Other parts of this series:
Middle market bank leaders are having a debate with themselves. They need to improve their numbers. But they know that the downside of slash-and-burn cost cutting is that costs come back like weight lost on a fad diet. But the pandemic and the economic outlook make uncertainty the only thing that feels certain these days.
Avoid the slash-and-burn trap
Even so, leaders must demonstrate cost savings to shareholders. This can make slashing and burning costs look pretty appealing. But I advise middle market bank leaders to avoid this temptation. Lasting cost savings never come from frenzied, one-time cuts that focus on laying people off, introducing hiring freezes or canceling projects. This simply isn’t sustainable. After all, short-term thinking leads to short-term results. Banks end up stuck in a vicious “groundhog day” cycle of cost cutting that hurts the customer experience. And as customers leave in frustration, they take future revenue with them.
Play the long game
This is why I remind middle market bank leaders to play the long game when it comes to cost cutting. Instead of focusing on what the bank must “do without” to reduce costs, I advise them to take a broader, more future-focused view of what they can “do better” by managing costs differently. This means being strategic about cutting costs, and changing how the bank spends the money that’s saved to improve the customer experience and generate revenue. It starts with taking action in three areas:
1. Redeploy and reskill the workforce
In the early months of the COVID-19 outbreak, many national banks made a commitment that they would not lay off employees during the 2020 calendar year. It’s the right thing to do for the greater good, and it’s also right for the business. We’ve already seen banks in the middle market take this approach. They helped small business customers secure PPP loans in a quintessential “all hands on deck” effort. And it paid off. Redeploying talent protected jobs while creating opportunities to improve revenue streams and the customer experience. This approach will continue to make sense as we strive to understand the complex forgiveness and repayment plans as the economy improves.
Banks need to determine how they can make the best use of the extra talent capacity they have at this unusual time. They can reskill and cross-train staff for future flexibility—anything from improving branch staff’s digital skills to getting call center staff ready for the predicted onslaught of loan defaults. One of the best things that banks can do for their employees is to offer new skills. In fact, doing so creates just the kind of agile, flexible organization that banks need today.
2. Find answers—and actions—in data
Banks, including the middle market banks, are sitting on a treasure trove of data. Some banks are better at extracting actionable insights from the data than others. But let me be clear: there’s never been a more critical time for this market to lean hard into customer data. It offers a much-needed path through uncertainty, and is key to informing investment decisions.
Banks that do this well will combine their internal data with traditional marketing data, such as mobile device signals or geographic data. This way, they can assist customers more proactively. For example, imagine if a bank uses data to identify customers at increased risk of defaulting on their loan. Then the bank proactively develops the right interventions to assist these customers so they never get to that point. Instead of getting pushed to collections, customers get a positive experience, and the bank retains a customer. It’s a win for the customer, and for the bank.
3. Assess projects with a business-case view
When the pressure to cut costs heats up, the first thing that middle market banks tend to do is stop all projects. The irony is that this inevitably kills the ones that are on track to save the bank money and generate new revenue over the long term. It’s a long-term loss disguised as a short-term gain.
Instead of taking this hardline view, banks should use a business-case view to assess a project’s potential over time. Of course, the evaluation criteria may look different than they did before the pandemic and the current economic situation, as will decisions around resource and staff allocation and timing. Also don’t forget your customer-facing employees. They can be a secret weapon here because they have invaluable “frontline” insights that can inform these tough decisions.
Yes, there is another choice
With a strategic approach that prioritizes strategy and long-term vision, middle market banks can do more than address cost pressures. They can spend money today to make money tomorrow. Are you ready to move beyond slashing and burning? Connect with me on LinkedIn to share your thoughts.
Read How Middle Market Banks Can Play to Win for more insights on succeeding in the new reality of banking.
Your acquired insight shines through in this series of blogs Paula. Hope things are well with you and yours.