As our client base grows, adds complexity, and begins to embrace the elusive CRM strategy, your friends at GonzoBanker have seen increasing demand for software tools to measure and analyze the profitability of business units, products and customers. Why, we’ve even witnessed what could best be called paranoia from clients about being behind their peers in this area. But let me assure you that no matter how little profitability analysis your bank or credit union is now performing, you are not far behind the curve.
If there is a technology project that has been less successfully implemented than bank profitability analysis, I cannot name it. Maybe data warehouse or the kiosk; perhaps account aggregation? Could be, but the volume of attempts to implement these systems is dwarfed by the number of banks attempting to run profitability measurement tools.
Sure, you read the banking rags and the vendors’ brochures, and you get all fired up. We have visions of installing an intricate but infinitely fair and understandable system that’s embraced from the CEO to the CFO to the commercial lenders and platform reps. The front line sales staff, armed with product and customer profitability numbers, knows exactly how profitable each customer is, what product he or she will be most likely to purchase next, and how to customize the pitch and treatment of the customer as a result. Senior managers are able to compensate lenders and branch managers based on the profitability of their portfolios. Regional staff bonuses are tied to the region’s profitability. There are no complaints from the masses because the system is clever and bulletproof, and the group hug at the company Christmas party brings a joyful tear to the CEO’s eye. 10-4, but,
“Don’t believe the hype – it’s a sequel
As an equal, can I get this through to you”
Very few banks have even remotely approached this level of precision and tranquil acceptance. When you eventually tie incentives to profitability measures generated from a black box, you’re affecting people’s PAY – dollars – and not everyone is going to make more money when a new system is implemented. Doesn’t work that way.
So the numbers get assassinated. Passive aggressive comments about the flaws in the system, the way it is applied, its assumptions, and the CFO’s intelligence float around the water cooler and hang heavy at the outdoor smokers’ nook. Without staff acceptance deep into the org chart, the reports generated from expensive profitability systems eventually become mere curios for the chest-thumpers in the Finance department.
Some troubling facts about bank profitability systems, as delivered by Gwenn Bezard of Celent during a May 2002 presentation at BAI’s Internet Delivery and Risk Management Conference, include:
So the profitability systems, easily costing well into six figures and managed by relatively expensive analysts, go through their routines and churn out reams of highly useful but largely ignored information. Without employee acceptance and strong direction from the top, the information gets a collective, “Hmmm, interesting” at staff meetings, and then it’s back to debating whether “customer-centric” or “financial services provider of choice” works better in the Mission Statement. Time and money is spent for valuable data, and then all too often nothing changes:
“Soy un perdedor.
I’m a loser baby so why don’t you kill me?”
I’ll grant you that there are certainly short-term reasons to keep an unprofitable branch’s doors open or to give a red ink-laden product line a chance to survive. But with the vast majority of our clients, profitability information is rarely elevated past “Nice to Know” status versus evolving into a tool that inspires management to change operations or make decisions differently.
It is all about Acceptance, Bubba. The problem is not in the systems themselves. There are some truly remarkable software packages managed by highly competent financial managers employing state-of-the-art funds transfer pricing and other analysis techniques. No, the problem is that profitability systems are typically perceived in the field as a black box in Finance, designed by people who have never had to sell anything. Add that to the fact that the data generated by these complex and expensive systems is rarely harnessed as designed, and 9 out of 10 banks call their profitability measurement and analysis process a failure.
But what is going on, you may ask, at the 10% of banks that are successful? There are some unmistakable consistencies among banks that have hit home runs in developing profitability systems that are accepted AND USED:
Obtaining the right profitability analysis systems and smart people to manage them is difficult, but that is the tip of the iceberg. Navigating the intangibles is what will get your institution ahead of the curve.