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Critical strategy considerations for depository institutions


Lewis Carroll once made the astute remark, "If you don't know where you are going, any road will get you there." This maxim certainly holds true for our personal lives and maybe even for our business lives too. Success is achieved only when the path is clearly marked and the goal is well defined. Whether we're talking about people or companies, the most successful ones share the common characteristic of being good planners and executors.

This article is intended to refresh and crystallize the importance of developing a strategy - a business plan that will decisively improve the performance of your organization. First and foremost, take the time to develop a plan. There are critical strategy considerations for financial institutions that should be explored and exploited.

Over the last few years, we have seen deterioration in the political and economic climate affecting financial institutions. We have seen federal regulators define tougher standards that have affected all parts of an institution's structure and organization. We have seen higher capital requirements create challenges, while lending to qualified customers has become more daunting than ever. It has even become more difficult to find talented leadership, especially in operations. What's more, all financial institutions, regardless of size or capital structure, have been affected.

After all these momentous changes in the industry, financial institutions must ask themselves several questions:

How will these watershed events affect our business?

Does our business plan take account of these new market realities?

Is our present plan adequate to meet the regulatory, market and competitive challenges?

At a minimum, you should have plans developed for a one year, three year and five year time horizon. Below are some important strategic planning issues that all financial plans should consider.

The master plan – Major components

Operational improvement

Many financial institutions have been forced to reduce costs to improve earnings. Financial institutions should continue to search for ways to cut costs, while also striving to develop a culture of business process improvement. This process should be ongoing, rather than just temporary or in reaction to short-term financial conditions. Some of the ways to improve operational efficiencies are:

  • Spend analytics – "Spend" is the common name for the organization's purchases. Most financial institutions have little experience in advanced procurement practices. Consider launching an initiative to evaluate such things as sourcing, pricing, alternatives and volume procured. A related initiative is Demand Management, a process for evaluating the costs, benefits and overall value of organizational purchases. The goal is to rationalize buying patterns and procurement requirements, and it should be a cross-departmental effort.
  • Shared services – Many organizations today have multiple facilities and/or multiple companies. Financial institutions should continue to investigate ways to consolidate non-client facing functions across facilities or companies. Many internal processes could be aggregated, including accounting, accounts payable, payroll, human resources, internal audit, compliance, information technology (IT), item processing, marketing, loan administration, mortgage underwriting and credit analytics.
  • Marketing justification – Marketing expenses have grown substantially over the years. Yet it's not always clear if marketing purchases are improving the bottom line. Many marketing programs focus on general branding and creative initiatives that have little direct connection to growth in sales or revenue. To address this, organizations should analyze each marketing campaign to see how it affects overall business, sales and customer satisfaction benchmarks. The litmus tests for determining the viability of any marketing program should be, "Does it lead to deeper market penetration and increased wallet share?" and "Did a particular marketing campaign increase auto loans, mortgages, credit/debit cards, deposits or other investments?"
  • Product management – Who are the product managers? A common organizational problem is a lack of alignment and accountability in product management functions. Frequently, an organization will have certain employees carrying out such tasks as reviewing product financials, modifying product features, launching marketing plans and training personnel on origination and new accounts. However, accountability for product performance is often vague and undefined. For instance, if the annual budget indicates that auto loans will increase by 12 percent and after eight months, growth is only six percent, who will be accountable for insuring that campaigns focus on attaining the 12 percent target?
  • Business process improvement – To root out inefficiencies in internal processes, organizations should track the performance of each process. IT is one function that can benefit significantly from performance tracking. Goals should be established for functional managers, as well as a baseline against which to measure their performance. These operational metrics can be used to help reduce costs and improve customer service. Metrics can also be used to identify non-value added tasks that can be earmarked for elimination. Examples of these tasks include excessive handling of documents, ineffective use of functions available in computer applications and superfluous, poorly managed meetings.
  • Technology enablement –Technology can help financial institutions operate at optimal efficiency. Evaluate your technology platform and applications to determine what steps should be taken to improve security, cost effectiveness, process performance and product management. As one of the most expensive items in the budget, IT costs can be reduced by having network, applications and security procedures assessed periodically by an independent consultant.

