Saturday, 29 October 2011

Common Sense to Successful Strategy Execution

The title of this post is a modification to the original, The Secrets to Successful Strategy Execution, originally published in Harvard Business Review in 2008 by Booz & Co. consultants. As the authors noted in the article, "A brilliant strategy, blockbuster product, or breakthrough technology can put you on the competitive map, but solid execution can keep you there."

The authors' research, querying 125,000 employees from over 1,000 companies, identified four fundamental building blocks to create an execution culture. These are:

1.  Clarify Decision Rights. Sometimes called empowerment, this building block is critical for quick, effective decision making. Have you ever worked for a boss that frequently questioned decisions you made? The result: you push the decision up the chain of command so you don't get blamed for mistakes. This behavior is endemic in a dysfunctional organization that requires senior leadership to make even the most mundane decisions. This, in my experience, is a common challenge with community financial institutions (FIs). Clarify the kinds of decisions that managers and rank-and-file can make at every level, and don't second guess those decisions when made. Learn from mistakes, but don't punish or second guess less than optimal decisions. Because we all make them.

2.  Design Information Flows. If we are to push decision rights down the chain of command, we must provide the necessary information to make informed decisions. Clarifying decision rights does not mean creating a culture of winging it. To supplement the culture for successful execution, ensure the needed information flows across organizational silos and up and down the chain of command. This is a challenge in financial institutions, as our silos are Superman strong. For example, in a recent meeting I attended the head of retail banking was pleased at the level of new account acquisition. However, we did profitability measurement that demonstrated the aggregate number of accounts barely budged. Why? Nearly as many accounts closed as were opened. Had Finance shared information with Retail, perhaps this trend could have been uncovered earlier and Retail could have implemented strategies to stem the outflow of customers.

3.  Align Motivators. I would report that this is the easiest to put in place. But I would be wrong. So many FI strategy sessions include revamping their incentive compensation system to align with strategy. I wrote a post specifically about branch incentives on these pages. But FI's remain doggedly attached to compensating on volume versus profitability for lenders, and the traditional holiday bonus for staffers. If you want to create an execution culture, develop incentives that motivate strategy execution.

4.  Change Your Structure. I teach Bank Organizational Structure at two banking schools *yawn*. In those sessions I dream of an FI that organizes according to their strategy versus legacy. FIs are starting to look at their org structures to determine if it inhibits strategy execution, a promising development. But history remains, and change is slow. Take small business banking as an example. Most FIs are struggling to serve this important customer base well because responsibility for service rests squarely between commercial and retail. Small businesses typically don't borrow or use credit cards and home equity loans for early stage funding. Not fertile ground for commercial lenders. Branch bankers are uncomfortable talking about cash management or financing with the small business owner. What results is a confusing web of responsibilities in serving small businesses. If you want a to foster successful strategy execution, ensure your organizational structure is consistent with your strategy.

There you have it! Four common-sense building blocks to create an execution culture. Thankfully, FIs are more often looking to develop strategies for a sustainable future instead of looking only one year down the road through their budget. Executing on such a strategy is critical for us to remain relevant to our customers, our employees, and our communities.

What do you see as critical to successful strategy execution?

~ Jeff

Saturday, 22 October 2011

Tweet Stream: Dick Durbin Staffers on the Durbin Amendment

Today I had a Twitter conversation about how the Durbin Amendment turned out to be a boon for retailers and a bust for financial institutions and consumers. Senator Dick Durbin from Illinois sponsored the amendment to the Dodd-Frank Act, decrying the unfairness of the debit interchange fees charged by financial institutions to retailers and how it inflated costs to consumers.

The consequences of the amendment are becoming clear; 1) lost revenue to all financial institutions, not just the largest, 2) Increased other fees by financial institutions charged to consumers to make up for the loss, or the decline in "free checking", and 3) no price reductions at the register for consumers. Dick Durbin took to the Senate floor to castigate Bank of America for trying to bridge the revenue gap by charging debit card fees.

