It’s mid-February Gonzo Bankers, and I have a little secret to share with you: many banks still have not finalized their 2003 operating budgets. In addition, those banks who have approved their budgets have left the “DRAFT” stamp on the cover because they are hoping to squeeze out better numbers once further analysis is done.
What’s going on? Some of this delay is a result of that classic budget cycle in banking:
Step 1: The Finance group presents a very organized budget plan with milestones at mid-year and promises, “We’re going to finalize this budget by October!”
Step 2: No one except the auditor submits their budget information on time, so the milestones start to slip.
Step 3: The first cut at a “bottom up” budget has the CFO hyperventilating into a paper bag. There are more staff adds, merit increases, technology purchases and branch remodels than Citigroup would need in a boom year.
Step 4: The bank begins endless arm-twisting and negotiation meetings to get the numbers in line until finally the CEO and CFO deliver the top-down “correct” numbers.
Step 5: At the next staff meeting senior management agrees that the CFO took “far too long” putting the operating budget together. This is a perfect opportunity for the CFO to practice his anger management exercises.
It’s typical life in banking. However, what is not typical is how challenging banks are finding it to garner core earnings growth. This industry has done a lot of things right over the past few years. Banks have hunkered down on their core businesses, pushed up the fee income, and watched headcount growth like hawks. The trouble is, it is getting tougher to find that next wave of performance improvement.
Well Gonzomongers, there is hope – I’m convinced our industry can find billions in additional profit improvement if we just have the right information on which to act. One simple word can unlock these billions: benchmarks.
Benchmarks are religion to the folks here at Cornerstone Advisors. That’s because we have witnessed first-hand the vast disparity between high and low performers in different banking functions. We dream how kick-butt the industry would be if we could raise peer medians closer to these high performing levels. Of course, any time we talk of benchmarking, we invariably invite the natural criticism and pushback that comes with this discipline:
Oh, we’ve heard everything and our skin has become mighty thick in the process. Frankly, we can understand the natural skepticism of benchmarking and appreciate the fear that figures might be used irresponsibly. Yet, like any management function, these concerns can be mitigated with a strong, disciplined benchmarking process. After conducting banking studies for more than a decade, the team at Cornerstone has learned the deep truths about benchmarking:
Collecting, massaging and analyzing data involves a lot more than some geek with a database. It involves understanding how different bank functions operate, what measures are important to management, and how to spot “outliers” in the sample that make absolutely no sense. From there, a ton of phone calls and emails are necessary to verify the data.
Here is what we have found from a multitude of studies: though there are always some gray aspects of data that require interpretation, the “story” that benchmarks tell is accurate more than 95% of the time. We have never seen a bank benchmark “low” in a process and then turn out to be a high performer after digging deeper. In fact, a low benchmark typically incites a senior manager to respond, “I had a suspicion we weren’t doing too well there, but I didn’t have the data to prove it.”
Banks that sincerely care about their employees understand the long-term benefits of benchmarking. Layoffs are so typical in banking that employees have become cynical of them. Yet banks could avoid a large portion of these layoffs if they practiced better capacity planning and performance management. The banks with the biggest layoffs are the ones that didn’t have the information to challenge staff additions as they were made.
One of the most valuable aspects of benchmarking is that it uses facts instead of sound bites to determine a function’s performance. With clear performance scorecards, management teams have less time to gloss up a PowerPoint that touts their business because they are too busy trying to hit their numbers. Benchmarking ensures that the “performers” are recognized over the “promoters.”
Let’s face it, our industry can benefit tremendously by building the collective data to make benchmarks more accurate and meaningful. We get excited about this idea because of the amazing “high performers” we have met on the road. See if any of these examples sound interesting to you:
How do these numbers compare to your institution? Wild? Crazy? Sure! But these banks and their performance are real. We’ve seen them. We know them. It is possible.
Maybe now you can understand why Gonzo gets excited about disciplined benchmarking. These scorecard figures help banks focus on higher performance. They force the right questions and create the right motivation to improve processes, watch expense growth, and hold managers accountable.
Banks often shy away from benchmarking because they believe growth will solve their earnings requirements. True, banks need to grow, but it is how they grow that will separate the winners from the losers. If you don’t think discipline is important during growth, remember that $1 million in expense savings equates approximately to:
At Gonzo, we find that disciplined growth can be achieved when a bank sets deeper performance benchmarks than just ROA, EPS and “making budget.” We like to see formal scorecards that “strip the onion” across all the bank’s major functions. With ongoing trends and peer benchmarks included on the scorecard, the real victories and challenges become painfully obvious. Check out the sample scorecard that Cornerstone Advisors uses to gauge bank performance. Think of the power a bank would have if it pooled this information (just like our FDIC call reports) to know where it stands.
Armed with this type of information, bankers could go to work on fundamental improvements that wipe that “DRAFT” stamp right off the cover of this year’s budget. As Winston Churchill once said, “Give us the tools and we will finish the job.”
The sample scorecard is a PDF file, viewable with Adobe Reader. Click “Get Adobe Reader” button at left for a free download of the Adobe Reader software.