Today, an increasing number of banks operate with a geographic structure rather than a functional approach. Of course, many community banks have always operated with such a structure. Branch or regional managers run their territories as, in effect, local Presidents, and the bank allows them a significant level of autonomy, particularly in what and how they sell.

 

 

Wishing to compete effectively against local banks, larger banks are emulating this approach. They hope to counter the carpetbagger characterization with which community banks often portray them as they enter markets and, over the longer term, become embedded in the local community. However, for a bank to capture the full benefits of putting responsibilities in the field and closer to the customer, senior management must also ensure that the bank takes advantage of the strengths that functional groups provide. Too often, geographic structures result in an inadequate or, at best, inconsistent emphasis on opportunities related to small business and commercial banking, among other areas. These areas are important to many customers and can also generate significant deposits and loans.

 

Why Geography Makes Sense

Potentially, a geographic approach can provide many benefits to a banking organization:

 

• A geographic approach can link the bank closer to the community in which it operates

 

• The bank should be more responsive to customer needs, and it can allow for faster decision making

 

• This organizational approach can attract frustrated, but high quality, big bank employees. For example, we know of more than one New York bank that gained great branch managers from major big bank competitors based upon the responsibility they would be given. At their old employers, they had been neutered as decision-makers. At the new employer, they were masters of their branch domain

 

• For new market entrants, it dampens the impact of local competitors trying to portray the bank as an outsider

 

• It sells well in terms of market positioning

The Flip Side of Geography
 
Of course, execution is key to attain benefits like those listed above. Further, a geographic approach brings with it some negative tendencies that need to be addressed by senior management:

 

• The bank must require consistency across the geographies. Related specifically to small business, we find that some regional and branch heads understand and appreciate the value of small business while others largely ignore it. Those avoiding business targets view them as a diversion from their core consumer focus; others do not understand what small business requirements are; another group is intimidated by what they view as the sophisticated requirements of a business customer. Too often, bank management allows the local leaders to determine whether they will play in this space, giving up revenue opportunities to more disciplined competitors

 

• Segment heads have no distribution power. Under a geographic model, small business segment leaders frequently lack direct ownership of the sales force responsible for executing on their market focus and the sale of related products. They must rely on the interest of branch leaders who may or may not see value in their offer no matter the extent of the customer opportunities

 

• A geographic focus may encourage a product versus solution orientation. The Holy Grail in small business banking involves providing targets with an offer that captures the business of the owner and the commercial enterprise, as well as, selectively, the employees. First and foremost, deposits, then loans, payroll, and investments, among other areas, all fill in the profit puzzle. Unless geographic heads have a fairly sophisticated understanding of the opportunity and how to pursue it, they may overlook this potential to pursue lower hanging fruit, that is, a loan, free checking, or other products that fail to result in longer-term relationships

Balancing Geography with Function
It should not come as a surprise that we recommend that banks operating with a geographic focus incorporate a strong functional approach as well. But practically, how can this be accomplished? Success here is not easy, and it requires the interaction and direction of senior management and the goodwill of geographic and functional heads. Some management actions might include:

 

• The functional head should have clear responsibility for developing the approach that the local geographies execute. While the sales force may not report directly into the functional group, its role should include ensuring consistency in training, products/services emphasized, incentives, and the communication of internal and external best practices. The functional head should research industry best practice performance and lead the bank toward it

 

• The bank should create a strong dotted line to the functional head. Emphasizing geography should not mean dismissing the importance of the functional groups. On the contrary, some of the most successful large, geographically-organized banks view functional teams as partners and lever the expertise, discipline, and feedback they offer as critical to geographic success

 

• The functional groups should have input into compensation. By determining the sales metrics for the field sales personnel (with input from the field), the functional team should set the criteria by which success in their area of focus is measured and rewarded

 

• The functional area should have a P&L. Whether by double counting or shadow accounting, functional groups need to quantify their economic value to the bank. They need to be able to demonstrate their value both to overall bank management as well as to individual geographic heads. As part of developing a quantitative report card, the functional group should also model the opportunity and upside available to each geography. For example, related to small business, for each geography, the functional group should provide an analysis of the potential loan, deposit, and investment opportunity both for the business and the owner, thereby, helping to set local priorities

 
Concluding Thoughts

Given how organizations change, in three-to-five years we might be writing that the functional organization has become dominant and that banks need to determine how best to link their various geographies to that model.

 

Organizational structures change with shifting needs and shifting fashion. Nothing is intrinsically wrong with either the geographic or functional approach; executing on either model requires an understanding of its limits and a focus on capturing the benefits of the alternative. However, to capture these benefits, senior management must engage and lead this process, ensuring that they take advantage of the best of both worlds: local presence and authority targeted by centralized segment expertise aimed at highly attractive opportunities. Without capturing the best of both organizational worlds, a hit or miss approach will result in lost revenues and growth.