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Five Sticking Points To Building Process Efficiency

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6 minute read – The following blog post was written by c. myers and originally published by CUES on June 5, 2023.

Big recession?  No recession?  Rising cost of funds?  Regardless of what’s happening in the environment, building a more efficient organization brings big benefits, including cost control, and better employee and customer experiences. 

A good percentage of strategic plans include efficiency-related initiatives, many of them geared toward embedding process improvement into the culture, or creating a culture of continuous process improvement.  If you’re on that path, here are a few of the sticking points we’ve observed that you’ll want to avoid: 

1.  Executives not knowing when to hit the gas and when to back off – Executives know that they play a key role in shifting the culture to one that continuously thinks about and acts on building efficiency.  They need to clearly and consistently message the objectives of the culture change and their support of it.   

But when it comes to standing behind their words with actions, we see some executives struggling with too much or too little involvement.   

Initially, executives should be involved in deciding on the organizational changes that will serve as the foundation of the culture change (see #5) and they should ensure that the changes are adhered to over the longer term.  And high-impact or high-volume processes will likely require deeper executive involvement.  But beyond that, the role of the executive suite is to ensure that process improvements support the strategy and don’t, for example, fly in the face of personalization, customization, or customer service in the name of efficiency.  Let go where you can, gradually if necessary – partly to build trust and capacity and partly because most executives don’t need anything extra to do.   

2.  Expecting a few individuals to make it happen – Hiring or training some people with expertise in process improvement is part of the foundation for building a culture of continuous process improvement.  But it’s only the beginning.  Having your process improvement expert observe processes, interview individuals, and prescribe changes will miss the mark.  To truly understand processes, why they work the way they do, and get buy-in for change, facilitated group discussions that include the key players – doers, managers, and systems experts – will uncover far more opportunities and creative solutions.  Not only will this result in better processes, it also exposes more team members to process improvement which causes them to think differently about their processes, leading to cultural change.  

3.  Believing that technology is THE solution – In the end, just about every efficiency improvement an organization wishes to achieve involves human behavior.  Focusing first and foremost on engraining the necessary mindset and habit changes in your people will result in positive, high-impact and sustainable gains that will permeate the organization.  Technology does deserve focus during process improvement, and while you may determine you need different software or modules, how the software is used is often the area that holds bigger opportunities, which can go a long way toward getting a better, faster return on your technology investments.  The process steps that happen outside of the software also typically offer major opportunities for efficiency gains. 

4.  Not enough discipline around the power of the blended mindset – We often see organizations take an either-or approach to process improvement – either process improvements are all huge, beastly projects, or they are a series of one-off quick wins.  Yet the powerful impacts come when they can draw on both.  Not all improvements require an extensive formal process, but you shouldn’t shy away from those because you don’t have the time or energy to step back and really challenge the way things are done, especially for high impact or high-volume processes like getting a consumer auto loan or opening a new account.   

The key is clarifying what a quick win looks like and when a more comprehensive approach is called for through intentional conversations and the creation of working agreements.  Incremental or quick win improvements can provide speedy relief to employees and customers with a minimum of fuss.  At the same time, viewing an entire process from start to finish, mapping all the steps, and revamping or reimagining it from the ground up with all the right players involved can bring about transformative change and efficiency.  Effectively incorporating a blend of approaches keeps the organization moving forward with quick wins while leveraging the more transformative process improvements. 

5.  Lack of a good process for improving processes – That sounds circular, but it’s important to establish a good process that ensures sustained dedication to process improvements, which builds the culture.  Highly important is the devotion to doing a certain amount of process improvement, ongoing.  Many accomplish this by holding a few project slots for process improvements every year.  Also, key are dashboards or similar means of tracking progress, maintaining a list of staff suggestions, prioritizing which ideas will be tackled first, and scheduling periodic evaluation of key processes.  The process should also include monitoring previous improvements to make sure the efficiency gains stick, as well as celebrating successes and continuing to keep process improvement top of mind in the organization. 

Being good at improving processes is necessary, but it takes organization-wide behavioral shifts to build a culture of continuous process improvement.  Building a more efficient organization can help control costs and enhance employee and customer experiences, regardless of the external environment.  Don’t let these pitfalls hijack your progress.  Engrain these changes and establish a culture of continuous process improvement to reap the benefits of greater efficiency and productivity. 

