Are you investing in a new system, or pumping millions into an old one to stay ahead of the technology curve?
Stop trying so hard. Instead, sit down and figure out the return on investment on all that spending. That's the word from Dave Jeppersen, vice president of direct marketing for Capital One Financial Services.
Capital One, a credit card marketer with 43 million customers and $67 billion in outstanding loans, has no choice but to think this way.
It sends 2 billion pieces of mail a year, and spends hundreds of millions of dollars per annum on IT, the company's third-largest expense after charge-offs and payroll. It will conduct almost 80,000 product tests this year. And it invested a considerable sum in an “architecturally elegant” database a couple of years ago.
But the firm is not interested in high-tech glitz for its own sake. It views its total systems as “an investment portfolio of technology,” some elements offering a high return and some low, said Jeppersen, speaking at the National Center for Database Marketing Conference in Orlando, FL last month.
The technology ROI curve goes through several stages:
- Birth
This is when new technology is brought in and implemented. Jeppersen wants to see money on the table right away.
“I demand 300% return on investment — three times the money back, and it has to pay for itself quickly,” he said. “We're maniacally focused on short-term value. I don't like long-term implementation.”
- Growth
This is the phase in which new uses and values are unlocked. This is where you can “dwarf the original business case,” he said.
For example, Capital One was able to identify prospects for a card with a fixed rate of 4.99%. It brought in $76 million in new loans in the third quarter.
Technology also has enabled the firm to target people for other types of financial services — such as money market accounts, which are now a major part of its business.
The Danger Zone
- Maturity
This is the danger zone in which the systems may start producing lower growth. But many firms fail to see the writing on the wall.
“You've got to be aware of where you are on the curve,” Jeppersen said.
He gave a case in point. Jeppersen was frustrated because 25% of his IT budget was going into one place, requiring hundreds of servers and a large support staff. He looked into it and asked, “What am I getting?”
He found that nobody was willing to say that they needed the system. So he reduced costs, moving staff into more profitable areas, and cut off all investment. The system now accounts for 10% of the overall IT budget, and nobody has complained after six months.
What are the most common mistakes made by marketers when managing technology?
One is to keep pouring money in because they are getting good response rates.
“Before you know it, you slip into maturity and the growth rate slows down,” Jeppersen said.
Another mistake is to stay focused on “birthing” new technology while giving short shrift to return on investment.
Jeppersen cautioned that a system can reach the end of the technology curve but still produce a massive ROI.
On the other hand, it can reach the end of the ROI curve but still be good technology.
Have Capital One's efforts paid off? Yes, Jeppersen said.
Its earnings per share totaled $3.93 in 2002, compared with 64 cents in 1995, its first year as a public company. It's projecting $4.55 for 2004.
How Low Is Low?
For comic relief, Jeppersen offered the following variables for determining when ROI is low.
There's room for improvement, he said, when:
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Your system is down two days, and nobody notices.
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The free software you downloaded 12 years ago has better capabilities than your new $20 million system.
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Consumers complain about documents coming off the dot-matrix printer.
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Staffers would prefer to use pen and paper.
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There are repeated system downturns because someone keeps dropping the punch cards.
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The predictive dialer keeps dialing the national do-not-call list.
