Last Thursday’s American Banker featured two side-by-side stories that senior bank management should read and consider:

 

• Susquehanna Bancshares announced that it was cutting 350 jobs, in part due to its acquisition of another player.

 

• In another story, a Nebraska community bank head stated that over the next five-ten years, “We’ll be left with a shortage of trained lenders,” as bankers retire.

 

As the industry begins a year in which revenue growth will be increasingly difficult to obtain, I think these stories provide banks with some near-term action steps worth considering.

 

 

Cut 10 percent of employees now.

Despite the leverage provided by technology, banks continue to operate with too many employees. Much of the overstaffing results from poor job definition, for example:

 

• Lack of consistency and clarity about the branch manager’s role

 

• Poor hiring practices

 

• Poor sales management procedures in business banking and the branch

 

• Insufficient deal screening clogging up the credit approval pipeline

 

• Poor communication from management concerning loan prospects to be prioritized and, alternatively, avoided

 

• Continued sale of low margin products that provide little value to customers and marginal impact on the bank’s bottom line.

 

The list of areas in which bank resources are being poorly applied extends beyond these items. The quality of staff at many banks is highly varied; a lack of consistency and rigor in managing employees frequently exists; many banks are selling too many products/services. Therefore, as these areas are addressed, a 10 percent staffing reduction should be a minimum goal for most banks.

 

Note that we said “as these areas are addressed.” In years past we worked on a number of bank-wide cost reduction programs, much as Bank of America reportedly is completing now. Those programs, largely non-strategic in approach, can suck the sales energy out of a bank and erode its culture. Rather than that type of shotgun approach, banks should be much more targeted and exact in evaluating how to become more productive without harming the essence of their institution. Banks like BofA may find that cost cutting firms are just that, cost cutting firms. The costs will disappear, but so too may the revenue engine of the bank after the cost cutters are gone.

 

Alternatively, a more thoughtful and tailored approach to improving productivity can reenergize rather than enervate a bank, in effect scraping off the barnacles that any institution collects over time.

 

Encourage retirements now.

Few executives in banking seem to realize what a great opportunity they have as older employees retire.

 

In this newsletter and in speeches, I have frequently recounted a meeting with a senior banker who, when I discussed the steps that his bank was taking to allow him to spend more time selling, said: “I’m an old dog and old dogs don’t like to leave the porch.” Many of these self-described “old dogs” remain lenders, not true relationship bankers. Their focus on lending continues even though bank returns will increasingly rely on non-credit products. Further, their energy and innovation levels are hard to measure.

 

In some cases, bankers have already retired while remaining on the job. These employees are highly risk adverse, but not in the appropriate way of avoiding portfolio risk. Rather, some are simply trying to avoid any controversy that could cause them to “rock the boat” or lose their seemingly tenured employee status. Bluntly, courage is in short supply at some banks.

 

In an environment in which growth is both critical and difficult to achieve, banks cannot afford to maintain a cast of highly paid, semi-retired employees. This is where senior management and the Board need to assert themselves; at many banks, however, senior management and the Board are part of the problem.

 

That said, in the past year we have worked with several banks and leaders who are willing to push against the tide to get things done. Some act from a realization that despite the view of many that banking is a nongrowth industry, in fact, tremendous growth opportunities exist for the best players. Some act from frustration at being saddled with a high operating expense ratio versus their peers. Others know that if they can act more quickly and nimbly they will have a significant competitive advantage versus most competitors. Still others know that they have their backs to the wall and must act to change the way they do business.

 

Concluding thought.

2012 will be year in which the best players continue to shine versus the mediocre. It is also a year in which it will be very hard for many not to generate mediocre revenues and returns. Those senior managers that are willing to diagnose their banks and frankly address the issues that the diagnosis uncovers will position themselves for long-term success. Others may continue to survive but with decreased relevancy for their customers and decreased justification for their continued independence.