Bridging Two Worlds

By Steve Klinkerman

Banks must do far more than digitize traditional functions to compete online. To achieve real corporate transformation, the industry needs transformed leadership.

More executives recognize the need to transform their corporations to compete in e-commerce, but most still remain understandably perplexed about how best to proceed. It may well be true that "The Internet changes everything," as the popular saying goes. But inside a company, perversely, that insight can come to mean, "therefore no one's really responsible for anything." The nebulousness of the challenge becomes a license to drift.

Richard Schroth says this will not do. A former senior fellow at the Wharton Business School and author of a forthcoming book, E-Engineering the Corporation, Scroth insists that the board of directors, chief executive and senior management team are directly responsible for steering their companies into the Digital Age. Those who don't participate in the creation of new markets risk being shut out of them, he warns, and banking companies seem especially vulnerable in this regard.

One problem is that banks are carrying too much old-school intellectual baggage. But Schroth insists there are a variety of specific steps that institutions can take to reinvent themselves, if only they have the will to do so. Executives must move beyond the old proprietary business model, where companies try to individually own and control every aspect of the process, to a network model, where collaboration often is the primary means of creating wealth. Bankers should be working side-by-side with corporate customers to create online solutions, and they must learn to take the consumer's perspective in developing online retail banking capabilities.

Senior managers must also come to grips with a variety of pivotal issues having to do with their own concepts and conduct. They must work assiduously to compile the human talent needed to animate all of the company's ventures, Schroth says. They need to loosen their grips on traditional internal fiefdoms, moreover, and learn how to digitize and outsource functions to achieve the hyper-efficiency needed to compete online.

Especially for larger companies, the time has come to manage online ventures within a portfolio context. Not only will this help manage the bewildering risks that interconnectedness brings, but it will also help clarify the online strategies, tactics and standards that will be used to advance the company's fortunes and protect its interests.

This is strong medicine, obviously, but Schroth is in a position to dish it out. Advisor to major corporations such as Royal Dutch Shell, G.E. Capital, Pfizer Pharmaceuticals and Marriott Corp., Schroth also is a senior partner at Heidrick and Struggles, the executive search company. He founded Vanguard Research and Advisory Services, which became the technology wing of consulting firm CSC Index. Schroth was interviewed by Banking Strategies this spring in Las Vegas, where he spoke at BAI's conference on audit, compliance and electronic security.

Banking Strategies: What's the essential challenge in transforming a company to compete in e-commerce?

Schroth: A big part of it is managing the economics of two worlds, one grounded in the Industrial Age and the other in the Information Age. It is only in recent decades that the word "executive" has shed its administrative connotation and come to define an individual charged with making decisions based on a view of the whole. But even that definition proves limiting when the whole is narrowly construed as simply one's own organization. Strategies developed under that view emphasize in-house development of proprietary products, distributed through proprietary networks, with everything tightly controlled.

Today, the whole is the network, and its dynamics are not proprietary. Instead of vanquishing opponents, the emphasis is on collaborative winning. And that has all sorts of implications for how companies are managed, structured and staffed, how products are developed and delivered, and how customers are approached. Most executives haven't expanded their thinking as to what constitutes the whole, and that compromises all sorts of decisions. .

Banking Strategies: It seems like you're talking about two different states of mind. Can you elaborate?

Schroth: The old industrial model is based on scarcity. The view is that there's only so much. Each of us is largely going it alone. Progress for one often comes only at the expense of the other. The emphasis is on control and proprietary solutions. The attitude is: "Don't tell. Don't share. Don't let anyone in."

The network model, by contrast, is based on abundance. The view is thatthe possibilities are virtually endless. Each of us is interconnected and can progress in concert with the other. Here, the attitude is: "Let's tell everybody. Let's see how many others we can involve. Let's see how big we can scale this." You're pooling capital, intellectual resources and delivery models.

Today's managers face the challenge of maneuvering in both worlds. But you can't approach them in the same way. You break out of the old mindset by awakening to the dynamics of the network and then configuring online ventures accordingly. You leave industrial concepts in the world where they belong.

Banking Strategies: How well is the banking industry handling this transition?

Schroth: Traditional banks have moved at a relatively pedestrian pace, to the point that they are at risk of losing their role in the supply chain of e-commerce. For example, although dot-com financing certainly has a volatile aspect, it still is the case that banks are near the bottom of the list of places where startups seek capital. Instead, the supply comes from public markets, and entrepreneurs, and from corporations participating in joint ventures.

