Chapter 10: Get Your Lenders to Engage, Not Revolt
Our Story So Far
If you’ve made it this far, you’ve embraced the concept of a pricing ecosystem and you’ve got an idea of what pricing tool you’re going to buy and how you’re going to make that purchasing decision.
Now comes the really fun part: Getting your lenders to actually use it.
Before you can get to that point though, rolling out a new pricing system requires some work on a broader, higher level at the bank. It’s a necessity given the cross-functional and complex nature of pricing. Embracing the Price Getting aspect – and everything that follows from that – requires deep organizational change. You need to put a great deal of thought into the cultural and planning phases of implementation.
Banks get a bad rap when it comes to change. Almost every piece we read on bank innovation mentions that amazing new technology is available, it’s just that the darn banks are no good at implementing new things. If we’re honest, we’ve said similar things on our blog and podcast.
But, to be fair, banks actually have done a pretty good job with innovating over the last decade or so, particularly given all the other pressing issues they’ve had to handle. How many of those smug fintech competitors have had to rebuild nearly every process in their shop to comply with thousands of pages worth of new regulations?
Struggling with change is not unique to banking, as all organizations in all lines of business face similar issues. The simple fact is that humans are creatures of habit. We see this firsthand when we roll out our pricing tool in new banks.
The technology part of it is incredibly easy. Since we are a cloud-based solution, it is simply a matter of turning on their account and then showing them how to configure it. The real pain comes when we take away the tools the bank had previously been using and try to build new processes around our solution. The habits are WAY harder to change than the tools.Over the last several years, we have rolled out the PrecisionLender pricing and profitability solution to hundreds of banks and thousands of users. And, if we’re being frank, we’ve achieved varying levels of success during implementation.
A few clients took to the new approach quickly, and were off and running with huge results right out of the gate. A few others haven’t been as successful, and have struggled to get the right people on board with all of the changes. Most fall somewhere in between. They see tangible results in a short time, but know they are still leaving money on the table through their inability to get everyone rowing in the same direction.
In short, we know firsthand that change is really hard, especially when you are changing something like pricing, which is so cross-functional and touches almost every part of the bank. While we’ve earned our implementation stripes rolling out software in banks, the lessons we’ve learned there can be applied to change (of tools, processes, people, etc.) in any type of organization.
To understand why the habits are so much harder to change than the technology, we’ll share a popular story that just happens to be based on some bad science. Stay with us and we’ll explain the bad science part.
The Five Chimps Experiment
Years ago, scientists did a study with chimpanzees. They put five chimps in a small room that had a ladder at the center with bananas at the top. Whenever one of the chimps would climb the ladder to get the bananas, the scientists would spray the other four chimps with a hose. Chimps are smart, so it didn’t take long for them to figure this out. Pretty soon, whenever a chimp would get hungry and decide to try for the bananas, the others would pull him away. If he was persistent, he would get a beating from his fellow chimps. No one likes to get sprayed with a hose.
Then came the really interesting part of the study. The scientists removed one of the five chimps, and replaced it with a new one. Of course, the new chimp immediately tried to climb the ladder, and received a beating for it. He eventually caught on, and gave up on the bananas.
The scientists then removed another of the original chimps, and replaced him with another newbie. Just as expected, he started to climb the ladder, and received a beating from all the others. Then came the surprising part: The first newbie joined in on the beating of the second one, even though Newbie No. 1 had never been sprayed with a hose. He didn’t know why it was a bad thing that Newbie No. 2 was trying to climb the ladder, but he helped pound on Newbie No. 2 nonetheless.
The scientists kept replacing chimps one by one, and pretty soon they had five chimps in the room that had never been sprayed with a hose. And yet, any time one of the chimps would start to climb the ladder, the other four would administer a beating. They had no idea why they were doing this, just that it had always been this way.
Now the bad science part: It turns out there’s no evidence this experiment ever happened. Instead, it seems that people have blended stories about a couple of studies, and the chimps with the ladder exhibit behaviors that are really only shown in studies of humans.
But the mythical five chimps experiment gained widespread popularity nonetheless, because it strikes a chord with nearly everyone. We have all been in situations where a behavior or practice is deeply embedded in the organization, and getting rid of it is nearly impossible. No one knows why they are doing it, just that it has always been that way.
Where Can You Make Mistakes?
Being aware of this phenomenon, though, doesn’t solve the problem. After years of implementing new systems and processes in hundreds of banks for thousands of employees, we have learned a few key principles.
We’ll start with the foundation of change, which is all about culture. Of course, the overall culture won’t change overnight. So instead, we will touch on one small, but important aspect: Is it okay to make mistakes in your bank?
