Many of the buzzwords coming from consultants and business-school professors represent management tools that can be of substantial value to all corporations. Finding the substance behind the phrases, however, can present a baffling challenge to busy managers.
The concepts reviewed today are benchmarking, best practices, de-averaged profitability, and shareholders value analysis.
These terms all center on providing a better understanding of how well your business is currently operating. Further, these techniques should offer a clear road map of alternative actions to consider.
Where Do You Stand?
Benchmarking, simply stated, involves evaluating and comparing how key practices and processes are performed today. As will become apparent, benchmarking and best practices should be looked at together.
Benchmarking can focus either on developing comparisons within your own company or with competitors in a specific business, market, or geography.
Gregory Watson of Xerox, who has written extensively on this topic, defines benchmarking as "a systematic and continuous measurement process ... to gain information that will help the organization take action to improve its performance."
For example, corporate bank departments may benchmark, or compare, the performance of their bank officers with one another as well as studying other peer banks. Areas to compare might indicate productivity or profitability performance.
Productivity Measures
Included among productivity measures could be the number of accounts managed or the number of monthly new business calls made. Typically, performance measures evaluated reflect activities that would result in an increased bottom line, for example, the amount of fee revenue generated or reductions in problem accounts.
On the retail side, teller productivity and branch manager effectiveness would be important areas to review.
After the numbers are needed up, however, benchmarking has little or no value unless management understands the "why" behind the numbers.
For example, in the case of teller productivity a number of factors affect performance, including the size and activity of a branch, its mix of transactions (i.e., simple versus complex), the level of customer service offered, and the mix of full and part-time staff.
Look at All the Numbers
In fact, unless numbers are examined carefully, benchmarking can turn into a trap. Tellers within a particular branch may be completing a high number of transactions but offending the customer base by offering only a low level of service. The raw benchmarking numbers provide only the bricks necessary to create true comparisons.
The value of benchmarking often results from the questions raised in the process. Why is there variance between apparently similar groups or individuals? Do differences result from factors outside the control of management?
Can counteracting steps be taken? What would be the economic impact of improving below-average performance? What investment is required to generate that result?
Banc One appears to be among the most successful banks at using benchmarking. In part, that results from the high degree of cooperation and collaboration among the many banks in that institution.
Managers who find themselves lagging in a certain area, such as loans or deposits generated, will regularly make direct contact with a peer in another location who has demonstrated success in that area. Such a culture leads to bankers learning from one another.
Management also needs to look outside the industry for models of performance. One of the best examples of this practice is examining McDonald's to evaluate how best to move consumers through teller lines.
Similarly, banks should also look at other financial services companies, such as commercial finance companies and brokerage firms, to consider other organizational models and compensation structures.
Twin Techniques
Best practices and benchmarking should be considered inseparable. Evaluating the best practices that exist within your company and at competitors allows you to adopt tactics and approaches proved to be effective elsewhere.
How do you recognize a best practice? Best practices are usually not hard to find, either within your own company or at competitors. Benchmarking often allows managers to determine where to look for best practices. Look first to those areas or people who are generating the best results. A reputation for excellence usually means that best practices are being employed.
Which practices should you examine? Different businesses will find value in focusing on areas of particular importance to them. Corporate bankers may need to look at which competitors are most successful in selling fee-based products to their customers.
Market Segmentation
Trust bankers may find the greatest value in understanding how their peers segment their marketing approach to various customers. Retail bankers may focus on non-branch-based product delivery.
How can you win by looking at best practices? Breaking up a business into its component parts is a key to gaining maximum value from this approach.
For example, when we look at corporate banking, we divide that business into its major components of success: sales and marketing, underwriting, account monitoring, and workout. In the above case, no institution, including your own, employs best practices in every area.
Finding out what best practices are operating in a target market creates a goal for management to meet and exceed.
De-Averaged Profitability
The phrase may seem obscure, but the concept behind de-averaged profitability is remarkably straightforward. This analytical technique is called upon as a result of senior management dissatisfaction and the limited understanding of profitability provided by a single net income number.
Detailed analysis of internal business performance "peels the onion" on profitability. For example, our customer segmentation of the personal trust area for a client revealed that most of the profits were being generated by a handful of large accounts. In fact the majority of the accounts, which were relatively small in dollar amount, lost money.
Similarly, study of retail branch networks (geographic segmentation), often shows that areas in which a bank possesses a meaningful regional presence make money. In contrast, "one off" retail branches in noncore locations are poor performers.
Clear Functional Lines
In certain lines of business, such as mortgages and student loans, a functional segmentation for a business is appropriate. Such analysis will reveal the relative value of origination versus servicing activities.
This process should lead to clear actions for management to consider. In the case of the personal trust example, management had a number of options, among them: reprice small accounts; shift marketing toward the larger, highly profitable accounts; develop a lower-cost delivery system to reduce the cost of serving the smaller customer. Depending on a particular market, all or none of these options would make sense.
As with benchmarking and best practices, de-averaged profitability analysis is only a tool. The value of the process depends on the energy and commitment that management is willing to invest in it.
Shareholder Value Analysis
Just as benchmarking and best practices are closely related, so too are de-averaged profitability and SVA.
SVA, which rose to prominence in the mid-'80s, helps companies examine themselves, much as a corporate raider might, in order to reduce the likelihood of an unwanted takeover.
Simply put, SVA requires an analysis of each business on a stand-alone basis. Based on the results of a de-averaged profitability analysis and the attractiveness of a business for a particular bank, management puts its businesses in different buckets.
Businesses are classified either as core, transitional, exit, or outright sale.
Core businesses are those considered essential and key to long-term profits. Transitional are those operating below but close to the required profitability threshold. In a sense, they are on a "watch list" during which they will become core or are determined not to be a good fit.
Exit or Liquidation
The exit category refers to businesses that have a subpar return and in which no upturn is expected. Further, either because no buyers exist or for strategic reasons (such as analyst perception), the last option bucket, liquidation rather than outright sale, will be most appropriate.
For the SVA process to be worthwhile, management must be willing to look at its businesses anew. An in-depth perspective concerning the banks' strengths and weaknesses is a requirement.
Most banks would be making a serious mistake by abandoning their branch system, but for Bankers Trust it was the right move.
Value to Expanding Banks
It allowed BT to concentrate on the institutional areas where it wanted to develop expertise. At the same time, the branches had substantial sales value to other banks that wanted to expand their retail branch network.
Exiting the branch banking business was a win for Bankers Trust, the buyers of the branches, and, ultimately, BT's shareholders.
This brief sypnosis of these tactics highlights the values they offer. These approaches offer no quick fixes, but, rather, can be a way to create a strong data base that can provide the foundation for transforming your business.
