Scott Morgano FIS Consulting Services 800.822.6758
Industry drivers behind transformational change Financial institutions trying to improve their financial performance significantly often find themselves pulled in conflicting directions. They must increase lending in order to grow revenue, but at the same time must not let credit quality dip. Replacing fee income becomes critical as overdraft revenue has fallen due to changes in Reg E. But financial institutions must be mindful not to run afoul of the new Consumer Financial Protection Bureau s guidance whatever it may be. Try and grow by acquisition? A good strategy if you can get the right franchise at the right price, while not becoming a target yourself. And you can always cut costs again, right? The overall industry return on assets indicates performance is still not back to 2006 levels, with banks both above and below $1 billion in assets. 1.50% 1.25% 1.00% 0.75% Under $1B Over $1B 0.50% 0.25% 0.00% -0.25% 2004 2005 2006 2007 2008 2009 2010 2011 Return on Assets Rebound, but still not at pre-recession levels Given these challenges it s surprising more bankers have not opted for a less regulated, less competitive field than banking maybe the automotive industry? Looking a bit deeper into current research, a picture can be painted of the challenges bank executives face. Focus on loan growth In interviews FIS conducted with C-level executives at mid-tier financial institutions, we found organizations were looking to grow revenues more than cut costs in order to improve financial performance. The top growth strategy by far is to increase lending revenue. The following graphics highlight those findings. 1
Focus of Financial Institution Strategies in the Next 12 Months 40% 28% 16% 12% 4% 1 2 2 3 3 4 5 1 Revenue growth 2 Lean toward revenue 3 About equal 4 Lean toward expenses 5 Expense management Based on the importance of growing revenues, executives were then asked to rank the tactics they planned to pursue to grow their top-line revenue in 2012. Not surprisingly, the leading tactic was to grow interest income, with executives giving this a 5.30 out of a possible 6. The tactics were numerically ranked on a scale from 1 6 with 6 indicating the greatest area of focus. Pursuing an increase in insurance business had the least area of focus. Average Ranking Six Potential Revenue Growth Strategies Insurance6 2.38 Brokerage5 2.58 Wealth Management4 2.90 Deposit Charges3 3.36 Non-interest Income2 4.48 Interest Income1 5.30 2
Replacing fee income Beyond interest income, the second leading source of banking revenue is non-interest income. That revenue source has its own unique challenges. Checking Account Income Components 4% 5% 28% 48% Historical view, derived from FRB Transaction Deposits, Commercial Banks Analysis FIS research indicates that most banks are losing 15% 30% of overdraft income with potential additional overdraft regulation and litigation looming. Additionally, the Durbin Amendment will erode non-interest income further even at banks with assets below $10 billion. Grow by acquisition 15% Except Fees (Mainly OD) Net Interest Margin Maintenance Fees Interchange Transaction Fees Consolidation remains a prominent driver in the banking industry. The FDIC closures seem to have peaked within the last two years, but traditional M&A and consolidation remain rampant in the banking sector as evidenced in the following graphic. Number of bank mergers and acquisitions, 2007 2011 1,048 650 613 840 756 2007 2008 2009 2010 2011 Source: Thomson Reuters and SNL 3
Improve efficiency As mentioned previously, institutions not focused on revenue growth must continue to cut costs. This has proven to be a daunting challenge, as overall efficiency metrics continue to rise for the industry as a whole. 61.0% 60.0% 59.0% 58.0% 57.0% 56.0% 55.0% 54.0% 53.0% Efficiency Ratio Source: FDIC 9/30/11 58.5% 58.4% 57.8% 58.0% 57.3% 56.2% 56.6% 56.8% *Annualized Q3 data 59.5% 59.4% 55.6% 57.2% 60.6% 1999 2001 2003 2005 2007 2009 2011* How to respond? Given this challenging environment, most financial institutions are responding in some form or fashion to both the competitive and regulatory challenges they face. The problem is many respond with half-hearted measures that often produce mediocre financial results. Many examples exist of organizations trying to side-step their way to high performance. The tactics selected are not fully coordinated, management is not vested in the success of the initiative and results lag expectations. Financial institutions that fully engage in transformational change realize meaningful results. This transformational change usually encompasses a significant upgrade in technology (converting to a new core processing platform), a radical reengineering of their business processes (going entirely paperless) or a major strategic shift (changing to a sales culture as opposed to an operational one). Many times transformational change initiatives encompass all three of these elements. To ensure success, executives embarking on transformational changes need to devote significant attention and resources to a change management methodology and developing communication plans within that methodology. Key elements of transformational change Change management Planning for and managing transformational change requires a disciplined approach to ensure the stage is set up-front and the return is achieved at conclusion of the initiative. The initiation, planning, execution, monitoring and control processes each create specific value. Given the operational focus most managers maintain, managers often forget how difficult 4
