“Blow away the lies that leave you nothing but lost and broken-hearted…”
– Bruce Springsteen
Spinning last month’s numbers? The typical bank today is filled with “performance” measurements that distort the truth rather than report useful information. Bankers often find themselves morphing into slick PR agents at month-end, sounding at times as if Don King has stepped out of the boxing ring to promote retail banking:
“Our branches are on fire… they are burning with sales desire… we booked more business than the month before and we’ve got lots more in store!”
Such bombast is frequently used to describe a flat deposit month in the branch system. Let’s face it – bankers need to challenge some of the junk we’re letting pass as performance measurement. Here are just a few examples of rampant salesmanship that can be heard in the halls of today’s financial institutions:
“Our Internet banking users are up 400% in the last year!”
TRANSLATION: “We only had 1,000 Internet banking users before, and now we have 5,000, or roughly 3% of our checking account base.”
“We sold over $100 million in investment products during 2000.”
TRANSLATION: “The truth is, we collected about $350,000 in fees and commissions from these investment sales. This revenue was just enough to cover the direct expenses of our brokerage operation.”
“The Commercial Lending Division currently has $1.3 trillion in the pipeline expected to close over the next few months.”
TRANSLATION: “We didn’t book a damn thing last month. With loan payoffs, the portfolio actually shrunk, and we’re still having trouble getting anyone on that pipeline report to call us back.”
“We are now selling 2.5 products to every new bank customer during the first sales encounter.”
TRANSLATION: “When customers open our FREE checking account to get the Pyrex dishes, we give everyone ATM cards and count them as product sales. Then, about half the customers open up CDs because of our 50 basis point relationship bonus promotion.”
“Our earnings per share grew a solid 10% last quarter.”
TRANSLATION: “Dear Lord, we bought back as much stock as we could… sold some securities to book a quick gain…didn’t pay the data processing bill and asked each member of senior management to sell a kidney on eBay. Holy smokes, we have nothing left in the drawer for next quarter. Please bring us core business growth!”
Certainly, measures like the ones described above can be valuable, but too often they get “gamed” by management, and no one seems to scrutinize and challenge the numbers. Banks desperately need to build focused, pragmatic scorecards to track performance improvement. But if this report becomes the epicenter of political propaganda, it’s done more harm than good.
In building a low-B.S. scorecard process, I offer the following pointers:
1) Measure net growth over gross production numbers whenever possible.
Too many banks waste time trying to reconcile inflated gross numbers with their actual net growth. Eliminate the middleman and hold managers and sales folks accountable for net loan, deposit and managed asset growth.
2) Revive the lost art of revenue and expense.
It’s a crying shame in the banking industry that we rarely talk in terms of simple revenue and expense numbers to assess performance. Why? Because calculating these figures often requires two anxiety-provoking activities: funds transfer pricing and overhead allocations. These are fairly basic concepts that bankers have characterized as quantum physics.
The banker typically laments, “We just don’t have the sophisticated profitability systems to tell us if we’re making any money in that area.” Weak. The problem isn’t a lack of systems, it’s a lack of will to use common sense approaches to profitability measurement. Start with a simple Excel spreadsheet. The yield curve’s been pretty flat these past years. Don’t get hung up on micro-precision and start looking at loans and deposits in terms of what they contribute to margin. Come up with 4-5 simple formulas for allocating overhead (employees, space, assets, accounts and transactions) and just do it! Then start driving management meetings with discussions and brawls about revenue and expense.
3) Manage staffing with simple productivity numbers.
In our consulting practice, we like to focus on benchmarks that are difficult to game: loans outstanding per commercial officer, new accounts per platform staff, loans closed per underwriter. In addition to comparing these figures to peers, new resource requests can be held in check by tracking these simple numbers quarter to quarter.
4) Drop the frivolous measures.
If the bank adopts a rational, laser beam focus on net growth, profitability and simple productivity measures, more artistic measures of performance like the illusory loan pipeline, the new customer cross-sell ratio and scores from the latest mystery shop can go away. High performing banking organizations tend to focus on a few key metrics that fill a one-page scorecard, not a full-color, leather bound three-ring notebook with gold embossed titles reading, “Acme Bank High Performance Pathway to Profits – September Update.” No one really reads or believes that garbage anyway – especially the stock analysts. -sw