The biggest obstacle to strategic success is failing to understand risk.
Risk is the threat lurking in the shadows that need to come to light so they can be managed. Before undertaking any strategic initiative, a financial institution needs to uncover these potential pitfalls and consider ways to avoid them. It needs to invite input from across the institution to reveal both weaknesses and hidden strengths. Only then will it have the information it needs to introduce controls to limit the probability or impact of unfortunate events and maximize the realization of opportunities.
Strategic success is not just about how, it’s about why.
It reminds me of a story Shelly Palmer, CEO of the The Palmer Group, told in AdAge about a blue disco ball. Palmer was once a gofer on a movie set. One day the movie’s director told him he needed a 60-inch blue disco ball for an upcoming scene. Gofers don’t ask why, they just do as they are told, so Palmer set about on an exhaustive search of Hollywood. With no 60-inch blue disco balls in sight, he got permission to custom order one from a vendor—at an astronomical cost of $10,000, which today is about $36,000.
The day of the shoot the delivery was running late and the director was getting angry. When the studio’s prop master came by and asked what the problem was the director said he needed a “huge” disco ball. Then the prop master asked a very good question: “What are you trying to accomplish?”
It turns out the director wasn’t planning on including the ball in the shot. He simply wanted to see small “dancing blue dots of light” on the floor. The prop master instructed his team to put blue gel on the lights aimed at a silver disco ball, accomplishing the same affect for next to nothing.
The studio still had to pay for the ball, though, which was delivered shortly after.
Don’t Assume You Know the Solution
This story can teach us a lot about strategic planning. Sometimes we look at our goals and assume we know the solution to our problem. We want to increase revenue 10 percent so we raise fees. We want to offer new mobile technologies so we just use whatever our core processor is offering. We want to control our image in the public so we prohibit employees from using social media even in their off hours.
Are these the best choices? They may be, but there is no way of estimating their impact without considering risk.
Maybe the blowback from fee increases will damage the institution’s reputation or anger customers enough for them to look for a new place to bank. Maybe the fees will be high enough to draw regulatory scrutiny. Perhaps the core processor’s solution isn’t cutting edge enough to be worth the investment. It’s possible that a blanket policy prohibiting social media use will be enough to make employees seek out new employment or discourage new employees from coming aboard in an industry with a shortage of top talent.
You don’t know if you don’t take the time to ask.
Risk Management Requires Perspectives
You also want to ask the right people. Too often an institution blows the opportunity to plan ahead and talk about critical issues when all the institution’s best and brightest minds are in the room because no one took the time to do the homework in advance.
I’m sure there were plenty of meetings about sets, props, and costumes long before the director even stepped on a sound stage. You’d have thought that someone would have gone through the script and drafted a list of props, special effects, and other needs specifically mentioned in the script. Had someone taken notice of the “dancing blue dots of light” early on, it would have been brought up in a meeting with the prop master with decades of experience instead of being addressed last minute by a director with other talents. It would have saved $10,000 and hours of the gofer’s time as he called every prop house in town in search of an unnecessary and very specific 60-inch blue disco ball. After all, wouldn’t a 59-inch disco ball have worked too?
I don’t know what movie was being filmed and how it performed at the box office, but if the blue disco ball is any indicator for how the picture was produced, I doubt it was a strategic success.
Avoiding the Blue Disco Ball with Risk Management
Is your FI at risk of investing in its own version of a 60-inch disco ball? It could be if it isn’t aligning its vision, mission, and values with strategy, strategic objectives and risk.
Let’s say that a financial institution that wants to be the market leader for mortgage origination. It also values stability. Would it make strategic sense to invest in a strategy that invests heavily in faster payments?
Faster payments are increasingly important is a world of evolving customer expectations, but it will require resources. That means there will be fewer resources available to market, originate, close, and service mortgages while ensuring compliance. If a core update is necessary, the driving force behind that update may be faster payments instead of how it will support the mortgage function. Also, the newer technology is more likely to face hiccups than one that has been around for a decade, which could impact reliability. On the other hand, it may give the bank a competitive advantage if it can shave time off closing.
The only way to predict the results with any certainty is to fully assess these risks and opportunities to determine if the potential cost makes sense in light of the institution’s mission, vision, and values. It needs to know how much potential risk exists and whether or not it aligns with the institution’s risk tolerance. Not only that, but it must measure those results against other potential strategies to see if a strategy with less risk is more appropriate.
Every strategy has risk, but not every risk is worth taking. By aligning risk with strategic planning, a financial institution is not just ensuring that its strategic decisions align with its mission, vision, and values, it provides insights that allow an FI to chase its destiny in the most intelligent way possible.