change can be. It is much more than just coming up with an idea one day and then doing something different the next day. A significant transformation project touches on virtually every process and procedure within a financial institution. One of the laws of organization change is that People don t resist change, they resist being changed. 1 The best way to bring people on board is to have them participate in the change process. There are variations of how this could be done, depending on the culture of an organization. The executive team should be taken through planning exercises to gain common understanding and buy-in for the scope and objectives for the transformation. Each potential stakeholder should be evaluated to develop an understanding of the specific roles and responsibilities required from their organizations, including identification of the roles for key personnel. An experienced facilitator, combined with subject matter experts, should lead the executives through these discussions to help determine the level of their team s involvement, the visibility of their personal support for the effort and the time required of them and their staff. Typically the executive preparation sessions are designed to gain agreement on the following: Scope Measurable objectives Constraints Guiding principles Roles and responsibilities Initial identification of risks Communication strategy How/who is authorized to make what types of decisions? Executive roles in sponsorship Control and monitoring process Human resource strategy An outside advisor can lead a discussion and facilitate resolutions on issues relative to the above topics. Based on their experience, they can share what issues are most likely to surface and the impact timely involvement can have on their resolution. They can also recommend the most qualified champions for various and specific change activities. As importantly, they can help define the time requirements of executives, assuring the executives are as effective as possible in participating and leading the change. The smoothest transformations occur when the right stakeholders are involved at the right time, doing the right thing. The changes the organization is going through are not just a system change. They impact how everyone works and cooperates. Change management is essential. Communications plan In almost every study, communication-related issues are the most frequent problems a project team experiences. The change manager or project manager spends almost 90 percent of their time communicating. For a significant change, a formal Communications Management Plan should be developed that goes beyond status reports. The Communications Management Plan includes the following processes: 1 The Team Handbook, Oriel Incorporated, 2003. Chapter 1 7 5
Identify stakeholders Plan communications Distribute information Manage stakeholder expectations Report performance An effective Communication Management Plan will lead to effective control of stakeholder expectations. The transformation may impact nearly all staff, so developing an effective communication strategy becomes very important. Initially there will be many unknowns regarding the change and its potential impact. Some of this may be taken very personally. Therefore, it is important to have a human resource management plan to communicate what will and will not be in scope relative to the management process for changes in roles and responsibilities. It is important to communicate the effort required and by whom. It is important to communicate the objectives. It is important to anticipate what impact the change will have on various areas. Hard-earned experience shows that a series of carefully designed communications, specifically used to address the needs of each audience, has a significant positive impact on the outcome of the transformational change effort. It is critical to assign a communications manager for a transformational effort to analyze the communication needs of the stakeholder audiences and manage the entire Communication Management Plan from start to finish. An outside partner can provide examples of such communications and customize them to the situation the institution faces. If the organization has internal resources to handle internal communications, a partner can take a less active role in explaining objectives and keeping the staff adequately informed. The partner can anticipate the issues that most likely need to be addressed and, through experience, can provide the organization a number of approaches to assist. For instance, one of the first issues that always seems to arise is the potential displacement of employees. Noted author William Bridges focuses on the emotional and psychological impact and aspect of transformational change through these three simple questions: 2 (1) What is changing? Bridges offers the following guidance the change leader s communication statement must: Clearly express the change leader s understanding and intention Link the change to the drivers that make it necessary Sell the problem before you try to sell the solution Not use jargon (2) What will actually be different because of the change? Bridges says: I go into organizations where a change initiative is well underway, and I ask what will be different when the change is done-and no one can answer the question a change may seem very important and very real to the leader, but to the people who have to make it work it seems quite abstract and vague until actual differences that it will make begin to become clear. It should be priority to get those differences clear. (3) Who s going to lose or gain what? Bridges maintains that the situational changes are not as difficult for companies to make as the psychological transitions of the people impacted by the change. Transition management is all about seeing the situation through the eyes of the other guy. It is a perspective based on empathy. It is a management and communication process that recognizes and affirms the employees realities and helps bring them through the transition. 2 Five Principles of a Good Change Management Strategy, William Bridges, VirtualProject.com Web site, April 2010 6
What to avoid in transformational change initiatives Many transformational change initiatives have fallen short of true transformation. Common pitfalls include unclear governance, lack of management commitment, and lack of effective monitoring and control to ensure implementation occurs to meet the measurable objectives set forth. Overcoming these pitfalls goes a long ways toward ensuring a major initiative delivers the intended benefits. Bloated or unclear governance Too often during times of transformational change the governance structure and process is not clearly understood or is too complicated, involves too many people and delegates responsibility too far down the chain of command. Organizations often exacerbate this problem by attempting to involve seemingly everyone in the organization in decisions, regardless of the impact on their staff and processes. Worse yet, despite the involvement of many people, there's often a consensus needed, so instead of decisive leadership, the