Lessons from the leading edge of gender diversity

Advancing women to the top may be a journey, but how to do so is no longer a mystery. New research points to four principles that can help just about any company.

APRIL 2013 • Joanna Barsh, Sandra Nudelman, and Lareina Yee

Source: Organization Practice

We all know the gloomy statistics: some 49 percent of Fortune 1000 companies have one or no women on their top teams. The same is true for 45 percent of boards. Yet our latest research provides cause for optimism, both about the clarity of the solution and the ability of just about every company to act.

Almost two years ago, when we last wrote in McKinsey Quarterly about the obstacles facing women on the way to the C-suite, we said our ideas for making progress were “directional, not definitive.”¹ Since then, we’ve collaborated with McKinsey colleagues to build a global fact base about the gender-diversity practices of major companies, as well as the composition of boards, executive committees, and talent pipelines.² We’ve also identified and conducted interviews with senior executives at 12 companies that met exacting criteria for the percentage of entry-level female professionals, the odds of women advancing from manager to director and vice president, the representation of women on the senior-executive committee, and the percentage of senior female executives holding line positions.³ And in a separate research effort, we investigated another group of companies, which met our criteria for the percentage of women on top teams and on boards of directors—a screen we had not used for the first 12 companies identified.⁴

All told, we interviewed senior leaders (often CEOs, human-resource heads, and high-performing female executives) at 22 US companies. Two emerged as high performers by both sets of criteria.⁵This article presents the interviewees’ up-close-and-personal insights. Encouragingly, many of the themes identified in our research over the years—for example, the importance of having company leaders take a stand on gender diversity, the impact of corporate culture, and the value of systematic talent-management processes—loom large for these companies. This continuity is reassuring: it’s becoming crystal clear what the most important priorities are for companies and leaders committed to gender-diversity progress. Here’s how the top performers do it.

1. Diversity is personal

CEOs and senior executives of our top companies walk, talk, run, and shout about gender diversity. Their passion goes well beyond logic and economics; it’s emotional. Their stories recall their family upbringing and personal belief systems, as well as occasions when they observed or personally felt discrimination. In short, they fervently believe in the business benefits of a caring environment where talent can rise. “I came here with two suitcases, $20 in my pocket, and enough money for two years of school,” one executive told us. “I know what kind of opportunities this country can provide. But I also know you have to work at it. I was an underdog who had to work hard. So, yes, I always look out for the underdogs.” Similarly, Magellan Health executive chairman René Lerer’s commitment stems from watching his parents struggle. “Everyone is a product of their own experiences and their own upbringing,” Lerer said. “The one thing [my parents] strived for was to be respected; it was not always something they could achieve.”

Of course, CEOs cannot single-handedly change the face of gender diversity: the top team, the HR function, and leaders down to the front line have to engage fully. But the CEO is the primary role model and must stay involved. “It has to start at the top, and we must set expectations for our leaders and the rest of the company,” Time Warner Cable chairman and CEO Glenn Britt said. “I’ve cared about this since the beginning of my career. I wasn’t CEO then, of course, but it was important to me and has continued to be.” Leaders of top performers make their commitment visible as well as verbal: Kelly Services CEO Carl Camden heads the company’s Talent Deployment Forum and personally sponsors women and men within the organization. “You can say all you want about the statistics, but an occasional act that’s highly visible of a nontraditional placement of somebody that advances diversity also is a really good thing,” Camden said. “It gets more talk than the quantity of action would normally justify.”

The bottom line: Numbers matter, but belief makes the case powerful. Real stories relayed by the CEO and other top leaders—backed by tangible action—can build an organizational commitment to everything from creating an even playing field to focusing on top talent to treating everyone with respect. Each time a story is told, the case for diversity gets stronger and more people commit to it.

2. Culture and values are at the core

For many of our best-performing companies, a culture of successfully advancing women dates back decades. “In 1926, we hired our first woman officer,” Aetna CEO Mark Bertolini said. “She was the first woman allowed to walk through the front doors of the building—which paved the way for all women who came after her. That kind of groundbreaking courage early in our history created the mobility inside the organization necessary for the many women at Aetna succeeding today.”

Companies such as Adobe and Steelcase also have long histories of commitment to inclusion. “I am a big believer that so much of it is role modeling,” Adobe CEO Shantanu Narayen said. “If you have good role models, then people are inspired.” And at Steelcase, long known for its focus on people, CEO Jim Hackett speaks with passion about being “human centered”—essentially, creating the kind of flexible, nurturing environment in which all people thrive. Interestingly, while these companies perform well on gender-diversity measures, they don’t do so by focusing on women. Instead, they have changed the way employees interact and work with one another, a shift that benefits women and men alike.