What did Senator Durbin think would happen? Frank Sorrentino III, CEO of North Jersey Community Bank, weighed in on this question with an obligatory community bank bias. But the larger question remains, what did Senator Durbin and his staff think would happen?

If Senator Durbin and his staff had a Twitter debate about framing the amendment, here is how I imagine it would have went...

@sendurbin Alright, we gotta do something to get my name on Dodd-Frank. Can't have that weasel from Mass. or the has-been from CT getting all the PR.

@suckupstaffer You are right Sir! Your name somewhere on that bill would be huge!

@lifelongstaffer The perception is that banks are evil. Let's play off of that.

@sendurbin That's a good angle @lifelongstaffer. Tell me more.

@lifelongstaffer Well, we could scour bank income statements and talk to some lobbyists to see where banks make money, and attack there.

@newstaffer Wait. Isn't the bill supposed to stop the abuses in mortgage originations, packaging, and selling by large banks and mortgage brokers?

@suckupstaffer Pipe down @newstaffer, I think the Senator is about to tweet.

@sendurbin Where do banks make money? Hold on, I think I remember Mike Duke of @walmart whining to me about debit cards at a $500/plate fundraiser. Give him a call.

@suckupstaffer Yes Sir! Right away!

@lifelongstaffer @walmart is a big contributor. So if Dukey has an idea, we can pummel banks, get our name on the bill, and throw a bone to a patron. Win-win-win.

@suckupstaffer Mr. Duke suggests we commission a study in the bill with the ultimate goal of reducing what banks charge on debit card transactions.

@sendurbin That sounds like a great idea. We can call it the Durbin Amendment!

@suckupstaffer You're a genius, sir!

@lifelongstaffer We could spin it that we are reducing fees for consumers. We can exempt small banks so we don't look like big, bad government.

@newstaffer But if we reduce interchange fees for big banks, and try to exempt small ones, how would that work?

@lifelongstaffer It doesn't matter newbie. It only matters that it looks like we're helping consumers at the expense of too big to fail banks. Could be huge!

@sendurbin I like it fellas!

@suckupstaffer Then I like it too!

@lifelongstaffer And the windfall to @walmart will keep our campaign coffers full for the foreseeable future!

@newstaffer Wait, isn't the amendment supposed to reduce prices at the register for the consumers, not inflate @walmart's profits?

@sendurbin *laughs* Son, if that's the way it goes down and the banks charge more fees, I'll take to the Senate floor as the champion of the consumer!

@suckupstaffer Another win. Genius!

@newstaffer But the likely result is more fees to the consumer as banks try to make up for decline in interchange fees. We may win in perception, but lose in consequences.

@sendurbin *grins*

@lifelongstaffer @newstaffer Son, you have a lot to learn about politics.

It could've happened!

If you are a Senator Durbin staffer, please forward your cease and desist letter to me via e-mail. I would be happy to post it here, take down this post, for fear of having the full force of the rather sizable federal government coming after me.

~ Jeff

Saturday, 15 October 2011

Occupy Wall Street: Occupy This!

The Occupy Wall Street gang seems to garner more press coverage than the state of the U.S. economy, the presidential election, and the MLB playoffs combined. In terms of media excitement, only the trial of Michael Jackson's doctor competes.

Who are these people and what do they want? The press can't even figure it out and spin it to something cohesive, even though they really, really, really want to. But it has something to do with economic justice, whatever that means. Whenever talking heads say "___fill in blank____ justice" it makes me nervous. It usually relates to socialism and according to all of my college economics professors, socialism doesn't have a great history of success. Though I admit that I could not understand many of my econ profs.

