Why You Need To Put The Big Rocks in First [Podcast]

Podcast Transcript

Hi and welcome to Lender Performance, your guide to becoming a better lender. I’m your host, Jessica Stone, Director of Client Success here at PrecisionLender and I am joined by Dallas Wells, our Executive Vice President of Banking Strategy. Thanks for joining us today. We’re going to talk about a blog post that was written recently by our CEO, Carl Ryden a couple weeks back called “Putting First Things First.” In this blog post, Carl talked about a struggle to keep the urgent from crowding out the important. Dallas, you want to expand on that a bit?

This is one of Carl’s favorite stories. It comes from a class he was in when he was at MIT. They have the author of “The Seven Habits of Highly Effective People”, a guy called Stephen Covey, came to MIT and was talking to a room full of students. This is a story that I’ve heard a couple different versions of, but Covey has a little different twist on it, it’s really good. Carl uses it to make some good points to banks about prioritizing things and figuring out this tricky thing of, “Do we work on what’s important or are we working on what’s urgent and right in front of us?”

The story that Covey tells is, he comes in to the class, and he puts a big glass jar on the table in front of him, and he fills it up with big rocks the size of a fist. When no more rocks will fit in the jar, he asks the room, “Is the jar full?” Everybody in the audience says, “Yes, it’s full. There’s not room for any more rocks.” Then Covey takes out a container of pebbles, he pours those into the jar, and they surround the bigger rocks. Then he says, “What about now, now is it full?” The crowd responds this time, “It’s a little bit mixed.” The jar looks full, but they could sense that Covey was making some sort of point here with this, obviously. He reaches below the table and he pulls out a container full of sand. He pours in the sand, and it goes in between all the pebbles. Then he says, “Is the jar full now?” Now everybody in the room is really certain that they’ve got this figured out. “No, of course it’s not full.” Covey says, “Good.”

Now he pulls out a container of water, he pours water in, it goes into the sand, fills it all the way up to the top. Now he asks the room, “What was the point of this? What’s the lesson to be learned?” As Carl puts it, this is a room full of people doing an MBA program at MIT. You’ve got the classic room full of Type A types, overachievers in there. They all think that the answer’s obvious. If you’re creative, if you’re diligent, if you’re really persistent, you can always find time to do one more thing. You can always add something more to your to-do list, or one more project, or something else into the budget or the plan, you can always make it work no matter how full things seem.

Covey smiles, and shows them the trick that he’s pulled which is that he says, “No, the lesson here is that if I hadn’t put the big rocks in first, I never would have been able to get them into the jar. In your business and your life, you have to put forth the effort to identify the big rocks, and then make sure that you put those in the jar first or they’ll never make it in because the jar is already full of the little stuff.” It’s a powerful visual, and it’s really important for banks, and this is some version of this conversation all the time. Banks need to ask themselves, what are their big rocks? What are the things that need to go in first? That’s the big takeaway there.

I know that as Carl puts it, “In the wake of the financial crisis, banks were particularly susceptible to what’s urgent versus what’s important,” because they had to tackle urgent matters in order to survive.

Now hopefully things can take a beat and figure out that urgent versus important. With that story in mind, Dallas, what do you think are the types of things that a bank might consider ‘the big rocks’ for them?

They way we look at this, and the way we see some of those high-performing banks looking at this, really to look at the next quarter’s earning and what you hear especially from the larger banks is, “Well, we’ve just gotta cut costs, we’ve gotta reduce head count, and we’ve gotta cut size back a little bit.” They’re in this mentality of we have to cut in order to survive, we have to remove all this excess stuff, and what they’re then doing is constantly cutting away. Now there’s this reducing revenue stream too, which means compressing margins and getting rid of lines of business, getting rid of production staff, getting rid of their support staff, so there’s less and less revenue which means next quarter you’ve got to come back and do it again. There’s this constant cutting away, and now they’re … They’ve done this enough quarters in a row that they’re cutting at the core fundamental parts of the business. The big rocks are the things that some of those non-bank competitors are starting to do really well, which is focusing on the customer.

We’ve been inwardly focused on the banking industry for a really long time, and trying to clean up our own house, basically. Making sure that we can deal with the risks first and foremost. Then we can deal with the new regulations that came because of the risks. Then we’ve got to try to cut costs to survive the next quarter or else Wall Street’s going to be mad at us. It’s that cycle that has to be broken, and the only way to break it is to focus on customers, build new revenue, new revenue that can help pay for some of those investments that need to be made. We hear a lot of times, we love what you guys do and how you go about it, we have a lot going on right now. It seems like, “We’ve gotta sell this collection of branches. We have to do a core system conversion. We may have to put in this new BSA tracking system. We have to deal with our fair lending issues.”

All of those are those reactive cost-cutting, dealing with the risk and the compliance stuff. It’s not that those aren’t a big deal, it’s just that there’s no room for the big rocks when banks are done dealing with it. They’ve got to re-prioritize a little bit towards customers and revenue.

Dallas, what do you think a bank can do to focus the attention on those big things you mentioned compared to the reactive things? How can they shift focus?

That’s the $64,000 question. Once you decide that it’s a big thing, how do you make everybody pay attention to that? That’s going to be a very different thing for … One of the first banks I worked at, a $200,000,000 bank in the middle of nowhere, versus your trillion-plus-sized money center international bank. Those are different things. They both start with this idea of simplifying that message of everybody knows what the important things are and making sure that everybody is being clearly communicated that same message. We get conflicting things all the time where we talk to the loan side of the bank and they say, “Look, they’re telling us that we have to grow by 15% next year. We’re all about growth, we’re all about taking market share, we’re all gung-ho about doing that.” Then you talk to the finance group and they’re like, “We’ve gotta cut costs. There’s just no room to invest in any new tools.”

