Employee-Generated Strategy

Tinfoiling writes:

The lowest employee on the organization chart has the greatest contact with the customer. But why are they the least consulted when it comes to any change in process with the customer?

My take: The reason, Gene, is that there is a lingering perception among many senior execs that only senior managers (can/should) set strategy.

A number of years ago, for a strategy consulting project I was leading (for a client we had already done work for), I put together a project plan that included interviews with a number of mid-level managers. My boss (the partner) asked me why I was planning to talk to “them,” and I said it was because “they” knew what the real issues were — with the firm’s customers, with the firm’s capabilities, and with the firm’s current strategy.

His response: “We’re not going to talk to them. Only senior execs set strategy.”

That was more than 10 years ago, and not a whole has changed. But it will.

While a lot of the discussion on the blogosphere and in the press focuses on the impact of social networking on the consumer landscape, less attention is being paid to how social networking — and the collaborative technologies that enable it — impact how we manage the organizations we work in.

Granted, there have been articles discussing the use of Wikis to enable team collaboration, but not a lot has been written about the impact on how corporate strategy is established.

One of the positive trends in the strategy thought-leadership world over the past few years has been the linkage of strategy to execution (e.g., Blue Ocean Strategy) and the need for organizational alignment regarding strategy (e.g., Alignment: Using The Balanced Scorecard To Create Corporate Synergies).

But most of the authors still start from a top-down perspective of how strategy is determined and decided upon. So we end up with recommendations to create “chief strategy officers” to monitor and align strategy development efforts — in effect (to create a visual), to manage the strategy waterfall.

This is going to change. Rather than create chief strategy officers — who serve as strategy state police, preserving the status quo, firms will change the way they formulate strategy in the first place. And “formulate” won’t even be a word used in conjunction with strategy, because it has all the wrong connotations.

Michael Raynor gets this. In his book The Strategy Paradox, he recognizes that the focus and commitment required to generate the highest returns (the hallmark of today’s strategy formulation approach) is in odds with an inherent inability to plan for an unknowable future. As a result, he advocates for the development of a new competency: “Managing strategic uncertainty through the creation of strategic options.” As David Newkirk writes in Strategy-Business:

As decisions move up the corporate hierarchy, executives’ time horizons should lengthen and their priorities should shift from managing commitments to building options on an uncertain future. “CEOs should not see their role in terms of making strategic choices — that is, commitments,” Raynor writes. “Rather, they should focus on building ‘strategic options,’ that is, creating the ability to pursue alternative strategies that could be useful, depending on how key uncertainties are resolved.”

As “decisions move up the corporate hierarchy”? Doesn’t sound like a lot of today’s firms, at least as it applies to strategic decisions.

Three factors are going to contribute to a new way of “doing” (avoiding that “formulating” word) strategy, which I think of as employee-generated strategy (think user-generated content, but much much better):

1) Technology.
The tools are out there — blogs, Wikis, organizational visualization tools, etc. I’m not sure anyone has quite brought them together in a way to support a new way of doing strategy, though.

2) Demographics.
If the younger generation (Gen Y, Millennials, or whatever you want to call them) are as collaborative as they claim to be, then they’ll help bring about this change in strategy development.

3) Experimentation.
Regardless of the technology or demographic factors, there’s enough dissatisfaction out there to cause firms to experiment with how they develop strategy, and lead them to be more inclusive and collaborative with the process. And prove my old boss wrong — that is not only senior execs who set strategy.

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Not Another Chief Something Officer

I’ve read the Harvard Business Review for 25 years now, and at no point during that time, has it been as good as it is now under Thomas Stewart’s editorship.

The period before his reign produced a spate of annoying “no, no, no — let ME tell you what strategy is” type articles. Seemed like every article was about the latest [fill in the blank]-based-strategy concept.

But under Stewart, the articles are thought-provoking and relevant. Can’t ask for anything more than that.

