markets, narrowed basic margins, and nonbanks' invasion commercial banking's turf all signal that U.S. banks are losing share in a traditional market. There is no shortage of advice on how to fix this problem. Seminars and articles cover commercial lending from every direction, touting reengineering options and a wide array of system-oriented solutions. Given the banking industry's tendency to follow trends, commercial bankers often implement "solutions" before accurately diagnosing their problems or considering less trendy approaches, such as improving basic functions. As a result, a problem's symptoms are addressed but not its sources. It is easy to lose sight of the key elements of a successful wholesale business line. Banks and nonbanks alike have realized that to compete they must excel in: *Analyzing markets and defining customer needs. *Developing clear marketing strategies. *Leveraging resources (people, physical infrastructure, and technology). *Providing incentives that are consistent with desired performance. *Increasing productivity of management and support staff. *Expanding capabilities beyond traditional lending and depository services. *Taking a global view of risk management. *Using technology to enhance product offerings, productivity, and service. In practice, some banks focus on the motions of reengineering and the features of new technology while overlooking a number of existing problems. Retail bankers have worked diligently to understand and anticipate customer needs. Yet this same resource commitment has not been directed toward commercial and small-business needs. As a result, commercial bankers often meet new economic cycles, markets, products, and industry concentrations with an inadequate understanding of their potential impact on customers and, in turn, on their own business. To be prepared and to anticipate change, it is essential to develop information on the bank's strengths and weaknesses and, similarly, those of the bank's markets. Third-party resources (focus groups, surveys) and a bank's own account officers and staff often provide excellent information. However, care must be taken to confirm perceptions and avoid focusing on inappropriate strategies by collecting effective management data from bank systems and publicly available data bases. Many banks still do what they have always done: try to serve all markets through broad commercial efforts. Few can do this successfully. For most, defining or refining a strategy to capitalize on strengths is critical to improving performance. In developing a strategy, make sure to invite the participation of all areas involved in the servicing of commercial relationships. Concentrate efforts in a business area where the bank has proven competencies or where the market offers a great opportunity you can address. The day of the one-dimensional commercial lending function has passed. Given the inroads that nonbanks have made into the loan market, banks must offer other products and services to generate revenue and cement commercial relationships. Products should be dictated by customer needs, not by a standardized set of services that is forced on the marketplace. Once target markets are selected, think outside the box and innovate ways to provide service. Be open to new ideas that advancing technology can make available and to strategic alliances that can help you to meet changing demands without having to build the technology in-house. We have seen banks change position titles and assign new salaries without redefining job responsibilities. They fail to ask fundamental questions about what products and services are needed and what is the most efficient combination of buildings, equipment, people, and technology required to deliver them. Identify the roles that will make your business effective and refuse to limit role definitions to historical positions. Identify your needs for each job, take inventory of resource skills, and develop plans to align job requirements with people. You will then need to determine which staff members with training can requalify for new roles and, more difficult, eliminate those who cannot perform effectively in the new environment. Processes built over time to deal with now obsolete factors often add no value, but instead pose pointless requirements with built-in, unnecessary hurdles. Banks can quickly increase productivity by eliminating these unnecessary steps, redefining roles, and retraining staff. Some of our clients free relationship managers from tedious and repetitive tasks by building teams that include credit underwriting and account servicing experts. These teams give the business development staff the freedom and support necessary to be more productive in the market without abdicating responsibility for the credit or noncredit relationship. Most banks want to create a sales- and a customer-driven culture, yet continue to measure staff in ways that are inconsistent with these objectives. If management's emphasis is on thrashing lenders over the number of credit file exceptions or rehashing loan write-ups over nonessential information, then the lender's "incentive" is to remain internally focused rather than sales oriented. Developing effective measurement systems and incentives depends on available management information and how well you apply these data to create sophisticated and accurate measures. Set clearly defined goals, measure performance against them, and base your decisions to reward, penalize, or dismiss staff on measurable results. During reengineering, some banks look at specific segments of the credit process and fail to integrate all of its activities. Commercial banks that are unwilling to change traditional credit administration and risk management requirements have experienced less-than- spectacular results after reengineering. If reporting, audit, and documentation processes remain sacred cows, practices that add no value may continue under the guise of maintaining control over credit risk. When examining the process, ask what value each step contributes to the management of risk or service to the customer. Be willing to eliminate the ones that add no value. Because of past asset-quality problems, requirements for documentation, updating loan grades, conducting loan reviews, and reporting problems have been established. But meanwhile, obsolete administrative requirements have not been eliminated. Cumbersome, distracting procedures and a loan-by-loan risk management focus hamper the ability of lenders and administrators to effectively anticipate and manage the effects of the next economic or industry downturn. Lenders tend to blindly follow procedure instead of examining the process and its risks. Focus your efforts on understanding the current portfolio and how it compares to the risk tolerance defined by the bank and the marketplace. Then determine how to reposition the portfolio to meet changes in your strategy and environment, and find out where the greatest potential for future problems resides. Finally, design management reporting requirements to facilitate forward- looking management of portfolio risk, and stop treating all loans as equal. Precious capital can be wasted on the latest technology if banks do not understand how it will support the commercial banking process. Recently installed networks, mainframe systems, and personal computers are overused, not used at all, or underutilized for many reasons: *Failure to recognize change management issues during installation. *Failure to anticipate training requirements or to match training to needs. *Failure to link the appropriate technology to the actual needs of staff. *Failure to let the needs of customers drive the technology. It is easy to be dazzled by one feature of a relationship management or loan pricing software only to find out later that it lacks more important features. Determine your needs first, then acquaint yourself with available solutions and consult with banks already using them. Determine whether an unintegrated solution, though cheap and fast, is as good as an integrated solution that will enhance your existing processes. When deciding, include all areas involved in the commercial relationship to ensure consensus among lending and deposit service areas and their supporting systems. Solutions should be considered collectively as part of an overall program. Each bank's needs, however, will dictate the emphasis on individual components. The challenge for commercial bankers is to recognize the order in which performance issues should be addressed. Development of a clear-cut strategy, based on good market information, is an essential first step. Beyond that, the banker must stay focused on the factors we have presented. The urge to jump on the latest reengineering or technology bandwagon can be overwhelming. But long-term success can only be achieved by those who understand customer needs, provide services efficiently, and anticipate changes in the market from both a customer needs and a risk management perspective. Mr. Murphy is a senior consultant in the financial institutions group at A.T. Kearney Inc., Chicago. The firm is a wholly owned subsidiary of Electronic Data Systems Corp., Dallas.
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