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Monitoring Future Risk Is More Critical Than Ever

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4 minute read – Risk often comes in pairs, and right now, interest rate risk (IRR) and liquidity risk are the dynamic duo putting pressure on financial institutions’ balance sheets.  In looking at paths to address these risks, the options don’t always look that great.  In some cases, they may create other issues with earnings and capital and impinge on the organization’s ability to move forward strategically at the needed pace.   

Giving the balance sheet time to heal 

An approach to consider is to be patient and let your balance sheet heal.  An immediate concern from decision-makers might be that being patient looks an awful lot like doing nothing.  They worry that examiners won’t like it.  Also, the Board and leaders may not be comfortable being passive and feel an understandable desire to “get ourselves out of this situation quickly.” 

But the key is that being patient is not doing nothing; on the contrary it’s an active process that requires analysis and monitoring.  Given enough time, many sources of IRR and liquidity risk will resolve themselves, but leaders need to understand whether they have the time.  This requires a two-step process that includes effective analysis that illustrates whether giving the balance sheet time to heal is a viable option, and beefed-up monitoring to ensure the healing is on pace as the future unfolds. 

Step 1:  The time horizon for pain – target financial structures bring clarity 

To start, see what the interest rate risk and liquidity position will look like at a point in the future if the budget comes true.  The budget contains detailed projections for at least the next year or two for a reasonable view into the future.  Using year end balances, model a target financial structure that shows the IRR and liquidity positions one or two years down the road.   

With this information, decision-makers can evaluate whether patience and giving the balance sheet time to heal is a viable path:  How does the model’s assessment of IRR and liquidity look at that point in the future?  Is the financial institution better prepared for market rate volatility, or did the financial institution increase its risks?  How do the results compare to our policy limits and guidelines?  How satisfied are we with the direction and speed of progress?  Understanding that positioning today and weighing options with the Board and Management are incredibly valuable.   

Step 2:  Strong ongoing analysis and monitoring 

After the target financial structure analysis, regardless of whether the decision is made to be patient or take action, closely monitoring the IRR and liquidity situation of the current balance sheet as the future unfolds is critical to make sure the results are following your desired path.   

Things are happening fast.  Expected changes in interest rates are still fluctuating, which means that a range of interest rate environments should be modeled for better decision-information.   

Given how quickly the environment is changing, many institutions are moving to beef up their monitoring of current IRR and liquidity to monthly simulations, sometimes just for a short period of time, to make sure they are staying on top of their risk.  As part of monitoring the situation going forward, returning to Step 1 periodically for an updated view of the time horizon for pain may also be called for.  Strong ongoing analysis and monitoring allows decision-makers to understand their risk position sooner and move quickly to identify options and take action as needed. 

In addressing the one-two punch of liquidity risk and interest rate risk, careful evaluation of the available options, including the option to give the balance sheet time to heal, is the necessary first step.  A wrong decision in this challenging environment can be very costly, both in terms of dollars and opportunities.  But on the flip side, the impact of good decisions is potential material improvement in earnings, risk, and strategic progress.  It is necessary to look beyond traditional methodologies to address this risk environment and provide the intel you need.  Analysis that looks to the future to help in understanding the time horizon for pain, along with frequent monitoring of the actual changing risk profile, are critical pieces of decision-information that are invaluable when making the best decisions for your institution. 

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Taking Steps Toward Cultivating a More Strategic and Aligned Board

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4 minute read – The world is becoming more complex by the minute.  As this happens, many Boards are stepping back and asking themselves how their role should continue to evolve to best help the organization.  Many Boards are expressing a desire, as well as realizing the necessity, to go to a more strategic level to continue to serve the organization in the appropriate role.  One of the challenges and questions for Boards is where and how to start that process. 

One way to get started is by working to align the risk tolerance of the Board and Management team in light of the organization’s strategy.  The questions and discussions around risk are not always connected to the thinking and discussions around strategy.  As a result, and quite unintentionally, the strategic direction and potential opportunities are viewed separately from risk.  On top of this, there can be a lack of clarity on risk tolerance which creates misunderstandings and can result in strategic confusion and missed opportunities.  An example of this is around credit risk: 

  • The Board and Executive team agree that the organization should expand its lending into lower credit tiers.  The opportunity being discussed is to make more loans at higher yields and serve a broader range of customers.  There is acknowledgment that there is more risk in the lower credit loans, but clarity around the Board’s and Executive team’s appetite for this risk is just not achieved.   
  • Down the road, credit losses begin to occur.  The Board becomes concerned and starts asking questions about specific losses and the level of realized risk.  The Executive team is confused by the concern, thinking there is agreement on the strategic direction.   

