Before the Great Recession, most financial institutions were rolling along, reaping return on average assets (ROAA) in the neighborhood of 1.35 percent. ROAA nose-dived (along with practically every other economic and financial indicator) between 2007-2009, only to tick back up in 2010. From 2012 to 2016, the average ROAA was around 1.02 percent. In the first quarter of 2017, ROAA ranged from an average of .89 percent for the smallest financial institutions up to 1.02 percent for those with assets in the $3 billion to $10 billion range, according to research by Resurgent Performance.
While current ROAA is certainly much better than what the industry experienced during the Great Recession, it’s still not near enough to pre-recession levels for comfort. What’s holding the industry back?
Burdensome regulations certainly contribute to the industry’s weaker performance, but another factor is in play. Too many financial institutions are still trying to achieve pre-recession numbers using pre-recession tactics in a post-recession environment that has changed significantly.
Essentially, they’re trying to tow a 2,500-pound fishing boat with a smart car. When you’re towing a heavy load, you need extra power to get the job done, which is why you hook your boat trailer to a pickup truck. Even pickup trucks are changing the way they generate the power needed to tow these heavy loads.
While standard engines lose a lot of the energy they produce right out the tailpipe, turbo-charged engines redirect wasted energy back into the system and turn it into extra power. Today, truck makers are using smaller, but more powerful and more efficient turbo-charged engines that can pull heavier loads than the gas guzzling V8s of 20 years ago.
Banks need to learn to do the same thing. In our industry, data is the “energy” that powers modern financial performance. To compete and excel in a post-recession environment, banks need to find new ways to capture every bit of power their data can produce.
In short, banks need to start turbo-charging their performance, and more efficient use of data is the key to achieving powerful performance results.
Improve efficiency and boost power
Technology has helped some financial institutions achieve improved efficiency, but overall, banks still waste a lot of energy on data-driven performance management. In most financial institutions, the CFO, controller or entire finance department serve as aggregators and distributors of data. Having a single access point for data creates a frustrating bottleneck when other members of the organization need key information to effectively perform their roles.
The data aggregator(s) waste too much time wrangling reports and spreadsheets, and very little time is spent on driving performance. In the absence of an efficient process for capturing, visualizing and using information, most of the data being generated daily by the core system goes unused.
Banks can improve their data management and turbo-charge their performance with these five steps:
- Designate a performance management leader.
Creating a performance management leadership role helps put the focus back on performance management. This could be a new hire or someone already on board in the organization, but he or she must understand the KPIs and their drivers, and command the respect of co-workers. This person will be responsible for educating others in the organization on performance management, and for tracking and monitoring results.
- Engage and involve all team members.
Having a designated performance management leader doesn’t mean everyone else is absolved from thinking about performance. It’s imperative to create a culture that emphasizes performance management as everyone’s job, from the board room to the teller line.
Broadcasting a cultural change throughout the organization will require some education on key points, including what your KPIs are, what they mean and how what each person does every day can move the entire bank toward those goals.
- Eliminate wasted energy.
Technology is supposed to make life easier and systems more efficient, but outdated technology can do just the opposite. The days of Excel spreadsheets and report wrangling should be long over, yet many banks still cling to these outdated technologies. Migrating to a technology tool that provides everyone with easier access to more timely information is critical if you’re going to reduce energy waste in your organization.
The right technology tools will allow key users to access important data daily, whenever they want it, rather than waiting for monthly or quarterly reports generated by a finance team that should be focusing on performance, rather than report-generating. The right tool provides visibility and transparency, and creates accountability.
- Match performance goals to the market.
Because your new technology tools give you and the entire staff better, more timely information, you’ll be able to better understand the market or markets in which you operate. Use this information to set realistic, achievable goals that are specific to each of your markets, instead of expecting the same results from all your markets.
The budget process should be bottom-up, versus top-down, and involve all your market leaders in establishing goals and setting budgets. This will also help you create ownership and accountability for achieving goals.
- Get board members on board.
Board members have a fiduciary responsibility to the bank’s shareholders, but most are not bankers themselves. They will need your help to understand the bank’s goals and how their actions can help the organization meet its performance management objectives. Use technology to share data with the board, keep them informed and educate them on KPIs and what they mean.
Turbo-charged for the future
Ford is a leading manufacturer of turbo-charged pickup trucks that deliver a quality blend of performance, efficiency and power. A few years ago, the EPA announced a critical, challenging standard for the auto industry — by 2025, automakers must achieve an average fuel efficiency of 54.5 miles per gallon across their line of vehicles. Because of its focus on constantly improving the efficiency of its turbo-charged products, Ford is already rolling toward that goal.
Just as regulation is driving change for makers of turbo-charged vehicles, the banking industry must innovate in light of ever-changing regulations. Banks that focus on turbo-charging their financial performance now will be better positioned to “keep on trucking” no matter what the regulatory environment brings.
If you want to dive into this topic more deeply we discussed it at length with Heath Fountain, CEO of Planters First Bank in our webinar called “Proven Strategies for Creating a Performance-Driven Culture in your Institution”. Heath shares how he took a small, struggling community bank and super-charged their performance by building this kind of culture!