"Putting agility into practice is a real challenge for financial institutions."
Thus says Dr. Walter Heuschele, managing partner at Management Partner, here in an interview with Kreditwesen (KW) a trade publication for banks:
KW: In your opinion, what issues are having a particularly strong impact on banks and "Sparkassen" savings banks today?
The basic situation and relevant influencing factors are well known: Regionally oriented credit institutes are facing increasing pressure on profitability. While income is falling due to low interest rates, costs are at best remaining constant. At the same time, regulators' actions are adding to expenses. That's nothing new. What is decisive now is the answers top managers find for this situation, especially in savings banks and cooperative banks. Just complaining about this pressure on earnings doesn't help.
KW: How optimistic or pessimistic are you about the future of savings banks and cooperative banks?
Each change - and that includes the current increased pressure on earnings - brings both opportunities and risks. It's important to look at both. Especially savings banks and cooperative banks have absolutely no reason to be pessimistic, since their own values and culture of trust give them an asset that others lack. While many financial services providers use largely the same business model, regional banks have a genuine differentiation factor, but one that has to be converted into financial success.
KW: How do top managers deal with the current market situation locally?
Fundamentally, we see three reaction patterns: Many banks look at the issue through "optimizing glasses", that is, they put costs and resources at the center of their decisions. From this they develop the decision to intensify "private banking", since the margins here still appear decent, and to make their online banking more competitive while at the same time adjusting the size of their stationary branch network. A second approach is of a more strategic nature: Here, managers take a hard look at their business models in light of the current situation. In addition to ideas for optimization, they think of ways to bring the themes of trust, customer loyalty and the core brand to life. We think this second approach is more rewarding, since it goes beyond the optimization plane and considers the critical cultural side. Many loud discussions in past weeks and months have taken this dimension into account too little. There's also a third approach, where top managers think they can sit out the earnings pressure and hope the problems will solve themselves. These managers may soon have to consider a merger out of necessity.
KW: What type of consulting is currently in demand? Are the current projects driven by general factors, such as the low interest rate environment and regulatory requirements, or more by regional conditions?
The demand by savings banks and cooperative financial institutions for consulting can largely be placed into five categories. First, reflection on the business model issue, as already described: These discussions are driven mainly by the fact that banks have lost their traditional planning security. Savings banks and cooperative banks are subjected to an enormous number of external influences, caused by factors such as globalization and technological development, just to name the most obvious. Putting agility and mobility into practice count for more as a strategic answer than defining a presumably foreseeable gap, which can then be closed. By the time such a concept has been implemented, the environment has in all likelihood already changed. Top management would do well to set up their financial institution so it can react flexibly to the new situation. Putting agility into practice is a real challenge for financial institutions, since in the past they focused more on striving for security and avoiding mistakes.The second focus in on the sales side. Here, the proven models leading toward multichannel banking are reworked. But for savings banks and cooperative banks, online sales are not an easy subject, since many of the responsible people remain stuck mentally defending the stationary branch business. But building a competitive online business means being competitive against direct banks as well. Concerns about internal cannibalization of branch sales are rather obstructive. Regarding sales concepts, another aspect needs to be considered: We would do well to involve customers more and more in the development process. It helps very little when a bank or savings bank develops something that customers later don't accept. If they participate actively in the design, not only are the solutions better accepted, but many new perspectives are also brought in.
KW: What about the issue of costs ...?
Right. Thirdly, banks are looking harder again at their cost structures. But here we have to be careful: If we look too hard at processes and how to optimize them, we won't create the needed space to respond to market movements.
Banks should ask the more fundamental question about what the essentials are. What really creates customer value in a bank, and what parts of the organization bind lots of capacity but don't provide any direct added value? Put otherwise: How would you rebuild the bank or savings bank from today's perspective? Only after tightening it up appropriately does it make sense to optimize the remainder that's really needed through processes and structures. Such an approach can also motivate employees to think creatively about what the bank could eliminate without the customer feeling a loss.
The fourth aspect is help in implementing new technical concepts. Management often makes the mistake of bringing more and more new concepts into the organization without letting go of something somewhere else. Then they're amazed when new processes are hard to implement. Finally, the fifth adjusting screw is the opportunities provided by technological developments, and not just for the existing bank business, but also beyond. That also includes looking at competitors outside the industry.
KW: After the projects are executed, how can you verify success?
Without measurements, every change remains haphazard. Changes are especially effective when designed as learning processes - at all levels, including top management, executives and the supervisory board but also employees and customers. During the project work, we establish criteria together with participants that we can then use to measure change later. As a result, not only do we set the variables, but we ensure their acceptance.
KW: Can you ensure that the concepts you bring into financial institutions fit together with the collaborative projects of the associations?
These collaborative projects establish necessary and sensible frameworks for orderly change in the associations. We see our work as helping with implementation, taking into account the special local market conditions and entrepreneurial sophistication of top management. When implementing these concepts, we believe the same applies as for customer loyalty. Success is reached when the financial institutions are actively involved and so a critical mass is set in motion.
KW: To what extent do the supervisory committees of the banks you assist demand to look at your work?
For strategic changes, we of course recommend including the administrative boards or other supervisory committees. It's a smart management decision to involve the supervisory committees early instead of surprising them someday with a message of salvation. And not just the supervisory committees: To achieve success, you need to include all interest groups in the change process, involve them in the search for overarching interests, and have them participate in developing solutions to the extent possible.
KW: Do the impulses for working with consultants sometimes come from the administrative boards?
In well set-up banks, rather seldom. A strategic discussion is normally initiated by top management itself, either during the planning process or when there is a change at the top. Only in the case of mergers do the impulses also come from outside.
KW: How can you gain knowledge about the regional market of a savings bank or cooperative bank during a project?
A bank should involve customers from the region in its deliberations. By involving them, those aspects that are relevant for customer value can be seen early. Added to this is the variety of perspectives that result from what customers say. This approach is naturally supplemented with analysis of regional data. If you only listen to people in the bank itself, you'll normally hear only ideas that are already familiar.
KW: Have you changed your consulting focuses since the financial crisis?
It depends. Technology-driven tasks are independent of the financial crisis. Other topics, such as values and trust, have gained greatly in importance due to the turbulence in financial markets. Savings banks and cooperative banks, in particular, can profit from this. The loss of trust caused by the financial crisis has made life difficult for many bank employees. As bankers, they used to exercise an honorable profession, but today they're made out to be potential defrauders in the public eye. Customers see this much more realistically and don't follow this hype.
KW: What value does coaching for executives have?
If the future is no longer predictable and everything is interconnected, we need a new image of leadership. It's no longer competence about the destination that's needed, but competence about the path. This leads to a new requirements profile for executives. Developing them in this direction doesn't happen by talking theory, but only through action - and coaching is a way to open the door for that.