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Moving from Budgeting to Strategic Planning


December 4, 2017

By: Larry Martin

Sacred cow definitions:

1.      An individual, process, organization, institution, etc., considered to be exempt from criticism or question.

2.      A pet project, usually owned by a Senior Executive, immune to criticism and the company's standard processes.

3.      A firmly held mainstream belief considered to be true without independent verification.

One of the first consulting lessons I learned to improve a bank’s performance was to find and rationalize sacred cows.  Sacred cows exist in all banks, industry trade associations, and service provider firms.  Some sacred cows are positions, some processes, and some business units.  Regardless of the type of sacred cow, they have negative implications to strategy, performance, and culture.  Rationalizing them improves performance in many ways.

Having reached the status of a “sacred cow,” exempt from criticism or questioning, the business unit, person, business practice, or approach can continue without questioning.  Everyone accepts the situation, keep their heads in the sand, and allow something to continue that if proposed today would never pass muster of diligent decision making since the base assumptions are not relevant. 

A life example of a “sacred cow” process

A young woman is preparing a pot roast while her friend looks on.  She cuts off both ends of the roast, prepares it, and puts it in the pan.  “Why do you cut off the ends?” her friend asks.  “I don’t know”, she replies.  “My mother always did it that way and I learned how to cook it from her”.

During her next visit home, the daughter asked her mother, “Why do you cut off the ends of a pot roast when you cook it?” Baffled, the mother offered, “That’s how my mother did it and I learned it from her!”

Her daughter’s inquiry made the mother think more about the pot roast preparation.   When she next visited her mother in the nursing home, she asked, “Mom, why did you cut off the ends of the pot roast when you cooked it?”     The grandmother’s eyes sparkled as she remembered.   “Well, the roasts were always bigger than the pot that we had back then.  I had to cut off the ends to fit it into the pot that I owned”.

Time and cooking vessels changed making the practice unnecessary and wasteful, yet the sacred nature of “The way Mother did it” prolonged the outmoded practice.  

A bank example of the bank budgeting “sacred cow” process

The last bank where I worked prior to becoming a consultant was a multi-billion-dollar bank and one on the largest banks in Colorado at the time.  Like all banks, they had an annual budgeting/financial forecasting process.  All key functional areas received their budgeting package along with instructions that included the overall asset growth and profit targets for the company and the date the completed package was due back to finance.  The banks’ approach to annual budgeting/financial forecasting had been in place for several years.  

One business group had been working diligently to arrive at business strategies and goals for the coming year along with associated income and expenses.  They were careful to align specific resource expenditures to specific strategic actions and bottom-line results.  Unlike some other business units in the bank, this business unit served an attractive market with good growth and profitability.  As one of the largest banks in town, their competitive position was very good.  The result was the ability to achieve strong annual asset growth with strong profit and asset quality.  Other business units did not have the same opportunities.  The business unit prepared their budgeting package confidently knowing their asset growth rate and bottom-line profitability to be much stronger than the bank targets provided.

Sometime later all budgeting areas received a communication from Finance that basically said, “please, review your budgets and reduce your expenses by 10%.”  This non-strategic across the board expense reduction was necessary to achieve the overall bank profit levels targeted.  The Finance area repeated this several times before finalizing the budget.  The process did not incorporate the ability to recognize the strategic impact of various business units and their varied abilities to contribute to company asset and profit targets. Instead just blanket across the board expense reductions or revenue enhancement demands without the benefit of business plans and reality checks. 

The budgeting/financial projection process, a sacred cow, was burdensome, bothersome, and somewhat of a joke.  Everyone experienced with the bank’s budgeting process knew they needed to inflate their expenses knowing a request to reduce them would follow.  They also believed the bank would not achieve the final budget as we had not for several years.  Being new to the bank I did not play the game well.

How the process changed

Shortly after this budgeting experience, the company announced the hiring of a national consulting firm to help improve the bank’s financial performance.  While one of the largest banks in town, and publicly traded, the bank’s asset growth and profit performance had trailed peers for years.  Management finally decided they needed an outside perspective to help improve performance to quiet the quarterly grilling they received from investment analysts and shareholders on their mediocre performance.  A collective cheer went up from the troops at the announcement of outside help, after all we were all shareholders.