In a lot of banks, mistakes of any kind are simply not tolerated. It’s understandable. As Dallas’ first boss told him when he got into banking, “If the owner of a retail store is right 95% of the time, he becomes Sam Walton. If a banker is right 95% of the time, he is out of a job.” When it comes to credit, regulatory compliance, or fraud, that is absolutely correct. The problems occur when we allow that mentality to pervade across the organization, and creep into all of our decision making.
If you think about this from the perspective of your staff, you will understand why your new initiatives meet so much resistance. The status quo is proven and safe. If we stick to that, no disaster can befall us, and if so, it’s not our fault. We were just following the established procedures and the entrenched tools. Trying something new, though, is risky. What if we change a process and it fails? Now we can be blamed for rocking the boat when we should have just stuck with what was working.
To overcome this, the leadership of the bank needs to differentiate the areas where perfection is the standard (credit, etc.) from the areas where it is okay try new things and fail. For example, what if we tried having the lenders use the pricing tool instead of having the analysts do it for them? Granted, they might enter it wrong. But it might also speed up the process AND allow that lender to come up with a better, more profitable, structure that the borrower prefers. But unless everyone knows that it’s okay to try something like this, you will get big push back on every small change and you’ll miss out on a lot of potential benefits.
The key is essentially matching up the risk and reward for your employees. In the right areas, make sure they know it’s okay to try to climb the ladder. Make sure they know there is the potential for a reward, and – more importantly – that there is no hose for them and their teammates if they fail.
Going From Concept to Reality
Getting your bank on board with the concept of change is one thing. Turning that concept into reality, in the form of a project that fundamentally alters the way the bank does its business – that’s another.
Here are a few tips on how to take those ideas out of the clouds and into your bank’s everyday operations.
Sell the Future State
Once the foundation has been set with a culture that embraces change, it’s time to start selling. In order for any big project to succeed, you have to sell the future state and all its accompanying glory. We all know that the journey may be a difficult one, but if we can at least see the light at the end of the tunnel, we can get on board with it.
There are two important distinctions to make here. First, the benefit of this future state is all in the eye of the beholder. For example, when we look at who are champion is at each of our clients, we see an almost equal split between finance and lending.
In the finance/treasury world, they may be excited about better risk adjusted returns, improved margins, and better allocation of capital. The lenders? Not so much. They need to know how it will affect their ability to serve their customers and grow their portfolios. If the project creates an impediment to either of those, then it is likely doomed from the outset, regardless of what it can do for margins and capital allocation.
In a similar vein, if the lenders are excited about getting a sales and negotiation tool to win more deals, the finance group may have a little heartburn: Are we letting the foxes guard the henhouse?
An effective project will take an inventory of each stakeholder, and make sure there is a future state for all of them that is worth the effort. If you don’t have that, then you might need to rethink the whole project.
Secondly, selling the future state doesn’t mean you need an unalterable master plan. You will learn as you go, and plans will most definitely change. You aren’t selling a precise road map, but rather the improvements that will be seen once you get there.
Get User Input Early and Often
In the “old days” of software and systems (like 5 to 10 years ago), all vendors knew to sell directly to the C-suite, and then the bosses would impose the tool on the end users. The tool was used because it was required, but the end users often hated it, as it was chosen by the people who would have the least amount of interaction with it.
A classic example is the early versions of CRM, where management teams wanted all of the data and insights into the sales process, but were not the ones who had to actually do all of that manual data entry. Instead, the software was just something inflicted on the staff so the bosses could get the reports they were after. Let’s just say the results weren’t what was promised, and a lot of organizations soon abandoned some very expensive projects.
We see a similar issue with pricing. If the end users – in our case the lenders – don’t use it, then nothing else matters. It doesn’t matter how robust our reporting is or how flexible the product configurations are if the lenders hate it. Therefore, we design everything to start at the lender and work backwards. In our opinion, this extends all the way to the buying and implementation process.
Before buying PrecisionLender, we’ll insist that the lenders see it and agree that it’s a tool that will be valuable to them. We also suggest putting a couple top producers on the project team. They usually resist at first, but it is the best way to make sure they get a voice in the process. We don’t want to impose a tool on them; we want to let them help design a tool that allows them to do their job better.
This same principle applies to any new tool or process. The end users, those who will be most affected, should not be the last to know. Getting their early buy-in and giving them a seat at the table will head off a ton of problems later on. After all, it’s a little harder to revolt against a tool or process when you had a vote at the very beginning. Skin in the game is a powerful motivator to make it work.
