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Budget time: Looking in the right places?

Has your bank got budgets and planning by the right end?

“There’s really not much that indicates we’ve learned anything new over the last several cycles,” says veteran lender and CEO Ed O’Leary. Each week in his blog he strives to fix that. “There’s really not much that indicates we’ve learned anything new over the last several cycles,” says veteran lender and CEO Ed O’Leary. Each week in his blog he strives to fix that.

“If we had some eggs, we could have ham and eggs, if we had some ham.”

This circular expression has been credited to Groucho Marx, Laurel and Hardy, and others. It even showed up in a book about the history of White Castle hamburgers, attributed to a company official who was bemoaning World War Two meat rationing’s impact on a hamburger chain.

This bit of doggerel comes to mind because I have been thinking about outcomes, and, as part of that, how banks reach them.

Most banks right now are in the middle of the 2016 budget process. If done properly, that process will lay out in reasonable detail and with a degree of accuracy the outcomes that the enterprise expects over the course of the coming year. This is different from forecasting, which to me is the process of estimating the various forces and impacts on one’s operating environment.

Budgeting and management

A budget has a significant management component to it: If we do this, this, and this, we’ll have outcomes of X, Y, and Z.

We seek to manage to those “downstream” outcomes by controlling or influencing the “upstream” inputs.

This is an important and recurring discipline for all businesses. But too often I think it occurs with insufficient awareness of the importance of the context in which certain things occur. The context is probably akin to organizational culture, though context and culture are not the same.

At least not initially. But over a longer period of time, perhaps the two, context and culture, are virtually identical and maybe the shorthand way to understand this is through the budgetary process.

In the big picture of things, an enterprise is built through its people and its processes. We hire certain people to do certain things. These evolve in scope and complexity over time but in most industries, they are similar with features peculiar, though not unique, to each industrial group.

Next, we organize the workflow or the processes. These require certain competencies to accomplish and this is where we see the importance of budgets, planning, and the practical urgencies of whom we hire for what ends.

Only then do we arrive at the stage of being able to assess the final outputs of these myriad processes and the validity of our hiring decisions.

Starting at the end, not the beginning

It seems to me that too many practitioners and managers tend to start at the wrong end of the process. They default, almost, to the outcomes and work backwards in a “tinkering” sort of way to control (manage) the various components.

When management operates this way, it’s almost impossible within the flow of what occurs to make important modifications to things that logically should occur toward the beginning of the process.

In thinking this over, timing itself comes into question. Do we start too late in the calendar for calculating next year’s results to impact the beginning of the process in any meaningful way?

Here’s an example of what I mean. Banking requires “salesmanship” at virtually all levels of customer contact. So how do we organize the process of recruiting, hiring, and retaining people to accomplish these jobs? 

Do we look for people with banking experience in various functional areas and then emphasize sales training and incentive programs? 

I’ve seen a lot of that and you have too. But wouldn’t it be more direct and simpler to seek out and hire people who have the natural gifts of an outgoing personality? And the ability to smile? 

It strikes me as a whole lot easier to hire someone with a pleasant personality and teach that person the banking business than to teach a sourpuss to smile.

I think the same thing way about how we should process the workflow. We need to engineer it in a way that produces certain outcomes and engineer the system from the top down rather than from the bottom up. What comes out at the bottom is the product of lots of upstream activity that simply isn’t looked at carefully and continually in terms of producing consistent and satisfactory results.

Achieving desired outcomes

Outcomes occur within a specific overall context. Determine the characteristics of that context and one is really describing the culture of the organization.

Try this for a way of describing culture: It’s a living, dynamic, and participatory present reality that is experienced in common with all the participants or employees of the business.

Can you “budget” that? 

No, but we seem to try with our narrow focus on downstream outcomes without sufficient reference to the upstream components of whom we hire and what competencies we assign to the various jobs and tasks that in total comprise the internal processes.

You’d be surprised if I shared the source of my definition of culture. But that’s a bigger story and we should get into that as a separate topic.

Meanwhile, it’s important today in the environment of thin margins, high competition, intense regulatory scrutiny and public skepticism of banks and bankers that we build a foundation for strong and consistent performance. But so much of what we do starts too far downstream to really institutionalize the process to our long-term benefit.

We tinker rather than build. We look for a “strong culture” but grope at results and don’t realize why the outcomes we seek are so often unattainable in the fullest sense.

Stephen Covey reminds us to begin with the end in mind. In too many banks, we start too late in the calendar and too far downstream to make the real changes that are needed to maximize result.

I wish you all well in the process. It’s necessary and useful but incomplete the way we approach it. We need to marry up the processes of planning and budgeting. Too often these complimentary tasks are performed by different people and certainly for different objectives.

Once again, we are demonstrating our institutional fondness for silos.

Ed O’Leary

Banking Exchange Contributing Editor Ed O'Leary, a veteran lender and workout expert, spent nearly 50 years in bank commercial credit and related functions, working with both major banks as well as community banking institutions. His last job before retiring was as the CEO of a regional bank headquartered in Alburquerque, N.M. He earned his workout spurs in the dark days of the 1980s and early 1990s in both oil patch and commercial real estate lending. O'Leary began his banking career at The Bank of New York in 1964, and worked at banks in Florida, Texas, Oklahoma, and New Mexico. He served as a faculty member and thesis advisor at ABA's Stonier Graduate School of Banking for more than two decades, and served as long as a faculty member for ABA's undergraduate and graduate commercial lending schools. Today he works as a consultant and expert witness, and serves as instructor for ABA e-learning courses. You can e-mail him at [email protected]. O'Leary's website can be found at

In mid-2016 O'Leary's "Talking Credit" blog received a bronze excellence award for the Northeastern Region from the American Society of Business Publication Editors.

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