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BirdsEye View

cost cutting the right way

Danny Buck, Regional CEO for Sterling Bank of TX, sent the following comment on the last article, "When the Bank next Door gets Acquired...". he says, "It also helps if you can quickly hire some of the acquired bank's key front line employees, especially lenders and lending assistants. A very solid $100+ million bank got acquired by a large bank, which caused disruption in the market. Similar fallouts happen often, and SuperCommunity Banks benefit greatly from them by hiring lenders with portfolios who are eager to work for a relationship organization. We are having the best year we have ever had in this region because these new lenders make a huge contribution by being motivated and capitalizing upon the acquisition fallout opportunities. Success breeds success, and other lenders in our region have taken it up a notch. Thank Goodness for mergers and acquisitions!".

Bob Hutchinson also wrote about the incentive compensation article: "Another tool I found of value is publicly posting incentive standings by geographic area and category. It adds a sense of competition among the best of the best to be number one...and also encourages the bottom of the list to do everything they can to improve. Peer pressure is a great motivator."

To learn more about this article's topic and other topics, join us in one of our Forums this Fall. Check out www.anatbird.com for a full schedule of our Forums, agendas, travel tips, recipes, book reviews, my family's pictures (including our most recent trip to Egypt) and other information.

Cost Cutting the Right Way

Most banks go through a feast or famine cycle every few years. They focus on revenue growth, build the infrastructure and staff to get there, and then realize that they have become too cost inefficient. In addition to this natural cycle, revenue depressing external factors such as recession or margin pressure bring about the same reaction: we must cut costs.

The typical answer: bringing in consultants who look in every nook and cranny, streamline operations and provide objective advice regarding the bank's optimal cost structure. The problem: in the process, many of these consultants end up cutting through the fat and often into the bone, thereby debilitating the bank's future revenue growth. Too often, the engagement ends up in the bank being sold since it cannot grow income due to cost cuts that went too deep.

There are several alternatives to this approach. One, which is the toughest to implement, is to inculcate a well-reasoned cost cutting culture into the bank. In other words, ensure that all employees run it like they own it, turn off the light at the end of the day, and that staffing levels are well under control as a matter of course. Park National of Newark, OH is such a bank. As a result, they enjoy an efficiency ratio in the low 40s that has been maintained for many years.

Another, less integral approach, is one that has been practiced by Westamerica and other banks, often borne from a financial crisis yet blossoming into a fine company.

Here are the tenants of such an approach:

  1. Determine your strategic focus. Decide what lines of business you want to be in and which you should divest or dis-invest in. Banks are notoriously bad in initiating divestitures. However, focused resource allocation is essential to success as well as to cost efficiencies. It facilitates thoughtful resource allocation and avoids wasteful forays.

  2. Review staffing at the branches. Once you know who you are and whether service is a cornerstone of your strategy, you can staff to the market position you desire. Creating discipline in branch staffing is a tough thing; I've never met a branch manager who felt they were amply staffed. Yet, when the manager has a stake in the profitability of the branch and its resource optimization (which means maximizing revenues off appropriate resources, NOT minimizing resources for lowest costs), they view their staff in a more entrepreneurial way and make the right decision both regarding staffing size and mix as well as hiring the fight people. It should also be noted that, if all branch staff are appropriately productive at a certain minimum level, hiring more people who will be at least equally productive is a profitable venture.

  3. Centralize branch operations as much as possible without compromising customer service. One of the underpinning of SuperCommunity Banking is customer-transparent cost savings. This is a perfect example of such an opportunity. Pulling out operations from the branch that can be done more efficiently in a central location without negatively impacting service levels is a delicate operation, but it can be done successfully.

  4. Separate the operations and sales functions in the branch. In today's cross-training environment, it is counter-culture to preach dedicating separate resources to bank operations and to sales. It doesn't work for all institutions, but it does create efficiencies and greater revenue growth in many. This approach, coupled with minimizing branch operational functions, allows the customer sales and service team to focus on their customers and prospects, while building the technical expertise within the branch operations staff to facilitate compliance with the many new and re-emphasized regulations, such as Bank Secrecy Act and Graham Leach Blialy.

  5. Divest what isn't consistent with the core strategy. Ask yourself this question about every department: how does it contribute to the strategic focus on the company? If the answer is unclear, take a second look. Again, the goal here is not to minimize costs but to reallocate costs and capital to lines of business where they will produce the best revenue and franchise value impact.

  6. Build clear accountability. Structural changes and cost cuts are only effective if they persist. That will only happen if accountability for the overall performance of each unit, such as branch, department and line of business, is clearly identified. Holding people accountable has several benefits:

    • It allows the more effective managers to shine

    • It eliminates the need for "Corporate" to require cost cuts or recommend them; they will be done at the local level, where they are more likely to be done well, without compromising future revenues

    • It aligns the expertise and the execution where they belong: in the business units.

  7. Create profit-driven vs. product goals. Product pushing goals miss the point in two ways: (a) They focus on volume, not value (b) they focus on what we need, not what the customer needs. Goaling overall unit profitability at all levels is a more effective way to create accountability at all levels and ensure both cost and revenue consciousness that otherwise is hard to find.

  8. Use systems, technology and process to help people do their job. Once the basic infrastructure is set, continue improvement through basic management and technology tools to help your people get even better at what they do.

  9. Compensate on overall performance. Aligning compensation with desired results is tougher than it seems. Too often we believe the incentive program is fool-proof until we get the bottom line results. Building compensation and reward systems to reinforce the strategic focus and overall financial discipline of the organization will lead to a cost-conscious culture rather than a one-time event. Paying for bottom line results or net growth when the former information isn't available vs. volume-driven goals is a good beginning.

  10. Continue scrubbing. As those of us who have engaged in cost cutting (a.k.a reengineering) projects know, the waste grows back in within a couple of years. One way to avoid repeated projects is the expectation of on-going scrubbing. Annual reviews of product lines, vendor contracts, phone services, branch and other distribution etc. is an important discipline to achieve a cost culture that will serve the organization for years to come.

There are many ways to make a buck in our business. However, one thing is universally true: an organization with an efficiency ratio of 60% needs more revenue dollars to make the same bottom line than one with an efficiency ratio of 50%. The expense base is a rock we all carry. The key is to ensure that we have the optimal cost base to generate the most revenues while maintaining our strategic identity for our customers and shareholders alike.