How CBA's chief picks good companies

When describing the Australian business scene, Commonwealth Bank chief executive Ian Narev has a way of separating the corporate ‘sheep’ from the corporate ‘goats’ -- in other words, separating the good, well-managed companies from the not so good, or bad ones.

I must emphasise that in his KGB interview (below) Narev does not use these terms but that’s what he means.

The companies that are the ‘goats’ are those that have simply reduced their head count and taken chunks of their business offshore to gain lower labour costs. Narev does not elaborate but I would add that the Australian ‘goats’ are a real danger because if our dollar falls or business recovers their costs will rise again. I suspect many of these companies are now annoying their customers and they are vulnerable to rivals who adopt what Narev believes is the winning strategy.

He says that businesses in this new era of communication and technology must fundamentally re-engineer their entire operation -- almost redesigning it from a blank sheet of paper.

My guess is that too few Australian companies are in the ‘sheep’ category, which is one reason why our inflation creeps up when the dollar falls.

When Narev found two Australian manufacturers who had become globally competitive by re-engineering their entire business and culture he took the top Commonwealth Bank management team out to see them. 

“That’s what our bank has to do”, he will have told the CBA people.

In explaining that the Commonwealth Bank has re-engineered its entire operation and is a ‘sheep’ rather than a ‘goat’, Narev points to a whole range of indicators. But let me tell you a story that confirmed to me that something fundamentally different has happened at CBA.

A mate of mine is one of the largest and best known of the banking product brokers and issuers -- he has a low cost base and tries and ensnare customers from the large banks by offering lower rates or more suitable mortgage products.

A few years back Commonwealth Bank customers were easy meat and could be stolen very easily because the CBA bank executives thought being a customer of the bank was a privilege and they would not get into the grubby business of price bargaining.

Fast forward two or three years and the Commonwealth Bank technology is now so good that when my friend makes a bid for a good CBA client the bank’s systems enable it to be lightning fast in recognising just how good the client is and finding a way to keep that client, including dropping the mortgage rate.

The other banks cannot act with anything like the speed of the Commonwealth and so are easier prey.

In simple terms Narev’s predecessor, Ralph Norris, invested some $1billion in Commonwealth’s front-end banking technology. Narev’s job has been to continue the investment program and turn it into wins.

And he is going to be tested many times because new opponents in the form of PayPal, Google and Amazon will over time attack portions of the Australian banking market.

When CEOs proudly announce cost reduction, the question should be “how did you do it?” Did you fundamentally re-engineer the business or did you simply send the call centre and other activities offshore?

I suspect too many Australian companies are ‘goats’.