My first division officer in the Navy told me that if bad things were happening to me, look to me first before I start pointing the finger elsewhere. I think both bankers and Occupy Wall Streeters are falling into a whining trap. If Occupy Wall Street truly represented a movement to improve the economic status of lower and middle income families, here is where I think they should focus their energy, and also what banks can contribute:

1. Learn robotics. Factories provided blue collar workers with middle income wages. We ignored the signs of globalization, and instituted wage scales and inefficient work rules that made manufacturing things overseas much more attractive to companies (and buyers of the goods manufactured). So we let manufacturing leave our shores for cheaper labor and more flexible work rules. But the loss of manufacturing jobs in the U.S. has stabilized. If we are to grow manufacturing with middle income jobs we need to master robotics to make plants more efficient and attractive for companies to work here. According to, a robotics technician can earn $30,000-$45,000. Do you want to do something to help the U.S. economy and your family, consider robotics. If not robotics, then research good paying blue collar jobs (see here) and focus your efforts there. And for Pete's sake, be flexible. If you install doors on GMC trucks, don't go on strike if asked to do dashboards on Chevy's.

2. Start a business. Economic cycles of yore resulted in many more business startups than the current one. One reason, in my opinion, is politicians' continually extending unemployment benefits. If you keep paying somebody not to work, it saps the sense of urgency for would-be entrepreneurs to seek opportunities to be their own boss. During periods of heavy uncertainty it is typical for opportunities to identify and fill a need to arise. Don't let the drug of the monthly check keep you on the sidelines. Do some research, write a plan, and start a business. You want bankers to suck up to you, see what happens when you get a successful business up and running.

3. Go to business school. If you would like to earn similar money to Wall Streeters, go to business school and earn it yourself. There is a misconception that people that work in finance were born with silver spoons in their mouths. To be fair, there are some on the Street that were born on second base and think they hit a double. But I know from experience that many if not most came from much humbler beginnings, went to B school, and worked hard to get where they are. Most Americans that are in the lower to middle economic categories do not pay full fare at business school. Some may go for little or no cost. So if you want to Occupy Wall Street, why not do it from inside the building instead of out.

This is a banking blog. So how can bankers improve the economy, their communities, and expand opportunities for Occupy Wall Streeters? Here is how I think:

1. Run an Angel Fund from your holding company. "Bankable" businesses typically have a profitable operating history or real estate with significant equity. This makes startups that don't have real estate to lend against unattractive to banks. So how can banks get capital to entrepreneurs with a great idea, solid business plan, and reasonable chance for success? How about run an Angel Fund that focuses on startups within the bank's markets? The bank need not be the only investor, but can run it profitably through management fees, the "ups", and diversification.

2. Do SBA lending. So many bank clients shy from SBA because of strict rules, paperwork, and fear of not receiving the guarantee if the business defaults. But there are ample vendors to do SBA lending for you and can be flexible in how the program is structured. If you don't want the risk, simply receive a marketing fee for bringing the vendor to the customer and providing an opportunity for that early stage business in your community to receive a government backed loan.

3. Run a business plan contest. How many times have you driven down the street and see a new business that you doubt will succeed? Many entrepreneurs jump in with both feet prior to doing research, writing a business plan, and having the capital in place. The discipline of doing so improves the likelihood of success. Why doesn't your FI run a contest in your community for the best startup business plan and award a meaningful prize, such as $25,000, to get the business off of the ground. The Nashua Bank in New Hampshire ran such a campaign and the CEO said it was a great success. The discipline of performing the research and drafting a business plan will help all participants, not just the winner.

There! Three things that would be more constructive than carping about bankers' pay by Occupy Wall Streeters and whining by banks about the state of the economy. Let's get off the whine and into the game!

What do you think would be more productive use of time for FIs?

~ Jeff 

Thursday, 13 October 2011

The Elephant in the Room: Branches

In keeping up with industry reading it is clear to me that we, as an industry, are perplexed at what to do about branching. The recently released FDIC Summary of Deposits showed the second year of branch decline. The most recent ABA study on delivery channel preference showed online banking eclipsing branch transactions for the 55+ set. That's right... old people letting their fingers do the walking.

But the #1 or #2 reason cited by small businesses and individuals as to why they select their bank remains branch location. When I ask executives what makes a branch successful or not, the top two reasons continue to be branch location or personnel, not necessarily in that order. Confusing? Yes.

