Getting Value from Annual Strategy Sessions

Before the downturn of the last decade, banks were minting money, but no more. Today, most financial institutions are dealing with reduced margins, limited avenues for growth, increased operating costs and greater capital constraints. As a result, bank management needs to be more targeted in what it does and how it does it.

Of course, having a strategic plan does not guarantee success. Yet, it seems both short-sighted and dangerous to operate without a rigorous annual process that confronts assumptions, reaches out across the bank for employee input, and encourages consideration of external best practices and an independent perspective to challenge a bank’s traditional approach. The downside of not developing a well-developed strategic plan exceeds the costs of creating one.

For many companies, the annual strategic planning cycle has begun or kicks off within the next few weeks. Still, we hear much grumbling from our clients and others about the value of the planning process. One frequent comment: “I hope we accomplish more than we did last year.” Too often, this annual ritual brings to mind the Bill Murray movie Groundhog Day in which activities are repeated endlessly without any signs of progress. The strategic planning process at many banks often fails to achieve its potential impact, resulting in agreement on various tactics without providing the power of a strategic core.

Rather than considering it another activity to be checked off, in fact, senior management may have no more important role than agreeing to a strategy, committing to it and then executing it. Our experience is that too few banks do so.

What is strategy?

Textbook definitions of strategy abound. Arthur A. Thompson and A.J. Strickland in Strategic Management provide a practical focus: “A company’s strategy is the ‘game plan’ management has for positioning the company in its chosen market arena, competing successfully, pleasing customers, and achieving good business performance.” They add: “In crafting a strategic course, management is saying that ‘among all the paths and actions we could have chosen, we have decided to go in this direction and rely upon these particular ways of doing business.’”

So, strategy demands choice and focus. Unfortunately, we find that many companies resist, either explicitly or implicitly, making the type of decisions required to develop an effective strategy. To repeat one comment from the head of a bank about the market he serves: “Everyone is our customer.” In a sense, if everyone is your customer, then you have no targeted segments or differentiating products and your ability to generate sustainable above market returns seems unlikely.

Many banks simply don’t get the need to choose a defined strategy, determine priority customer segments or tier customer focus based upon current and expected profitability. Oftentimes, bankers seem comfortable going in multiple directions; the hard part for many involves narrowing their focus and choosing a handful of “directions” and then sticking with them. Why?

Most banks continue to be consensus driven. Satisfying various internal factions marginalizes potentially bold decisions. We remember one project that began with a steering committee of 12 members; by its end, about 20 bankers were attending, many of whom were primarily focused on turf protection.

Banks are too often consensus driven and (using the word advisedly) “gentlemanly” in how they approach and resolve problems. Optimal decisions get marginalized in the face of organizational issues, the “tenure” of long-time employees and the lack of management’s “will to manage.” There is too much internal emphasis on providing “ground cover” from possible negative feedback versus demonstrating leadership.

Strategy is often considered amorphous. A well-created strategy is specific and actionable, but too often the end result of a strategy project is a document that lacks focus and meat. Strategies set a direction. And, for a structured institution like a bank, once strategies are set they are meant to stay set for a period of time. A company’s strategy should not frequently change in a fundamental way. However, once “set,” strategies are often too easily ignored as the documents gather dust rather than become dynamic tools. Follow-up is critical to bringing a strategy alive; too often, banks lack the internal management strength and conviction to follow-up on strategic decisions.

Strategy implementation takes time. A strategic plan often takes multiple quarters or years to have an impact. But, signposts of success can, and should, be set so that progress is clear and further refinement of the strategic approach is possible.

Many banks act as if they have to serve virtually everyone. Contrast this view to the comments of one non-bank financial services executive: “We pick our competitors.” Non-banks know the specific types of customers they want to serve and design products to suit them. Their focus does not blow with the wind. Even smaller banks often offer too many products to too many customer types, diluting their effectiveness.

We spoke with a client recently who bemoaned the failure of one since-abandoned offering: “We tried it for six months and it did not work.” In our view, the “it” he referred to plays a fundamental role in account retention and enhanced per account profitability. To this banker, however, it was just another tactic that had been tried (ineffectively) and could then be dismissed. Companies operating with a sharp strategic focus have too great an appreciation of their end goals to abandon an important element of success. They set and keep priorities.

