Earn It – Chapter 11: The Power of Continuous Improvement [Podcast]

December 5, 2016 Iris Maslow


If changing your bank’s pricing culture, tactics and tools seems overwhelming, that’s because it is.

In this episode, Dallas Wells and Jim Young talk about harnessing the power of continuous improvement to tackle change, which is Chapter 11 in the Earn It: Building Your Bank’s Brand One Relationship at a Time.



Podcast Transcript

Jim Young: Hello and 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 Jim Young and I’m sharing co-hosting duties today with Dallas Wells. Thank you for joining us. Dallas and I are back again to talk about the book we have been co-writing along with PrecisionLender CEO Carl Ryden. It’s called ‘Earn It – Building Your Bank’s Brand One Relationship at a Time’. We’re releasing it in sections, a month at a time. We’ve been doing it actually all of 2016. It’s all available at Earnitbook.com.

This week we’re going to discuss Chapter 11, the power of continuous movement. Dallas, you and I have been in the weeds with this book all year long, building that story a chapter at a time, and we’re getting close to the end, spoiler alert. I’m curious though if you had the same reaction. When you put this down on paper, this particular sentence, I’m going to read it here. I’m going to tell you my reaction and see if it’s the same as yours. Here’s the sentence at the beginning of Chapter 11: In order to get your bank where it needs to go, all you have to do is change its pricing culture, create a new sea level position, break down silos, share more information, create a new ecosystem of tools, figure out which tools to purchase, then get everyone to use them once their put in place. I looked at that sentence and I was like, that’s pretty overwhelming. What was your reaction?

Dallas Wells: Yeah, kind of the same thing where a chapter at a time, you look at it, and you’re like, “Come on, this is so obvious, why doesn’t everybody do all this stuff.” Then you tie it all together and it’s like, “Oh, that’s why.” It’s a daunting, overwhelming thing. All we’re asking you to do is reshape your entire bank front to back. Yeah, I kind of had the same reaction of … and I think that’s why we naturally came to this part of the book which is, we’ve laid out this framework, but now it’s time to actually do it and it’s like, “Oh boy, where do we even start.”

Jim Young: Right, right. Totally rational reaction to feel overwhelmed, but also not really a viable game plan going forward. How do you get folks off of square one, and how again did somehow manage to weave sports into this book yet again in the process?

Dallas Wells: Yeah, well we know that’s always the goal first and foremost, to get that in there. This time it was cycling, which is not what I would have ever expected to include, but it fits very well. With all of this stuff to do, and for a lot of banks, such a big delta between where you are today and where you ought to be. It’s daunting, so I think the path of least resistance is to say, “That’s too much, let’s go tinker over here with these other things.” It seems easier. The sports analogy that fits really well is one that I didn’t know before Carl started sharing it repeatedly with me sometime last year, over and over again, “You have to read this, you have to listen to this guy talk.” It’s Dave Brailsford who is the cycling coach for the British cycling team, which again you can see why I didn’t know, that’s not something that I would follow or most folks would.

The short version of the story is British cycling was just atrocious. They were kind of a laughing stock. Brailsford was hired with the goal of, “Hey, make us viable.” He wanted to go beyond that and actually become a world cycling power, which they most certainly are now. A lot of what he talks about is essentially 1% improvements. Where are we today? Where do we need to be to actually be winning Tour de France, Olympic medals and all of those things. How do we get from here to there, and how do we just pick the most important things and make these little incremental 1% improvements on everything that matters, and we’ll make a difference to us. Those eventually added up in a relatively short time frame into real results that have been repeatable. This wasn’t just, “Hey, you got lucky. You have a great athlete somewhere along the way.” This is multiple Olympics in a row, multiple international events. They’re always at the top of the medal stand there, which considering where they came from is pretty darn impressive.

Jim Young: That’s actually one of the things that kind of struck me though. Sometimes you think, “Okay, 1% gains, that’s great, but I’m never going to get there if I do it 1% at a time.” It is one of the remarkable things about the British cycling team. I think something that’s probably instructed the banks is how quickly those 1%’s actually add up to something significant at some point.

Dallas Wells: Yeah, absolutely. Especially in the banking world where good results and bad results tend to kind of compound on themselves. It’s an asset based business, so what you’re earning today is based on the decisions you made yesterday. Once you start making a few good decisions in a row that make you 1% better, it takes a while to get started, but once they start showing up they compound very quickly. I think that’s what they found in cycling too is 1% better than you were yesterday gets to be pretty darn good, and pretty tough to achieve.