The bottom line: Gender-diversity programs aren’t enough. While they can provide an initial jolt, all too often enthusiasm wanes and old habits resurface. Values last if they are lived every day by the leadership on down. If gender diversity fits with that value set, almost all the people in an organization will want to bring more of themselves to work every day.

3. Improvements are systematic

Achieving a culture that embraces gender diversity requires a multiyear transformation. Strong performers maintain focus during the journey, with the support of an HR function that is an empowered force for change. Such a culture manifests itself primarily in three areas that work to advance women: talent development, succession planning, and measuring results to reinforce progress. Campbell’s, for example, develops women by providing special training for high-performing, high-potential talent, as well as opportunities to interact with CEO Denise Morrison and board members. Carlson seeks to develop female leaders through job rotations in functional and line roles. Current CEO Trudy Rautio, for example, previously served as the company’s CFO and as the president of Carlson Rezidor Hotel Group’s North and South American business.

It’s critical to identify talented women and look for the best career paths to accelerate their growth and impact. Many companies convince themselves that they are making gender-diversity progress by creating succession-planning lists that all too often name a few female “usual suspects,” whose real chances for promotion to the top are remote. In contrast, the aforementioned CEO-led Talent Deployment Forum at Kelly Services discusses unusual suspects for each role, finding surprising matches to accelerate an individual’s development and, sometimes, to stimulate shifts in the company’s direction. (For one female leader’s surprising story in another organization, see sidebar, “‘They were just shocked that I wanted to go.’”) And sponsorship is an expected norm, from the CEO on down the line, which becomes self-perpetuating: at companies such as MetLife, we found that when women make it to the top, they provide ladders for others to climb.

 

Another Fortune 50 company ties gender diversity to talent planning and compensation in order to drive results. “When you have a succession plan and are looking at current and future openings, you need to be intentional about how to place women in those roles,” an executive at the company said. “When there is no woman to fill a gap, you need to ask why and hold someone accountable for addressing it. We tie it to the performance-review process. You may be dinged in compensation for not performing on those dimensions.” Ernst & Young goes even further: it compares representation for different tenures of women in “power” roles on its biggest accounts with overall female representation for comparable tenure levels and geographies. When those two metrics are out of sync, E&Y acts.

The bottom line: Get moving. Evidence abounds about what works for identifying high-potential women, creating career opportunities for them, reinforcing those opportunities through senior sponsorship, and measuring and managing results.

4. Boards spark movement

Our research suggests a correlation between the representation of women on boards and on top-executive teams (exhibit). Leaders at many companies encourage female (and male) board members to establish relationships with potential future women leaders and to serve as their role models or sponsors. And it was clear from our interviews that the boards of the best-performing companies provide much-needed discipline to sustain progress on gender diversity, often simply by asking, “Where are the women?” “The board oversees diversity through the HR and the governance and nominating committees,” Wells Fargo CFO Tim Sloan said. “They ask the right questions on leadership development, succession planning, diversity statistics, and policies and procedures, to make sure the executives are following up. Our board members tend to be very focused on these topics. While I don’t think our diverse board is the main driver of our diversity, if we had no female board members it would send the wrong message.”

Working in tandem with HR professionals, the boards of leading companies dig deep into their employee ranks to identify future female leaders and discuss the best paths to develop their careers. Dialogue between the board and top team is critical. “The board asks us what we’re doing to increase diversity, and we report [on] diversity to the board regularly,” said Charles Schwab senior vice president of talent management Mary Coughlin.

Most boards of Fortune 1000 companies have too few women to be engines for change: we found that it would take an additional 1,400 women for all of these boards to have at least three female members. Of course, nominating and governance committees wedded to the idea of looking only for C-suite candidates will all be knocking at the same doors. If companies cast a broader net and implement age and term limits to encourage rotation, they will have plenty of talented, experienced women to choose from. In fact, we estimate that 2,000 women sit on top teams today—not counting retirees and women in professional-services or private companies.

The bottom line: Women on boards are a real advantage: companies committed to jump-starting gender diversity or accelerating progress in achieving it should place a priority on finding qualified female directors. It may be necessary to take action to free up spots or to expand the board’s size for a period of time.

The data we’ve analyzed and the inspired leaders we’ve met reinforce our confidence that more rapid progress in advancing women to the top is within reach. Frankly, the formula for success should no longer be in doubt. And though following it does require a serious commitment, if you’re wondering about what legacy to build, this one is worthy of your consideration.

About the Authors

Joanna Barsh is a director emeritus in McKinsey’s New York office, where Sandra Nudelman is an associate principal; Lareina Yee is a principal in the San Francisco office.