Which is not to say that I agree with everything in HBR. Case in point: The Chief Strategy Officer article in the October 2007 issue. The authors (Accenture consultants) studied the CSO role in a number of firms and wrote:

Increased volatility, rapid globalization, the rise of new technologies, and workforce changes have contributed to an environment in which top-down planning needs to be balanced with quick and agile execution. That is why more companies have found it necessary to hire CSOs.”

According to the authors, CSOs must engender commitment to clear strategic plans, drive immediate change, and drive decision making that sustains organizational change.

And who should fill this role? The authors believe it takes someone who is: 1) deeply trusted by the CEO; 2) a master multi-tasker; 3) a jack-of-all-trades; 4) a star player; 5) a doer, not just a thinker; 6) a guardian of horizon two; 7) an influencer, not a dictator; 8 ) comfortable with ambiguity; and 9) objective.

Until they got to the last point, I thought they were talking about me! Yeah, right. And I’m sure that the people who meet this criteria are dime a dozen in your firm, as well.

Unfortunately, what the authors have described is a nearly impossible job, requiring superhuman skills. What they haven’t done is identified the root of the problem — why is there a need for this role in the first place. What they’ve done — and why I call out the fact that they’re consultants — is fall into a trap that many management consultants fall into when they can’t solve a sticky problem: They advocate appointing a Chief Something Officer.

We’ve seen this recently with the Chief eCommerce Officer, Chief Innovation Officer, and Chief Customer Officer. And there lots of reasons why these positions often fail to live up to their expectations (I don’t mean to imply that they’re complete failures in even most cases).

In the case of the Chief Strategy Officer, while the HBR article mentions a number of firms with CSOs, it never really says what impact the role had on those firms, and why it had that impact. And it never identifies why there’s a problem in the first place.

Volatility, globalization, etc. are all certainly factors impacting firms today, but there have always been factors impacting the ability to balance top-down planning and execution.

So what’s the underlying cause for why balancing strategy formulation and execution is so hard? I’ll give you an acronym to help you remember the answer: ANT. Where:

ANT = Ain’t Nobody Talking

Ain’t nobody talking about what the firm’s strategy is (and isn’t), ain’t nobody talking about what assumptions and conflicts are inherent in the strategy, and ain’t nobody talking to each other on a regular basis about how the strategy impacts execution.

A CSO might be able to address some of those issues, but it’s not the only way. Interestingly, preceding the CSO article in the HBR issue was an interview with Jeff Bezos from Amazon who said:

We have a group called the S (Senior) Team that stays abreast of what the company is working on and delves into strategy issues. It meets for about four hours every Tuesday. The key is to ensure that this happens fractally, too, not just at the top. At different scale levels it’s happening everywhere at the company. And the most important thing is that it’s informed by a cultural point of view — we are willing to plant seeds and wait a long time for them to turn into trees.”

The CSO approach is, unfortunately, often a manifestation of the quick-fix, silver-bullet mentality that exists in many firms. The prevailing attitude: “Since we don’t have the discipline to fix the root of the problem, or even figure out what the root of the problem is, let’s just put somebody in charge.”

We don’t need another chief something officer.

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We Need A Strategy

If I had a nickel for every time I heard someone say “we need a strategy” — whether it was a marketing, Web, database marketing, analytics, advertising, IT, or you-name-it strategy — I’d be rich. If I had to pay a nickel for every time the ensuing strategy-development effort failed to materialize or pay off, I’d be in debt for the rest of my life.

The problem lies in the different interpretations of the term strategy. Thesaurus.com defines strategy as “a plan, method, or series of maneuvers or stratagems for obtaining a specific goal or result.” But when used in practice, we often use the term to mean “a solution to a problem”.

What’s important, here, is recognizing what’s causing the problem in the first place: Misalignment. Misalignment between the lines of business, and between functions like marketing, analytics, advertising, and so on.

You need a strategy, all right — at the business level. But at the LOB and functional level, what you need is a plan that aligns with the strategy. “Well, that’s what we’re trying to do”, you say.

