To Grow or Not to Grow? That is NOT the Right Question
June 5, 2024
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7 minute read – In the continually evolving landscape of finance, growth is not just a goal, but a necessity for survival and prosperity. Financial institutions operate in highly competitive environments where growth not only helps to ensure but also signifies relevance and progress. Not all growth strategies are created equal, and some may prove harmful if not guided by sustainability, value creation, and customer focus. So, what types of growth are the most impactful? This blog explores the benefits of growth for financial institutions while addressing concerns of growth strategies that may not yield favorable results, emphasizing the importance of sustainable and value-driven expansion.
In times when the cost of growth is higher, successful financial institutions may elect to focus on strategies that lay the foundation for higher growth in the future rather than “forcing” less meaningful types of growth. This can come in many forms, including investments in talent and technology that better position the organization to deliver value to their future customers. This can also include outreach to existing customers and communities to make more meaningful connections today that may yield higher growth in the future. Keeping the focus on long-term growth potential is an overarching imperative.
- Enhanced Financial Performance: Growth typically leads to increased revenues and profitability, enabling financial institutions to reinvest in innovation, technology, and talent. Expansion can allow for economies of scale, lowering average costs and improving overall efficiency.
- Greater Market Penetration: Growth can also enable financial institutions to reach new markets and demographics, expanding their customer base and diversifying their sources of revenue. Increased market share helps to strengthen competitive positioning and fosters brand recognition and customer loyalty.
- Opportunities for Innovation: Growth often provides financial institutions with the resources and incentives to innovate, develop new products and services, and adopt emerging technologies. Innovation not only potentially drives differentiation but also enhances customer experience and satisfaction.
- Risk Diversification: Growth can allow financial institutions to diversify their assets and revenue streams, reducing reliance on any single market or product. Diversification potentially mitigates risks associated with economic downturns, regulatory changes, and industry disruptions, enhancing resilience and stability.
- Talent Attraction and Retention: Growth can also create opportunities for career advancement, skill development, and higher compensation, making financial institutions better able to attract top talent. A talented workforce is essential for driving innovation, delivering superior customer value, and sustaining long-term viability.
Where Growth Strategies Can Go Wrong:
- Quantity Over Quality: Some growth strategies prioritize quantity over quality, focusing solely on expanding market share or asset size without regard for profitability, meaningful impact, or customer satisfaction. Such strategies may lead to costly unsustainable growth, dilution of brand value, and increased operational risks.
- Short-Term Focus: Pursuing growth at any cost often leads to myopic short-term focus, where financial institutions prioritize immediate gains over long-term sustainability. This can result in aggressive lending practices, speculative investments, and neglect of risk management, exposing institutions to heightened volatility and possible scrutiny.
- Regulatory Compliance Risks: Rapid growth can outpace the institution’s ability to ensure regulatory compliance, leading to legal and reputational risks. Failure to comply with regulatory requirements can result in fines, sanctions, and damage to stakeholder trust, undermining the institution’s credibility and long-term viability.
- Cultural and Organizational Challenges: Inorganic growth through mergers, acquisitions, and some other indirect channels can introduce cultural clashes and organizational complexities, hindering integration efforts and potentially eroding employee morale. Failure to address cultural and organizational challenges can impede synergies, disrupt operations, and undermine the intended benefits of growth.
Common drivers of short-term focus are the organization’s key performance indicators (KPIs) if they are not aligned with beneficial growth or are not adjusted for rapid environmental change. If an organization’s growth KPIs focus only on short-term growth goals, which are frequently based on one calendar year, this might yield unintended consequences. For example, if bonus payouts depend on reaching certain near-term growth goals, that could provide a powerful incentive for focusing on the wrong types of growth. It is generally a better approach to consider growth goals that encompass a wider time frame perspective. This can allow for the natural ups and downs of the cost of growth to level out. Think of the last few years. During the pandemic, growth was excessively easy and inexpensive, but more recently the cost of attracting growth has increased dramatically. Having 3- or 5-year average growth goals can factor in this kind of overall environmental impact into account. Take the time necessary to have thoughtful discussions with the Board and Management as you consider what KPIs are best for your organization.
In conclusion, growth is essential for financial institutions to thrive in dynamic and competitive markets. However, the pursuit of growth must be guided by principles of sustainability, value creation, and customer-focus. Financial institutions must prioritize meaningful growth strategies that enhance financial performance, foster innovation, and strengthen market positioning, while mitigating risks associated with short-term focus, regulatory compliance, and cultural challenges. By embracing a balanced approach to growth, financial institutions can achieve enduring success and contribute to the prosperity of their stakeholders and the broader community.