In the approach to the consumer, banks often emphasize replicating traditional paper-based functions online. That's a tactical approach that ignores an influential context for online transactions, namely, communities of interest - women, small businesses, retirees, and so on. Each online community has its own needs and requires its own blend of advice, information and ancillary services. You can't just post transaction capabilities on the Net and expect to win business. Then there are the undernourished corporate relationships. Banks have missed opportunities to become codevelopers of e-commerce strategies with corporate clients. They haven't leveraged their status as trusted intermediaries to participate in the formulation of new ventures and establish themselves in nascent markets. They have confined themselves to being relatively passive suppliers of financial services at a time when corporations are looking for collaborators, facilitators and codevelopers.

Banking Strategies: What can institutions do to get back into the game?

Schroth: One priority is processing information in real time. Instantaneous response mechanisms are needed - to animate customer relationship management strategies for Web sites; to facilitate customer self-service online; to process transactions; and to deliver the information required by communities of interest. Institutions that can't muster this level of functionality will be shut out of the online market.

Another priority for banks is to become far more active on corporate boards. To ensure their place at the corporate developmental table, senior bankers need to establish themselves as people with initiative, insight and strategic sensibilities.

Banking Strategies: Getting back to your comment about the difficulty of bridging two worlds, how must traditional management practices change to accomplish such things?

Schroth: For one thing, the board of directors must become far more involved. The risks in an interconnected world are vague and complicated, so even directors' traditional fiduciary role must be redefined. But that's just the start of it.

Frankly, it's questionable whether many chief executives are consistently acting in the best interests of shareholders, employees and customers. Their overriding emphasis seems to be on building personal wealth. The board is the only entity connected with the corporation that can curb this tendency and keep the CEO focused on the issues. Also, corporations really do need the intellectual energies of the board as they traverse all of the strategic and structural changes involved in e-commerce.

Directors need to study their respective organizations and develop a vision and sense of shared destiny with the CEO and senior staff. They should demand value, clearly articulated strategies and an active corporate evolution. The acquisition and management of human capital should be of particular concern. This is the real stuff of shareholder advocacy and corporate transformation.

At the CEO level, several layers of definitional work are needed. This has to do with how the board defines the CEO role and how the executives define themselves and their organizations. It is very difficult to create governance models that nourish innovation.

Part of it is attitudinal, seeing to it that the old self-interests don't pollute new undertakings. Part of it is motivational, assuring that key personnel are getting the stimulating growth opportunities and financial rewards needed to keep them fully engaged. Another part is migrational, recognizing that top talent is increasingly mobile and adjusting the approach to recruitment and tenure accordingly.

A huge part of the challenge is finding the blend of concept and structure needed to pursue online ventures. Too much is at stake to take a scattershot approach, where various groups try various things and it's never really clear whether organizational cohesion is even being consciously pursued, much less achieved.

Instead, online ventures really should be managed within a portfolio context. Risk management alone justifies this, but there are many additional issues that require methodical evaluation: What's the framework for structuring equity positions in Web ventures? What's the role of the capital markets group? When should we develop, and when should we acquire? What's the strategic context for joint ventures and alliances, and how should they be structured and implemented? Who's minding the store, in terms of monitoring resource deployment?.

You need a system to identify and leverage new types of business functionality as they are created, to make sure the company gets the full benefit of any innovations that it had a hand in developing. And there are accounting issues to be considered, such as the degree to which interim startup expenses should be capitalized as research and development. This is the level of comprehension that the CEO must bring to e-commerce.

From another perspective, the definition of wealth itself is changing, and bank CEOs seem to have been slow to grasp this. Enormous energies have been expended on mergers and acquisitions, which accumulate wealth in industrial terms, denominated by physical assets such as branches. But intellectual assets primarily drive wealth creation in the New Economy, and that requires a far different executive orientation. It is crucial that people make this mental transition.

Banking Strategies: What's the task facing senior management?

Schroth: The senior management team also must recast itself. People should view themselves as institutional and developmental assets, and stop behaving like feudal lords. Many resist progressive frameworks because they think that their jobs and organizational units are placed at risk. But the risk exposure really stems from being misaligned with the market.

The intensity of online competition is such that hyper-efficiency is required to remain competitive. Yet companies still are burdened with disastrous levels of corporate overhead. Often, a 50% reduction in corporate staff is needed to meet the efficiency dictates of e-commerce, yet we see few instances where companies have developed cohesive exit strategies for surplus managers and alternative Netsourcing arrangements.

Banking Strategies: One prescription that comes up repeatedly in our articles is to be careful not to let strategy discussions stray too far from the customer. Do you have additional thoughts on how banks can strengthen their online ties with consumers and businesses?

