Efficiency ratio improvement has been a recurring theme in recent bank quarterly earnings calls and investor presentations. Many institutions have focused first on rationalizing expenses—a healthy, periodic exercise.
For most banks, though, measurable improvement—and long-term survival—requires revenue growth. Banks that are unable or unwilling to make sizable investments to fund growth must determine how to generate more from existing investments. Even banks that continue to open new branches are demanding shorter payback periods on their de novo offices.
Banks have achieved some success recently boosting retail sales productivity. According to Cornerstone Advisors, Inc.'s 2007 issue of The Cornerstone Report, the median number of new accounts opened per platform, per full time employee (FTE) and per month climbed to 48 last year, up from 42 in 2003 and 45 in 2005. However, achieving incremental improvement year over year can quickly become daunting when no more quick fixes remain. In addition, the challenge to improve is inherently more difficult when budget constraints limit expansion into high growth markets, halt investments in technology and hiring and drive sales goals that demoralize employees.
There are no simple solutions; rather, a multi-pronged approach is required to cultivate an effective sales culture. A number of valuable tools and services are readily available, including sales coaching and training programs, customer relationship management (CRM) and contact management applications, guidelines for incentive program design, industry benchmarks and performance scorecards. Beyond that, many banks need to address more fundamental drivers of sales productivity: resource allocation and focus, process efficiency and employee retention.
Optimizing Resource Allocation
Few things impact branch sales performance more than location. A 2003 MapInfo study of deposit growth at over 5,000 mature branches determined that location drives 65% to 75% of branch success. Our own analyses have consistently demonstrated the correlation between trade area attractiveness and branch performance (see chart, “Allocating Branch Resources” this page).
Market data, such as household and business counts, projected growth rates, financial product usage and competition, and turnkey market assessment reports and tools are readily available and affordable for even the smallest banks. Consequently, banks that rely on intuition or other subjective approaches to identify and prioritize potential de novo sites are at a severe competitive disadvantage.
Many banks today have limited investment resources and flexibility to open new branches at will and, as a result, must fund some or all new branch network expansion through divestiture or contraction of existing offices. Branch network optimization, therefore, requires an understanding of branch sales performance as well as market opportunity.
Many banks struggle with evaluating branch performance by overemphasizing branch profitability, which relies on an inherent assumption of how customer accounts are assigned to individual branches. These analyses are typically based upon where a customer lives, transacts or last opened an account and thus can easily overstate the importance of a single branch when customers utilize multiple branches or delivery channels or opened accounts long ago. Instead, banks should focus more on direct measures of contribution, such as the number and dollar volume of new accounts opened, number of sales referrals to specialists and other sales metrics that more accurately reflect the current value the branch brings to the bank's growth efforts.
While branch offices are typically the most expensive sales resources banks deploy, optimization of sales people is similarly important. More specifically, banks should use market and branch performance information to identify opportunities to reassign top sales people from poorly performing branches in mediocre, slow growth markets to new offices and existing branches in prosperous markets with high growth expectations and excellent sales momentum.
Often, the same data used to drive branch and sales person placement is instrumental in setting local sales objectives and individual performance goals. For example, while the bank as a whole may have substantial targets for both consumer and business customer acquisition, the local market opportunity and composition will vary from branch to branch. In most instances, branches in commercial zones—i.e., those with relatively high numbers of businesses and having high ratios of workplace population to residential population—should have higher goals for business product sales while offices in more residential zones should be asked to concentrate on consumer targets.
Data providers such as the U.S. Census Bureau, Claritas, Inc. and Oxxford Information Technology report geographically on market consumer and business segment composition, home ownership, and financial product use. This information is useful to determine which employees should focus on objectives like selling home equity loans to affluent prospects or checking accounts to college students.
Finally, banks must also mine their own customer data to identify and prioritize opportunities for market and customer base penetration. Branches with many established customers in mature markets may generate more value to the bank by focusing on cross-selling while branches in growth markets concentrate on new customer acquisition.