But the reason you’re not succeeding at effecting any change — or remediating the problem — is that your “plan” or “strategy” isn’t calling out the elephant on the table. That is, the specific points of misalignment as they relate to budget allocation, project priorities, IT interdependencies, skill gaps, and (often one of the biggest contributors) incentives and compensation.

Marketing’s strategy has to start with a expose of where the alleged business strategy falls short. An online channel strategy that espouses cross-selling a firm’s products isn’t going to succeed if the product “owners” (product managers, LOB execs, etc.) aren’t willing to bundle their product or concede margins by giving some customers discounts.

Exposing the weaknesses in corporate strategy is a dark and nasty job — but Marketing has to figure out how to do it in a tactful way.

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Is Your CRM Strategy Helping Or Hurting?

Matt White, writing on Finextra, shares Turkish bank Garenti’s CRM strategy:

If you go into their branches you have to swipe your bank card receive a ticket, and wait to be called. But not all tickets are equal. High income ‘superstars’ get seen within five minutes, the pretty well off have to wait a bit longer, and the great unwashed should be granted an audience after about ten minutes. Non customers have to wait for up to half an hour. Garenti says that if these people want to be seen sooner, they had better open an account.”

My take: Funny, but instructive. Funny cuz’…well, you know why. Instructive, though, because it highlights two issues that banks, often unknowingly, have:

1) Their customer segmentation scheme does more harm than good. Although few (if any) North American banks require customers to “swipe in” before receiving service, the Garenti story does highlight a drawback that many banks here do face. Few banks, thanks to how they segment their customer base, account for a customer’s potential relationship value.

Like Garenti, many banks segment customers on number of products owned and demographic factors like income. But number of products currently owned may not provide any insight into how many more products a customer might have with the bank. And a customer’s income, while a potentially good predictor of the need for financial products, isn’t necessarily a good indicator of the products that customer will consider the bank for.

As a result, this approach to segmentation may lead to preferential treatment for customers who have no intention of expanding their relationship with the bank, and reduced service levels to (and attention to) the customers who represent their best long term opportunities.

While many observers complain that segmentation schemes are, often, not actionable, there’s another issue. Most approaches don’t help the bank understand the kinds of relationship a customer wants to have. Some customers are looking for a personal relationship with a banker, another wants help and guidance making smart financial decisions, while a third may only want to park his paycheck into a checking account before putting that money in investment accounts (that aren’t with the bank).

In Garenti’s case, it’s possible that some of its “best” customers might tolerate a longer wait in the bank, especially if they could come in, get a cup of coffee, and relax for a bit. Isn’t this what a lot of banks are going for, trying to re-create the Starbucks experience in their branches? But Garenti’s segmentation dictates a CRM strategy that forces it to ignore this option.

2) They fail to understand the importance of the initial sales experience.
Garenti’s tiered service levels may improve service to its “best” customers, and possibly even improve its retention levels. But it may adversely impact new sales (i.e., prospects getting up and leaving during their 30 minute wait), and — just as importantly — be hurting future customer loyalty. The longer-term loyalty impact is not as apparent because few financial firms really understand how important that initial sales interaction is for shaping future purchase intention.

Opening a checking account may not be a particularly stressful, or highly emotional, event for many customers. But it’s likely that they’ve made a conscious choice to pick one provider over another — and there is stress or emotion involved in worrying about whether or not they’ve picked the right one.

While a bad experience in that initial interaction may not dissuade a customer from doing business with the bank, it might produce a negative story that the customer tells himself about the bank. A story that could limit the future potential of that relationship right from the start by diminishing the customer’s desire to turn to the bank for more products and services.

So should Garenti — or any bank for that matter — flip-flop the scenario and give prospects priority? Well no, that won’t work either. Then they’d be no better than the telcos who give all the good deals to new customers and treat existing customers like 2nd class citizens.

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There’s no easy answer to these issues. But, as a starting point, banks must: 1) better understand the kinds of relationships that their customers want to have, and 2) develop a segmentation approach that builds on those relationship types. And not simply let the existing segmentation dictate their CRM strategy.