Facebook’s Sheryl Sandberg: ‘No one can have it all’

Coming to terms with that reality is invaluable for women trying to find fulfillment as both great leaders and great parents.

APRIL 2013 • Joanna Barsh

Source: Organization Practice

Facebook COO Sheryl Sandberg has emerged as a leading voice for gender equality since she delivered, in late 2010, a provocative TEDWomen address on why a smaller percentage of women than men reach the top.¹ In this interview—available here as both a video and an edited transcript—with McKinsey’s Joanna Barsh, Sandberg (an alumnus of McKinsey, the US Treasury Department, and Google) expands on issues from her new book, Lean In: Women, Work, and the Will to Lead (Knopf, March 2013), and explains why women need to “lean in” to gain confidence, develop skills, and become more comfortable as leaders—herself included.

A conversation with Facebook's Sheryl Sandberg

The social-media company’s COO discusses how women can find fulfillment as both great leaders and great parents.

The Quarterly: When were you first self-aware that you really were a leader?

Sheryl Sandberg: I don’t easily identify as a leader. Looking back on my childhood, I thought of myself as a little bossy. I think as a boy, I would have thought I was a leader. We need to change that if we want more women in leadership.

The Quarterly: What drives you today?

Sheryl Sandberg: I really want to do mission-based work. I believed in the Google mission. I believe strongly in what Facebook’s doing. That’s why I get up and go to work every day. But probably for the first time in my life around these issues for women in leadership—maybe a “calling” is too strong of a word— it feels like something I was meant to do, supposed to do, have an opportunity to do, maybe have a responsibility to do. I spent most of my career, including my time at McKinsey, never acknowledging that I was a woman. And, you know, fast forward—I’m 43 now—fitting in is not helping us. Women have held 14 percent of the top jobs in this country for ten years. No progress. We need a new and much more honest and open dialogue on gender.

The Quarterly: When did the shift happen for you?

Sheryl Sandberg: I left McKinsey; I went into the government for four years. When I then left Treasury, it took me almost a full year to get a job. By the time I got my job at Google, I was so happy to have employment that I was no longer afraid, I just wanted to start. I began with a team of 4 people and wound up with a team of 4,000. So for the first time, I really managed a large group of people. At every stage, the men were in my office, saying “I want the next job. We’re opening an office in India, I want to do it.” And the women, when I tried to talk them into taking on something new, said: “You really need a new role.” “I’m still learning.” “You really should think about doing something else.” “I’m not sure I’m qualified for that job.” Sentences I never heard from the men.

If you drill into the data, study after study shows exactly the same thing. Starting in junior high, if you ask boys and girls, “Do you want to lead? Lead your high-school class, lead your junior-high-school class, lead your club in college, lead the organization, team, or company you join as an adult?” More men than women want that. All the studies show this. And that’s how we get to a world where 14 percent of the top corporate jobs are held by women. We need to encourage women to lead, and we don’t do that.

The Quarterly: How did you step into that?

Sheryl Sandberg: I sit here today not having a comfortable relationship with power, ambition, or leadership. For men, leadership, power, and ambition are unambiguously good words. As men get more successful and lead more, they’re better liked. For women, those things are not encouraged and actually are actively discouraged, because all of us, men and women alike, dislike women who are more successful. As men get more successful, they are liked more. As women get more successful, they are liked less. That is a really powerful negative incentive for women to lead.

The Quarterly: Why is building communities of women so important to you?

Sheryl Sandberg: The tension between work-at-home moms and work-in-the-office moms is real. All of us feel it. That needs to change. I look at what the women in my community who are working in their homes are doing not just for their children but for mine. And this is hard because I drop my kids off and they’re there. I volunteer some, but I don’t volunteer nearly as much as those mothers. I can feel guilty and jealous. Or I can feel grateful that my kids are getting a better education because of them. The reverse happens, too, as I’ve heard from my friends who are stay-at-home moms. They say that when they see women in the workforce, they can sometimes feel bad about their own choices. But sometimes they’ll say, “They’re setting a great example of what’s possible for my daughter.”

One of the most important things women can do working together is to make it clear that every bit of work a woman does—whether it’s in the home, in the school, in the community, or in the workplace—is valued as much as work that men do. Across the board, we are not there. Women are paid 77 cents for every $1 men are paid. For the same work, we are paid less and are less valued. We are promoted less. We get fewer of the top jobs. We do not live in an equal world. An equal world would be a world of equal opportunity and equal choice and equal encouragement. Compare a career to a marathon. Men and women arrive at the starting line equally trained and fit. You could argue, based on educational attainment, that the women are more trained and fit. But at least equal. And think of a career like a marathon: long, grueling, ultimately rewarding. What voices do the men hear from the beginning? “You’ve got this. Keep going. Great race ahead of you.” What do the women hear from day one out of college? “You sure you want to run? Marathon’s really long. You’re probably not going to want to finish. Don’t you want kids one day?” The voices for men get stronger, “Yes, go. You’ve got this.” The voices for women can get openly hostile. “Are you sure you should be running when your kids need you at home?”

