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If you're looking to implement technology within your bank, this is the episode to listen to. Dallas shares lessons he's learned from bank technology implementation projects that didn't quite go as he'd planned.
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Jim Young: Hi welcome to The Purposeful Banker, the podcast brought to you by PrecisionLender where we discuss the big topics on the minds of today's best bankers. I'm your host Jim Young, Director of Communications at PrecisionLender. Today I'm joined again by Dallas Wells our EVP for International Operations. We're going to talk about a pair of important lessons that banks quite frankly a lot of businesses should apply to innovation. One of them comes from the good folks at Bain via their blog. The other comes from, well Dallas' personal experience.
So let's start off first with that article from Bain on their blog. It's by David, I think it's, I'm going to go with Michaels here. Could be Michelles. Apologies to David if I get the pronunciation of your name wrong. But it is called Never Waste a Good Transformation. Dallas, I'll be honest with you, my first impulse on this was the main point of this was you should put your best people on your most important innovation projects. That seems like it should be obvious. Why do you think they felt compelled to write about this?
Dallas Wells: Well, I'll tell you they probably run into some of the same things that we have which is they get into a lot of these big change things for large complex organizations and it seems obvious but very few actually do that. So my guess is they felt compelled to write this out of frustration in that they've been in a lot of projects where they had what I would call the B team. I think the big story or the big picture idea here is that businesses get busy running their day-to-day stuff and so when there's a new project some businesses will put their very best people on it and others will say well we're too busy doing this other really important stuff. We have to make this quarter's number. We have to land this deal, whatever the fire of the day. And so whoever's not all that busy is who they put on the project. And if you're not all that busy in a business that's scrambling, there might be a reason for that. So I think that's their reasoning.
Jim Young: That is interesting and it ... it's a very good point because we deal with it here too.
Dallas Wells: Yes.
Jim Young: Over on our marketing side we talk about trying to build the engine while you're flying the planes kind of is the phrase that gets thrown out a lot. And quite frankly it doesn't matter how well you build a cool engine if your plane has just crashed into a hillside. It is a bit of a conundrum. It seems like one thing you mentioned was sort of this quarterly numbers. I wonder if part of that is do you have to maybe say look we're going to bite the bullet and take some short-term pain on our returns because this is the long-term play and maybe is that an issue even more for a publicly traded bank that doesn't necessarily have that luxury?
Dallas Wells: Yeah, I think that's a big part of it is a short-term focus versus a long-term focus. Being willing as a management team, as a board, as investors to say, okay we're going to have what may be an ugly quarter even an ugly year because we feel like there's some really important things that need to happen and we're going to focus some time, attention and resources on them. So being publicly traded is a part of it although there are publicly traded companies out there that say or even don't say, they are very unapologetic about it, just we're going to lose money for a while. I think Amazon is the classic example of-
Jim Young: A long while.
Dallas Wells: Yeah, for the last 20 years now have just, "We're not going to make much money." And at first investors gave them a lot of flak for that, but go back and look at their returns over those last 20 years. I think they might be onto something. Jeff Bezos is even though they were publicly traded and his personal wealth was tied to that stock number, has never cared about hitting a quarterly number just for the sake of hitting it. It's how do we make this business the best that it can be. And I think banks, even ones that are not publicly traded get really almost obsessed with the number, the quarterly number. They have good intentions in trying to align management's performance and their pay. When everybody's paychecks depend on it, you get what you pay for.
If you're paying for hitting the quarterly number, or hurting the annual growth number that's what everybody's going to spend their time and attention on. If you come to them and say, "Hey would you set that aside for a minute because I've got this really cool new widget I want you to help get up and running," they're going to say, "Wait, that's not what you pay me for. That's not how I make my bonus." And so it's a little bit about incentives. It's a little bit about corporate culture and some companies just do it well and others don't.
Jim Young: Yeah that's a good point because I always initially frame that question in terms of the external view of a business or in our case as a bank's performance. But there is also is absolutely that internal incentivization ... is that a word just ... if not-
Dallas Wells: I think you made one.
Jim Young: Yeah, exactly. That's what podcasts are for. But I'm also curious too though, when you're having that discussion and you're trying to weigh these things what matters, how much does it matter, do you find sometimes in your observations dealing with banks that maybe sometimes it's just hard for some of them to grasp how much the innovation matters? They've got this concrete reality in front of them of the day-to-day business.
Dallas Wells: Yeah.
Jim Young: And then you've got this sort of maybe abstract thing of this thing is going to help us in the future sort of thing?
Dallas Wells: Well you know we had an interesting conversation with a banker, of course we won't name names. But this was I don't know a year or two ago maybe. Carl was actually, Carl Ryden was a part of this conversation and you know how Carl gets very excited so he was all wound up and-
Jim Young: I'm not familiar with this, huh, interesting.
