In our last newsletter we focused on why smaller banks risk losing out to larger competitors. The reasons for this significant threat result from the combined impact of current management practices at many smaller banks combined with improved execution from larger players. Smaller banks are hobbled by their internal silos that limit cooperation within the bank and cross-sell to the customer; the lack of an emphasis on objective performance and profitability measurement; and little consistency or discipline in the banks’ approach to (in particular) commercial targets, in effect, allowing the banker and the sales manager to craft their own jobs.
These banks have made themselves vulnerable to banks like Chase, Wells, Bank of America, Wachovia, Citi, and many others that have survived their acquisition integration challenges and have now become intensely market focused. Smaller banks can and MUST learn from the bigger banks, adopting many of their approaches and processes while differentiating themselves by their strong focus on the customer. In fact, adding more structure should allow these banks to increase the time available for customer interaction by their bankers as well as improve the quality of those meetings.
Limit the degrees of freedom to increase sales. Despite what middle market bankers suggest, commercial banking is not an art. It is a business that should follow a rigorous process based on making multiple targeted calls and following up on them in a quality fashion. A strong sales management process is critical to making small business and middle market activities pay off. Yet, many banks allow their bankers to decide how much time they spend selling versus focusing on administration and credit.
Perhaps even worse, many neglect instituting strong sales management procedures. Increasingly, we have come to believe that a strong sales management function is the key to the sales puzzle. We recently worked with a client that had invested in what it viewed as a good sales training program for its bankers. However, it has virtually no consistent sales management process: the training is probably a waste of money since the bank did not incorporate follow-up and a disciplined sales process. Good sales training without excellent sales management processes as follow-up is a huge mistake. Fix the process first, then train.
Bigger banks tend to impose a process on employees. For example, the commercial bankers at Bank of America all follow the same rulebook and move in the same market direction in response to the same metrics and goals. The bankers know what is expected of them and understand the compensation structure in which they operate. As for the customer, it may not be right for all of them, but given the bank’s results, it is right for most.
Break down the silos. Small banks cannot afford the time-consuming, expensive, and enervating impact that infighting creates. Yet we have seen silos at most of our small bank clients. Senior management has got to step up to break down the barriers. Easy to say, right? However, the economic imperative behind demanding cooperation is stronger than ever. Small and mid-sized banks must sell the whole bank if they are to tie the customer to their institution and mitigate the strong marketing power of the big banks and non-bank players.
Allow silos to continue and the bank’s future is very much in doubt. We have seen too many instances in which bankers spend much more energy on internal matters than in thinking about how best to sell customers and prospects. Conversely, I heard a client at one of the world’s largest banks say, “We’ll work out internal compensation later. Let’s just do what is right for the customer and the bank.”
Fighting internally is easy; selling to customers is hard.
Manage by numbers. Larger banks have no choice but to develop and manage against metrics; they have too many employees and locations to rely on subjectivity. Smaller banks also have no choice but to manage based upon numbers, but many do not seem to realize it. Our view is that, in the future, it is going to be much harder for smaller banks to attract and retain excellent people. Bigger banks are looking to smaller competitors for experienced staff and often can offer greater pay, benefits, and career diversity.
Within smaller banks as well as large, the best players want to understand how they are being paid and expect to be paid more than others based upon their performance. Subjectivity and “secret” formulas need to go. Gaps between mediocre and top performers must increase dramatically.
Celebrate the retail system. All too often the small bank caste system puts business banking and retail banking into a lower rank than commercial banking. We have written about this in many newsletters. The caste system is part of the same silo mentality that needs to end. Their lower internal prestige exists even though much of the revenue growth is traceable to them and higher returns result from these areas. In addition, oftentimes, the future of the bank relies on them.
“Traditional” commercial bankers have disappeared from most large U.S. banks, replaced by men and women who sell aggressively. At the smaller banks, many commercial bankers need to change quickly and also learn some humility.
Concluding Thought
Frankly, most banks will not demonstrate the management will to demand consistency and discipline, break down silos, manage by the metrics, and focus on high-performing areas despite their historic focus. Unfortunately, smaller banks tend to be more insular than larger players for various reasons. But, the higher rate environment has eliminated much of the easy money in banking. Unless managers step up, they will see a diminution in share, net income, and shareholder value.
Now is a particularly good time for some soul searching at many banks. Banks that view themselves as unwilling or unable to change do have the option of packaging themselves for sale. For those banks, it may be better to go that route sooner rather than later.