Make Your Strategy 12 Strong

I have never been a fan of comparing combat to corporate. That is the attitude I brought to the keynote speaker at a recent banking conference I attended.

His name is Mark Nutsch, a former U.S. Army captain with Green Berets Operational Detachment Alpha (ODA) 595, a unit that was one of the first special forces units to be inserted into Afghanistan after the 9/11 attacks. The exploits of ODA 595 are chronicled in the book Horse Soldiers by Doug Stanton and the movie 12 Strong starring Chris Hemsworth. 

An elite army unit inserted into Northern Afghanistan to work with a warlord to flush out Al-Qaeda militias? Yeah, just like that rough and tumble world of hammering out a strategy over lattes and planning its execution over conference calls. Does anyone die if a deadline is missed?

This is why I resist comparing whatever it is that I do to war.

Then Mark described how their best-laid plans went to hell due to changing situations on the ground, and then I started connecting the dots. In a speech to military planners in 1957, Dwight Eisenhower famously said "Plans are worthless. Planning is everything." As soon as things go wrong, your plan must change. Much of it at least.

This brought me back to another military figure, James Murphy, former Air Force fighter pilot, Bosnian War veteran, and author of Flawless Execution. In that book, Murphy described strategy development and execution using the Plan-Brief-Execute-Debrief method used by fighter pilots to plan missions.

This method emphasizes the debrief mentality when mission participants gather after execution phases (in a fighter pilots parlance, after the mission was completed) to identify what worked, what didn't, new information, changing situations, and course corrections. Murphy's firm, Afterburner Inc., would later adopt the more expansive model below.

Future Picture is a vivid description of what success would look like if the plan was executed flawlessly. In Flawless Execution, Murph used the example of "Taking out 75% of the enemy's surface-to-air missile (SAM) capability" as a Future Picture. This might be considered a Vision in corporate terms. I tend to call it the Aspiration because Vision has gotten a bad rap. Mostly as a result of bad visions that communicate nothing to those responsible for executing the strategy on what success would look like. Murphy's example is pretty clear.

Mark from the Horse Soldiers used Commander's Intent in his speech, which is much like what Murph has as Leader's Intent in the above model. Commander’s intent is a clear and concise expression of the purpose of a military operation and the desired end state, guiding subordinate leaders in decision-making and execution. Recognizing that the original Plan would be altered as situations changed and the execution is modified.

I recently told a bank CEO, about to embark on their strategic planning process, that it is disheartening when we as consultants review the in-force plan that has not been changed since it was adopted years ago. If the plan was used as intended, there would be post-it notes and changes all over it. Ok, maybe not post-it notes and dog ears, but the document would be marked up to the point of near non-recognition than when it was adopted. 

Except for the Commander's Intent, or the Future Picture, the Aspiration, or the Vision. That would not change, or it would change minimally.

So how does your financial institution create the culture to "Win" as Murph's model demonstrates? Here are 3 ideas:

1. Have a clear Commander's Intent/Future Picture/Aspiration/Vision. Whatever you call it, make it clear where your financial institution is going from the Board room to the teller line. "Be number one or number two in every market we serve" is pretty clear. Don't let the ups and downs of the current situation cause you to lose sight of your brass ring.

2. Build an execution culture. Depending on what study you read, strategies fail somewhere between 70%-90% due to poor execution. Identify those hopefully few metrics that define success in strategy execution. Assign the tasks that need to get done in order to lay the bricks that get to your strategic objectives and vision. Name names. If Marsico is Project Leader on the "implement integrated cash management" suite by December 31st, I don't want to show up to the Management strategy update (debrief) meeting with nothing to report. Imagine if I were tasked with taking out a SAM site in the Flawless Execution example above, and I said "I didn't have time because of my day job" in the mission debrief.

3. Use the debrief method to modify the plan. I tell management teams that they should meet regularly about strategy execution and to make plan modifications. If the modifications are immaterial, a term pre-agreed upon between the Board and Management team, then make the changes and inform the Board by including the immaterial plan modification in the next Board meeting package. If it's material, then propose it to the Board and make the changes after Board approval and/or modification to the proposal. Financial institutions already do this with policies. At least quarterly, brief the Board on plan execution. You may find their perspectives extremely useful in getting to "Win." They are from varied backgrounds and professions, want the institution to "Win", and you pay them anyway. What great consiglieres! 

None of these things will lead to death if done poorly or not done at all. So I still resist comparing combat to corporate. But that doesn't mean we can't learn from the military on how they plan and execute when the stakes are so high. 

For us, the stakes are not so high. But death to our institution is a real possibility. 