The Quarterly: Women in their 20s seem worried: “I’m working too hard to find a partner.” “I can’t have a baby and do this.” “I can’t do all these things.”

Sheryl Sandberg: Women start worrying about balance at a really young age. We were raised in my generation with “You can do anything.” We didn’t have the example of trying to do both careers and families and it not working. We didn’t worry about this at all. I never thought about whether or not I could balance kids. It just never occurred to me. It would just all work out. But the girls in college today—they’re worrying about it. So I am worried that our leadership percentages at the top could actually go down. In business, most trends that go up for a while, or are flat for ten years, then go down.

I fully understand that there are lots of reasons to take time out of the workforce or leave the workforce. And I’m fully supportive of any men or women who want to do that. But I really want to urge women: do that when you have a child. Not three years in advance. Because by leaning in and keeping your foot on the gas pedal, you just give yourself options. And then you can make better choices.

The Quarterly: What about after women have a family?

Sheryl Sandberg: No one can have it all. That language is the worst thing that’s happened to the women’s movement. You know, no one even bothers to apply it to men. It’s really pressure on women. I think what happens to women is we compare ourselves at home to the women who are work-at-home mothers and we fall short. Compared to them, I fall short every day. And then you can compare yourself at work to some women but mostly men who have no other responsibilities, really. They go home whenever they want. And you can feel bad there, too.

So we can spend all our time feeling terrible about how we’re lousy workers and lousy mothers. And, by the way, I do this a lot. All of us do. Or we can start realizing that we can be great mothers. The data on this is super clear: you can be a very successful parent with a great relationship with thriving children and have a full-time job. And you can be a great worker and a great colleague at work but not be there for 12 hours a day in person. And I think we have to let ourselves do that.

The move from Google to Facebook was scary. I was going from just running sales and operations to running the whole business side. Facebook’s regular hours were often all-nighters. If I had just stayed there all night because that’s what everyone did, I would have been exhausted. I would have decided that I was a bad mom, and eventually I would have quit. The other way it could have worked out was if I could come in early, work the hours I wanted to work, leave at 5:30 pm, get back online—which is exactly what I do to this day—and see if it worked out. And then if it did work out, I had a chance of staying.

What I think people don’t see is, if you do it the first way—just do everything asked of you—you’re not actually giving it a chance to really work. If you do it based on what you really need, then you can. And I’m not saying I don’t make sacrifices. You know, there has never been a 24-hour period in five years when I have not responded to e-mail at Facebook. I am not saying it’s easy. I work long hours. I am saying that I was able to mold those hours around the needs of my family, and that matters. And I really encourage other people at Facebook to mold hours around themselves.

The Quarterly: Your aspiration is to make “leaning in” a global trend for women. In fact, you are seeding a nonprofit called Lean In. What are your hopes for that?

Sheryl Sandberg: I am hoping that my book is just the start of the conversation. I really want to help build a global community where we’re giving women not just the desire to lead but the support and the tools they need to do it. So the Lean In community is doing three things. First, we’re helping to foster a daily conversation. It will take place on Facebook, unsurprisingly: people telling their Lean In stories, people discussing issues—creating opportunities for people to come together around the issues and challenges women face in leadership.

The second thing we’re doing is Lean In Education. We’re getting great practitioners and professors who teach classes for usually very elite groups of women. We’re taping them and putting them online where they’re broadly accessible to anyone. And the third thing we’re doing is based on the YPO² model, helping women and men set up Lean In circles: peer groups of 8 to 12 people who agree to meet once a month. The idea is that by giving women the tools, the education, and the support they need, we can encourage more women to lean in and encourage more men and more organizations to explicitly support women in leadership.

I want to change the numbers at the top. I’d like to know that in my daughter’s generation, they are not going to be 14 percent of the top jobs. That we’re no longer going to write headlines saying that women are taking over the Senate when they get 20 percent of the seats; 20 percent is not a takeover. I want real equality.

About the Authors

Sheryl Sandberg is the chief operating officer at Facebook. She previously served as vice president of global online sales and operations at Google, as chief of staff to former treasury secretary Lawrence Summers, and as a consultant at McKinsey. This interview was conducted byJoanna Barsh, a director emeritus in McKinsey’s New York office.

Success Mantra

"The Biggest enemy of success is

           "fear of failure" 

So when FEAR knocks out at your door,

send COURAGE to open the door,  

     

  success will wait for you".