This is a topic we have discussed many times, but every new endeavor needs a clear owner. Someone needs to have both the responsibility and the authority to move the project along, and with that comes clear accountability. Committees can certainly be used to help, but there must be an individual’s name attached to it if you want it to be done on time and on budget. In our world we refer to this person as a Chief Pricing Officer, but every project needs a similar role.
As one of Dallas’ bosses once told him, “There are lots of people involved, but I’m putting you in charge so I have one throat to choke.” Dallas definitely got the point, and made sure that the project was herded through as planned.
Conversely, if your bank chooses not to implement change, someone needs to own that decision as well. When the outcome of staying status quo rests on someone’s shoulders, it no longer becomes a state that’s easily defaulted to in lieu of change.
The most common objection we get from prospects is that, because they already have so much on their plate, they can’t imagine adding another project – especially one that will touch many parts of their business. This sentiment doesn’t change just because the bosses decide it’s a priority. The project team often walks into the kickoff meeting expecting the worst, as their plates are full of other projects that are behind schedule and are falling short of promised results.
To combat this, when implementing PrecisionLender we simply reduce everything down into manageable pieces. Everything from configuration to user training is broken down into a bite-size chunk, and then assigned to a person with a due date. Once we start making progress, we communicate that over and over again.
When a team can see measurable forward progress after a couple of weeks, and realize that it actually wasn’t so painful, the project tends to pick up momentum. Yes, this takes a fair amount of advance planning, but it’s always worth it.
Shorten the Time-to-Value
The final item on our list is one that is closely related to several others, but it’s important enough to merit its own section. We see a lot of banks that do a great job with selling the future state, but still wind up in projects that eventually become so long and drawn out they lose momentum and stall before completion. Banks are usually beholden to the annual budget cycle, which means anything that stretches out too far without generating results runs the risk of losing resources.
To keep everyone engaged in projects, it’s vital to shorten the time-to-value. That means getting some early wins that keep everyone engaged in moving things forward.
Modern software can do this as long as it is built into the plan from the beginning. In our case, our goal is always to have the system configured so that deals can be priced with it inside of a month. Yes, more tweaks will be made, and we are often still finishing up integrations and data feeds. But, deals can be priced and won, and benefits (and goodwill) can start accruing very early.
This heads off a lot of frustration from both users and management, and helps keep the back end of the project on track. Getting something live and “in the wild” sooner also has the added benefit of accumulating new data. We learn what works and what still needs to be adjusted early enough to easily make the changes. It is always harder if you wait.
With that said, change is hard. We know this firsthand and we’ve witnessed many banks struggle with it, as well. But positive change also brings opportunities. With the right processes in place, you’ll be ready to implement those changes and vault your bank ahead of the competition.
Training: The True Test
We’ve now come to where the rubber meets the road. You need to roll out the new pricing system to the lenders and get them to actually use it in the way it’s intended.
Unfortunately, when rolling out any piece of the ecosystem of tools we described in Chapter 8, you might be fighting against some deeply held grievances.
Most lenders have had an awful pricing model inflicted upon them somewhere along the way, and they’ll eye any new tool with a healthy dose of skepticism. This is one of the reasons Carl has banned the term “pricing model” when referencing our own software. He considers it a borderline fireable offense. This deeply embedded skepticism is why it’s so important to involve lenders early; if they aren’t part of the buying decision, you might already be too late.
To overcome this kind of bias, you will need a carefully orchestrated rollout. We consider the implementation a full-blown marketing campaign, and put a lot of effort into the messaging. Lenders will start getting teaser emails well in advance of training, all with the intention of softening the hard feelings and building some anticipation. By the time they actually show up at their training session, the lenders should be curious about the specifics, and at least believe you are making a genuine attempt to provide them with a tool that is for their benefit – not a tool that will be used to police them or limit their pricing independence.
The training itself is incredibly important. The goal of this session should not be to make your lenders technical experts on the new pricing tool. Instead, the goal is to get them beyond the Price Setting issues and concerns so they are thinking about Price Getting. What is the best way for them to talk about price and structure with their borrowers, and how can this new tool facilitate that discussion?
To this end, don’t lose your users by getting too far into the weeds. If you’ve done your job well to this point, you’ll have a tool that is intuitive and easy to use and that is well supported by the vendor with lots of self-serve training and help material. Your users don’t need to know what every single button in the system does, nor is that a realistic goal for training. Instead, the goals of a successful training session (for any tool) should include:
- Keeping it short. No one can pay attention through a four-hour training session, no matter how good the trainer is. And lenders aren’t exactly known for their long attention spans.
