Getting out of our own way

Two important trends have permeated the industry in the past several years:
 
·               Pulling various staff functions from multiple geographic areas into corporate headquarters in a quest for additional efficiency and process streamlining.
 
·               Investing major resources in compliance and risk management, often to the point of strangling the organization.
 
While I’m a great fan of both efficiency and compliance (see my recent article “Compliance: The wind beneath my wings”), these two trends give me serious pause.      I’d like to explain the reason why,
 
Centralization, the first trend, is a cornerstone tenet of SuperCommuntiy Banking. Effective utilization of consistent, simplified processes and centralized efficiency of back-office operations are motherhood and apple pie to me. And yet, as I look at bloated holding company structures and reduced efficiency of centralized processes, I wonder if centralization is all it was cracked up to be.
 
It stands to reason that consistency is the first step toward efficiency. Slightly divergent processes to accomplish the same end task inevitably produce confusion and waste. But, surprisingly, so does careless centralization. I continue to be amazed by how easily and unintentionally we grow infrastructure to the point of inefficiency. There are many reasons for that, which largely fall under the category “the road to hell is paved with good intentions”.
 
We build infrastructure in anticipation of good things to come: organic growth, acquisitions, technological innovation. Unfortunately, they often don’t come on schedule, which leaves us overstaffed (in theory, temporarily). As we generally know, temporary overstaffing typically turns into permanent overstaffing…
 
We also centralize in an effort to create consistency and efficiency. Yet at corporate headquarters every single exception turns into a bureaucratic quagmire in a very short time, and those multiply exponentially.
 
To sum, be careful what you wish for. Or, alternatively, be very careful how you implement what you wish for. Centralization and consistency are beautiful things. But they can be misused to build fiefdoms and back office mazes that are anything but efficient or simple.
 
The same comments go for risk management and compliance. I consider both functions not merely a necessary evil to get the regulators off our backs. They can become true partners in effective organization management and resource allocation, especially when risk-based capital is being utilized. At the same time, they can become organization strangleholds, choking every ounce of entrepreneurial spirit out of the organization and fostering inside-the-box thinking. These perils tend to occur especially when staffing in both functions starts growing inappropriately.
 
I still remember how, immediately after SOX was enacted, compliance staffs mushroomed into unmanageable proportions. You could hire a compliance person any day, but not any front line, revenue generating people, due to cost cutting measures. Many banks have been in that mode ever since, especially after being slapped with a Fair Lending issue or two, or a failed BSA exam. CEOs were committed to never go through that nightmare again, and they threw resources at the problems.
 
These tactics were time-appropriate. However, while regulatory and risk management burdens are greater than ever, we need to take a closer look at the balance between staff and line functions and headcounts. The old rule of 2/3rd of all employees should be touching customers is still an excellent one. Is your organization practicing that balance? And, if not, how can you get back into balance? And, while at it, look at your executive committee: Are at least half of its members revenue generating members? If not, the back office is running your organization, and that’s not always a healthy balance to maintain.
 
As a proud board member of three outstanding banks, I have huge respect and appreciation for compliance and risk management. They keep our collectives touches out of hot water. They often develop better ways to get the job done and generate value out of their functions. Just make sure that these two areas do not become a synonym for carte blanche. They, too, should be held accountable for productivity and value-add expectations, just like the rest of the company.
 
Before you feather and tar me, let me be clear what the message is: Centralization, consistency and simplicity are music to my ears. Compliance and risk management are not only necessary regulatory requirements but also good business and management practices. Let’s just not forget that, at the end of the day, what really counts is what returns we generate for our shareholders. If we achieve stellar compliance ratings but don’t make any money, we are not doing our jobs. A healthy combination of excellent and efficient processes and risk mitigation with strong business practices and organic growth is what I’m after. It’s too easy to favor one (either one) over the other, and, when that happens, shareholders suffer.