Mid-year 2006 provides a good opportunity for bank executives to review the status and performance of their bank’s middle market group. Banks concerned about lower than expected revenue numbers or looking for an area that can contribute increased levels of growth should investigate and reevaluate their approach to mid-sized customers.

The Traditional Middle Market Approach Is Costing Banks Money

The revolution that has impacted retail and small business banking has frequently left the middle market organization untouched. By revolution, we mean the changes that banks have introduced across the value chain, including redefinition of the banker’s role, a standardized product set, streamlined and limited documentation, elimination of most exceptions, increased speed of decision making, emphasis on alternative channels, targeted performance metrics, and increased regionalization or even centralization of decision makers. The way that small business and retail banking is being executed today is often dramatically different from how it was being accomplished three-to-five years ago.

 

However, in many cases, within the same bank changes to the middle market group’s approach to its market have been slow and, often, minimal in nature. While the best small business and retail groups embrace change and experimentation, the typical middle market area drags its feet, effectively raising barriers to change. (Note: We know banks, including clients, in which the middle market area has demonstrated clear leadership in many areas. Unfortunately, they are the rare exception.)

 

Earlier newsletters and articles have discussed why this resistance occurs. Factors vary and may involve a firm belief by the bankers that their current approach best fits customer needs; they believe that any change threatens the customer relationships they have worked hard to build up. Other bankers have simply done things a certain way for a long time and are uncomfortable with change, particularly change that would force them to do increased selling. Some even look down on the small business and retail groups as being less professional than they are.

 

Historically, many senior managers have allowed the middle market group to exist as something of a private preserve, left to make its own decisions about how best to approach the market. This position of privilege existed even as the returns generated by middle market groups were eroding. Today, more senior managers are losing their patience with the middle market effort and are beginning to subject that area to the same level of intense reconsideration that has been applied to the small business and retail areas. Why? Multiple factors are pushing this change: the level of growth being generated by the middle market group is sub-par; returns are eroding or flat; cross-sell is insufficient; banker productivity numbers are inadequate; the “independence” of the middle market group is in conflict with a one-bank culture being promoted by many executives; and the middle market fails to refer significant business to other areas of the bank even though they view themselves as leaders in relationship building. Management realizes that the potential upside from changing the middle market exceeds any risk involved in doing so.

 

I have written extensively about how to make middle market areas more productive and profitable. For this newsletter, let me suggest three basic steps related to launching a change initiative.

 

Step One: Get the Facts. Many of our middle market projects begin with developing a fact-base, including:

 

• What is the level of RM productivity and how does it compare with other banks?

 

• How much time does the RM spend selling versus time spent on administration and credit-related activities?

 

• What non-credit products are currently being cross-sold?

 

• What revenue opportunity exists? What is the level of current product penetration versus potential cross-sell revenue?

 

Our experience is that without creating an objective fact base, internal disagreements eat up much time and keep the bank from focusing on the customer revenue and service opportunity. One reason why clients bring us in is to quickly develop a fact base and draw out the implications of that data for them.

 

Step Two: Compare to Industry Best Practices and Evaluate the Gaps. The typical bank is generating performance numbers that pale against industry leaders in the middle market. While any banker can articulate why the performance of other players is not relevant to his own group, in fact, assessing best practice performance is highly relevant and ignored at the bank’s own peril. Comparing the bank’s performance to leaders and assessing why the gaps occur and what they can do to close those gaps begins to create a road map for change.

 

Step Three: Require Change. Certainly, the analysis cited above is helpful and fundamental for creating a mandate for change. However, banks need to avoid beating the analytical process to death. Within banks, we see analysis and the drive for unneeded and unlikely consensus building taking too much time and energy. This effort seems to become yet another excuse for bank management failing to make the changes that would increase productivity, customer service, and revenues. The roadblocks and resistance raised by middle market bankers effectively kill even minimal innovation.

 

In these situations, senior bank management has failed to provide the leadership and vision that is its responsibility. By doing so, these executives are also at risk of failing their shareholders and customers.

 

Get the Money Off the Table and Into the Bank’s Pocket

The Gentlemen’s Club that was once the middle market group has to be broken up, if a bank is to achieve its profit potential from this area. The performance gap between banks that have already blown up the old model and those that maintain their low growth approach is large and increasing. Interesting, for every banker that reads this newsletter and believes that his/her bank has adopted the optimal approach, there are ten more who know that their bank has put itself at risk due to its inability to address this area. Facing slower growth in multiple areas, addressing the need for change in the middle market is no longer an option.

 

Banks wishing to discuss how they might improve their middle market group’s performance should call us at 203/431-8330.