe we are pretty far along."

A recent Capital One campaign actively leveraged customer analysis and an advanced credit decision engine. This sophisticated, data-driven approach enabled the company to determine it was sensible to increase customer credit lines and offer an extremely low fixed rate (4.99%) on a new card. "We saw $3 billion come onto our books because of one offer in one quarter," says Jeppesen. "It was because of the insight we found through use of our technology."

"A truly analytical company is one that measures its actions and tries to understand the implications of its measurements," says Naras Eechambadi, founder and CEO of Charlotte-based Quaero, a customer-strategy consulting firm. "It designs and drives its marketing programs based on actual facts and learning that emerge from past experience... Sophisticated analytics and models are not the key. It's about how well the learning is disseminated across the organization so decision-makers can apply it to new campaigns and front-line service people can make discretionary judgments about how they ought to treat individual customers."

While such approaches may be difficult for many companies to internalize and execute, the economic downturn in recent years seems to have led to even greater hesitancy. Recognizing the necessity for significant change, many executives are deeply reluctant to take the challenging and unfamiliar steps required to lead an organization in this fashion. Some companies even face the danger of slipping into a kind of "death spiral" where customer information has not been applied or valued over the years and thus, is no longer even being collected out in the field.

"As the economy turns around and they want to engage in customer-focused activities again, they are really going to be hurting," says Cynthia Stuckey, VP of consulting for Milwaukee-based Hunter Business Group. Of course, it can be painfully difficult to change the way people think, or introduce a new order of things. It takes leadership. It takes evidence. And it takes time. Major League Baseball, for the moment, remains prisoner to the discredited view that money and star power rule, even as baseball organizations such as Oakland, Toronto and Boston begin to challenge this hidebound orthodoxy.

Numbers trump intuition

So, too, corporate America often seems a captive to its own rigid beliefs and irrational approaches to decision-making. One 2002 study by executive search firm Christian & Timbers found that fully 45% of corporate executives rely more on instincts than facts and figures in running their enterprises. While instinct and intuition are key attributes of leadership, they may not provide the best foundations for the increasingly complex decisions we are forced to make in an era of global, real-time commerce. Over the years, executive intuitions often have found expression in vast-yet poorly measured and managed-corporate acquisitions, information technology projects, and mass advertising campaigns. Indeed, the unwillingness to apply rigorous process discipline and measurement to such familiar growth strategies makes it hard to rationally consider the alternatives. Even as the evidence mounts, many executives never quite grasp that their real, definable and measurable opportunities might lie in building deeper, more powerful relationships with their customers.

Still another financial services player that is setting itself apart from the competition is Toronto-based CIBC, which has more than 8 million personal banking and business customers.

For CIBC Bank one of the central challenges it faced when it built a data warehouse eight years ago was determining how to manage customers across independent lines of business: credit cards; mortgages; commercial loans; checking; mutual funds; and certificates of deposit.

Taking a customer-focused perspective, CIBC collected data across business lines and employed analytical intelligence technology to better understand and predict customer behavior. The company learned to effectively segment its customers by needs and preferences, as well as by profitability and potential. Capitalizing on its customer analysis, CIBC now is attaining tremendous predictability and accuracy in its marketing campaigns and customer management initiatives.

Daymond Ling, director of modeling and analytics at CIBC, points to intelligence-driven campaigns for pre-approved credit cards that are generating astounding acceptance rates of 20% to 30%. He also maintains that some personalized campaigns reaching out to new customers generate a 300% return on investment. "The benefits come from multiple sources including goodwill, which translates into strengthened relationships in the long term," he says. "In the short term, the customers see you as an institution that they're willing to trust with their financial transactions. They also purchase more products."

As a result of such successes, CIBC has become deeply committed to competing, marketing and managing customers in a very analytical way. "If a campaign is not supported by a predictive model of some sort, the business people immediately ask why," says Ling. "So we've got them trained. They have accepted the practice and they do not want to go back to the days when they didn't have models."

And while CIBC certainly has powerful analytic capabilities, it recognizes that customer insight is useless unless it is "operationalized." With that in mind, the bank's customer marketing group actively works to support sales and service operations and establish strong relationships with channel partners. "Our challenge lies in our ability to bring focused insight and stories about customer behavior to the table to enable customer-centric decision-making to happen," says Ling. "It's not about customer analysis, per se. It's about getting people used to [applying the analysis] and having them talking about customer considerations as a culture."

As business success stories such as these suggest, winning isn't simply about having the highest IQ in the room. Despite their large departments of analysts, statisticians and data modelers (decorated with MBAs and PhDs from prestigious schools), many companies are failing to perform in today's hyper-competitive markets. While intelligence certainly matters, the real challenge lies in putting it to work.

Ultimately, one wonders whether Major League Baseball is merely a strange backwater of flawed management and misspent capital, or a vivid reflecting pool that shows us the extraordinary waste and irrationality associated with all business today.

What seems clear is that a number of smart and disciplined companies-in a handful of industries-already know the secret that allowed Billy Beane's cash-starved team to win a place in the playoffs for the last four years. They are quietly transforming their own sectors and resetting the pace. Eventually, these rigorous and relentless visionaries will change the game completely.

Copyright © 2004 Carlson Marketing Group, Inc. All rights reserved. Peppers & Rogers Group is a Carlson Marketing Group Company.

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