Jim Young: Yeah, but one thing they also found is that it’s the right 1%’s. It’s not just a matter of making a gain, they found that. They started off in track cycling, then they moved over into road cycling, and believe it or not, I’m actually quite conversant in all these because I’m a huge Tour de France viewer. They found that, “Hey, a lot of the stuff that we thought was important before on track is not so important on road. We’re trying to make gains in places that actually don’t help us.” I think that’s probably another message for banks there is that, before you go out and say, “We’re going to start making gains,” you need to figure out where to make those gains right?

Dallas Wells: Yeah, and I love how he puts it. He talks about the steak and the peas. You kind of need to figure out which is which so you know which things to focus on. I think that’s where a lot of banks tend to get into the weeds a little bit, they’re chasing the peas instead of focusing on the steak. They’re working on what’s urgent instead of necessarily what’s important. The thing that’s at the top of the list from the last exam, that the regulators are asking them for, or cost cuts because that’s what their competitors are doing and that’s what they talked about in their last earnings report. When you can read a whole bunch of different research papers, analysis, case studies and you can look all around you and see examples of it.

Revenue generation is where banks really differentiate themselves. That’s where they need to focus. That comes from the power of pricing, that’s why we built this tool, that’s why we’ve wanted to write this book. We feel like that’s the crux of it. Finding a way to focus on those most important things, even within pricing. That’s one of the things we stress with our clients all the time is, there are a million moving parts to price alone. There are about three that are really critical. Let’s get those right first. We will fiddle with the margins and mess with the precision and exact accuracy down the road, but lets start with the ones that really move the needle first, so we can start getting some improvement that helps pay for all of the time and effort to refine everything else later.

Jim Young: In a bank then, we’re talking about those improvements really on two levels. There’s the portfolio level, then there’s the transactional level. Let’s start with the portfolio, and shocker to our listeners, we’ve got another story to illustrate our points. You may have noticed we’re fond of that in this book, but no sports this time, just fighter pilots Dallas. Can you elaborate?

Dallas Wells: Yeah, not just fighter pilots, but Korean War Era fighter pilots. Those guys make the current ones look like weaklings in some ways, just because of what they were asked to do, and very different technology at the time. Anyway, this is something we talked about a long long time ago on one of our early podcast episodes. We won’t go in length to it, because it’s got a longer version of this story that I promise you is interesting and worth your time. It’s about John Boyd, kind of the father of modern fighter jet strategy, training and theory. He figured it all out, he was a high school dropout, figured it out by gut feel, then taught himself calculus so he could prove it out to the propeller heads at The Pentagon. What he talks about, and the framework that he came up with, is called an OODA Loop. We walked through that framework in the book a little bit, and again we talked about this before, there’s other resources out there we will include on it. The idea is basically that instead of trying to plan perfectly and analyze everything out to the nth degree to get it exactly right before you act.

That’s always the banker’s tendency right, we don’t want to screw things up, we don’t want to make a costly mistake. Instead, the philosophy is, find something small that you can test, a little hypothesis. You test, learn from it, and react. Then do that over and over again. For fighter pilots, the faster they can start a maneuver and see how the other guy reacts, then do something different, they call that getting inside their enemies OODA Loop. They’re making decisions faster and now that guy is reacting to something that was three or four iterations ago, he’s reacting to old news. In the banking world, the example we talk about, and this won’t be an unusual story for anyone. This is a bank that we just went through this conversation with a matter of a few weeks ago. They had some pressures in their marketplace, and senior management basically said, “Hey, everybody else is cutting their pricing, they’re getting really aggressive on loan rates. What would happen if we did the same?” That simple question turned into a six month project, a 96 page report with all kinds of R-squared factors, statistical analysis, appendices and references to other models. It ended up being essentially a lot of nonsense. The output was impressive, I read it, or glanced through it I should say.

Jim Young: I was going to say, really? Did you really read it?

