Banking School: Effective Decision Making

On occasion I have the privilege of attending a banking conference in a swanky locale. Last month, I attended a gathering of Pennsylvania bankers at The Breakers in West Palm Beach, Florida. These conferences are typically chock full of opportunities for me to learn something. I feel it my duty to pass what I learn to you in the hope that you will benefit from it, as I have.

There were many good sessions, but the one I found particularly interesting was done by David Martin of Commonwealth Advisors. David competes with me in one of my firm's lines of business and it may not be wise of me to play him up. But I respect Dave's opinions as a result of his decades of industry experience and willingness to share his knowledge. I may not always agree with him, but I have always respected him.

His topic of the day was on making difficult decisions. Banking has changed slowly from the Great Depression to the late 1970's... a little quicker from the 1980's until 2008... and in a major shift since 2008. However, as Dave put it, "bankers and their boards often apply more sophisticated analysis to routine loan and investment decisions than they do to critical strategic decisions". If our industry is undergoing a long-term strategic shift, as I believe it is, we need to chart a course that gives us long-term relevance to our customers, communities, and shareholders.

Here are the eight steps Dave proposed for effective decision making (from Harvard Business Review on Decision Making by Harvard Business School Press, June 2001):

1. 
   
   Set the Stage: This is the collaborative problem solving stage, testing and evaluating exactly what the problems are, presenting balanced arguments, establishing an openness to solutions and constructive criticism that carries into later stages.
2. 
   
   Recognize Obstacles: Cognitive Bias... our industry's bias toward the familiar has been a significant contributor to finding solutions that are small "tweaks" to business as usual; and Group Dynamics... going along with the group, assuming group harmony is more important than accurate strategic decisions... or... individuals dominating the discussion... or... silent dissent that typically results in meetings after the meeting to undermine decisions that were made in the group. Early recognition of these obstacles that subvert the effective decision making process is critical to avoiding them.
3. 
   
   Frame the Issue at Hand: Perform a root cause analysis by repeating the statement of fact and ask the question "Why?". Then identify your decision making objectives you want to reach by defining the performance that represents a successful outcome and painting a picture of what things will look like when the problem is solved.
4. 
   
   Generate Alternatives: Brainstorm solutions. Enlist a devil's advocate. Require details from participants to avoid platitudes such as "get us to the next level". Appoint a note-taker to ensure all ideas are considered and documented.
5. 
   
   Evaluate Alternatives: Use objective analytical discipline to evaluate costs, benefits, time, feasibility, resources, and risks. Also, identify areas of uncertainty and focus on those that have the greatest impact on the outcome of your decision.
6. 
   
   Make the Decision: Set up performance metrics to track progress towards your hoped-for results. Support the decision once it is made.
7. 
   
   Communicate the Decision: Notify those responsible for implementation and that will be affected by the decision. Explain the thinking behind the decision. Clarify what is expected to support the decision.
8. 
   
   Implement the Decision: Generate short-term wins. Monitor progress and fix problems before they grow. Be direct, open, and honest and allow no silent dissent that undermines the effectiveness of implementation in order to return to the status quo.

There are many challenges facing our industry that can be solved by implementing a disciplined decision making process to lead to better strategic decision making. I am confident more will emerge once the regulations resulting from Dodd-Frank start rolling off of the presses.

Rather than allowing these challenges to build up to overwhelming proportions, perhaps we should implement strategic decision making that is disciplined, focuses on the real challenges, and generates alternatives that will lead us into the future.

Alternatively, we could bury our head in the sand, complain about lawmakers and regulators, and pretend all is well with us and wrong with the other guy (see below for the "head in the sand decision making process").

- Jeff