This represents an ideal opportunity for Boards to be more strategic while gaining better clarity and alignment with Management.  Let’s rewind:   

  • As the strategic decision is reached to expand lending into lower credit tiers, Board and Management have deep conversations around the expected risks and rewards of the strategy.  Strategic Financial Planning can play a key role by showing a long-term view of this strategic path and the quantifiable positive and negative impacts.  Some what-ifs help frame what it could look like if the risks are greater than expected or if the rewards do not fully materialize.  This gives everyone a better idea of the range of changes that could be seen.  The group might discuss trigger points for when the strategy would need to be adjusted.   
  • The Board asks questions until they feel comfortable with a range of impacts and timing.  The major points of the discussions are documented. 
  • Down the road, credit losses begin to occur.  The Board monitors the situation; they may ask for the documentation related to the decision.  The Board views the realized risks in connection with the strategy along with its positive impacts and feels comfortable as long as the results are within expectations.  The Board and Management celebrate success in having carried out the strategy. 

This example illustrates a process for a new strategy, but existing strategies and risks should be discussed regularly, as well, because the environment is constantly changing.  In keeping with the example, a recession will likely cause credit risk to increase, so a conversation on the changing situation will help keep Board and Management aligned. 

As Boards endeavor to be more strategic, reaching clarity on risk tolerance and connecting it to strategy is a great place to begin.  Viewing risks through the lens of the strategy can help elevate the conversation and put it into context.  Management should supply relevant information and Boards should ask questions until they fully understand the reasons for and expected magnitude of impact, the speed of change, and the anticipated benefits to the organization so there are clearly documented points of reference when the risks are realized.  Reaching this alignment helps the organization move forward strategically as it takes advantage of opportunities while managing risk. 

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Could Your Deposit Pricing Strategies Today Impact Your Brand Image in the Long Term?

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6 minute read – Most financial institutions have, for many decades, utilized a strategy of lagging deposit rate increases when market rates rise.  However, with the increased competition for deposits at a time when it has never been easier to move funds, this strategy could potentially prove costly in the long run.  When determining your pricing strategy today, it is important to consider the effect on your brand image and how that might impact your business in the future.  

Decision-makers may want to consider a page out of Goldilocks’ approach with the three bears.   When trying to make decisions, consideration was given to options that were “too hard, too soft, and just right.”  Applying that same approach to deposit pricing in today’s environment might lead down a path with cost of funds perhaps being drastically higher, stable, or moderately higher.  The near-term financial implications of changing current deposit rates can be simulated in ALM models relatively easily.  However, it is imperative to consider the longer-term implications (Note that modeling the longer-term financial implications is critical, but some ALM models do not capture customer behavior well when modeling the longer-term implications.  See our recent blog posts on this topic here).  

It is important to dig deeper beyond the near-term financial ALM implications of any potential rate moves.  This includes understanding how your deposit pricing strategy potentially impacts your brand image and value proposition.  For many financial institutions, their value proposition has been heavily tilted towards offering more value on the loan side of the balance sheet.  This was part of a protracted effort to attract loans during times when it seemed relatively easy to attract deposits which tended to stick around with little effort.  With rates up significantly, back to the highest we have seen in 15 years, the tables have turned making it much more difficult to attract and retain deposits.  This is particularly true as higher rate offers are abundant, and technology has reduced the friction and time required to move funds elsewhere.   

Going back to the Goldilocks analogy, keeping deposit rates low perhaps requires the least amount of effort and may help to keep your current cost of funds low, but could also lead to driving a portion of your customers away in search of higher rates elsewhere.  Provided the portion of those leaving is relatively low, this may be a financially attractive path.  However, it is also important to think about the potential longer-term impact on your brand image, if your customers think of your organization as having below average deposit rates.  On the other end of the spectrum, if you elect to increase non-maturity deposit rates rapidly and significantly in response to market rate movements, it might do wonders for your brand image, but will drive your cost of funds higher and hurt your earnings more quickly.   