But the progressive talk about the future of the branch at times lacks common sense, in my opinion. This dates back to an interview I did with American Banker about a community FI that was opening coffee shop branches. I gave a twofold comment: 1) I saluted the FI for being creative; and 2) I doubted it would work, particularly in the locations and relatively conservative markets where they tried it. AB published the first and the second didn't make the editorial byline. The coffee shop experiment turned out to be a disaster, and the FI was later sold.

I recently had a Twitter conversation with a banker about branches that lack tellers. According to feedback from bankers that tried this concept, customers were confused when they walked into the branch. That made sense to me. We like the familiar... i.e. the teller line. But branch transactions have fallen off of the proverbial cliff. Do we need a long line full of bored tellers reading Nora Roberts novels? No. But perhaps we need a couple teller windows to process transactions and bring comfort to those of us that like familiarity.

As we evolve, I envision the comfort of knowing there is a branch nearby to continue. But the people who occupy those branches should evolve to those that can open accounts, troubleshoot problems, advise customers, develop business, and occasionally process transactions. This branch will probably be smaller, and less expensive to build out. Smaller is certainly a theme I am hearing from bankers and industry professionals. If you are of a mind to continue trying to make the branch into a destination to drive traffic, let me introduce you to Sisyphus. Going to the bank is a chore. Boom.

So what about these big branches that we all have? An industry stock analyst told me that big banks have advantages over small banks because they can pay for increased compliance expenses by closing branches. The community FI may not have this luxury. But big banks have challenges here, in my opinion. Many have built palatial branches that have no discernible value except as a bank branch.

The poster child of this concept is Commerce Bank of Cherry Hill, New Jersey which was acquired by TD Bank (see photo). Their brand is wrapped around their number of branches, the primo locations of their branches, and the look of their branches. But if branches become less important, and big banks can consolidate one branch with the one in the next town over, what are they going to do with the palace? These branches are very expensive, are fixed assets on the bank's books, and are 100% risk-weighted for capital calculation purposes. In other words, you have to carry more capital against the branch than a bond in the investment portfolio that might be 20% risk-weighted.

The pictured TD branch is about 100 yards from the Wells Fargo branch pictured below. Sorry for the poor focus but I took the picture with my phone while walking so cut me some slack! If Wells decided to consolidate this branch, it could easily be converted to an office, a hair salon, or a coffee shop. In other words, Wells could sell it and, current real estate market woes aside, can probably sell at a gain. The buyer can convert it to whatever they want. TD, on the other hand, may have to devalue their branch because they can't sell it. Or if they can, it would be for the land and the buyer may have to raze the building to something more functional. Think of all the empty gas stations dotting the landscape.

To be fair, the Wells branch had $52 million in deposits and the TD branch $130 million at June 30th. But the old Commerce was known for large branch deposit sizes because they aggressively pursued municipalities for their banking business. So aggressive, indictments were involved. But I digress. The TD branch does have more deposits, and perhaps this is partially due to the palace.

But as we determine our next step in branching, we can't ignore the trends that are telling us that transaction processing in branches is becoming secondary to something else. As branches decline in prominence, we should plan our next branch with the gas station in mind. We don't want to manage multiple properties of former branches that sit stale on our books eating our capital.

What is your opinion of what the "next" branch should look like?

~ Jeff

Tuesday, 11 October 2011

Guest Post: Third Quarter Economic Update by Dorothy Jaworski

Another Volatile Quarter

I know I risk sounding too negative, but we cannot seem to shake the crisis mentality that keeps whipsawing bond and stock markets. The crisis du jour originated in Europe with crushing debt levels in Greece, Italy, Portugal, Spain, Ireland and who knows where else. Germany remains fairly strong but sometimes appears to be coming to the rescue, sometimes not. Rumors of Greek bankruptcy surface every other day. French banks are the largest holders of sovereign debt, but, out of the blue, a Belgian bank, Dexia, has become the first to fall.

