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value proposition Capital One s early success is one such example Capital One noticed that most credit cards were issued at zero complexity: a single offering at an interest rate of 198% regardless of the creditworthiness of the customer Competitors acted like the market only needed one product to fit all risk profiles! Thus customers with good credit profiles paid a high rate (that supported deadbeats), and generated a handsome return to the banks This cost of deadbeats was borne by good customers was non-value-added in their view which created a market opportunity for a differentiated and highly attractive offering By building up private databases of credit information and developing proprietary algorithms, Capital One was able to tailor significantly lower rates for lower-risk cardholders, and to deny credit to higher-risk applicants How could they afford adding complexity, offering more options than competitors at a lower price Their investment in technology: by the third ring of a customer phone call, the computer recognizes the customer s telephone number, identifies the most likely reason for calling, routes the call to the appropriate associate, and then populates the associate s computer screen with products and services that the caller may be interested in purchasing In this case, the cost of complexity was low due to a smart investment in information technology, product design, and testing So Capital One could provide a highly desirable offering, which afforded them a 40% compound growth rate per year with the highest ROE and lowest chargeoff rate in the industry Their stock price grew three times more than the industry average over a five-year period (see Figure 13, next page) The single offering of 198% interest rate, offered by most financial companies, supported large non-value-add costs from the customer s perspective and opened up a complexity-driven profit opportunity As Capital One lured away the most profitable customers (high recurring balances and very low default risk) and built up a successful business, competitors not only lost share but were left with an increased proportion of economically unprofitable customers The incumbents scrambled to make up for the economically attractive customers lost to Capital One s strategy Some competitors raised prices on their remaining customers, falling into a death spiral 7 By raising.

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into the organization, to the point that many companies are now spending more than 80% of their IT budgets on maintaining their existing systems15 What is the PCE for core strategic processes Before spending millions more on IT, consider how much value-add is contained within even your strategic processes Value stream maps of these processes will highlight the opportunities to eliminate non-valueadd-related cost and capital costs Moreover, complexity analysis of your offering will significantly reduce or even eliminate the need for IT spending as you identify entire processes that are nonvalue-add or that support a product/service group that does not meet its cost of capital Can IT confer a competitive advantage Research has shown that on average there is no correlation between a firm s level of IT spending and its business performance16 So obviously the issue requires careful handling because throwing money at IT will not create value However, as Capital One and others have shown, IT can confer a competitive advantage when applied correctly How can I free up capital and ongoing cost currently tied to nonvalue-add IT systems They are of no more value than an empty warehouse To determine the dollar opportunity requires value stream mapping of the IT-related processes

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