By
Charles B. Wendel
In light of the near-term economic outlook, senior line and finance managers industry-wide are focusing on productivity and cost reduction issues. Rather than sweeping across-the-board cuts, smarter banks will be more targeted concerning where they focus for efficiencies and productivity enhancements.
The commercial banking area is ripe for this type of focus. At many banks, traditional high cost sales and delivery approaches still dominate; relationship managers continue to spend too much time on low value-added activities rather than focusing on priority opportunities and targets; cross-sell has been more talked about than successfully accomplished.
Radical restructuring of the commercial organization and rethinking of personnel needs and business focus can have a significant positive bottom line impact. Rather than harming customer relationships, in fact, a cost reduction effort aimed at commercial banking activities can actually result in better customer service.
After reflecting on the opportunities available to banks and based on ten years of work in the commercial banking arena, FIC has developed the Commercial Opportunity Programsm (COP) to generate improved profits for commercial banking units while reducing costs without harming the customer franchise.
The facts
Many commercial banking units continue to operate as they did ten or more years ago:
Job responsibilities have not changed significantly. Limited change has occurred despite a relatively high current cost structure and the opportunity to shift operational and credit functions, among others, to specialists, many of who are lower-cost personnel.
Relationship managers at many banks still spend up to half of their time working on operational issues that could be handled at least as well by operations specialists. Op specialists typically earn substantially less than RMs while maintaining the strong internal, problem solving focus important to customers.
Account loads have not increased significantly, even with enhanced technology. At the same time, per account revenue at many banks has remained flat or even declined. While many banks talk about the need for segmentation and increased selectivity in their customer focus, the talk has not always turned into action.
Cross-sell initiatives have had marginal impact despite internal hype and attention. Usually, customer profitability centers on deposits, cash management, and loans. At this point the costs involved in selling non-core products, particularly to smaller and mid-sized companies, have not generated a strong return.
Internal best practices are not exploited. During client projects we often find unusual and successful approaches being tried in various pockets of the company. However, most banks fail to communicate these initiatives across their institutions. Management needs to uncover and highlight internal best practices first, rather than immediately looking outside the institution.
Incremental rather than high impact change has occurred. Typically, marginal change wins out over more creative and impactful approaches. This occurs in part because of resistance from various internal self-interest groups that warn of the negative implications of too much change. If it believes in its approach, management requires the fortitude to resist any intransigence.
Too often, self-justification
reigns. In our consulting work, we have frequently heard managers say, “We
already do that.” “That” may be a
marketing approach or a tactical suggestion to enhance the sales effort.
However, we often find that the “that” is only being pursued in theory, or
happening sporadically or half-heartedly. Opportunities are left on the
table.
Lack of consistency exists across many banks, limiting synergies. Too often bankers in different units or geographies are allowed to “define” significant elements of their job. While some degree of flexibility is appropriate, senior management needs to ensure that its corporate ship is sailing in one direction rather than letting subordinates make that choice.
The results
Unit profitability and growth goals are increasingly difficult to achieve. Commercial unit returns are under severe pressure. On the deposit and cash management side of the balance sheet, large corporates have long aggressively managed their cash positions. Similarly, the middle market and small business segments are becoming increasingly savvy concerning the options available to them. The bank’s “free” balances will continue to erode, requiring a profit fix.
As for lending, banks need to tread carefully during this economic period, balancing their need for growth with portfolio management concerns. Many banks will be unable to grow loan balances in the face of appropriate internal constraints and customer hesitancy to borrow.
Non-banks players have succeeded at skimming some of the most attractive clients. Merrill Lynch and Morgan Stanley focus on capturing high-balance deposits from small and mid-sized businesses. As a customer in this category, we made over $10,000 last year in interest income from our sweep account. That is a hard value proposition to compete against. The major investment banks have long moved down into the core middle market to satisfy their financing requirements.
Banks are losing opportunities to grow wallet share. Even in a tighter economy, commercial customers are being approached, either through direct sales efforts or advertising with greater investment, finance, and advisory choices than ever before. Bank franchises have been whittled away by poor customer service and sales practices as well as the strong efforts from non-banks.
The solution
Given the above circumstances, what approach should management pursue? Our approach, the COP program, tries to quickly highlight key opportunities.
Quickly take a status check of where you are today. Managers need a mechanism to address the key issues facing its commercial unit. Getting some level of agreement on the current situation (for example, key products, skills, customer focus, economic performance and opportunity) creates a baseline for action.
Streamline processes and
realign job responsibilities. Bank processes are like the bottoms of boats.
Barnacles collect, slowing down the efficiency of the ship. Within a bank the
barnacles are often Byzantine or unnecessary processes and personnel not
focused on the optimal tasks.
Create strong separate sales
and service teams. Going forward, serving the customer with a team approach
is not an option; banks must develop a team orientation both for their own
profitability and the customer’s continued satisfaction.
Rebalance account loads and further segment customer marketing. Low-value accounts need to be moved to a lower cost servicing area. High-priority accounts demand a level of attention that will often exceed what they have received in the past. Assessing and reassigning accounts can result in some RMs managing higher account loads while others handle a reduced number of high-priority names.
The next step
The current situation calls for change; its economic impact is significant. How do you get started? An effective starting point for profit improvement requires management to complete a preliminary assessment of operations. This initial review highlights:
· Opportunities to realign job responsibilities and reduce personnel costs
· Processes to be streamlined with an initial analysis of their cost impact
· Commercial banking revenues being “left on the table” due to insufficient marketing or inadequate pricing policies
· Initial analysis of the total bottom-line impact of optimizing your approach (The “Where is the money?” exercise)
· Priorities for further focus
This assessment should require about one month to complete. However, its payoff can be substantial if management follows this fact-gathering and opportunity assessment phase with a concerted implementation effort to execute high-priority change.