Dallas Wells: I read enough of it to figure out the crux of it, which was exactly what their senior management team did. They got about five pages in and they’re like, “We can’t make decisions on this. Number one, it’s too theoretical, it’s all based on models. Number two, it’s all based on how we priced deals over the last two years, which was eons ago in the marketplace. Number three, it took them six months to come up with this analysis. That question that I asked, we’re already onto the next thing.” Our suggestion to that bank when they brought that to us and said, “Hey, how should we have thought through this?” It was, “Well, simple. Pick a market and do a test.” In about a day, you’ve got new profitability targets out there in place in front of your lenders in one market, for one product type, however you want to setup that little test. Cut the rates, price more aggressively, price closer to or below that competition, and measure the results.

Learn from that, wash, rinse and repeat. Do that as many times as you need to get some feedback. You’re talking about probably a month long process to adjust pricing. See how it effects volume, get feedback, make a decision and you’re off and running with real market proven feedback, instead of six months later with this research paper that everybody groans, wads up and throws in the trash. That bank is not unusual, that’s how a lot of banks make decisions.

Jim Young: Yeah, I was going to say, I didn’t want to be negatively stereotyping, but when we went through the whole OODA Loop, by the way OODA Loop is O-O-D-A, that stands for Observe, Orient, Decide and Act. As a fighter pilot it’s all about making lightning quick decisions, it’s being nimble, being flexible and being reactive. Those are not words, to be fair, we would associate with banks that much, to be fair to the bank that you just listed as an example. That sort of OODA Loop example would be the pilot saying, “Hmm, there is a jet that is on my tail, how did it get there? Let’s talk about how it got there, let’s analyze that and have a meeting to discuss what we should do next time that jet gets on your tail.” Obviously I’m exaggerating to make the point here that you don’t have that kind of time. By that time you’re probably already on the ground at that point.

Dallas Wells: Yeah, we’re sympathetic to why banks make decisions that way. It’s because it’s a very super thin margin business that is highly leveraged, a little bit of capital. If you’re wrong in one of those key areas, one of those steak areas that Brailsford talks about, it’s not just a, “Whoops, sorry we will try harder next time.” It is a, “No you’re out of business, and you may be banned from banking forever.” There are real repercussions to this. What we’re talking about is being smart about how you do those tests. Doing testing in one market is not going to derail the bank, but you can learn a ton from that. You can’t let the risk management, how you would make a credit decision, an underwriting change type of adjustment with your bank, you can’t use that same philosophy on all decisions. The marketplace simply won’t stand for it. That’s really what we’re talking about is in these areas, to get fast enough feedback, you have to think about it differently. That is a little bit of a change for banks. I’ve been a part of some of those 96 page research reports. I’m not casting blame here and saying we’ve never done any such thing. I’ve been guilty of that too, but the marketplace is speeding up, it’s not slowing down. We have to learn from some other industries and other approaches to try to find the places where we can shortcut that decision process a little.

Jim Young: Right. To take us back to a previous chapter, I think it might have been the previous chapter. As you mentioned a little bit with the decision making, you’ve got to find some places where it’s okay to, because when you test things it’s a little bit of trial and error, which the word there is error. There is going to be sometimes we go, “Oh, that didn’t work.” You have to find those places where it’s okay to say, “That didn’t work.”, and not “That didn’t work, we’re all fired.”, which is a very real issue at certain points.

Dallas Wells: Exactly, that’s the culture thing where we’ve brought up that suggestion to banks before and they say, “Hey, that’s great. Makes perfect sense. The problem is, that market where we run that test, what if it doesn’t work and the lender’s production looks funny.” Okay, that’s the being able to learn from a test and know that it’s a hypothesis. Some of them will be winners and some of them you’re going to be like, “Oh gosh, I’m so glad that we did that in only one market and not across our whole footprint.” That means top to bottom in the bank, everybody has to understand that’s what we’re doing. Those lenders, if their production looks weird for month, we know exactly what happened and everybody is okay with that.

Jim Young: Let’s talk about the lenders a little bit more. On the management level, it’s all well and good to do these OODA Loop’s, these tests and that sort of thing, but how does that translate to the guys who are actually having to do, to borrow one of our own phrases, the price getting. How do you sort of do this whole idea of continuous improvement in that sort of thing, and make it make sense for the lenders?

