Overview
In an economic downturn, our instinct is to hunker-down and weather the storm. For financial institutions, this may include cutting marketing or planning expenses. However, this is the prime time to develop a detailed strategic plan. Strategic planning is not just for "big" banks. It's vital for all financial institutions to look critically at their operations and strategy. Banks that plan will be better poised to make a noticeable recovery once the economy improves, gain market share and increase shareholder return. Possibilities recently sat down with members of our Financial Institutions group to learn their insights about strategic planning.
Panelists:
Linda Koerselman, CPA | Partner
Don Johnson, CPA | Partner
Dana Ereth | Principal
Tim LeClair, CPA | Partner
Why is strategic planning more important now than ever?
Linda Koerselman: In a challenging economic environment, coupled with a changing and expanding regulatory environment, strategic planning is a process that bank boards and management teams are reviewing with renewed focus. This may be due to the fact that regulators are recommending and/or requiring some banks to develop or update their strategic plans. However, most banks recognize strategic planning needs to be current and meaningful in order to respond to changing markets, the economy and pending regulations. Most boards and management groups wish to be in control of the bank's destiny, and strategic planning is necessary for that to happen.
Don Johnson: With all the recent regulatory changes and uncertainties, it's important that bank management have defined future business model objectives. This requires a mindset that needs to be embraced by the organization as a whole, not just upper management. In order to capitalize on opportunities in the future, a bank cannot apply a wait-and-see approach. Complacency is not acceptable. Banks must generate a vision and position to capitalize on opportunities as they arise.
Are you finding more banks conducting strategic planning sessions because of regulators?
Don Johnson: Yes, but I am also having discussions with banks that are just feeling pressure. We hear, "What are we going to do to generate income and expansion to survive in the new banking regulatory controlled environment—when it hasn't yet been totally defined?" It is positive that organizations are being proactive to recognize that they cannot just sit back and wait for the dust to settle. Instead they must attempt to address the current environment and start planning for the future.
Dana Ereth: Also, most enforcement actions will require some type of "strategic" planning, which will include board of directors and management assessments.
When banks conduct strategic planning, is there a defined process they should follow?
Tim LeClair: Every strategic planning process will likely be different because of the makeup of the participants. However, most processes will involve, to some degree, a review of external environmental factors, a review of internal environmental factors, agreement on a mission statement and/or vision, identification of strategic goals, and the development of strategic initiatives to achieve the strategic goals (including identification of personnel to champion the initiative and timelines). External environmental factors include such things as your geographic market, competitors, regulatory environment and technology. Internal environmental factors include organizational structure, current operations and current bank resources (personnel, funding, etc.).
Linda Koerselman: Strategic planning is different for each bank, but most will include similar components, such as mission statement, core values, SWOT (strength, weakness, opportunity, threat) analysis, financial planning, strategic goals with assigned responsibility and timeline development, profitability planning, succession planning (management and board level), capital contingency planning, technology planning, liquidity planning , risk management planning, expansion planning, and product and services planning.
What components are essential to a comprehensive strategic plan?
Dana Ereth: Comprehensive strategic planning will address the key issues, accountability of actionable goals and outcomes. We believe the key to strategic planning is the creation of a process, not just a document. The process should identify where the organization is now, where the organization wants to go, and how the organization is going to get there.
Who should be involved in the strategic planning process?
Linda Koerselman: Generally speaking the board and the bank's management team should be included in strategic planning. Input from bank employees may be solicited through a questionnaire, so their thoughts may also be shared. I believe the directors' input is extremely important in these meetings because of their backgrounds in other businesses or industries; their thoughts and experiences are always appreciated by management. In addition, as part of corporate governance, the board has responsibility to ensure strategic planning occurs and a sound strategic planning document is approved.
Tim LeClair: This will vary from bank to bank, but typically the strategic planning team will include representatives of the board of directors and key management executives of the bank. In small bank organizations, it is not uncommon to have representation of the bank's owners on the strategic planning team. It is important that the bank's leaders have sufficient input in the process to take ownership of the plan and provide a unified focus for future operations.
Should banks develop both short- and long-term goals or a specific timeline?
Don Johnson: Yes. Short term goals achieve results as stepping stones to meet long-term organizational objectives. The strategic planning process is ongoing, always being fine-tuned in order to obtain the vision of the organization.
Linda Koerselman: Generally, about five years ago, most strategic plans looked out over a five-year period—sometimes longer. Since 2008, around the time the economy began to struggle and the economic crisis ensued, banks began to focus on shorter periods, with the upcoming 12 months being the time of greatest focus.
Dana Ereth: Keep in mind, the business environment changes rapidly and will affect a bank's long-term financial goals. It's important to develop a specific timeline for addressing and prioritizing goals.
How should bank leaders communicate a defined strategic plan to employees? Is it important for bank management to share with employees the bank's plan, vision and direction?
Don Johnson: Communication is extremely important. Without communication, the strategic plan will never be fully implemented. It takes ownership at all levels in an organization in order to reach the vision. A successful strategic plan will become a mindset that becomes part of the culture of the organization.
Communication of the plan should be ongoing with genuine passion that defines how, why and the benefits to be generated by implementing the organization's strategic plan.
Dana Ereth: Communication with the public is also important, given the current negative media coverage of the industry.
How will a bank carry out its plan? Who is accountable?
Dana Ereth: Ultimately, the board of directors is accountable, but responsibility also lies with the chief executive officer as the visionary for the bank. Goals should be prioritized and delegated to appropriate individuals with accountability.
Tim LeClair: The strategic plan should be a living document, in that it should be referred to frequently, and impact decisions made in the day-to-day operations of the bank and the management of bank personnel. At some level, everyone is responsible for the achievement of the strategic plan. While strategic initiatives will have champions directly responsible for the achievement of the initiative, bank personnel and departments should have goals and objectives that will assist in achieving various strategic initiatives.
How should an existing strategic plan be evaluated?
Linda Koerselman: An important part of strategic planning is a review of the prior year's action items. Were they completed? Were the results expected? If an action item was not completed, evaluate why not. During the current strategic planning process, the action plans should each have a timeline and team members assigned for accountability. Don't let the strategic plan get old and cold. The board, or strategic planning committee that reports to the board, should meet periodically to review the progress of the action plans.
With competing priorities, how should a bank determine its strategy?
Tim LeClair: Certain priorities will be imperative due to the impact on bank operations or environmental factors. For example, management succession might be an imperative for a bank with a retiring president. Future regulation arising from Dodd Frank might result in regulatory imperatives. However, other priorities will need to be weighed based on cost, risk, return on investment and other factors.
Are there any other items of discussion that would prove useful in a planning retreat?
Linda Koerselman: I believe the discussion of the "State of Banking" is useful. This topic can include a discussion of bank profitability, economic factors, market factors and regulatory exam issues that are prevalent within the industry.
If you have questions about strategic planning, contact your Eide Bailly representative.