Dallas Wells: It was one of those it was a 10-minute conversation that became a two-hour conversation as Carl got all spun up on what was coming and how exciting it was. And the banker that he was talking to was getting it. He was nodding. He was following along and he said, "All that's great but I'll probably retire in five years. I'm not going to be here to see that stuff."
Jim Young: Ouch.
Dallas Wells: And so when you have a management team that is entirely in that bucket, what is their incentive to take a risk, go out on a limb, invest and maybe damage the last few years of their earning ability or however you want to look at it. Their legacy even. If they get it wrong, why rock the boat? Why not just ride it out with what's working and let the next team to come through deal with all those things that are around the corner if you're not going to be here to see it?
So, that's another interesting piece of it that I see a lot of banks struggle with because they're just like, "That's not my problem." The problem is is of course you can't just flip a switch and the shiny new innovative thing is there. It takes some time to get those things in place and there's a lot of banks that are not waiting around. The question is when do you miss your chance and when do you get left behind?
Jim Young: Yeah, absolutely. Not to get too much into a generational thing but I think the group or the demographic that gets innovation and is more at home with the concept of that changing of that sort of thing it would be the millennials coming. But A, banks are having a hard time recruiting them to come into banks maybe in part because of some of the way they look at innovation. And B, the ones that come in aren't necessarily ready to ...
I think there's this sort of middle ground group that from my experience the bankers that I talk with that seem to get it are that middle ground. They've been around long enough to understand how banks work and the difficulties that come with trying to change things. But they're still in touch enough with the tech revolution to get what the impact could be down the line. I think maybe that's if you're at that would be sort of one of the pieces of advice to your bank is to try to ... those people are there. Try to identify those people and that's probably some of the people that would be on your A team when it comes to innovation.
Dallas Wells: Yeah, I think you're right.
Jim Young: All right so now let's turn to you, Dallas. Sorry if it sounds like I'm taking a small bit of pleasure in this is because this is actually a bit of a mea culpa post that Dallas wrote on his LinkedIn account. I would encourage you ... he started to do a little bit more of this as he tries desperately to evade having me edit his posts. Dallas has started to write some stuff on his LinkedIn account so if you have a chance I would recommend following him on there.
But this piece was about you kind of went ... about innovation but you talked about it in terms of something that you did that kind of went awry and a lesson you learned from it. Let's start off with your attempt to get a client to change the way they were calculating their loss given default grades.
Dallas Wells: Yeah, so we jump right into the weeds there. I think listeners that are bankers will understand that but I'll frame it just a little bit for those who may not be. Banks do loss given default a lot of different way. So loss given default is if a loan goes bad, how much are we actually going to lose in that scenario? Most small banks and all banks not that long ago would lump all of that into their risk grade. If you were a risk grade three, part of that was how much might we lose if this goes bad?
The newer trend and what all the larger banks are doing and what I think every bank will have to do over the next couple of years especially around CECL implementation, is start to break apart the probability of the default and the loss given a default. Those are really two different things we're trying to measure and so they each get their own grade. There's a loss given default rating system in a lot of banks. In this particular project and the other context I'll add is kind of ... and maybe this is my excuse for how I went about this. But I think it's important the context and the empathy part that we'll get to in a little bit, it's important.
You've got two different groups that are working on this project. On one side you have the tech company that is bringing their software and helping this bank to implement it. So this is us. This is PrecisionLender and we're growing like crazy, right? We've doubled every year for the last several years which means we've hired a whole bunch of people. We have new clients, larger clients, things are more complex. We have a lot more engineers working on writing code for us and putting incredible new things into the product.
The pace of change can be a little bit mind boggling and new people that come on you can see it takes them a little while to acclimate. So we get used to you put a process in place and you're solving what is usually a ... something has gotten a little wobbly, right? We're growing fast enough that this thing needs to be changed. We put some duct tape on it. We fix it up a little bit. We say all right that'll work for a little while.
Then a year down the road probably a new person is now doing your role and you look back and they're just doing a gut rehab of everything you just finished not that long ago. They're pulling it out, putting something new in. And because of the pace of chance, that's perfectly okay. Everybody knows that what you did was a temporary fix and it doesn't mean that it was shoddy work just that it would only last so long. And the fact that somebody's having to pull it out and redo it means what you did was a success, right, because we've not outgrown it. You enabled the company to move past it and now it's time for something new. So that's on one side.