Dallas Wells: If you think about it, it works in a couple of ways. Number one, setting up mechanisms to ask for a couple more basis points on every deal. Rarely will you lose a deal over two basis points, but you multiply two basis points times a 20 billion dollar balance sheet, that’s real money. It’s figuring out a way to make those small incremental gains per transaction. That really takes a lot of the infrastructure that we’ve been talking about to this point. It also is a frame of mine of an approach for the lenders to use. They can think of themselves as the John Boyd, the fighter pilot. Especially when a lot of the complaints we hear are, “Hey, we’re dealing with this competitor over there who are much more aggressive, they have lower funding costs.”, whatever the excuse is. They feel like their outgunned. The other bank is letting their lenders price lower than I’m allowed to price, so what am I supposed to do about that.

That sounds exactly like John Boyd’s 40 seconds for 40 bucks bet that he had. Read the chapter and find out more about it. It’s basically his standing bet of starting from a position of disadvantage, and he will have you in his sights within 40 seconds. It’s a bet he never lost, and your lender should approach that thing the same way. He was doing it without OODA Loop, and that’s exactly how a lender should approach it, meaning that other bank may be able to aggressively price, but a lot of those banks we see pricing down there, they’re doing it because their a real pain in the rear to deal with. It takes them a long time to make decisions, it takes them a long time to get things underwritten, document prep is long. It’s just cumbersome and difficult, but man is it cheap. Use your speed, your quickness to your advantage. Your borrower comes in with an offer sheet, talk through that with him, find out what the paying points are. There’s always a paying point or they wouldn’t have come to see you. Find out what that paying point is, and come up with two or three options very very quickly, instantly, while they’re in the office with you.

A couple of options that you could do that would work that remove that paying point. What they’re going to do is go back to that other bank and say, “Hey, that guarantee that you’re requiring from my father in-law, or the extra collateral you’re having me pledge, they aren’t going to make me do that, so can you guys remove that?” They take two weeks to decide, another two weeks to get the commitment out, and even if they come back, you can do the same thing again. That’s Boyd’s whole thing is repeat that cycle over and over again. You’re responsive, flexible and creative enough times, they will eventually figure out, “I am not waiting anymore for the slightly better deal to come along. I’m going to go with the person that’s been responsive to exactly what I’ve been asking for, and they’ve done it quickly.” That’s how you can shortcut it, even if after that negotiation your process is pretty close to what the other bank’s is, you can definitely do the negotiation and price setting coming to that deal, you can do that part much quicker and easier for them.

Jim Young: Okay, well that makes sense again in theory. How should banks set it up so that their lenders can do this in reality?

Dallas Wells: We talk about that in terms of hurdle rates and target rates. What we’re really talking about is that concern of, “Well, gosh guys we can’t let the fox into the hen house right? We can’t just turn the lenders loose and let them do deals however they want just to be fast.” That’s because banks have always thought in terms of hurdle rates, the absolute bare minimum that we will accept, that’s what they publish out, that’s how they price deals. A lender starts from there, then if they need to negotiate, you’re right, they’re probably doing some things you really wish they wouldn’t. Targets are different conceptually, it’s not the minimal we will accept, it’s the thing we’re aiming at. There will be a fair number of times we come in below those, and we need to have consistent reasons that we justify doing those deals anyway. You don’t aim at the bare minimum, and we go through that logic in this chapter of kind of why that is. It’s a fairly easy mechanism to put in place that is subtle, but it really does change the mindset for the lenders.

Jim Young: Yep, that makes a lot of sense actually just to share a little behind the scenes at PrecisionLender. We were discussing a blog post that someone, we will call him Houston, how about that, who needs to turn in, and was perhaps a little behind schedule, but it was ahead of the schedule that that particular person had set previously. My comment was, that’s basically, we’ve set up a hurdle instead of a target. We made the hurdle, just not the target.

Dallas Wells: Yeah, exactly.

Jim Young: Not naming names here at all.

Dallas Wells: Yeah, no specifics.

Jim Young: All right. That will wrap it up for this episode. Thanks again for listening, a reminder you can go to theearnitbook.com to read each section of the book as it’s released. You can also sign up with your email to have those sections sent to you straight to your inbox each month. The first 500 who signup will receive a free copy of the final print copy of the book when it’s released, and it will be released in the spring. Those details and more will be on the show this episode, which you can always find at explore.precisionlender.com. If you like what you’ve been hearing, make sure to subscribe to the feed in iTunes, Soundcloud or Stitcher. We love to get ratings and feedback on any of those platforms. Thanks again for tuning in, until next time, this has been Jim Young and Dallas Wells, and you’ve been listening to The Purposeful Banker.


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