~ Jeff

P.S. Mark and a few of his comrades started Horse Soldiers distillery and I intend to partake in some soldier-strong bourbon!

  

Banking's Execution Imperative

Announcer: Spain had 85% possession against Sweden and did not score.

The strategy drawn up by the Spanish side played out... mostly. What Spain didn't do is execute in their attacking third to put one in the net. It doesn't matter if you had 85% possession. The scoreboard matters.

So it goes with banking. So often management teams put in the work to design a winning strategy. They march out of that planning retreat energized. And when their strategy consultant re-engages next year to see where they are on execution, there is disappointment. The economy, interest rate environment, or their "day job" held them back. And the institution didn't move forward. They didn't execute in the attacking third.

I realize the irony about me writing on execution when one segment of my book, Squared Away-How Can Bankers Succeed as Economic First Responders was "No amount of good execution will help a bad strategy." But if we don't get serious about executing on the well thought out strategies we worked so hard to develop, the scoreboard will reflect it. And we can't expect our competition to put up a zero so we stay level at nil-nil. 

I'm working this soccer analogy to the fullest.

Here is what I mean. Schmidlap National Bank, our hypothetical community bank, researches their markets, customers, competitors, strengths and weaknesses and determine that they can distinguish themselves as the best business bank for businesses between $1 million - $10 million in their markets. So they set out to make it so.

They debate what success would look like. To be the best business bank, they must baseline what their current business customers think of their bank, its products, and its service. So a strategic initiative is to baseline through survey, and repeat at least semi-annually. To align strategy with culture, they make executive and mid-level performance reviews within the departments that serve businesses dependent on continuous improvement in how your business customers view the bank.

Additionally, the strategy team thinks they should be paid for being the "best" in terms of pricing. As such, they identify top-quartile (among market peers) yield on loans to be their aspirational goal. And again, executive performance reviews and/or bonuses are linked to achieving top quartile yield on loans while achieving market average credit quality metrics. In other words, they can't deliver yield by chasing poor credits. 

But there's more. In order to align the organization with this strategic aspiration, lender bonus criteria is changed from volume to continuous improvement in the individual lenders' spread. So now, lenders' incentives are closely linked with strategy. They demonstrate continuous improvement in customer satisfaction scores, and continuous improvement in their portfolio spreads, and they have a good year. 

Each strategic initiative, inextricably tied to strategy, serves to set the table (i.e. culture) for successful strategy execution. And the initiatives are strategic. Not "replace the departing loan assistant" or "upgrade phone system." These are business as usual "to-do's". They are someone's day job.

But for bank executives, strategy execution is your day job.

Don't be Spain.

~ Jeff

And don't forget my book: Squared Away-How Can Bankers Succeed as Economic First Responders. 

Ten percent of author royalties go to K9sForWarriors.org, who work to bring down the suicide rate among our veterans. 

And don't forget my book: Squared Away-How Can Bankers Succeed as Economic First Responders

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Thank you!

Create Operating Discipline at Your Bank

Bankers have made great strides in developing the strategies to succeed over the long-term, analyzing the customers that most value their strategic direction, and gaining the buy-in from their Boards of Directors and employees. The next challenge is to build the environment and culture where the organization moves toward its aspirational future. To create operational discipline that greases the gears toward the bank you want to be without continuous leadership intervention.

In the video blog I give one specific example of how to do that. Make your own choices on the operational discipline you need to move you closer to your aspiration.

Link in case the video doesn't appear on your device:  

https://www.youtube.com/watch?v=3BdjHvF4OAw

 

~ Jeff

For Banks, Acquire or Be Acquired Is a Hobson's Choice

Bank Director recently held their Acquire or Be Acquired (AOBA) conference in the Arizona desert. It is a well run, well attended conference. When not there, which I wasn't this year, I follow the hashtag on Twitter. But the title of the conference bugs me. It's a Hobson's Choice.

According to Wikipedia, which is how I might have written college papers had it been available, Thomas Hobson was an English horse stable owner that gave buyers the choice of taking the horse in the closest stall or none at all. Translated to AOBA, merge or die.

But is that your choice: acquire or be acquired? What if, I don't know, you want to execute your strategic plan without merging?

I often say that "it all comes down to a spreadsheet". It doesn't mean that I wish it so. I want financial institutions to build an enduring and independent future. For the benefit of their customers, communities, and employees. If you have accepted shareholder money, i.e. you are owned by stockholders, you must also function for their benefit. One reason for the continued decline in the number of financial institutions, in my opinion, is the lack of balance in serving constituencies. 