On the other side you have the banks. Banks are not growing that fast. They can't grow that fast it's just not the nature of the business. So you've got a bank, if it's doing well and it's growing maybe between 5 and 15% a year, you grow the workforce by less than that because you're getting some economies of scale and the processes work. They're proven. It's a profitable business. And so to take something out, to redo something, you have to have a very, very good reason to do that. And so in a bank if you see somebody doing a gut rehab of a process you put in place a year ago, your job may be in jeopardy because that means you messed it up pretty bad.
So those are the two sides that come at projects like this and I think it's why a lot of banks end up struggling with getting these things implemented and why they have some disagreements with their vendors because the vendors promise a lot of speed during the sales process and they get into it and it gets bogged down in the way banks have to work and those two sides now both of them aren't too happy with the outcome. Okay, so that's my long back story.
Jim Young: I was going to say also another version of your back story could be found probably on your LinkedIn profile. We just follow your job title changes here at PrecisionLender here.
Dallas Wells: Yeah, I laughed at that at the introduction. It feels like every time we do this you call me by a different title And that's, yeah the nature of it.
So all that being said, we come into this project and the bank has a complex way of assigning loss given default. So as they price a new deal they have to figure out what's the risk grade? What's the LGD grade? How does that translate to the overall risk profile so we know how to price the deal? And for this bank there was actually multiple different models involved that they would plug stuff into to get a result back out of.
One of those was this LGD thing and they had a I don't know, 120-page manual that walked employees through here's how you assign it given the type of customer and the type of collateral and where the collateral is and how easy is it for us to get to and all very valid things that do help determine what that number actually is. The problem is if you're negotiating with a customer you're trying to structure a deal on the fly, that's really hard. And what comes out of that is a letter grade so it would be to make it up, an LGD grade of D. It tells us what the loss given at default is.
So the banker is trying to work with our customer and they're saying well if it's a D it's this and if it's an E it's that. So they're speaking a foreign language to their customers. That means nothing to them. What their customers knows is I have accounts receivable and inventory that are going to be my collateral for this loan and I have to decide how much of that stuff I'm going to give the bank as collateral. That's what we're really negotiating.
And so my, what I thought brilliant idea was is look we can probably come pretty close to short cutting that 100-page manual in the separate model. Let's just have the customer and the banker talk about how much inventory and how much collateral. And on the bank end we'll have some math that translates it pretty close. We'll figure out what the accuracy has to be but let's say we want to get it within 90% of what your final number's going to be. We'll do that for preliminary pricing. Sometimes we'll be high. Sometimes we'll be low. But on average we'll come out pretty darn close and so if it ends up being a slight, a different letter grade sometimes on the back end once you do your full analysis, then so be it, right?
I want to roll this out to the banks. I convinced the pricing team that's doing this. "Okay, we're willing to try that. We think that makes sense." So I feel like it's a big victory. We get ready to demo it to their relationship managers and I did all this work on their behalf. I was really proud that they were just going to love this and I was going to get the hero's welcome. I demo it and they absolutely hated it. They couldn't stand what I'd done. And it was because they had gotten so used to the old way they did it. They thought in terms of those letter grades. They really understand how the system worked and they had some doubt.
Well what if I guess that it's a D and it ends up being an E, aren't I going to get in trouble? And I'm not willing to take that risk. So what they were doing is they were putting it in PrecisionLender and then they were going back to that separate model anyway and double checking it and most of the time it was right. And sometimes it would come out slightly different and they were like, "See this things broken."
So it was a known error that we were putting in or possibility for error that we were okay with to make it more efficient and the actual users weren't. So our champion at this particular bank who's excellent. One of the few that we come across who gets both the in the weeds math and the bigger picture of rolling out a giant project like this at a big bank where people have been doing the stuff the way they've been doing it for a long time. And he said, "You know what Dallas, they're revolting against this LGD grade and that's not really what the problem is. The problem is we've moved all their cheese for all the things they do. We've taken their entire production process and turned it upside down and this was just one step too far." So he said, "I think you have the right answer but I also think it's a bad idea to try to do it right now."
So we pulled it back. We undid it. We put back the letter grades and the important outcome there was we didn't get what I felt like was the perfect end state. And we will eventually still try to push to get there. But it was a whole lot of change that we did all at once. I was kind of I think the term I used was running over people, right? This is the right way to do it so let's just push it through and get it done while we're doing it. It was the rip the Band-Aid off quickly kind of approach.
Our champion there at that bank had a really good feel for his end users and could give them this thing that they finally threw up their hands and said, "That's too much." He said, "Fine. I hear you. I understand. We'll roll that one back because you've done so good at taking the rest of this stuff, we'll take that one back and we'll put it back how you want it." So some empathy and understanding of your end users. Being able to decide which things are really critical, we have to do it this way to make this work. And which ones are like, yeah we'd rather do it a different way but it's okay if we need to leave this one in place to make you comfortable with it. Most of these projects get rolled out to end users and they just kind of get inflicted upon them and it's use it or else. So if you can do it a different way, it really is well received.