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Improving The Return On Financial Services Marketing

The authors of a strategy+business article estimate that the financial services industry spends more than $10 billion each year on marketing — approximately $8.5 billion of it on advertising. The authors contend that financial services firms can:

Boost their marketing effectiveness by 15 to 25%….by putting in place tools and processes that will measure marketing ROI more accurately than marketers’ intuition.”

This statement implies that: 1) the act of measurement will — in and of itself — improve effectiveness, and/or that 2) firms’ actual ROI may be higher than reported, but that financial services marketers aren’t accurately measuring results or attributing them to the appropriate investments.

Implication #1 is just flat out wrong. Changing your marketing tactics and spending levels will impact ROI — deploying tools and processes can only change how well you think you’re doing.

Implication #2 is a lot more palatable — and, if true, should have major impact on how financial firms allocate their marketing dollars.

In fact, the article cites the example of one firm that “drew on its ROI findings to slash it annual broadcast TV budget from $70 to $10 million, and shift spending to cable, online media, and sponsorships.”

But improving ROI measurement will not — in and of itself — result in change.

I’ve written before about the marketing’s civil war between the brand warriors and the database marketing/measurement army. The continued adoption of net measurement techniques — a noble effort on the part of database marketers to improve the accuracy of response attribution — actually works against them in this civil war.

At one large financial services firm, adopting new measurement techniques led the firm to conclude that it if response couldn’t be attributed to its direct marketing efforts, then the observed response must have come from its TV spend. The result: A push to decrease direct marketing investments, and hold TV spend constant. Astute readers know that this is a case of misapplication — these findings shouldn’t have been applied to media allocation.

Many financial services marketers understand that this is a misapplication. But shifting significant dollars away from traditional media, and away from branding to other purposes, is a challenge to their management religion. In other words, they’re convinced that creating brand equity is the best use of marketing dollars, and has the greatest impact on customer behavior.

But as long they’re winning marketing’s civil war, we won’t see large shifts in channel allocation like the example cited in the strategy+business article.

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Even More Thoughts On Customer Lifetime Value

Adelino started the discussion with a post on customer lifetime value modeling. Jim Novo continued it here. I’ll add a few thoughts. In measuring or modeling customer lifetime value, marketers need to:

1) Incorporate measures of risk. As Adelino states, CLV boils down to a single number. But there are a number of variables and assumptions that feed that number — variables whose values: a) are estimated at the time of calculation, and b) change over time.

Channel behavior is a good example of this. In banking, a customer who requires a lot of branch service is more expensive to serve (and thus less profitable, all other things equal) than a customer who relies heavily on the online channel for service. But this behavior can change over time — and in both directions. Younger consumers, who may rely heavily on the online channel today, may have more sophisticated needs in the future, and change the channel mix of their interactions over time. And older consumers can be trained and incented to use the online channel, even if they don’t today.

The key point is that CLV — which Jim rightly notes is a calculation at a certain point in time — incorporates assumptions about future behavior. The “risk” that this behavior could change should be built into the CLV calculation.

2) Use activity-based costing.
I used channel behavior as an example of a factor impacting customer profitability. But understanding actual channel behavior is a challenge for most firm, as is understanding the true cost of serving customers.

Without ABC, costs are often allocated based on product ownership because service behavior is accepted as an unknown. In some firms — even where service activity is incorporated into CLV estimates — differences in the costs of providing service across channels and even the differences in costs of different types of services is washed over.

Without ABC, marketers cannot get an actionable estimate of CLV.

3) Use CLV to drive customer relationship strategies. Somewhere along the line, it became fashionable to say that firms should “fire” unprofitable customers. Although Adelino mentions “dropping” unprofitable customers, his prescriptions lean more towards “managing” their behavior — through support charges or restocking fees, for example.

Firing unprofitable customers is a flawed concept. As I alluded to in point #2, few marketers can be 100% sure that their CLV calculation is accurate in the first place. But a customer — unprofitable or not — contributes to meeting fixed costs. If you drop unprofitable customers, you (negatively) affect the profitability of other customers — potentially pushing them in front of the “firing squad.” And the cycle continues. A ridiculous notion.