Liquidity is becoming a problem for these banks, and with their stocks battered daily, they have no ready sources of capital. There has been a lot of talk about rescues from the European Union, but the markets want action. The US is not of much help as the economic recovery is stalling and the debt ceiling/deficit debate/fight caused a great deal of harm to both consumer and business confidence.

In an environment like this, volatility rules. Stocks have taken the brunt of investor frustration, selling off steeply in the third quarter for the worst quarterly loss since the height of the financial crisis in late 2008 and early 2009. The Dow Jones Industrial Average was down -12.1% to just below 11,000 in the quarter, while the S&P 500 fell -14.3% and the Nasdaq fell almost -13%. And gold had the wildest price action of the quarter—beginning at $1,500 an ounce, soaring 27% to $1,900 on September 5th, and then selling off steeply by -14.5% to end the quarter at $1,624. Oh, the fortunes won and lost!

Enough about gold, and all I will say about stocks, because I always fear being a jinx, is that the forward price earnings ratio is not even 11 and the dividend yield is currently 2.3%, which exceeds the yield on the 10 year Treasury bond. This does not happen often.

Back to Back Historic Moves

The Federal Reserve made two historical easing moves during the quarter and still the markets are not happy. In August, for the first time since the 1940s, the Fed made a two year “promise”—to keep short term rates at their current exceptionally low levels until mid 2013. If you believe the expectations theory of interest rates, that long term rates are simply the compilation of the expected path of short term rates, then you believe that long term rates will stay exceptionally low too. Maybe this will not affect the really long term rates, such as the 10 year to 30 year range, which are so heavily influenced by inflationary expectations and the international flow of funds, but most other longer rates, such as 2 year to 9 year maturities, will be affected. So why were the markets disappointed in the Fed’s forward guidance? Why did the Fed have to act again in September?

Perhaps it is that the Fed did not tie their promise to economic performance, as I thought they should have, but they only chose an arbitrary period of time. By performance, I mean the unemployment rate, number of jobs created, or GDP growth. The Fed could have, and in my opinion should have, promised to keep rates low until unemployment falls to 7% or less, until we are creating 3 million jobs a year or more, or until real GDP grows at and stays above the 3.3% average growth rate of the past 60 years. Only then will inflation even hint at being a permanent risk.

We can only assess the Fed’s performance in terms of their dual mandate—maximum employment and stable prices—and not in terms of a two year waiting period.

So, disappointment in the “promise” to keep short term rates low until 2013 led to another historic action in September. In another easing action dubbed “Operation Twist,” the Fed stated that they will sell $400 billion of their shorter securities (less than 3 year maturities) and buy the same amount of longer securities (6 to 30 year maturities) by June, 2012. They haven’t tried a “twist” since the 1960s. They also added that they will reinvest cash flows from their mortgage backed securities from their Quantitative Easing QE1 Program into more mortgage backed securities, rather than into Treasuries.

Ben Bernanke was quoted as saying that Operation Twist is the equivalent of a 50 basis point cut in the Fed Funds rate. Hey, when Fed Funds is near zero, you have to try something. And don’t forget the cumulative actions they have taken to date—Fed Funds to 0%, QE1’s purchase of $1.5 trillion of Agencies’ bonds and Agency mortgage backed securities, QE2’s purchase of $600 billion of Treasuries, and now the “promise” and the “twist.” These actions someday will push consumers, businesses, and banks out of the liquidity trap.

Don’t Give Up on the Economy

It is not time to give up on the economy. The data has been weaker in recent months and GDP is stubbornly low, at 1.3% in the second quarter of 2011. Many forward looking indicators are showing positive signs, including the index of leading economic indicators, building permits, industrial production and survey measures, such as the ISM series. We have the full support of the Fed until at least 2013.

Companies are sitting on $1.9 trillion of cash on their balance sheets and banks have at least that amount in reserves at the Fed earning next to nothing. It will take time, but eventually, companies and banks will seek higher returns and invest and lend. We probably do not have much in the way of fiscal support from the government as high debt and the deficit make that unlikely. All companies lack the confidence to invest, to hire, or to move forward.

