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Bank Size: The Difference that Matters


Years ago, I went from being the senior operations officer for a large bank in a metropolitan area with a flock of VPs at my disposal to being senior vice president and cashier/operations division head for a small bank in a rural market. My direct reports included the security guard (as with Deputy Barney Fife on the Andy Griffith Show we did not give him the bullet), the head teller and the custodian – I was his backup and sometimes got the call when a toilet overflowed. More importantly, the interpersonal communication and organizational dynamics could not have been more different, a change I was not prepared for.

Over decades of working with financial institutions of all sizes, I have witnessed the structural differences between larger ($10 billion or more in assets) and smaller ($1 billion or less) organizations many more times. What I have learned is this: size does matter.

Even when we take market and organizational complexity out of the equation, these differences are pronounced and becoming more so. And the diversity based on size is more than just interesting: for smaller organizations looking to grow, it can provide a roadmap; for larger institutions that have grown rapidly, understanding the differences can explain why things might not work as well as they used to. For managers displaced from larger institutions who now find themselves in smaller organizations, understanding the differences can provide some understanding as to why that which worked at Mega-bank doesn’t work so well at Mini-bank.

Structural differences we’ve identified between large and small institutions include the following:

Process vs. People. Larger institutions tend to focus on “process,” such that individual performance is less important than the need for well-constructed, carefully documented processes. Smaller organizations tend to rely on people – “Bill will get it done for us, he always has!” – sometimes at the expense of good process.

Strategic vs. Tactical. Higher-level managers in larger organizations tend to be focused on strategy and what the bank’s competitors are doing and they are less likely to be heavily into hands-on management of technical functions. In smaller organizations, senior managers tend to be subject matter experts who “know everything” technically, while in larger organizations senior managers tend to have subject matter experts working for them as trusted advisors. Higher-level managers in larger organizations also tend to concentrate on leadership elements such as communicating and coordinating with staff and peers.

Market leaders vs. Fast followers. Whether evaluated using costs as a percent of assets or costs as a percent of operating expense, larger institutions are able to drive down technology and operational costs more effectively than smaller organizations. Smaller organizations tend to focus on delivering new products and services as “fast followers.” They usually can’t afford to be market leaders. A larger organization is more likely to feel it necessary to identify (or even influence) evolving trends, evaluate those trends against its business model and respond quickly to changes. Visible leadership of innovative processes and technologies is valued in larger organizations and executive management tends to expect senior leaders to participate in standards-setting bodies, trade associations, pilot projects, etc.

Best-of-breed vs. Off-the-shelf. There is a much stronger tendency to acquire “best of breed” solutions in larger organizations, with business units having a bigger say in the products selected. System users are the ultimate judge of how well a system meets functional needs, with Information Technology (IT) and Project Management staff serving as “trusted advisors.” In smaller organizations, IT often heavily influences selection decisions.

Service Level Agreements (SLAs) vs. Personal Relationships. In larger organizations there will be formal processes that require setting and measuring SLAs between customer-facing business units and internal operating units, usually followed by a second set of SLAs between internal operational units and IT. In smaller organizations, performance standards between business units tend to be informal, sometimes influenced by the quality (or lack thereof?) of the relationship between department heads.

Sales specialty vs. Delivery expertise. “Sales and service” functions are more likely to be disassociated from “delivery” functions in larger organizations. There is more willingness to combine functions that have similar managerial attributes in larger organizations, perhaps combining Loan Operations and Deposit Operations under a single executive experienced with managing back office functions. Smaller institutions, on the other hand, have a more vertical “line of business” organizational style; the head of Loan Operations may report to the senior lender, for example.

Heavy regulation vs. Light(er). Regulatory expectations are more demanding of larger organizations. (Community bankers struggling with ever-increasing regulatory burdens may have difficulty agreeing, but regulatory tolerance is usually even less at larger banks than at smaller ones.) Information security, disaster recovery/business continuity, vendor management and privacy standards tend to be rigorously applied to selection, implementation and operational efforts in larger organizations. Because they are larger, the risks are greater and regulatory oversight is more rigorous.

Formal Project and Technology Management Processes vs. Ad Hoc Processes. Larger organizations almost always have a Project Management Office (PMO) with clearly articulated processes for:

  • Alignment of technology with the needs of each business unit, including a high level of technology ownership from business units;
  • Project prioritization and resource allocation. Formal processes provide a written review of project scope, payoff, costs, required resources and timelines well before projects are approved and funded. Hard- and soft-dollar payoffs are quantified ahead of time and re-confirmed after project completion;
  • Clearly striking a balance between business unit autonomy and the need for standardization, to ensure systems are cost-effective and properly integrated;
  • And the PMO is less likely to be a unit within IT and more likely to report directly to the chief operating officer, chief administrative officer or senior operations officer.

PMO staff serve as project managers for most initiatives, working closely with IT, but they are accountable to line managers who control all the resources necessary for successful projects. The typical smaller bank, by contrast, will have someone in IT or a back office supervisor serve as the point person for most projects. These individuals can be effective in getting projects done, but often project plans, risk assessments, etc. are very informal, almost “written on the back of a napkin,” instead of using formal project management processes and tools. The back of a napkin can be efficient and successful, but it is much riskier. (Re-read the “Process vs. people” discussion above!)

The list above isn’t all-inclusive, but understanding the differences between large and small banks can benefit anyone who must operate in both worlds or is making a transition from one world to the other. In general, I believe it is harder for a high-level executive from a large organization to move into a smaller organization. The skills and attributes needed for success at Mega-bank are very different at Mini-bank. Likewise, executives from small organizations may find that the “hands-on” skills developed in smaller organizations have not prepared them for management in a large organization. Working in a smaller bank can be a lot of fun – I never worked harder and never learned more in less time – but it is not a difference to be taken lightly. Size does matter!

Mr. McFarland is a managing director with Cornerstone Advisors, a Scottsdale, Ariz., based consulting firm specializing in bank management, strategy and technology advisory services. He can be reached at [email protected].