Much like Goldilocks experienced, the challenge is to find that “just right” path.  This requires offering a solid deposit value proposition to your customers that helps to retain them while managing your cost of funds in a manner that maintains sustainable earnings levels.  This may require a trial-and-error approach to test different deposit strategies to find that “just right” path.  

Most financial institutions haven’t had to dedicate much strategic thinking to the subject of deposit pricing and its impact on their brand image in over a decade.  It’s time to reinvigorate those skills.  As any good marketing executive will tell you, brand image is an extremely important factor in the business world.  A strong, favorable brand image can create a resilient client base that chooses to conduct business with you, even when better rates might be available elsewhere.  There are, however, limits to the potential impact that a favorable brand image will provide.  An equally important consideration is that if that brand image is tarnished, it can be very difficult to recover from.  The process of restoring a damaged brand image can be extremely costly and time-consuming.  

Problem:  Your brand image could suffer because of a poor deposit pricing strategy.  According to Harvard Business Review, there are many factors that influence brand building/maintaining, and some important aspects include: functional benefits, experiential qualities, regard, and value proposition.  Some of these factors may take an adverse hit if the approach to offered rate levels is well below member (customer) expectations. 

Ask yourself: 

  • How might our value proposition to different segments of our key target markets be impacted by our deposit pricing approach? 
  • If we elect to maintain very low deposit rate levels, how could that influence the “regard” aspect of our brand image?  
  • If the functional benefits of our deposit products fall materially below market expectations (e.g., low rates), are the experiential qualities of our financial institution strong enough to sustain the strength of our brand image? 
  • How significantly might our approach to deposit pricing impact current and future liquidity? 
  • How significantly could our cost of funds be influenced in the short and long term? 

This blog only covers some of the initial considerations that financial institutions are facing in today’s environment.  Please refer to our blogs and podcasts on decay rates, deposit migration, and liquidity for more ideas.     

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From Lost to Found: Small Practices for Rediscovering Your Creativity

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3 minute read – “Global surveys have revealed that organizational leaders are mostly satisfied with their employees’ content knowledge or technical skills.  However, what they complain about is the lack of creativity in many otherwise qualified graduates.” [Source]

We often hear, “I used to be creative, but my creativity has disappeared.”  Lucky for you, unlike Amelia Earhart’s airplane, the Fountain of Youth, or that second sock in the dryer, creativity isn’t lost forever.  In fact, research shows that creativity is a skill that can be stretched and strengthened like any other skill.  The following tips are small practices that can be incorporated into your daily life in order to build your creativity, no matter how lost it might feel: 

  • Understand the problem.  This may require some digging.  We find that asking “Why?” again and again (five times usually gets us there) can be helpful in rooting out the deeper issue so that our brain power is focused on long-term solutions rather than quick fixes.  You can also make a habit of looking at situations from multiple angles and perspectives to help you gain greater understanding.  
  • Silence your inner critic.  One of the greatest hindrances to our creativity is judging ideas as being good or bad.  Avoid evaluating thoughts while in the creative process; give yourself the opportunity to associate freely. That “bad” idea may lead to a viable solution.  Notice how you feel when you don’t criticize your thoughts, allowing them simply to be.  
  • Detach yourself from emotional investment.  Our inner critic is often motivated by constructs of presumed values – the world outside ourselves tells us there are right ways of thinking of things.  Put yourself in the mindset that there are infinite ways of looking at a problem and allow yourself some curiosity.   
  • Stop thinking, give yourself space.  When you’re feeling stuck, go for a walk, take a shower, have a kitchen dance party.  Taking space from conscious awareness can enable the unconscious to work hard at reassembling information in new ways, discovering new ways to piece together puzzles.  
  • Surround yourself with ideas that inspire you.  Art, music, books, and people can all be sources of inspiration.  Exposing your brain to things that inspire you can lead to unearthing ideas you never would have found otherwise.  However, looking at only the parts of the world that give us the warm and fuzzies isn’t enough; seek out art, music, and people that challenge your thought process and biases.  Open yourself to the possibilities of the unfamiliar.  

There is no one way to foster your creative thinking; like most skills, it takes practice.  It can be uncomfortable breaking out of the regimented thinking we sometimes find ourselves in, but small steps make a difference so dare to try something small today.