- Focusing on the end results. Spend your training time on what the tool generates more than the “click here and check that box” technicalities. Your lenders should leave knowing what kinds of borrower conversations the tool will facilitate; they can figure out where to click to make that happen as they go. The system has been “hired” to do a job, and understanding that job is far more important than all of the ins and outs of the tool.
- Creating excitement for the users. They should be intrigued enough by the potential value that they are clamoring for the opportunity to play with the system. This is the only way you will really end up with fully functional users. If they need to be shown every little click they will ever make, you will end up with users who only know a small percentage of the full functionality.
- Doing it in person. Strive do the training on-site if at all possible. Yes, most of these things can be done remotely via the web or by pre-recorded training videos. But their effectiveness is a fraction of what can be accomplished when the training is done in person. For systems and tools this important, it’s worth spending the extra time and money to do multiple sessions to get as many people face-to-face as possible. The ROI on the technology will be far higher, and will easily cover this added expense.
Who Are Your Power Users?
Another key for training is determining the individuals who absolutely must become power users of the tool. Of course, the aim will be to make all users at least proficient, but keep in mind the disproportionate production we discussed way back in Chapter 6 (What Makes a Great Lender). If your bank has a typical Zipfian distribution of loan profits, then focus your attention and resources on the dollar and quarter lenders, and not the nickel and penny lenders. Worrying about getting ALL users to an acceptable level of proficiency is not just difficult; it may well be impossible.
As proof, we offer up the story of Steve.
The Story of Steve
Steve was a lender at one of our early clients, and was actually quite enthusiastic about learning the new pricing tool. He had been told how important it was to the bank, and he was nothing if not diligent. But let’s just say that computers were not Steve’s strong point. We fielded a steady stream of support calls from Steve that covered a wide variety of issues. They ranged from “What is my password?” to “Can you please show me again where the collateral gets entered?” One common element, though, was that Steve always politely suggested that we should include our phone number on our support site. He explained that doing so would make it far easier for him to contact us, as instead he had to keep calling the bank’s Treasurer and asking for the number.
This flummoxed us, because we had made certain to put the phone number on the support site. Email or direct tickets are a little more efficient for us, but we are always happy to meet our clients in whatever channel they are most comfortable with, so we had put the number prominently at the top right corner of the page from day one.
Steve, though, insisted it wasn’t there, and eventually progressed from politely asking to demanding that we add it. We scrambled to figure out the problem, running a variety of browser tests and even brought in the bank’s IT department. We eventually set up a screen share so that our team could see the exact same screens that Steve was seeing. As soon as it popped up on the monitor, it became painfully obvious what our problem was.
You see, Steve had, somewhere along the way, set his browser to be zoomed to +400%. For some undetermined amount of time, he had been viewing only the very top left corner of the entire internet.
It was at this point that we realized the true extent of the task we had signed up for, which happens to be the same task you face in improving pricing. On one hand, your very best lenders will demand a powerful tool that can handle incredibly complex structures. They intuitively know how important structure and pricing are to their customer relationships, and don’t want to be told they can’t quickly offer an option to a borrower because the pricing tool can’t handle it.
On the other hand, you will have the Steves of the bank. They will use the tool when asked, but getting them up to speed will drain every bit of your resources. Since getting ALL lenders to use ALL of the functionality in the right way is a Herculean (maybe impossible) task, instead focus your limited resources where they will have the maximum impact – on the lenders who are generating the vast majority of the volume. As with all things related to pricing, don’t let perfect be the enemy of good.
The Adoption Phase
The training of your lenders will feel like the grand finale to your project. To some extent this is true. If you have followed the playbook and executed it well, there will be immediate and significant improvements in the bank’s performance. Your lenders will be using pricing as a way to build relationships instead of treating it as the necessary evil in getting a deal done. However, a true pricing transformation doesn’t end with the initial roll out to the lenders.
For starters, this is pricing, which means you have a whole lot of additional stakeholders to make happy. Management will need to close the loop on all of the investments made to this point. Finance will need to see how the pricing targets are translating to production. Credit will need to figure out how they interact with what is likely a change in the order of operations.
And don’t forget that all those freshly trained lenders have to actually start using the software.
In short, you have rewired the brain of the bank described in Chapter 8, and there will be some lingering pain. What you are experiencing is the critical, but often ignored, Adoption Phase.
The Adoption Phase is the point in the project where momentum must be maintained, problems must be identified and corrected, and good habits must be formed.
If not? Well …
Every vendor has its share of adoption tales of woes and we’re no exception. Here are some of the mistakes we’ve seen and the lessons we’ve learned along the way.