Schroth: On the consumer side, banks have an opportunity to integrate the customer's financial affairs online. This is something that provides great benefits to clients and rewards the provider with renewed customer loyalty and new forms of opportunity.

Put yourself in the shoes of a customer who can go through your portal to aggregate information on all of her accounts, with your institution and elsewhere, and who has set up her bank software interface to handle payments on all of her personal bills. Once those capabilities are in place, why would that customer want to switch providers? And think of all of the opportunities to sell into that relationship.

But just to be clear, I'm not talking about corralling people, and getting their finances so entangled in intractable software that they stay with you out of a sense of resignation. That's falling right back into the control consciousness that characterizes the industrial model. You don't want to make customers feel like captives! Instead, the attitude is one of building layer upon layer of rewards, so that the customer feels part of something that is positive and constantly evolving.

To capitalize on this, however, banks have to provide the complete suite of tools desired by the customer - and the number of institutions meeting this standard right now falls somewhere between few and none. I don't mean to sound unappreciative of the efforts institutions are making. It's just that from the perspective of the online customer, phrases such as"one-stop shopping" and "integrated services" often ring hollow.

The point is that if you are only dabbling with concepts such as account aggregation and electronic bill presentment and payment, you are placing long-term customer relationships at risk. There's no finish line. You have to operate in a mode of continuous development to keep abreast of the market.

As part of this, banks need to do far more work on their software interfaces. People are easily frustrated by complicated screens and intricate navigation requirements. And they go through the roof over any sort of error affecting their financial accounts. Until people trust your software, they won't trust your institution online.

Turning to the crucial pursuit of online sales, people know they don't have to content themselves with the best of what just one provider has to offer. In many product areas, the game will be about providing best-of-breed selections from multiple providers.

That has implications for the value standards of your own offerings, and for the networking arrangements needed to compile product suites. And it is why the "intrapreneur" model - where developmental efforts are largely internally focused - doesn't work online, because it still serves the old self-interests. Web customers are not subject to the old geographical and charter constraints, so you can't win them with approaches that worked in those environments.

On the corporate side, one strategy is to make it easier for clients to migrate to your institution while creating value propositions that reward them for doing so. The goal is to provide capabilities that help speed transactions, lower costs and translate data into information that is useful for decision-making. The more compelling your online value proposition, the more willing companies will be to broach the transitions needed to come aboard.

Banking Strategies: Considering all of the diverse factors involved in organizational transformation, it becomes difficult to know where to start. What are the key things that banks must do to follow through on your suggestions?

Schroth: I would narrow it down to five priorities.

First, the relationship between the board and senior management must be strengthened. Directors must actively help the organization evolve into new patterns. In many cases where this does not happen, institutions will languish and ultimately be acquired.

A second thing is to pay attention to the war for talent. Because many modern organizations are so large, it can be hard to discern the erosions in workforce aptitude than can occur over time. I've talked about motivating and rewarding people. But it's more than that, really, because you have to be clear about the kinds of employee attributes and behaviors you are seeking in the first place.

Understanding customers is a third priority. Nothing I said earlier was meant to trivialize the importance of providing outstanding financial services in the manner that they currently are formulated. You've got to utilize current capacity, serve the best customers and maximize short-term profitability. But in a fast-changing market, it is critical to discern how relationships are evolving. You have to interact with current and prospective clients and find out how you can help them get where they want to go in e-commerce. That knowledge becomes the basis for redeploying your own capital.

Fourth - and this one is really critical - you must constantly strive to discern the difference between true online business pursuits and other ventures that really are just fascinating developmental exercises. It's not enough to create something packed with visual, informational and transactional intensity. You're not trying to create exhibits for the next World's Fair. Instead, you're trying to create business processes that distinctively satisfy customer needs and provide an appropriate return to shareholders. It can be exceedingly difficult to set enthusiasm aside so that you can objectively assess digital projects, but you inevitably are going to run into trouble if you don't infuse some dispassionate analysis into the proceedings.

To these four things I would add the importance of fighting complacency. Because banks so thoroughly dominate the paper-based aspects of the payments industry, they have a tendency to think that the market won't evolve to electronics if they drag their feet. That's simply not true. New market entrants are legion, and many are formidable competitors. The sense of urgency comes as you realize that transformation is not an elective exercise, but rather a matter of survival.

Mr. Klinkerman is editor-in-chief of Banking Strategies.

Copyright © 2003 by Banking Strategies, published by BAI.

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