Our end-of-year newsletters are focusing on areas that our clients and contacts tell us are of critical importance in 2005.
Two issues ago, we highlighted a heightened emphasis on gaining more wallet share through cross-sell. Our last newsletter focused on changes in organizational boundaries: many banks want to rely more on their branches to handle the smallest businesses while moving their small business groups’ scope to companies of $10-$20 million in revenue. In addition, increasingly, banks are forming dedicated groups to build share with lower-end middle market companies (generally $10 or $20 million in revenues to $50 million).
Reengineering 1990
Our third theme may appear to be a throwback to the past. During the 1990s, many banks launched bank-wide reengineering programs. Banks such as CoreStates, Midlantic, Michigan National, and First Security, among others, hired advisors who structured a rigorous analytic and decision-making process related to cost reduction and revenue growth. Unfortunately, in truth, most of the focus was on cost.
Too often, the result was a bank with a lower cost structure and greater efficiency, but also one that did not have the strategic focus or the growth orientation to survive. Therefore, for both those reasons cited above and others, the result was acquisition by banks that had developed more sustainable growth engines.
Michael Hammer, the professor and consultant who in the 1990s preached the message of Reengineering, viewed it as a multi-year process that demanded rigorous self-assessment and a long-term commitment to change; it was not a “quick hit” program. Unfortunately, many observers (including those working at the “reengineered” banks) believe that a short-term focus dominated those efforts: in several cases, bank management was trying to fight off or avoid a takeover. Further, in many cases, the bank advisors themselves received a percentage of agreed to cost takeouts and estimated revenue growth resulting from their engagement. Arguably, the opportunity for conflicts of interest was significant.
Reengineering 2005
Today, the discipline of reengineering is returning to banking, albeit in a less frenetic environment. 2004 will be a good to very good year for most top banks. In the majority of cases that we know, banks considering a restructuring process are strong today and want to remain strong tomorrow. They are proactively conducting a rigorous self-examination, based on their current strength.
In the short term, it is always easier to take out costs than to grow revenues. However, the great banks know that banking is a revenue and wallet share game, not just a cost-minimization exercise. For the 2005 reengineering programs to succeed, several guiding principles will need to overcome the tendency that always exists for quick hits:
1. Highlight the opportunity to reengineer for sales growth. Banks with a growth mission are examining the roles of RMs, Treasury Sales personnel, and others to strip away activities that keep them away from customers. Theoretically, this could result in reducing sales staff; however, these banks are reallocating the freed-up time to build an enhanced sales effort. If higher sales and customer penetration do not occur, the bank can then shift gears to capture cost takeouts. But, a growth emphasis comes first.
2. Leverage external and internal best practices. We often evaluate competitors for our clients. While no bank should simply emulate another, management needs to challenge itself to consider and, as appropriate, adopt approaches developed by big players such as Merrill Lynch and Wachovia as well as initiatives developed by community and regional banks. Perhaps even more critically, banks need to assess and exploit their own internal best practices.
Whether from internal or external sources, management needs to determine the “best” approaches and then have the intestinal fortitude to manage toward consistency across the footprint.
3. Renew your focus on centralization and outsourcing. Too often, we see our clients overemphasizing local involvement in tasks that can be completed by a central group. Appropriately, bankers want to ensure high quality, and they believe keeping control allows them to do so. Every banker can recount an experience in which centralized servicing failed. However, the fact is that centralization can and does work for many financial services firms today (for example, retail and small business credit). Banks need to operate with a bias toward centralization and with an eagerness to make it work.
4. Begin by building a fact base. One of the major benefits of a reengineering program centers on the degree of analytical rigor it brings to an institution. The process should convert anecdotes and intuition into analysis that meets internal review. Management can quantify and review questions such as how much time the branch managers, RMs, and others spend on various tasks. An internal team can then determine the changes they would like to see and how to accomplish them.
5. Manage the consultants. Consultants play a critical role in a reengineering program. They should bring process, discipline, and experience. They should know the industry and be able to provide best practice insights. However, these programs demand the highest level of attention and time commitment from senior management.
Final Thought
Reengineering can refocus and reenergize a company; conversely, a poorly planned reengineering program can distract and sap management’s energy. Fortunately, it appears that managers pursuing reengineering this time are doing so from a position of relative strength and with a clear sense of the pitfalls they must avoid.