Executive Summary: While banks know that they cannot “shrink to greatness”, generating improved earnings in 2012 begins with cost reduction and improved productivity.
At a recent banking conference, I spoke with an industry colleague who articulated a view with which I strongly agree. He said, “Banks can eliminate ten percent of their employees without harming their customer service or income.” He went on to say that getting to 15 percent personnel reductions could begin to hit the “bone” of many banks. In short, most banks continue to be overstaffed, providing senior management with an opportunity it should take advantage of. And 2012 is the year to do so.
2012 will likely be a tough year for revenue growth. In many cases banks need to give strong priority to building up their C&I or small business groups or developing areas of industry or product specialization. That revenue-oriented process should begin immediately, and for many banks these actions are critical to the bank’s long term survival. However, it will likely require anywhere from six to eighteen months to generate bottom line results from new revenue initiatives.
Cost reduction can begin immediately and have immediate bottom line results with little, if any, negative effect. Banks need to reexamine traditional practices and job definitions to determine how to free up costs. At the same time, beyond reducing costs, many of these actions can also improve productivity and portfolio quality.
Some examples include:
* Retail. On the retail side, banks need to evaluate how they manage their branches. Almost universally, branch transactions and traffic are down. Depending upon branch activities and geography, two, three, or perhaps more branches can be combined under one branch manager.
This approach allows management several attractive options: the bank can “bank” the cost savings from eliminating relatively high cost branch managers (firing tellers has little impact); alternatively, it can take some or all of those savings and put them to hiring a branch-based salesperson to focus on revenue growth.
Too often, banks are trying to fit square pegs (service oriented branch mangers) into a round hole (outwardly focused salesperson). Despite the dollars and time spent on training, the successful conversion rate is low. Using some of the cost savings from combining branch management staff allows a bank to hire a true salesperson who can kick start the sales effort quickly and help change the internal culture.
One by-product of branch manager rationalization may also be regional consolidation with the elimination of the worse performing several regional heads. In fact, rethinking the overall organizational structure can eliminate layers of management and the slow and mediocre decision making it fosters. This approach is relevant not only to retail but all other areas.
* Commercial. To this day, bank relationship managers (RMs) continue to perform tasks that an account administrator or operations person could complete more cheaply and, oftentimes, more effectively. More than ever, banks cannot afford to have RMs design their own jobs. Fortunately, we see senior management tolerance for this anomaly rapidly disappearing. Management should be reconsidering issues related to job design. Once it determines what their RMs should be doing, management needs to ensure that the new “model” is consistently implemented across its footprint. In short, no customized job design based upon the preference of the individual.
In addition, in commercial and other areas, banks can centralize more operations and risk management processes. Given the leverage that technology provides, the need for local support staff has been significantly reduced. Again, tradition and the desire of RMs need to be reassessed in light of the bank’s need for improved earnings.
Banks must also aggressively weed out the poorest performers, whether in commercial or other areas. Management should give high priority to exiting the bottom five percent of employees as soon as possible. A senior commercial lender told me that eliminating poor performers had a very positive impact in ways he had not even expected. The mediocre lenders submitted the worst quality deals, thereby, slowing down the credit process for the better lenders and their clients. Eliminating the poorest performers had virtually no negative revenue impact while having a positive impact on productivity and morale.
* Wealth Management. As with commercial RMs, the productivity and effectiveness of financial advisors and private bankers needs to be evaluated and improved. Given reduced lending opportunities, banks may need fewer commercial RMs (and managers), particularly once the position is redefined and standardized with lower value tasks being moved to lower cost personnel. So too in the world of wealth management, where many parallels with commercial banking exist.
Lower performing wealth bankers also add little value and can be exited, freeing up costs, either to improve the bottom line or to hire better staff. Jobs can be redesigned to eliminate nonessential tasks and, again, consistent implementation of job redesign has to be non-negotiable.
Concluding Thought.
Revenue remains key to a bank’s long term success and attractiveness. Nevertheless, over the near term focusing on cost reduction can provide substantial economic and cultural benefits to a bank. By the way, to optimize those cost savings, leverage the experience and objectivity of a third-party. Otherwise, expect cost savings to be less and the timeframe for achieving them to be longer.