What is on the horizon to shake up the economy? For one, the original culprit of the economic weakness, in my mind, was the spike in oil prices to $115 per barrel and in gasoline prices to near $4.00 per gallon. Oil prices have slipped back by -30% to $80, while gasoline prices have only fallen by -15% to $3.39. Gas prices clearly have room to move downward. This will act like a tax cut at just the time when it seems Washington DC will not provide one.

Another positive is the beginning of another refinancing wave by consumers as the Fed has pushed down long term rates, including mortgage rates. Companies can take advantage by issuing debt at lower interest costs. Stay tuned!

Thank You, Steve

As I was writing this, I saw the announcement by Apple that Steve Jobs had died, after battling illness for eight years. He had a profound influence on so much of the technology that we use in our daily lives. He made computers easy to use and gave us the iPod, the iPhone, and the iPad. Fifteen years ago, these were products we did not even know that we wanted and needed. I have the iPhone and iPad and cannot imagine life without them. He will leave a huge legacy in the company he co-founded and the products he helped invent. I will miss his brilliance. Thank you, Steve!

Thanks for reading! DJ 10/05/11

Dorothy Jaworski has worked at large and small banks for over 30 years; much of that time has been spent in investment portfolio management, risk management, and financial analysis. Dorothy has been with First Federal of Bucks County since November, 2004.

Tuesday, 4 October 2011

Brand Leadership: What does it mean? What should it mean?

I am a student of my industry: consulting and banking. If bankers tell me their institution has a superior brand, I want to know what that means. Too often I am told that the FI has a superior brand because customers come up to senior executives and board members on the street and tell them so.

I am no statistician or expert on human behavior, but I have to believe that people willing to approach senior executives or board members of the local financial institution are probably going to say something positive by an overwhelming majority. A polite neighbor does not make for a statistically significant study.

What I do find in many FIs that claim the throne of brand leadership is higher cost deposits, and lower yielding loans. I hear how the FI keeps deposit prices high so customers don't leave, or runs deposit pricing specials to bring new deposits in the door. I find lenders loosening covenants, waiving fees, and lowering rates to "get the deal done".

Is this our perception of brand leadership? I say no.

Mike Schultz and John Doerr, in their 2009 book Professional Services Marketing, identified traits of brand leaders in the consulting industry. Here is what they found:

"Brand leaders:
  • Priced their services at a higher level than their competitors in the market; and
  • Realized higher actual hourly rates compared to the lesser-known firms in all categories of professionals."
In other words, according to Schultz and Doerr, brand leadership translates to real money as buyers of consulting services are willing to pay more. See the chart below:

I frequently cite such studies, plus life experiences we see everyday of how brand equates to either 1) getting more customers faster than competitors; 2) keeping customers longer than competitors; and/or 3) charging more than competitors. Take Mac users versus PC users. Mac has clearly created a brand that evokes loyalty, even at higher price points. How about Marriott customers, citing Marriott Rewards and the superior quality of the hotels? Remember the old axiom, "you will never be fired for hiring IBM" when it comes to hiring a technology solutions firm? Brand, brand, and brand.

My firm recently lost a small strategic planning engagement because of our price. The price was not particularly high, but it wasn't Wal-Mart low either. We work hard to build an environment for robust dialogue that results in a well thought-out strategy. Background work to bring together the data and prepare to create that environment takes time. This FI was not willing to pay for that time and shame on me for not building a brand that this CEO was willing to pay for. I will work harder to do so in the future.

But my colleagues and I should not be alone in building brand. If community FIs believe they bring greater talent, faster responsiveness, and tailored solutions to their customers, then customers should be willing to pay for it. If not, we run the risk of building Four Seasons expenses that we give away at Econo Lodge prices.

Your brand should mean more than that. What do you think brand leadership should result in?

~ Jeff

Link to the Fees and Pricing Benchmarking Report: Consulting Industry 2008

Note: I have no relationship with the authors of the report or the firm(s) that conducted the study. I cite it hear because it demonstrates, in clear terms, the value of brand.