Locations and channels

Some organizations have evolved and changed to the point that it is no longer clear which geographic locations and client types they are serving. Consider the location of offices, branches, kiosks and ATMs. Consider online banking, credit card use and call center capabilities. Is there a one to five year plan on how to align with current and prospective customers? Consider these topics within your strategic plan:

  • Geographic locations – Assess your market to determine the future locations and the functional expectations of these physical banking locations. Offices, branches, kiosks, and ATMs are different functional models. Each has different costs and usefulness to customers. Develop a longer term plan that considers these models as chess pieces. Acquire the physical capabilities to best serve your long term customer needs and expectations for growth in customer market share.
  • Channels – An extension of the "physical location" analysis and plan should be to assess and construct a business case for the evolution of other channels that are used by customers. Determine next steps, investments, targeted customers and measureable expectations for the aggregate "go to market infrastructure" to include electronic banking (mobile, online, internet and phone), call centers, merchant card services, indirect loans, ATMs and other variations of branch locations (full service, less than full service and kiosks).What is the purpose of each channel type? What is the expected use of the channel? What is an appropriate investment into each channel?

Organizational effectiveness

Organizations don't stand still; they are always in a state of flux, growing and changing. All the more reason why a company should periodically re-evaluate its organizational framework. Here are some considerations:

  • Structure – Periodically, it is prudent to evaluate the leadership structure, roles and responsibilities and span of management. Over time, the organizational responsibilities of select individuals become less than optimal. There are frequent examples of organizations where vice presidents, senior vice presidents and executive vice presidents create levels of management that lead to inefficiencies in decision making and operations management. Proper organizational alignment is necessary to plan, monitor, manage and execute effectively. Assess past and current roles and organizational structure to create the momentum for an effective future organization structure.
  • Building a legacy - Efforts should focus on planning for future leadership. Identify people in the organization that show promise for management. Develop plans to provide mentoring, coaching and tasks with ever increasing responsibilities. Organizations that become comfortable with the current management team sometimes realize too late that turnover and retirement may hinder the continued strong performance of the financial institution. Are you building the next generation of leaders?
  • Culture – Culture is a set of shared attitudes, values, goals and practices that characterizes an institution, organization or group. Culture manifests itself in the behaviors of our employees, in the decision making processes and eventually in the financial performance of the organization. Culture is one of the most important aspects of any company and can be a strong determinant of corporate success or failure. So as you plan for the future, explore ways to promote the desired behaviors, communication styles and attributes that would create a more prosperous, congenial and effective cultural environment.

Competitive differentiation

Today, it is challenging to attract and sell lending products. Industry consolidation means there are fewer but stronger competitors. Competing in today's market is also complicated by increased credit risk, low interest rates and lackluster economic conditions. To compete effectively, financial institutions must differentiate their products, services and brand. There is an all out war on attracting qualified customers. This is a time to differentiate your company, increase market share and expand lending revenues. Here are some suggestions:

  • Research the market to identify products that are expected to sell well in the next 12 to 24 months. Simultaneously, assess the competitive strengths of direct competitors in these product categories.
  • Create a robust selling architecture that includes an assessment of loan officers, client service representatives, product features and pricing. Define tactics to improve selling effectiveness and product attractiveness.
  • Analyze marketing programs to ensure that campaigns and budgets are aligned with products with the best sales potential.
  • Identify existing customers that have more than three or more financial products.
  • Define tactics to use in customer service that can help strengthen loyalty and longevity.
  • Develop tactics to improve the effectiveness of networking by all employees.
  • Initiate or expand internet messaging and marketing campaigns.
  • Create a list of key referrals and define tactics to create positive traction from those sources.

For more information

Management is being measured, tested and challenged every day. Strategic planning is a foundation for the future. An anonymous quote, "It's not what you know; it's what you do with what you know" sets the tone for what is necessary for success. This checklist of topics, tactics and suggestions can lead you to improved planning, execution and financial results.

For more information please contact your financial institutions representative or Jim Lamb, Partner, Financial Advisory Services, 816.751.4054.