Executive Summary: Small Business segment heads, like baseball managers, seem to have relatively short life spans. Better expectation setting, organizational clarity, and greater senior level involvement can improve prospects for success.

 

 

Several recent conversations with current and former small business bank segment leaders point to the precariousness of managing this segment. In their view, five years is about as long as one can expect to run a small business group.

 

Our own experience supports that view. Given that this week the movie Moneyball opened, it is worth considering that small business heads suffer from a similar level of job insecurity to baseball managers. They are handed a team and strategy by their boss (in baseball the General Manager) and, then, are given responsibility for making the team a success. However, most bank bosses (usually heads of Retail or Commercial Banking) fail to provide the small business head with the fundamentals required to succeed. Just as the best baseball managers do, small business heads may need to push back against the assumptions and biases of their higher ups, if they are to succeed.

 

Three key reasons contribute to the relatively short lifespan: lack of control, poor understanding of the requirements for business banking success, and unrealistic senior management expectations and commitment.

 

Lack of control.

In many cases, the business banking manager has responsibility for the segment’s success without the authority required to succeed. In our view, the most effective business banking efforts are usually those organized as lines of business with dedicated sales staff and support personnel. However, at many banks, the business segment operates with the sales staffs reporting to regional bank heads. That regional bank head may or may not be interested in business banking. Further, they can determine the level of effort aimed at that segment. Oftentimes, this approach results in an inconsistent effort across the bank’s footprint.

 

Consistency and rigor in the sales effort and streamlined, customer-friendly approaches are critical to the segments success. They can better be achieved centrally than in a decentralized organization.

 

High expectations.

Some bank heads may expect too much too soon from the business segment. The good news is that despite the economic doldrums and the new normal of slow growth, the small business segment remains highly attractive. In fact, as retail earnings become more difficult to generate (in part thanks to Dodd-Frank and the Durbin Amendment), business and commercial banking have increased as areas of focus for many banks.

 

Top management often views this group as a great loan and deposit source, but seldom understands the intricacies and complexities of serving this segment. The small business managers themselves may contribute to this misunderstanding unless they focus attention on future rather than past profit levers.

 

Lack of knowledge about the requirements of business banking success.

To this day, most banks focus on loans as the key to a business banking relationship. This view persists despite the improved cash flow management and conservatism of many quality companies. I met with a senior banker last week who believes that, for the next generation, companies will borrow less versus the past. Companies have improved their cash management and, reacting to the economic morass we are in, they are wary of debt. We agree with that view and, therefore, we think relying on lending as the relationship cornerstone offer is a mistake.

 

Not only is lending less critical to some, at many banks the cost of lending has increased due to higher costs to originate, the desire to “touch” a loan more, and the demands of greater regulatory compliance. Banks need to look at the all-in cost of originating, underwriting, and servicing loans. In some instances, that analysis will tell an unpleasant story.

 

Any bank that is not viewing the business banking relationship as “holistic” should probably should not be in the business and, most likely, is doomed to failure. By the overused term holistic we mean that a bank needs to address the entire business banking household. This includes the needs of the company, its owners, and its employees. In “needs” we would capture transaction requirements (checking, cash management), credit, investments, and (if offered) insurance and advisory services. The economic success of this business demands that banks understand and proactively respond to these needs.

 

Ten years ago, most of the banks we knew thought that cross sell was a nice idea but impractical to accomplish, given internal silos and existing accounting systems (that is, getting economically rewarded for selling a product outside of your silo was difficult). Today, everyone nods in agreement that this approach to the customer is important. Many say they are already pursuing that approach, but in most cases they are deceiving themselves in thinking they are doing anywhere near what they can.

 

Most banks are still pushing commercial deposits (today of limited value to many banks) and loans (today of limited value to many companies). The best players (few in number) have graduated beyond this limited focus. How many senior bank managers accept the need for a different approach and are acting on it?

 

The new normal requires increasing your wallet share with current customers (who already have relationships with other insurance, investment, and personal services providers) and/or taking market share from other banks (that should want to keep their customers even more than you want to take them away). Arguably, it is harder than ever to build a business banking franchise; it is also more important than ever to a bank to do so.

 

Poor hiring.

An additional reason for failure also needs to be addressed. Small business banking groups require a leader. They need a man or woman who is passionate about the business, eager to challenge traditional approaches, and willing to buck (respectfully) senior management to do the best for their customers and the business segment. Too many managers serving this segment simply go along, seemingly blown about by internal politics and bureaucratic policies. Top management at banks that are truly committed to this segment may need to rethink who is running the business. A strong sales manager and creative thinker will be more important than someone who has years of experience serving this segment with mediocre results.

 

Concluding thought.

There are relatively few Bill Beane’s (the General Manager glorified in Moneyball) in banking or anywhere else. Even Billy Beane, who was remarkably successful years ago, now has a team that is finishing near the bottom of the heap. The need for rethinking traditional approaches and reinventing where necessary is continual.