We have these two conflicting strategies in place, and they’re at odds with each other, so the simple act of someone at the very top levels of the bank has to say, “These are the big things. These are the two projects that have to get done.” The banks that we’ve seen do it well frame it exactly like that. They say, “Hey, 2016 is, here’s the two things we’re doing. We’re going to buy this and get it rolled out, and we’re going to do this training program and get that rolled out.” Whatever the things are, but everything else, it’s a noise, and it needs to go later. Those big things are the first priority and that’s what the top-level managers are incentivized to do is make those happen.

Dallas, to that point of what’s noise, or what in this scenario, what’s the sand or the pebbles or the water? How do you help parse out what’s the rock and what’s everything else?

The bank level is about when do you feel like you’ve squeezed enough blood out of that stone, of the cost-cutting. We always fall back to the old McKinsey study of, this is not a banking study, it’s from the S&P, all different types of businesses. What’s the impact of a 1% improvement in pricing versus a 1% cut in costs? You can do that same basic math with banks. There are some that when you go through that exercise, the answer is, “Gosh, you guys do need to cut some costs.” Especially some of those banks that design their whole business plan around being able to get a 4% or better net interest margin. They’ve got these big expensive branch networks, they have have expensive funding costs, and they haven’t been able to scale to make it work. Those bank’s answer is cost-cutting. Those banks are getting pretty rare, too. Most of what we see is banks that say, “Yeah, we can probably cut another 1%,” but the real, true excess has been cut. Going through that exercise of what’s really meaningful to the bank.

Once you get down to the loan department level, it starts to get a little easier. When we’re looking at setting pricing, it’s easy to do a quick sensitivity now at this time. One of the things that moves the needle for pricing, much focus on the … For example, banks get really hung up on the overhead costs. They’ll spend a week arguing about whether this size loan’s a $1,200 overhead charge or a $1,300 overhead charge. Then they ask our opinion and my response is, “I don’t care.” It’s not because it doesn’t matter to me is which one they choose, the point is, it doesn’t matter to the results. Minimal impact on how we actually handle that deal. Always being willing to take a step back and say, “I know this feels really important, but how much does it move the needle?”

That willingness to be the world that way seems to make a big difference of, “Okay, now we want to get it right, so let’s prioritize that later. What are the different risk grades that we’re using? How do those impact pricing? That’s an important one. Let’s spend some time on it.” The overhead, I don’t care. Use an average number from all the rest of your banks out there, you’d probably be close enough, and you can perfect it later after the big things are in place.

Dallas, you talked about some examples for the loan department. What about down on an individual level, maybe for a lender? How do you think they might identify what their big rocks might be?

Most lenders, they have a basic idea of the 80/20 rule, this is true at the bank level and it’s true for just about every individual lender that 80% of their profits come from 20% of their customers. For the bank, 80% of the growth comes from 20% of the lenders, and so on. In most banks, it’s a little more pronounced than this, and what lenders need to understand is which of their customers are important? Which ones are driving those results? Focus the time and attention on those. If you ask lenders who their best customers are, they’ll think of who has the biggest loan outstanding. There is a decent correlation between that and their actual best customers when you measure them for profit, but it’s not perfect.

A lot of times they’re surprised when we measure those out and say, “Well, actually here’s your ten most profitable customers. They need most of your attention. Number one, make sure they’re happy, make sure you’re growing those relationships, and number two, find more like them. This is what a profitable customer looks like. Go find those. Spend a lot less time chasing the other 80% that are wasting the most of your time.” The lenders that we see that are exceptionally profitable and really good, are the ones that tend to have a handful of customers in their portfolio, but they’re really, really good customers.

One of the first lenders I worked with had three customers that he worked with. This was a decent-sized bank, but he also had a $300,000,000+ portfolio that he managed by himself. That’s a decent-sized bank that he was managing just with him and a loan assistant. He only had a couple customers to deal with. He had deep relationships and he created value for them. With that time and his interest focused in the place, he was doing the important things. He definitely had the big rocks figured out. That’s an extreme example, but those are the lenders that we see doing really well. Small accounts of portfolio, but big dollars in profitability from it.

I think that will do it for us. Anything else Dallas, that you want to cover on this subject?

I don’t think so, I think the big takeaway is that whatever level you’re thinking about, whether it’s individual performance or your team or the loan department, or even all the way up to the full bank. It’s just that willingness to take a step back and ask about how much this thing that we’re doing really impacts the bottom line.

A lot of times we make commitments to, “We’re going to cut expenses by 5% in this area.” When you realize that going from zero to 3% is pretty easy, but it’s that fourth and fifth percent that are really, really hard. We spend a lot of time on them and they’re not making that much of a difference. We have to be willing to do that quick back-to-the-envelope now is the impact and find the big things that are going to matter and make time for them. Carve out parts of your day and parts of your budget to allocate to those things and make them happen. If some of the other stuff falls by the wayside, you’ll be just fine.

Thank you, Dallas. That will conclude our episode today, so thanks everyone for listening. You can always find more information about our episode today at precisionlender.com/podcast. If you like what you’ve been hearing, please do subscribe to our feed in iTunes, SoundCLoud, or Stitcher. Give us ratings or feedback on those platforms. Thanks again for listening, until next time I’m Jessica Stone …

I’m Dallas Wells

… And this is Lender Performance.