As suggested by Thompson and Strickland, five elements are necessary to build, execute, monitor, and improve a strategic plan.

Developing a strategic vision and business mission. We approach the writing of an aspirational mission statement with great skepticism, even as consultants who from time to time help develop them. Many of these documents are disingenuous, ringing false with both customers and employees. After all, what company does not say that they will offer premier customer service and support customer relationships?

Ideally, a strategic vision statement should serve as a roadmap for a bank’s future course, “the direction it is headed, the business position it intends to stake out, and the capabilities it plans to develop.” Mission statements and visions are not worth the paper they are written on unless they are backed up by clear objectives and implementation plans.

Setting objectives. In effect, the objectives are the quantitative and qualitative yardsticks by which managers measure performance and can be both financial and strategic. Financial goals relate to growth, profitability, credit quality, etc. Longer-term strategic objectives are equally important and usually center on culture, quality, customer service and reputation building.

What happens when a long-term objective conflicts with the short term? In 99% of the cases, managers go for the short term. In Thompson and Strickland’s view: “Long-run objectives should take precedence. Rarely does a company prosper from repeated management actions that put better short-term performance ahead of better long-term performance.” On one level, their comment expresses the naïve view of two professors who do not have to face increasingly demanding analysts and investors. However, we have seen many managers who are so short-term oriented that they undermine ongoing strategic initiatives. Top management has to possess the self-confidence and the strength to balance the short and long term.

Crafting a strategy to achieve the objectives. At this point in the process, a company has decided its vision for the future and the general objectives by which it will measure success. The strategy consists of the specific steps that will allow management to achieve its objectives.

If your vision is to be the number one or two bank in your catchment area, your objectives will include a focus on growth, profit, market share and perceived customer service. The strategy is the “how,” based on a bank’s current and anticipated capabilities (core competencies), competitive environment, and customer perception, among other factors.

Many managers fail in their self-assessment process of current capabilities and customer perception. Think of the Emperor’s New Clothes. We know of one bank that has been a great new business source for its rivals (described by a rival as “the gift that keeps on giving”). This bank’s customer service and overall customer experience is widely viewed as abysmal, but conversations with that bank’s management indicate that they are clueless and simply fail to understand how their customers perceive them. Unless they change their approach and face up to the disconnect between them and their customers, they will never achieve their goals.

Facing up to reality is a critical area for board and top management emphasis. Frankly, and of course self-servingly, outside consultants can play a critical role here. You want someone who will “push” the thinking without political concerns, an impossible role for an insider to play. In addition, an outsider brings experience with a myriad of bank and, more important than ever, non-bank financial services competitors as well as a perspective on the needs of the post-Baby Boomer generations.

Implementing and executing the strategy. Even with a well-defined and rigorous strategy in place, the work has only begun. Execution is very hands-on and requires great persistence and attention to detail, including: addressing organizational issues; redefining employee roles and responsibilities; building cost-efficient IT support; instituting enhanced approaches to compensation; and changing the culture.

Someone has to be in charge of execution. That person must have both the responsibility and the authority to make things happen. And that is exactly the point at which many strategic initiatives fail.

Evaluating performance, monitoring new developments, and initiating corrective adjustments. One of the most frustrating and exciting elements of strategic planning is that it is never ending; once agreed to, strategies need to be reevaluated and enhanced while maintaining their consistency. That’s why management must view strategic planning as an ongoing dynamic process and not a one-time event.

To take advantage of the benefits of strategic planning, we advise:

  • Setting clear, quantifiable goals for the strategic planning process;
  • Having senior management in front and committed throughout;
  • Appointing an internal implementation czar;
  • Using an outsider to assist in designing the process, raising the tough questions, and introducing external best practices and relevant market information;
  • Making the strategy a living document that is reviewed and revised yearly based upon market realities, core competencies or others factors.

Lots of work, yes, but, potentially, a great payoff from doing so.

Mr. Wendel is president of New York City-based Financial Institutions Consulting, Inc. He can be reached at [email protected].