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In the end, marketers cannot simply use the CLV calculation as the only dimension upon which they segment customers. Even good-old RFM metrics can help better segment customers in order to drive marketing strategies. In the financial services world (where purchase frequency is low), I advocate using customer engagement measures to help provide a qualitative perspective on customer behavior and strategic directions.

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A Tale Of Two Strategies

The Gainesville Sun tells of a woman who’s fighting her credit union over fees she was charged for not using the CU’s telephone banking system, not having her transaction slip ready at the drive-through window, and for coming in more than four times a month.

Meanwhile, another credit union rolls out its “Signature Membership” program which — among other requirements like having a certain number of accounts opened — stipulates that a member must make a minimum of 15 transactions per month of any type. In return, the CU waives a number of service fees.

My take:
An interesting contrast in strategy and philosophy. The first strategy disincents customers to interact with the firm, while the other incents them to interact. Neither strategy is inherently better than the other. However…

If you pursue the first strategy, you better offer superior rates. Cuz’ nobody’s gonna want to come into your branch to talk, in fear of incurring a charge for doing so.

If you pursue the first strategy, you better not run out of transaction slips when customers are in line. Cuz’ they might riot if you do. I know I would.

If you pursue the first strategy, you better hire the best damn service reps on the planet. Cuz’ for $2 a pop to interact with them, they better be good.

If you pursue the first strategy, you better pay your people really well. Cuz’ nobody’s gonna like working in such a customer-unfriendly environment. I know I wouldn’t.

Not that I think one strategy is inherently better than the other, mind you.

Hat tip to CBruen.

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A Little Knowledge Is Great Marketing

American Banker reported yesterday that Bank of America will launch an online and in-branch advertising campaign called “A little knowledge is a powerful thing” to educate consumers about banking and credit card fees. The article calls the campaign “ironic” since more than half of BofA’s revenue comes from non-interest income. Bruce Hammond, president of BofA’s card services division was quoted as saying:

“Our research shows that if we equip consumers with this account information, they become more empowered to manage their finances and more satisfied with their banking experience.”

My take: This is a bold move — and great marketing — because it demonstrates:

1) Transparency. I’ve argued before that the way to win over financial services customers is by demonstrating customer advocacy (versus worrying about whether or not they advocate for the firm). Transparency — being open about fees and rate structure — is an important component of being an advocate for the customer.

2) The importance of customer engagement. Engagement isn’t about how long someone looks at your ad (sorry, branding folks). It’s about the emotional connection someone has with your brand or firm. BofA’s move will help engage consumers more deeply with managing their financial lives — an important step to becoming engaged with BofA itself.

3) Long-term thinking. Is BofA putting some of its fee revenue at risk? Possibly. But they’re betting that by delivering on points #1 and #2 (transparency and engagement) that it will win out in the long-run. Many industry observers (myself included) have long criticized financial institutions for taking the short-term view towards building profitability. BofA’s move clearly displays long-term, strategic thinking.

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Fixing The Marketing-CEO Disconnect

HBS Working Knowledge interviewed Harvard Business School professor Gail McGovern about fixing the disconnect between marketing and the CEO. Here are a few of the key points that stuck out for me and my responses.

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McGovern: “Over the past 10 years the mix of marketing skills needed by a company has radically changed, and many senior executives…have not kept pace.”

My take: This skill deficiency is a two-way street. For sure, non-marketing execs have lost touch with many areas of marketing expertise (but are experts in branding, of course). But on the other hand, few CMOs have developed the fourth skill crucial for CMO success.

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McGovern: “While CEOs have commonly delegated advertising and advertising strategy to outside agencies, now they are delegating sales, distribution strategy, pricing, and product development to CMOs, who often lack overarching strategic responsibility.”

My take: In which firms has the CEO delegated responsibility for sales, distribution strategy, and/or product development to the CMO? The problem is very much the opposite: The CMO should be involved with (not necessarily controlling) these functions, but isn’t. Part of the issue here relates back to the point regarding skills. Many CMOs — overly focused on branding — haven’t developed the skills required to participate in, let alone be responsible for, functions like distribution strategy and product development.
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McGovern: “[B]oards, and even CEOs, have been lulled into complacency by the CMO.”

