• Huge gaps exist between what finance leaders feel is important to monitor, and what they actually measure and track
Pressure from an uncertain economy and unprecedented competition from an increasing number of sources has 92% of CFOs and financial executives feeling like their financial institutions should be doing more to leverage data to inform strategic decisions. Underpinning their concerns, according to the new Kaufman Hall report 2020 Outlook for Financial Institutions: Addressing Economic Uncertainty and Competitive Pressure, is a need to gain a better understanding at a more granular level of what drives profitability.
These needs manifested throughout the survey. For example, 94% of finance leaders feel it is important to monitor relationship profitability, but fewer than half (40%) currently do so. Nearly all (95%) feel strongly about monitoring officer profitability but only 48% do it, and 94% believe measuring customer profitability is important even though only 43% currently monitor this critical metric.
“Financial institutions are experiencing a time of significant challenge and transition,” said Kermit S. Randa, chief executive officer of Kaufman Hall Software. “Quantifying these challenges is a critical step for prioritizing and solving them. Our survey shows that across various dimensions, industry leaders need to better leverage their own data to navigate changes, maximize value to customers, compete with new players, and build a profitable future.”
Overall, only 16% said they have a clear understanding of what drives margins at their institutions. The most common answer, offered by 60% of respondents, was that they have gaps in their understanding but are working to improve. Sixty-eight percent of respondents said their institutions plan to improve profitability measurement across various dimensions, such as customers, channels, and relationships, in 2020. This number represents a significant 12% uptick over 2019, demonstrating increased recognition of the importance of this type of measurement.
“While we are officially in the longest economic expansion in history, the excitement is tempered by conflicting indicators such as slow job growth and GDP growth that is slower than other expansions. This suggests the expansion has been weaker than thought,” said Ken Levey, vice president at Kaufman Hall and the report’s author. “This situation is made worse by the fact that there are currently less than 30 basis points separating the one-month interest rate and 10-year rate, which make it difficult for institutions to remain profitable just through generation of net interest margin. Still, there are opportunities if you know where to look. This report’s findings demonstrate that many institutions don’t know where to look because they lack insights that guide profitable decision-making, despite the availability of tools designed to deliver a tremendous advantage today and position them for explosive growth when things get better.”
Relationship pricing is under-utilized
The survey showed that relationship managers at 50% of financial institutions are largely unable to evaluate the impact of new business on a customer’s overall relationship. More than half (53%) of those who can conduct such an evaluation only use basic information. By bringing relationship profitability information from the back office to the front lines, institutions can use data to drive day-to-day decisions, improve relationship value and customer service, and derive greater value from key relationships.
The survey also found that only 38% of respondents include profitability as a metric in calculating incentive compensation for their employees, and 39% would like to do so. Since losing even one top relationship can seriously impact margins for all but the largest institutions, it is simply smart business to understand the value of each relationship and tie the profitability of those relationships to the compensation strategy for relationship managers.
Strategic priorities
Based on the results of this survey, Kaufman Hall has identified 11 strategic priorities for 2020 and beyond. These priorities fall into two categories:
Addressing Economic Uncertainty
1. Gain actionable insights for data-driven decision-making, creating and managing planning models that are connected to market and operational drivers.
2. Better predict net interest margin and improve accuracy of predicted cash flows.
3. Increase profitability by understanding where profit is coming from across customers, relationships, branches, channels, officers, and products.
4. Ensure that profitability analyses and pricing adequately consider portfolio concentration, credit, and reputation risks.
5. Accurately assess the profitability of customer relationships and create portfolio management plans for each relationship tier.
6. Design incentive compensation plans that fuel profitable growth, measuring employees on net contribution.
Gaining a Competitive Edge
7. Follow industry standards by encompassing cash flow-based planning, funds transfer pricing, and scenario planning as routine elements in planning processes.
8. Improve accuracy and transparency using a single platform for financial performance management.
9. Enhance reporting and analytics through dashboards that help executives better understand why results matter.
10. Create more time for analysis and innovation by automating processes for data collection and report distribution.
11. Prioritize portfolio management by identifying top-performing relationships, products, and relationship managers.
“Kaufman Hall’s annual Financial Outlook survey report gives us an objective perspective on the challenges and opportunities our industry peers are facing,” said Ryan Neese, vice president of financial planning and analysis for Lake City Bank. “We find it useful to assess how our road map – focused on enhanced data dependent analyses, customer profitability, and planning tools – compares to others. We use this information to provide insights and support to our strategic plan for growing Lake City Bank.”