Ignore one constituency to focus on another leads to problems, or the lack of alternatives, i.e. Hobson's Choice. AOBA.

So here is how I propose you work your strategy for the benefit of constituencies while keeping your eye on shareholders at the same time.

Strategy and The Option to Sell

Build a strategic plan that is aspirational. Shoot to become the financial institution you want to be. Identify it, and set strategy to achieve it. When you target such a future, which should benefit all constituencies, develop financial projections on what success would look like, in financial terms, if you nailed it! 

How far out should you project? As far out as you estimate it would take for the full economic value of your plan to play out. This could be three, four, five or even more years. Long term projections allow management teams to make strategic investments to build an enduring future. Budgets allow management teams to think short term, and delay strategic investments.

Naturally, I have a spreadsheet for you from our hypothetical banking company, Schmidlap Bancorp. 

Full disclosure, I used Evans Bancorp in Hamburg, NY. A well run, $1.3 billion in assets financial institution near Buffalo. They are not a client, so I know no inside information about the bank. Although the base period are their 2017 numbers, the projections are my own, not theirs. But I will refer to them as my hypothetical bank name.

Schmidlap's strategic plan includes near-term strategic investments that will adversely impact their earnings in Years 1 and 2. Their strategy is to achieve a 1%+ ROA in four years. Their plan has them achieving their aspiration.

The board and management team, in balancing their duty to shareholders, developed the present value per share of implementing this strategy. The table above shows the per share results. Schmidlap currently trades at 18x earnings, and their per share price was $40.70 at last close. If they execute this plan, and maintain an 18x earnings multiple, then the present value of executing this plan is $42.97 using a 10% discount rate. Perhaps you think this is uninspiring. But we are discounting results by 10%. So this plan should result in a 10% plus compound annual growth rate in their stock price if they succeed. Note that Schmidlap pays a 2% dividend yield. So the annual total return of this plan would be 12%+, all things being equal.

Not too shabby. 

But wait. An investment banker presents to the board that Schmidlap could reasonably achieve $46 per share in a sale. A 13% premium to their current stock price of $40.70, and a 7% premium to the present value of their strategy. This is termed the "strategy gap". If the gap is beyond board tolerance levels, management could revisit their strategy and sharpen their pencils, seek a downsteam merger partner to stoke earnings growth, or some combination. If they can't bridge the strategy gap, then perhaps a sale is in their future. And the investment banker smiles.

Hold on though. By remaining independent, and assuming management does not do wild things to materially elevate risk, Schmidlap maintains the option to sell into the future if they are not successful in executing their strategic plan. In most instances you can achieve a premium in a sale due to the synergies of the combination with a buyer. The oft-cited "cost savings". 

But what is the value of that "option to sell". I have ideas, and they are in the spreadsheet below.

If, in year 4, Schmidlap was not able to achieve their strategy, and they decide to sell, the buyer and Schmidlap would split the benefit of "synergies". In the accompanying table, by 50% although merger negotiations may be more or less. In addition, those added earnings are tax effected, and a terminal multiple applied equal to the difference of Schmidlap's trading multiple, and the multiple currently prevailing if Schmidlap were to sell (23x minus 18x). This yields a per share value of Schmidlap's option to sell at $3.82.

So, the present value of Schmidlap's plan, if including their option to sell, is $46.79 ($42.97 + $3.82). And exceeds what they can reasonably achieve in a sale. 

Since strategic plans and merger multiples will always be estimates when a board makes a decision, I do believe there ought to be reasonable tolerance levels of the strategy gap. For example, if the above math resulted in less than $46, should Schmidlap sell? Probably not if within a board specified strategy gap tolerance level, such as 5% to 10%. There is so much uncertainty in predicting the future, and the bank is operating for customers, employees, and communities in addition to shareholders. 

But ignoring shareholder value... as one of my Navy captains once said, bad news doesn't get better with age.

And the AOBA false choice will be your only choice.

Do you apply these principles in strategic planning?

~ Jeff

Flawless Execution: Plan, Brief, Execute, Debrief

How do we connect our strategy to our vision? Can bankers identify, in high definition detail, the bank they want to become to remain relevant to their constituencies, and translate this future bank vision into action?

Regular readers of Jeff For Banks know I recently read Flawless Execution by former Air Force pilot Jim "Murph" Murphy by my post about defining your High Definition Destination. Far be it from me to send multiple shout-outs to an Air Force guy. The Navy has more planes (GO NAVY!). But, as the book's title suggests, Murph has some interesting thoughts on execution that I think can help banks bring vision to the ground floor.