            " Mistake,

               failure

                  &

            Rejections

are the part of progress & growth.....

Nobody ever Achieved any thing worth,

without facing these three things".

New credit-risk models for the unbanked

Lenders can use big data to create meaningful value for their enterprise, better outcomes for borrowers, and significant social impact.

April 2013 | byTobias Baer, Tony Goland, and Robert Schiff

Lending to lower-income households and small and informal enterprises is challenging. Many (though not all) of these customers have limited familiarity with formal financial services, which inhibits their ability to make good decisions about the responsible and appropriate use of credit. And lenders often have little to none of the data they might traditionally use to make sound lending decisions (for example, official proof of income and a credit history).

In this environment, most lenders have pursued one of two business models:

• traditional consumer finance, where lenders typically compensate for higher default incidence with higher interest rates while supplementing revenues with penalty and other fees
• microcredit, with its focus on informal, usually women-owned microenterprises, shorter-term loans (often of just a few months), labor-intensive but strong relationships between loan officers and borrowers, use of joint-liability groups (in which members guarantee their fellow borrowers’ loans), continuous lending cycles with borrowers taking on a new loan as soon as the last one is paid, and default rates as low as 2 to 3 percent

Neither of these models is ideal for cost-effectively serving the diverse needs of economically active lower-income families and businesses on a truly sustainable basis. But there is an opportunity for lenders to chart another path, using increased computing power and new sources of information and data (including mobile-phone usage patterns, utility-bill payment history, and others) to build better risk models. With these assets, and with scrupulous attention to privacy laws and customer consent and preferences, banks, retailers, utilities, and telecommunications providers can make responsible lending decisions in low-touch and low-cost ways.

At its best, this third path, beyond traditional consumer finance and microcredit, can help companies profitably serve vast unbanked populations, and can also help societies move toward an elusive goal: full financial inclusion. Today there are more than 2.5 billion people without access to formal financial services, and there are hundreds of millions of micro, small, and midsize enterprises with unmet financing needs.¹ Ensuring that these people and groups have access to a range of quality, affordable, and appropriate financial services is on the agenda of governments and businesses worldwide. New uses of data and information move us closer to this vision by enabling a more complete understanding of households’ financial needs. With that understanding, providers can move beyond simple lending to achieve several aims:

• help customers make good financial decisions (for example, through the use of targeted alerts)
• offer the right noncredit products (various forms of savings and insurance, for instance)
• conduct marketing and communications in ways that are more likely to resonate for distinct segments

These are exciting areas that are ripe for further innovation. But lenders must first master the tools, data, and information that underpin the new approach to lower-income lending. The efforts of some pioneering lenders are quite promising: new alternative data models have cut credit losses in experimental forays into lower-income segments by 20 to 50 percent and doubled their application approval rates.

New data, new uses

Lenders need to look into the future to determine whether to make a loan. It used to be that the most reliable way to predict the future was to review the past; for centuries, long-standing banking and credit relationships provided banks with a reasonable basis for extending credit.

In developed markets, this approach has evolved over the past few decades: data such as credit reports and salary history now help lenders to make the same kind of predictions but on a larger scale and in an increasingly automated way. These credit-scoring approaches typically assess three characteristics:

1. Identity, to reduce fraud
2. Ability to repay, based on income and current debt load
3. Willingness to repay, usually based on past credit performance

These methods are less effective, however, in emerging economies, and especially among lower-income segments. Because lower-income customers often have no access to formal financing, there is no record of past borrowing behavior. Debt capacity is hard to judge because most lower-income workers are often paid wages in cash and have little or no formal savings or registered assets that could be used as collateral. Many do not receive regular fixed wages, but rather are self-employed or depend on a portfolio of income-earning activities that is inconsistent by nature.

Some nontraditional lenders, however, are successfully getting around these problems. A handful of pioneering mobile operators, utilities, retailers, and direct-sales companies are using new approaches to tap into the new forms of data spun off from their core businesses.

These new approaches have their own challenges. Traditional credit scoring draws on a thin stream of data collected monthly from a small number of sources (for example, credit cards, savings accounts, pay stubs, and mortgages). The new nontraditional data, on the other hand, must sometimes be gathered from diverse sources, and the volume is often several times that of traditional sources. For example, each mobile account may generate hundreds or even thousands of calls and text messages per month, each carrying a rich data set that, subject to customer consent, can include the time the call was made, the location of the caller at the time of the call, who received the call, the type of information accessed via text messaging, and the types and number of payment transactions made through the device.