Jim Young: Yeah, you know it's interesting listening to you I've been thinking about actually some of my recent conversations I've had with some content vendors and talking to them. Inevitably in these conversations they start moving onto things and I find myself pumping the brakes on them and say hold on just a second.
Dallas Wells: Yeah.
Jim Young: I get it. I'm sure that is great. Right now this is all I can handle. Can we just talk about this part of it.
Dallas Wells: Yeah, exactly.
Jim Young: I've told them look I'm not saying this other stuff is we don't need it or that it's not a good idea. It's just that there's only so much I can wrap my head around right now. How do you know though when you've reached that line? You figured it out once they pushed back on you but how do you know when it's time to maybe push back again and say look I get it but this is ... you're going to have to move into this reality and just because that's the way you did it doesn't mean we should continue to do it that say.
Dallas Wells: Yeah, that's the difficulty of innovation and that's why some organizations are good at it and others aren't is it's definitely just as much art as it science. I think what it takes and what a lot of executives that lead change like this, what they aren't able to do is to get far enough down into the day-to-day work to truly understand the workflow before and the workflow after and to see it from that user's perspective.
I'll use something other than PrecisionLender. If you're putting in a CRM system, what the executives want out of it is the data that comes out the back end. They want to know what's the velocity of our sales opportunities and how long does it take us to get from stage C to stage D and how much fallout do we have between which stages. All those things help them make the decisions they need to make. But for that to work they have to have all the users input all of the deals they're working on. The data only works if it's complete and so they have to force all those things on an end user.
And what they end up focusing on is the output that they get, right? This is the data that I have to have to do what I want to do. They don't go down and sit down and look at well what's that do to ... in a bank if I'm putting CRM in front of a relationship manager and they now go from spending 20% of their time on this administrative stuff to now 60% of their time and I still hold them to the same sales goal, how do they feel about this project and about their work here now?
So yeah you get the shiny new dashboard but what'd you do to your sales staff? So understanding those workflows and taking the time to map them out and the part that gets missed just because it's time consuming is ask them. Talk to the people who are actually going to be doing it. Have them walk you through it and give them a voice. So, yes there are some things that just end up being look you're not going to like this but we have to do it this way for it to work.
But if you can give and take a little, if you can find other things it's like you know that's not that critical. The way you're doing it makes sense. Let's leave that in place. And having some trust and respect of those people who do the job every day. They probably do it a certain way because they figured out that's the way that works. So give them a voice. Give them a vote. Sometimes you'll have to overrule them but not every time.
And I think that was my big lesson is just slow down and listen and understand that the back story that I told there and the reason I think it's important is I was coming at that from a different perspective. It's totally fine to rip something out and put something else in if it's better. But that was my view of it because of the life I was living, my day-to-day job. Theirs was much different and where they were coming from it felt different when we put it in front of them. So when they said they didn't like it, we said okay. That makes sense and we hear you on this one.
Jim Young: And to connect this back, to bring it back full circle to the beginning, the person that you worked with who kind of helped you reach that conclusion, is a member, was an A team at that bank.
Dallas Wells: Yeah, exactly.
Jim Young: You need the type of people that ... that's Exhibit A for why you need those type of people in your innovation projects because they're the ones who can get, who can put a foot in both sides and understand it and figure out how to thread that needle to try to keep the ball moving and keep people happy.
Dallas Wells: Right. And there's two parts to that. Number one, having the skill and the empathy to hear and understand that. And then the second part which is just as important is having the oomph within the organization, right, to having a sufficient place on the org chart and respect of their peers to be able to decide when do we push and when do we not and to in this case slightly deviate from the playbook that we'd put in place.
We had a project plan and one of the things on there was remap the LGD grades and he had the authority within the organization and within the project there to say, "Nope, not doing this one that way." And so that's why it's really, really important that you just don't take the leftovers and that's a harsh way of putting it, but the B team because they don't probably have either one of those. Or they may have one and not the other and you really got to have both.
Jim Young: All right. Thanks again for coming on, Dallas. That'll do it for this week's show. If you want to listen to more podcasts or check out more of our content, you can visit our resource page at precisionlender.com. Or you can just head over to our home page to learn more about the company behind this content. Finally, if you like what you've been hearing, make sure to subscribe the feed in iTunes, SoundCloud, Google Play or Stitcher. We love to get ratings and feedback on any of those platforms.
Until next time this has been Jim Young for Dallas Wells and you've been listening to The Purposeful Banker.
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