Murph outlines how pilots plan for missions in a model represented in the accompanying picture. Could this work for community financial institutions? Let's walk through an example.

Suppose the FIs vision, or "high definition destination" is to be the number one business bank in the counties served for businesses with less than $10 million in revenue. The strategy team identifies a few Strategic Objectives that are critical to achieving the vision. For example, one Strategic Objective could be to develop a robust, yet simple suite of products designed to make the business persons' lives easier.

In the Flawless Execution model, a team would be assembled with all functions critical to the execution of the Strategic Objective present... commercial and retail banking, IT, compliance, marketing, etc. A plan is developed with responsibilities and timing. The team completes the game plan, and disperses to execute, re-assembling for regular updates and inter-dependencies.

After the product suite is developed and launched, per the plan, the team comes back together for a debrief to dispassionately discuss surprises, hurdles, miscues, and successes. This debrief is critical to organizational learning, ensuring the next Strategic Objective is executed better than the last. Yet, in my experience, the debrief rarely happens. 

Part of the reason is the increasing lack of candor in banking, and our society as a whole. I dedicated a blog post to this subject over three years ago, and I haven't noticed much improvement. How do we construct a culture of continuous improvement if we do not recognize execution flaws and impediments through a candid, yet dispassionate and impersonal debrief process?

Fighter pilots debrief this way because flaws in plan execution could end up in tragedy. Get better or risk death tends to add greater urgency than get better or have your FI relegated to the dust heap of irrelevance. 

But, as the numbers bear out, FIs need to get better at execution or risk irrelevance.  

How do you execute and do you debrief?

~ Jeff

jfb Toons: Bank Strategy Execution

Welcome to my first installment of jfb Toons, a cynical look at how financial institutions operate.

In this version, I migrate from the strategy development retreat to how that strategy is translated to day to day execution. I am occasionally confronted with facilitating plans for clients, only to come back one year later to find little has changed.

If I were to fill in the gap between strategy development and how it is executed, this is how I think it would go...

~ Jeff

The 17 Fundamental Traits of Organizational Effectiveness

I recently read Harvard Business Review's 10 Must Reads on Strategy and reviewed it in this blog. One of the "must reads" was The Secrets to Successful Strategy Execution by Gary Neilson, Karla Martin, and Elizabeth Powers from Booz & Co. I dedicated one blog post: naming it Common Sense to Successful Strategy Execution because I didn't think it was a secret. In this post I would like to write further on the subject, focusing on the 17 fundamental traits uncovered during Neilson, Martin, and Powers' research. 

The below table was drawn from research from more than 26,000 people in 31 companies. The Booz consultants distilled them in the following order of importance...

A note about the study: The Booz consultants tested organizational effectiveness by having participants fill out online diagnostic that contained 19 questions... 17 traits and two outcomes. The traits were ranked and indexed to a 100-point scale to determine their relative importance to organizational effectiveness.

In the study, 61% of respondents in strong-execution organizations agree that field and line employees understand the bottom-line impact of their decisions. This figure plummets to 28% in weak-execution organizations. For community FIs, this is terrible news, as so many rely on top-level profit reporting to determine success or failure. Does the deposit operations manager know the implications on product costs for adding a software component? Doubtful. Does the lender understand the profit implications to his or her line of business by authorizing the waiving of a fee? Unlikely.

A similar analysis can be performed on your organization as a whole, focusing first on the top traits and working your way down, ensuring your FI moves toward affirmative responses to each trait. Once completed, FIs can then incorporate the 17 traits into executive performance reviews.

Imagine an FIs board of directors using the above table to evaluate the effectiveness of its CEO. Or a CEO to evaluate the effectiveness of his or her direct reports. Simply putting the 17 traits in a spreadsheet, and responding on a five-point scale of "strongly agree" to "strongly disagree" would certainly motivate the person evaluated to create a strong execution culture in his or her organization. For proponents of the 360 review process, subordinates can also respond, giving the Board or CEO insights beyond their own perceptions and bias.

This blog has dedicated countless posts to strategy. If an FI is to promote an execution culture, it begs the question "execute what"? It reminds me of legendary Tampa Bay Buccaneers coach John McKay's response when asked about his team's execution after a lackluster performance: "I'm all in favor of it." My point is, and I do have one, when evaluating the organization and its executives on execution, it should be executing long-term strategy. That implies the FI has a long-term strategy to chart the course to compete and succeed in a rapidly changing industry.

What are your thoughts on developing an execution culture?

~ Jeff

Note: I tried to make the table as large as I could. If you would like a larger version, e-mail me.