That poses difficulties for risk modelers. While some new technologies are throwing off reams of data, others are allowing us to collect, aggregate, and analyze them in ways never before possible. There are new data standards and protocols, and new tools to bring together disparate data sets, matching and comparing them to generate insights. Many practitioners are not yet skilled in these and are unfamiliar with aggregating diverse and oblique data to derive meaningful insights. For example, an organization that wants to use data gathered from mobile operators, grocery stores, and utilities will probably need to have expertise in each of these sectors to determine which data are meaningful, what level of detail is optimal, and what combinations of data are most effective.

Sidebar

The benefits of strong privacy frameworks for lenders and borrowers

Gaining access to data can be difficult as well. In many cases, the data sets that lenders want will be owned by entities (telecommunications companies, utilities, or retailers, for instance) that may not want—or are not allowed—to share them. They may be disinclined to take the risk of offending their customers by sharing the information, and they may not have an immediate incentive to find ways to share it, even with their customers’ consent. Regulatory requirements and privacy laws may prohibit lenders from gaining access to certain types of information. (See sidebar “The benefits of strong privacy frameworks for lenders and borrowers.”) Governments are likely to be particularly cautious about sharing identity and other information that they collect about citizens.

Effective modeling

In our experience, organizations should tackle these challenges one by one and pursue three steps to develop effective credit-scoring strategies that will help them lend to economically active lower-income households and enterprises at scale:

1. Identify promising data sources
2. Secure access to appropriate data
3. Convert data into credit insights

Throughout this process, it is important for data-mining lenders to exercise careful judgment about what constitutes responsible lending to avoid hurting their customers, harming their reputation, or worse.

1. Identify promising data sources

Lenders should look for data that can be used as reliable proxies for identity (for example, to reduce fraud), ability to repay (for instance, income or current debt load), and willingness to repay (for example, past credit experience). Six data sources in particular should be assessed: telecommunications providers, utilities, wholesale suppliers, retailers, government, and financial institutions’ own previously overlooked data.

Consider mobile phones, which have become ubiquitous. By the beginning of 2009, emerging markets accounted for approximately 75 percent of the world’s four billion mobile phones.² Each of these mobile-phone accounts provides a particularly rich potential source of data. Virtually every detail about each call, text, and request for information a customer makes is captured and stored by mobile operators.

For example, for those customers who do not object to sharing their information in order to improve their access to credit, prepaid-minute purchase patterns can indicate a steady or uneven cash flow, and the timing and frequency of calls and text messages can indicate whether someone is working a steady job (for example, fewer calls between 9 a.m. and 5 p.m. may indicate that someone is working during those hours). Another example: the proliferation of data from mobile payments can provide credit underwriters with rich transactional information for generating credit insights.

Other technologies are also generating considerable raw data. Basic customer life-cycle management (CLM) applications are becoming increasingly commonplace throughout emerging markets, enabling businesses to collect information about the frequency and character of their interactions with customers. Point-of-service (POS) devices are used with increasing frequency by retailers of all kinds to gather transaction data. Retailer loyalty cards can provide important insights into consumers’ income and even family structure (for example, buying diapers or school supplies is a good indication of children at home). And governments are developing improved identification and tracking systems for their citizens, to improve delivery of government services, among other things.

The sidebar “New data from six sources” explains the new sets of data available from each sector.

Sidebar

New data from six sources

2. Secure access to appropriate data

The simplest way to gain access to data is simply to pay for it. This can work well in some circumstances, but it is not ideal insofar as it increases costs. And for regulatory or other reasons (retailers’ POS data for example is not typically available for sale), paying for access may not be possible. A better solution may be to strike partnerships with organizations to gain access in ways that provide benefits to all parties.

Many companies that do not provide financial services can benefit from partnering with organizations that do. Mobile providers can significantly improve their value proposition to customers by making credit services accessible through mobile phones. Not only will this help increase customer loyalty, it can also lead to higher revenues by driving more phone use. Mobile operators can also ask for their bank partners’ help to better assess the credit risk for moving customers from prepaid to postpaid. If regulation inhibits mobile operators from sharing data freely, another avenue is to prompt mobile customers to seek loans of their own volition. For example, mobile providers can assess their customers’ risk profiles and send credit solicitations to those who might qualify for loans. Customers can then decide for themselves if they want to share their information with the lender as part of the application process.

Lenders can strike partnerships with utilities and wholesalers to achieve the same ends. (Or to put it another way, utilities and wholesalers can build a lending business themselves, with varying degrees of help from a bank.) Lenders can also partner with retailers to accelerate the adoption of POS and other technologies that collect valuable customer data. Partnerships of this kind are already forming in several parts of the world. For example, retailers can offer credit to make in-store purchases, which may drive greater purchase volumes and deepen relationships with consumers. The technologies used to provide credit can then double as transaction-tracking devices. Credit providers can also support the development of reward cards for consumers that will enable retailers to collect information about customers’ purchasing habits.