Banks must also enhance the likelihood of sales success for frontline staff. Many banks attempt to mimic the behaviors of their most accomplished sales performers across the franchise by turning top sales people into sales coaches. This tactic can be very useful and may yield insights but often reduces the time the best people spend actually selling. In addition, many banks struggle with internalizing successful habits without reinforcement.
Banks are better served to take a more disciplined look at what people do and structure calling programs, sales interactions and other key processes to ensure consistent, desirable behaviors. Activity monitoring is critical, and performance scorecards should include metrics such as number of introductory calls, referrals, offers made and other early pipeline metrics to shed light on sales production variability.
An example of how pipeline monitoring can help to diagnose broken sales processes can be found in residential mortgage lending. At many banks, branch and call center staff refer all mortgage leads to lending specialists for application and origination. Frontline sales people are often paid incentives for referrals that result in booked volume. However, referral volumes will quickly evaporate and frontline sales people will focus on other product opportunities if few mortgage referrals are converted to actual sales. Additionally, mortgage lender effectiveness typically suffers when referral volumes surge and sales specialists struggle to give sufficient attention to all leads and are unable to determine which represent the best sales prospects.
Frontline pre-qualification questionnaires can be employed to weed out inquiries that are prohibited by the bank's credit policy and enable sales people to focus on only the most credible opportunities. Monitoring of pre-qualification processes through the capture and analysis of questionnaire responses illuminates where leads fall out of the pipeline and can suggest needs for additional sales training, new product potential, credit policy issues and opportunities for establishing referral relationships with third-party subprime lenders.
Process enhancement and redesign should not be limited to sales interactions but instead applied to the entire sales cycle, including fulfillment. Poorly designed and competitively inferior approval, closing or even debit card issuance procedures can easily derail sales. Banks, thus, need to adopt a customer perspective and monitor benchmark metrics such as responsiveness, turnaround time and number of customer handoffs. Furthermore, reassigning the procurement of lead lists and the design and implementation of traffic-driving initiatives from local branches to a centralized marketing unit with experience mining and scrubbing customer and prospect data can help ensure the quality and quantity of sales opportunities and the effectiveness of promotional programs.
Employee retention is paramount to retail sales and service quality effectiveness. While virtually all banks strive to retain their top producers, high turnover rates impair the organization's ability to meet bank-wide productivity goals. New employee learning curves, time lags in hiring and apathy by employees leaving the bank typically add up to sales production levels well below targets.
Consider a hypothetical example in which a bank has budgeted for 15% sales productivity improvement over the prior year and experiences 20% annual frontline turnover. If transitional positions produce only 75% of targeted levels (average of six months of old employee at 100% and six months of new employee at 50%, no down time), retained employees—the 80% that do not leave the bank—need to achieve a 25% improvement for the bank to hit the 15% goal.
Realistically, the top-tier producers carry much of the company. Taking the previous example one step further, if we assume that every retained employee outside of the top 20% makes the 15% improvement goal, the top 20% would need to increase productivity by a whopping 55% to make up for the drag caused by turnover. That is a tall order year over year.
High employee turnover generally results from a combination of multiple human resources weaknesses related to job design, hiring, compensation, counseling and the remediation of poor performers. Banks can gain insight on where to focus first by surveying employees to assess their general satisfaction and sense of value and obtain their perspective regarding:
Role clarity and expectations;
Feedback and mentoring support;
Reward, recognition and incentive systems;
Opportunities for advancement and professional development;
Sales tools, processes and training.
In addition, banks should participate regularly in compensation benchmark studies and develop scorecards that analyze internal metrics, such as time or dollars allocated to training per FTE, against industry best practices.
Sales people also need competitive products and services to sell and banks must continue to refine value propositions, pricing and product features. However, retail banks that fail to optimize placement, focus, and retention of sales resources will eventually stagnate, be forced to turn to cost reductions to achieve profitability and may ultimately struggle to remain independent.
Mr. Stein is a partner with Capital Performance Group, LLC, a Washington, D.C.-based financial services consulting firm.
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