Myself and a few others worked directly with the consulting firm on structuring and managing the project.  We segmented the bank into lines of Business around logical external customer markets or internal functional roles.  We assigned a team of bank officers to each segment identified.

Each Business line team prepared a business line assessment along two dimensions.  The first dimension focused on assessing the attractiveness of the market served by the Business line.  This assessment included quantifying market size and trend, customer key buying factors, market structure, differentiation opportunity, key competitors, ease of entry, and other analysis. The other dimension was assessing the Competitive Intensity of the Business line.  This assessment included quantifying the business lines’ market share and trend, ability to satisfy customer key buying factors, relative profitability, competitive strengths and weaknesses, relative technological position and other analysis.  

The bank’s Finance area created balance sheets and income statements for each business line that totaled to the whole bank.   These greatly assisted the work of the segment teams.  Prior to this each business unit and bank leadership had their budget versus plan but not a P&L that looked at all business units on a ROA and ROE basis.  

Finally, each business line team responded to future vision questions of the project steering group:  1) Resource and other requirements to improve their competitive position, 2) The type and level of resources required, 3) The time-period to accomplish and 4) The resulting changes in the competitive position.

Each Business line team presented their analysis and going forward vision to the Executive leadership team.  The executive leadership realized a need for strategic resource allocation for improved bank performance.  That is, allocate specific resources to those business lines offering the most and best growth and profit potential where the bank could be a strong and long-term competitor.  That also meant withdrawing or limiting resources to other business units, maybe even shutting some down, if their prospects were less robust.

What changed

The bank-wide results were both dramatic and quick in terms of growth and profitability.  Equally dynamic was the improved strategic clarity and focus.  All business lines received clear strategic direction, specific asset and profit targets, and clarity on key strategic issues.  Those business units with less robust opportunity and prospects had some difficult strategic issues to identify and address.  The banks’ Executive leadership continued strong involvement with all teams through the duration of their plan development, approval and implementation including comparing actual results to plans.

Lessons learned

The experience provided me three lessons:  

1.      Sacred cow processes have as large a negative impact on performance as do other types of sacred cows, they are just not as visible.  All processes need to be re-evaluated or relooked from time to time.  This banks’ approach to annual budgeting/financial forecasting was like cutting off the ends of the pot roast before cooking—out moded.

2.      Resource allocation needs to be strategic.  Not all business units have the same market potential or the same competitive ability.  Expecting all business units to grow at equal rates annually will result in the same mediocre results my bank had consistently demonstrated.  

3.      For a bank to be a consistent above average performer requires consistent application of strategic planning, strategic resource allocation and strategic management.   Like any new behavior, it takes time and practice to master.  Don’t give up and revert to sacred cow processes.

In our consulting practice, we have used the above strategic planning and resource allocation approach and variations numerous times with community banks large and small, those healthy and troubled, and those located in rural and metropolitan areas.  The results are always the same: improved performance, improved strategic clarity, and increased market share position.  

Incorporate strategic planning, management, and resource allocation into your annual budgeting/financial planning process.  Then, hunt out other sacred cows in your organization and deal with them.

 

About Bank Strategies LLC 

Bank Strategies, LLC is a Denver, Colorado based consulting firm founded in 1982 that provides a wide array of enterprise-wide risk management solutions which assist executive management teams and Boards of Directors of mid- and lower-tier size financial institutions in improving overall performance and profitability, assessing and controlling risk profile, and strengthening shareholder value.   Bank Strategies LLC and its team of professionals are well known and respected in the community banking sphere of banking institutions, attorneys, CPAs, trade association executives, and the press due to their quality of service, expertise and knowledge. More information is available at www.bankstrategiesllc.com.

To learn how the Bank Strategies LLC team can put more than 100 years of collective industry experience to work in helping your institution reach its potential as a high performing bank, call 303-903-9369. Or email Jim Swanson at jim@bankstrategiesllc.com.

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Contact Information

Phone: 303-903-9369

Mail: 75 S. Joyce Street, Golden CO 80401

EMail: Jim@bankstrategiesllc.com