My take: This comment came in response to a question about why marketing has evolved so far from the executive suite over the years. But it’s hard to believe that this could be happening in that many companies to make this a valid statement. The issue lies with a firm’s culture. Sales- and finance-driven cultures tend to marginalize marketing, or at the least, diminish its strategic importance in the firm. But it’s not the CMO lulling the exec suite into complacency.
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McGovern: “…[T]he yawning gap between actual revenue growth and investors’ expectations is a ticking time bomb. Marketing is the way in which firms can close this gap because it encompasses all the activities of n organization that listen to the customers’ voice and ultimately generates profitable relationships.”

My take: Marketing does not “encompass all the activities…that listen to the customer.” The voice of the customer is captured in areas like sales and customer service. The problem is that it isn’t always shared beyond those departments. [And if that weren’t bad enough, within marketing, the function that captures the voice of the customer (or tries to) — market research — isn’t well integrated with other areas of marketing.] McGovern’s statement is overly simplistic, it’s symptomatic of the biggest problem CMOs already have — accountability without responsibility.
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McGovern: “The key challenge [in aligning marketing activities with corporate strategy] is to develop a set of metrics that measure the impact of marketing activities against the goals of the corporation.”

My take: Metrics are great — as a tool to manage marketing’s operations, and to communicate its contributions and impact. But they’re a risky way to achieve alignment. McGovern hints at this herself, with her example of Starbucks picking the wrong metric to link back to corporate strategy. How much time elapsed and pain did they experience before they figured that out? At the recent DMA Financial Services conference, Martha Rogers commented that it takes eight quarters to get Return On Customer (TM Peppers & Rogers) calculations right. That’s a long time to not know if you’re in alignment or not. The right metrics are critical for staying on track — but they’re not the way to figure out which track to be on.

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Overall, I’m somewhat surprised by Ms. McGovern’s comments. Her executive credentials are impeccable. I’m left believing that this interview didn’t quite capture her real-world experience and perspective.

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Lazy Money

Announcing his firm’s new high-yield checking account, Charles Schwab said:

The financial world lives off lazy money. There is inertia, and in some respects that’s exactly why we decided we had to make this a very powerful offering.”

Chuck’s right on. (If the firm is going to run ads that say “Talk to Chuck”, then I can call him Chuck). Nearly 80% of consumers are rate-insensitive — they won’t move their money for less than two percentage points better than what they get today or aren’t interested in moving money to get higher rates at all.

This implies that once you’ve got a customer putting money into an account, it’s unlikely that they’ll pull it out for higher rates across the street.

But financial firms can’t survive in the long-term on lazy money. Renegades (like Schwab and BECU with its high-yield offering) will succeed — not just with the rate-sensitive minority of today, but with the rate-insensitive majority in the long-run — by:

  • Educating consumers. Renegades are raising awareness of their superior rates with offline, as well as online, advertising. This is changing the rate-insensitive’s perceptions that “it’s not worth moving my money”, “it’s too hard for me to move money”, and “I’ll have to pay more fees if I move money.”
  • Being easy to do business with. Most banks make it easy for customers to move money in — but expensive to move it out. Not so with the renegades. They’re showing consumers how easy it is to do business with them — an important driver of choice of firms with Gen X and Gen Y consumers.
  • Impugning other firms’ customer advocacy. Renegades alert consumers when rates reach a certain level — firms relying on lazy money would never do this. This opens the door for renegades to claim that the other firms don’t have their customers’ best interests in mind.

For many consumers, passive decision making drives their choices. They don’t want to think about who has the best rates, whose service is better, etc. So they make the easy choice — the bank on the nearest corner.

Lazy money — or financial apathy — is one of the biggest enemies of many financial firms. Smart marketers will help create this new breed of financial activist — and not simply try to compete on rates and fees.

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