“Success is simply a matter of luck. Ask any failure.”
What many of you are realizing at the same time is that there will need to be a change in focus relative to how profitability and performance are managed. To understand the change, let’s look at three factors that in tandem tell the story.
1. We have seen a very fundamental change in strategic focus with many of our clients. Most bank strategic plans focus on profit rather than growth. Events of the last two years have changed most of these plans. Five years ago, many plans focused on growth opportunities (more branches, new markets, new lines of business) with the acceptance of the fact that profitability from these investments might be longer term. No more in 2010. Nyet. The themes of growth and diversification that were overweighted in bank thinking have been replaced with the new overweights of credit quality, capital preservation and efficiency.
2. This change in focus has altered the way banks need to look at low performance. In a growth environment, there is more tolerance for unprofitable investments that have the promise of future payoff. Examples:
In a growth and diversification environment, these types of investments might be subsidized and justified based on promised future profitability. In a profit and efficiency environment? Nyet. In a profit environment, these people, places or products get judged on run-rate profitability with a very short “future profitability” leash. In 2010, a hard bright light needs to be shone on low performance.
3. What has not changed is the 80/20 rule, or some variant. The first thing I heard when I started in banking way back when is that 80% of the profitability is produced by 20% of the customers. With some adjustments to the two numbers, that rule has never changed. Ever. Nyet. We have been looking at benchmarks and performance at Cornerstone for many years. Based on the studies we have done and the clients we have worked with, we can tell you that in almost everything we observe, a bank-level performance number masks the fact that the top third of performers is covering up for the lower third. Back to our examples:
Without beating this to death, the same rule will be true in wealth management, investment sales, insurance, call center or any other production group – the top third is offsetting the bottom third. Duh.
Taken together, these three issues point to a key management issue for 2010 – getting to the profitability and efficiency we focused on previously can only occur if banks start aggressively and objectively managing the lower third quartile we outlined. Managing to raise the average or overall number won’t do it.
To do this, we think banks have to institute some rules of engagement that set a tone for 2010:
It’s time to manage the lower third of the quartiles. Duh, baby.
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