Partnerships with governments can be particularly beneficial, since government agencies collect so much data about citizens. Governments can benefit from the opportunity to further financial inclusion. Already, many governments promote credit bureaus as a way to both enable smarter lending and protect consumers from overextending themselves.

Governments are rightly cautious about sharing citizens’ information, as noted in the sidebar “The benefits of strong privacy frameworks for lenders and borrowers.”

3. Convert data into credit insights

Many consumer lenders have advanced credit-risk modeling capabilities. But incorporating these kinds of new data will require some big changes in people, technologies, and approach. Three key areas for change are talent, IT, and the collaboration between risk and marketing teams.

Talent. Even the strongest lenders will likely have to develop new skills to create risk models that capture the predictive potential of available data. Providers should involve people from several areas; primarily, this means statisticians with the technical skills to analyze risk variables, and it could mean adding to the army of PhDs that many banks already have on staff. However, even the slightest reduction in loss rates will justify these hires. For institutions without advanced skills, the benefits are commensurately larger.

Other resources that lenders should tap into are experts in the business areas from which the data are being drawn, potentially including those from partner organizations. Marketing professionals and sales leaders should be called on to contribute valuable customer insights and to identify ways in which the more sophisticated risk profiles can also be used to improve CLM and vice versa.

IT. Lenders will also need more computing horsepower. Typical credit-bureau data, including credit-line utilization, delinquency status, and credit inquiries, are based on a small number of financial events. But the new data, such as mobile records, might arrive by the gigabyte, even for a small number of prospective customers. Such data sets can easily overwhelm the software that many institutions use for statistical analysis. Lenders will need to invest in heavier-duty processing power and software. Recent developments related to cloud computing make this possible at a more reasonable cost than before.

Collaboration between risk and marketing teams. Lenders should also develop a road map for working with nontraditional data. Many credit-risk teams have been doing essentially the same thing for decades. They have developed long lists of standard transformations—such as calculating growth rates or using a dummy variable to flag customers who have become overdue at least once in the past. But when confronted with a table of the 300 payments, 2,000 phone calls, and 4,000 text messages a prospective customer made in the past year, credit-risk teams will need a thoughtful plan to convert data into insights.

A good start is for companies to turn to internal consumer-insights specialists, often drawn from the sales and marketing organization. A good retail expert might point out that cash-strapped people buy small, round-numbered amounts of gasoline, while larger, odd-numbered purchases are made by people unconcerned about the cost of filling up. Similarly, people who buy gas on holidays, when prices are higher, are exhibiting less frugal behavior than people who economize by buying on the days before a big holiday weekend. Between two customers who earn exactly the same amount of money, the latter behavior signals greater capacity to take on a loan.

Sidebar

Credit-risk innovators

Greater communication between the risk and marketing teams may also invert the identification of new segments to serve. In addition to the traditional approach of the marketing team identifying the customers to serve and asking the risk team to build credit models accordingly, the credit-risk team can now flag for the marketing group new data sources that increase the feasibility of serving those customer segments that were not previously a priority. The sidebar “Credit-risk innovators” shows how some leading players have brought these ideas together.

About the authors

Tobias Baer, based in McKinsey’s Taipei office, leads McKinsey’s global credit-risk analytics team; Tony Goland is a director in the Washington, DC, office; Robert Schiff is a principal in the New York office.

Four innovative ways Asian banks can create actionable insights from customer data

By leveraging the vast amount of data at their fingertips, banks can customize and right-size their services and products.

April 2013 | byKenny Lam, Joydeep Sengupta, and Renny Thomas

Service is among the top attractions for consumers to Asian retail banks, ranking above products and convenience—but overall satisfaction is not high. By differentiating against competitors with targeted customer service, banks stand to gain more market share, both through expanding their customer base and deepening relationships with existing customers. Yet with a finite amount of resources to deploy, banks need to find ways to align service and sales with customer needs and priorities.

The data advantage

Many customers value branch convenience as an aspect of service, for example, but only a limited number of banks will be in a position to capture that opportunity. Banks can, however, take advantage of many other opportunities to capture more value through better and more focused customer-portfolio management.

By customizing and right-sizing their service and product offerings, banks can intensify or expand their relationships with high-potential customers, while effectively managing costs in lower-value segments. The key to unlocking this value lies in leveraging the vast amount of customer data that banks now have at their fingertips. Pertinent data sets will more closely establish customer value to the bank, by customer type and segment; banks can then address their customer relationships with greater focus and relevance in products, pricing, and channel.