governance program is influenced by indecisiveness and multiple approval requirements that bog down progress. These types of problems are prevalent at large institutions in particular where the general structure of the organization is already very complex. What often happens in situations where the governance program is too large is that clear authority to make decisions is lost. The accountability for implementing transformational change must be pushed to the lowest level to gain buy-in and motivate front-line leaders and staff to adopt the new ways. Often, the middle managers, front-line supervisors or expert staff will resist change and find excuses not to transform. To prevent this, integrate the initiative s success into the individual s reward and compensation systems. Nothing provides focus like correlating a result to a person s compensation. Lack of management commitment Transformation initiatives require a passionate and empowered leader who is committed to the program's success, is situated at the right place in the organization and can achieve executive and steering committee alignment from the beginning. If your transformational initiative lacks such leadership, lip service and inertia can easily take root at the beginning of the project. One initiative we recently led had a resistant old-time employee reach out to the bank s CFO during the planning process. She claimed the planning effort was a waste of time and employees should simply be told what to do at the time of a major system conversion. How that CFO responds to the request shows where this bank is in terms of senior management commitment and support. Too many cooks in the kitchen Getting buy-in from many employees is important in any transformational change. But too many folks participating in planning efforts can create chaos and undermine productivity. One highly effective method which gains key input and buyin is to start the planning process with cross-functional action teams made up of rising stars, informal leaders and your sharpest staff. These key influencers will get fellow employees to follow their leads on the coming change, and offer insight on how best to implement new processes and technology. 7
This approach of cultivating the best and brightest avoids cumbersome meetings in groups too large to accomplish anything besides voicing resistance to the coming changes. Enabling successful transformational change A collaborative approach to gain employee buy-in To gain the buy-in of employees (but not too many employees initially) a collaborative methodology to solicit opinions and generate ideas on the implementation of the transformative change is necessary. This methodology should be efficient and democratic enough to ensure all employees have a voice in the plan development. The methodology should also have enough structure to guide various action teams toward forward movement, not letting them get hung up on details not critical to project success. This collaborative approach will keep group or committee members focused on the task at hand and should extend beyond the initial planning. A group collaborative methodology will be useful throughout the entire life span of the transformation initiative. Initiative structure with defined roles During the initiation and planning process, the formal governance structure should be constructed for the transformation initiative. Applying sound project and program management techniques, such as executive steering committee creation and assignment, are critical. An example of the organizational diagram from a successful transformational initiative is depicted in the following diagram. Common Program or Transformational Initiative Governance Structure Program Oversight Executive Steering Committee Program Sponsor Program Steering Committee FIS Client Relationship Manager Strategic Direction Performance Reporting FIS Program Manager Client Program Manager Project Integration Expectation Management Solution Architect Project Manager Project Manager Project Manager Project Manager Quality Manager Training Manager Project Delivery Team Project Delivery Team Project Delivery Team Project Delivery Team Assurance a Assurance a Assurance b Assurance Assurance c Assurance b Development Project Integration Project Conversion Project Core System Replacement Assurance c Project Structure 8
Senior management involvement and support Senior management must show their support and involvement in the transformation effort from the initial communication announcement until the final celebratory dinner. Financial institution executives must all sing from the same hymnal when communicating to employees. Formal presentations should be prepared centrally and internal memos crafted carefully. Most importantly executives must lead by their actions. They should be active steering committee participants. They should champion the new ways of business that surface during a transformative change. Senior management needs to demonstrate their support of the initiative and as well as the employees working to make the initiative a success. Metrics and measuring success The old saying that you get what you measure couldn t be truer than with transformation efforts. Operational and sales reports should be adjusted to measure the impact of any changes as they become implemented. New analysis will need to be created if new processes require different key performance metrics. There are typically meaningful opportunities to improve overall results by adjusting both the reporting and incentive reward systems, including: Production goal-setting to include not just metrics driven by the transformation initiative Periodic reporting of, and management follow-up to, performance against the goals, including coaching and other corrective actions to ensure focus on the desired results Incentive rewards designed to ensure the collection of fees and achievement of margin goals that are enabled by a transformational change effort Summary Transformational change is often required in these tumultuous economic times, but it is never easy. By taking a proactive, hands-on approach with proven change management techniques and communication planning, financial institutions improve their chances of realizing the significant benefits significant change can deliver. Contact Us For information about FIS Consulting, call 800.822. 6758 or visit www.fisglobal.com.. 9