Increasingly, banks are looking for opportunities to expand beyond their traditional boundaries. For most community banks, this means venturing into unfamiliar market niches, products, or industries. The initial conversation between management and the board usually focuses on the profitability of the new ventures. Nevertheless, a pragmatist on the board should ask about the essential considerations and risks in product implementation and delivery.
This article discusses a variety of strategic directions a community bank may take and focuses on the essential areas of risk. Of course, the level to which each bank considers these risks will vary greatly depending on the strategy they choose. For example, there are vastly different considerations for an electronic banking site on the Web than there are for entering the mortgage origination business.
The board and management should conduct due diligence in four major areas before deciding whether and how to launch a new business line. These areas are strategic planning, process, people, and technology.
The most important question directors should consider is whether the new product or service makes sense in their institution’s marketplace. Often banks will begin offering new products or services as a defensive measure. For example, many bankers believe they must offer Internet banking to stay competitive, so they are jumping in headfirst without understanding what their customers need or who they are. In reality, web-based banking may not make sense.
Therefore, an institution must understand its market and its niche in the marketplace. Doing so means being responsive to customers’ needs by offering the right mix of services. Directors should ensure that a formal market segmentation is conducted to identify opportunities in the marketplace. Afterward, products and services can be strategically matched to the needs of individual markets, thus generating the desired wallet share of targeted customer segments.
Equity in the marketplace is built upon customer satisfaction, loyalty, and retention. Banks should create products and services based on two principles:
- Offer customers what they want.
- Offer customers products or services when, where, and how they want them.
Banks that are successful at developing and delivering new products and services to the marketplace have a detailed plan. This plan acts as a road map and contains all of the information about the people, process, and technology that is required to bring the bank to its destination. Reaching this goal means successfully delivering the new product or service in a profitable manner.
A well-thought-out road map should also show the business risks that could throw a curve in the plan. Identifying risks is an integral part of any business plan or strategic initiative. Banking is an inherently risky business, and directors have a fiduciary duty to ensure that all parts of a new business plan are examined. Thus, being proactive in identifying, measuring, and monitoring risks in the bank’s marketplace is a crucial part of the board’s role in product development and implementation.
The following are important areas of risk to be considered in determining whether the potential product or service will be marketable, profitable, and provide an adequate return for the risk taken:
- Has the bank adequately identified the need for this product in its market segment?
- Does this new product support the board’s strategic vision and long-term business goals?
- Is there a detailed business plan to deliver the product?
- Does the organizational infrastructure of the bank have the capacity to deliver the product?
- Does the bank have a vision for the life cycle of this new product?
- Does the bank have an action plan for product development, marketing, and sales?
- Does the bank have a formal system in place to measure progress in achieving stated goals?
Along with a full discussion of the risks inherent in the business, a detailed strategic plan should also cover three distinct features. These include the process the bank will use to manage the new business; the technology investment needed to put the business into operation; and the organizational structure and people that will be necessary to run the business.
The plan for the new business should establish the process. A process must be consistent to be efficient and effective in delivering a quality product. Each delivery channel or access point for the new product could also require different process flows based on how the customers define the ways in which they want to be served.
Process mapping is a great tool to communicate the process, human resources, and the technology involved in delivering the new product to the marketplace. Process mapping also documents the internal controls involved in the organization. It is important to remember that controls are in place to ensure that the bank’s business objectives and goals are achieved. However, controls run up expenses, and more is not necessarily better when it comes to controlling and engineering a process that is already efficient and effective. For example, if the delivery of a product produces $10, but the actual cost of the controls in the process is $100, obviously this is an over-controlled process.
The goal is to establish a process that features a balanced control structure. Consultants involved in process reengineering projects often determine that inefficient and ineffective processes are caused by a lack of communication about people’s roles in a process and the layers of controls that hinder the process.
Designing and implementing a product process must also include measurement systems. Most banks spend a great deal of time and resources in product development and implementation but fail to include measurement systems in the product processes. The bank must be able to measure the quality and success of its new venture. Management can accomplish this in a number of ways. The most common leading indicator of product success is found right on the bottom lineu00e2u20ac”in the financial reports. These indicators are important in tracking the financial progress of the product and are generally easy to establish.
Measuring quality, however, is more difficult. Some of the most common types of quality performance indicators include scores on customer satisfaction surveys and the tracking of turnaround time. In a customer-driven organization, the greatest definition of success with regard to the implementation of a new product is increased customer satisfaction scores.
It is also important to establish goals for the turnaround time for your new product or service. Turnaround time is measured from the point at which a customer makes a request to the actual delivery of the product. For example, the turnaround time for a loan is measured from the date of the initial application to the date the loan is closed and funds are disbursed. One critical point is that customers demand service on their timeframesu00e2u20ac”not on the business’s. A quick turnaround of service can be accomplished by setting up quality standards based on customers’ feedback and needs.
The following are key risk areas in designing and implementing a new product or service process:
- Has the bank established the process for delivering its product or service?
- Has the bank communicated the process expectations to employees by establishing guidelines and procedures?
- Has the bank identified the key risks and mitigating activities (controls)?
- Is the process streamlined and balanced in its control structure?
- Does the bank have a formal system in place to measure product success in achieving financial and service quality goals?
The best-designed processes must have the right people in the right roles to deliver and support the product. Bank management can accomplish this by establishing and defining the expectations of each role. Training is very important and will go a long way toward ensuring that employees deliver service consistently. Having management set expectations and follow through on how they are met is also a key component of human resources organization. If management fails to set expectations for the delivery of the product, it also fails to communicate its business goals and objectives.
To be effective in their role in delivering the product, employees must take ownership of the new business. Thus, clearly defining and communicating employees’ roles and setting up effective measurement systems will establish accountability and a feeling of ownership within the new venture.
It’s no secret that employees perform better when they have incentives. The bank’s product goals should be linked to personal performance objectives of the employees delivering and supporting the product. Management experts recommend incentive programs tied directly to the product or service. To recap, the following are key focus areas for the staffing aspect of product delivery and support:
- Does the process have the right people in the right roles to deliver the product or service?
- Has the bank provided training on the product’s benefits and process?
- Are the bank’s overall business objectives linked to the personal objectives of the person selling and supporting the new product?
New business plans should clearly define the technology necessary to deliver the product or service in a profitable and effective manner. Of course, not all new products require new technology. But in identifying the most effective way of delivering the product, the bank should focus on automating as many processes as possible.
Technology has allowed the automation of everything from tracking sales and origination to underwriting consumer and residential real estate loans with scorecard decision-making processes. Bank management should continually explore all avenues to move data and information to the right people, when they need it.
The board should always identify the cost of any technology enhancements or new initiatives for product offerings in the short, intermediate, and long term. The following questions outline the most important considerations regarding new product technology:
- Has the bank identified the technology that is key in providing the product or service and measuring its profitability?
- Has the bank identified opportunities for automating processes with technology?
- Has the bank provided training in using the technology?
- Does the new technology support better management, evaluation, and cultivation of customer relationships?
The need for a plan
What does all this mean? First, the board’s role is to establish strategic direction for new products and services. Also, new product development is a team effort. While strategy is often done in a formal planning meeting at the board level, it may also spin out of informal brainstorming sessions at any level of the bank.
However a new product is conceived, strategic planning must consider the elements and answer the questions about risk addressed above. Once the planning is complete, line management must develop the processes to integrate the new product; identify and train the people to deliver the new product; and recommend investments in technology to execute the new product. The issues reviewed in each of these areas are designed to help the board ensure that their bank’s new venture achieves its expectations.