Leveraging granular customer data can help banks do the following:

• capture a greater share of market segments and deeper penetration (wallet share) of existing customers (that is, for the affluent segment, in the areas of wealth management and investments)
• increase the effectiveness of cross-selling, enhancing the ratio of products per customer as well as “customer stickiness”
• enhance the customer experience, based on a targeted approach to customer relationships, including greater focus on the direct sales force and aligned and enhanced high-function remote channels

Practical insights on four levels

Banks can use their data to create actionable insights in four areas. These levers derive their effectiveness from upgraded analytics based on banks’ existing data:

1. Analyze customer composition to define and prioritize the relationship approach for different customers, based on customer value to the bank.
2. Identify and size untapped cross-product opportunities among particular types of customers, using bank and benchmark data.
3. Help the front line with an up-to-date “propensity to buy” model, which demonstrates the historical probability for next-product purchases by existing customer type.
4. Identify underused channels by product, to expand opportunities for cross- and up-selling.

1. Prioritizing customer groups and defining the relationship approach for each

The application of this lever involves leveraging customer data to guide customer-portfolio management. Resources can then be aligned accordingly, and a customer lens on overall performance can be developed and continuously refined. Many banks have well-defined and relatively accurate models that use quantitative and qualitative information to estimate the total volume of customers. Customer market value (CMV) is tracked through these models. A customer-value view—the customer’s current value (CCV) to the bank—is obtained by laying CMV over the customer segments. The customers identified as having high CCV can then be given the focus they deserve, with the aim of creating deeper, enduring relationships throughout their financial life.

The exhibit below provides an example of how deeper analytics enabled by granular customer data allow banks to manage their customer portfolios beyond basic segmentation. Here four customer groups are defined and separately identified for retention, migration, expansion (acquisition), or deprioritization. Resources can then be aligned and allocated efficiently. Customers can be managed using the optimal channel, or channels, and marketing and product offers can be suitably customized to enhance customer value. The process also creates a customer lens on overall performance, a superior view than the typically siloed tracking of products or channels (exhibit).

Exhibit

Leveraging vast data helps banks define and prioritize customer relationships.

• Enlarge

2. Finding opportunities to raise product penetration among existing customers

Banks can analyze and benchmark their customer base to reveal opportunities for achieving deeper cross-product penetration. All customer categories, including wealth segments and customer types (mortgage holders, card holders, small and medium enterprises, and so on) can be benchmarked against best-practice financial institutions across the entire suite of the bank’s offerings. When benchmarked cross-sell percentages are compared with the bank’s actual cross-product-penetration levels, opportunities appear. These can then be sized and analyzed on a case-by-case basis to create targeted priorities within the bank’s grasp.

3. Arming the front line with a “propensity to buy” model based on the latest historical data

Banks’ frontline resources are often expected to fashion cross-selling priorities and targets from static models and all-purpose key performance indicators. Yet banks can give the front line a much more effective “propensity to buy” model by simply leveraging their existing pools of customer data. Each customer category, defined by current holdings, can be matched to the next-best products or bundles, defined by historical likelihood for cross-sell (propensity to buy). The model, simple in itself, is periodically refreshed based on the latest data on the bank’s customer base. By giving the front line up-to-date knowledge of how different categories of customers tend to behave, resources can be concentrated on realistic targets and mutually rewarding relationships.

4. Realizing the potential of sales channels to execute on product categories

Banks understand that certain products sell better through particular channels, and they orient their sales and marketing accordingly. Everyone knows that mortgages are not sold online, nor are complex investment products sold through telemarketing calls. However, the number of sales channels through which certain products are sold can be expanded, using upgraded analytics based on the bank’s own customer data. A product-by-product analysis of each of the bank’s sales channels will reveal channel opportunities outside traditional patterns. These are channel-product pairings in which sales have occurred but not on a systematic basis. These opportunities can then be evaluated and judiciously operationalized according to the size of the opportunity and the bank’s specific targets.

Sometimes the front line in the channels selected for expansion will not need product-specific retraining, but it should be kept in mind that fruitful expansions can also occur in channels where some retraining is required. Either way, enhanced sales-channel potential is captured from the bank’s existing resources by leveraging the bank’s existing data, adding overall value with little added cost.

As Asian banks attempt to keep their current customers, explore the potential for greater penetration, and attract new customers, they should look to the enormous amount of customer data they have already compiled. Insights from customer data can be used to optimize customer relationships, align channels, energize the front line, and open pockets of growth across the bank.

For more, see the full report from which this article is drawn, Retail banking in Asia: Actionable insights for new opportunities.

About the authors

Kenny Lam is a principal in McKinsey’s Hong Kong office, Joydeep Sengupta is a director in the Singapore office, and Renny Thomas is a principal in the Mumbai office.