Creating Uneven Playing Fields
Any time a new system is implemented at your bank, there’s going to be an early period in which you need to build up the trust of the system’s users. They have to feel that the system is there to benefit them and make their lives easier. Nothing sabotages those efforts faster than doling out access to the system unevenly – with some lenders getting licenses and others having to share access. It creates a pricing caste system and it makes it very hard to track performance. If your lenders don’t feel you’re judging their performance fairly, you’ve got a big problem on your hands.
Refusing to Remove the Training Wheels
Ever see the Seinfeld episode where Jerry buys his father, Morty, a new handheld electronic organizer called “The Wizard”? Morty tells Jerry he loves the gift, and then proceeds to only use it for calculating tips – much to Jerry’s chagrin.
Banks are making the same mistake when they purchase a pricing tool and then only let the lenders do the bare minimum with it. By failing to trust and empower their lenders, they’re basically heading down the same path Ryan took in Chapter 7 – one that ended with the lenders rebelling against the pricing tool (and Ryan).
If you’re not willing to give your lenders that level of freedom, then you either need to A) Refrain from buying the software, or B) Bring in some new lenders who will inspire more confidence.
Putting the Cart Before the Horse
This doesn’t happen too often, but we have seen banks get so excited about the potential of a new pricing tool that they put one in place before they have a pressing need for it – i.e. enough lenders to leverage the tool’s power or a large enough commercial book to impact the bank’s bottom line.
It’s great to be looking ahead when it comes to technology. Just don’t look too far ahead.
Setting It (Up) and Forgetting It
It’s sorely tempting to stop and take a break after pushing through the purchasing, implementing and training phases. Don’t do it.
At this stage you’re being watched very carefully by your lenders. Chances are they feel a bit jaded when it comes to new software. They’ve probably experienced at least one “next great thing” that never got any traction at the bank. So they’ll be looking for signals from bank management when the new pricing tool comes out.
If you fail to provide incentives for putting the new software to use or you don’t make it clear that there will be repercussions if the software isn’t used, then you’re sending a loud message to your lenders. It says: “We’re not really that invested in the success of this software.”
If management’s not going to buy in, then why should the lenders?
Getting Incentives Right
Of course, you can’t just dangle any old carrot in front of your lender and expect the right results. To ensure your pricing overhaul is successful, you might just need to overhaul the incentive compensation for your lenders, as well.
There are countless examples of incentives gone bad, leading to unethical behavior. But most banks are actually pretty good at this. They have enough controls and balances in place to avoid truly ugly ethical scandals. Instead, banks more often fall victim to the law of unintended consequences.
The most common example of this is found in the call center. The call center staff is measured on number of calls answered or average call length. Yes, you get the efficiency you’re after, but you also get an awful experience for your customers as the staff plays hot potato with the issue, quickly (and rudely) passing off anything difficult instead of taking ownership of the problem and solving it for the customer.
Unfortunately, these kinds of misaligned incentives are everywhere in banks. Dallas ran across dozens of them in his banker days, including a few that are incredibly common but also qualify as real head scratchers.
For example, most banks incentivize their tellers to have balanced drawers. At the end of a week or month, any teller that has not had offage will receive a small bonus. Dallas saw tellers who spent hours searching for where they got off by a dime. This was not only lost labor, it also caused long customer lines as tellers helped each other look for mistakes during shift changes or day changeovers. All because of a dime.
In another bank, the credit analysts were measured on the number of credit memos they generated in a month. As you can imagine, the memos were sloppy, and important red flags were missed. Even worse, this system also ensured that the large, complex deals, the time consuming ones you’d want to avoid, ended up in the hands of the people without enough clout to pawn them off on someone else – the most junior analysts. The bank’s most critical deals were being underwritten by kids who were weeks out of college instead of by experienced experts. Not surprisingly, this bank got waylaid with some huge losses during the financial crisis.
The bottom line is that incentives matter, and they need to be well thought out. But since commercial lending is the biggest source of both profit and risk in the bank, surely the incentive plans there have been perfected, right? Not even close. We see two mistakes on a regular basis that tend to do more harm than good.
It’s All About Size
Most lenders are incented on the size of their loan portfolio. Period. Yes, banks are probably measuring lots of other things, including spreads, fee income, deposit balances, and loss rates. But in most banks, lenders know that this is just noise. When it comes time for raises, bonuses, and promotions, it is ALL ABOUT the size of the portfolio. Did you grow your portfolio by $25 million last year? Then no one will say much about the relative risk or profitability levels, and your bonus is safe.
There are obvious problems with this mindset, and most bankers are fully aware of them. They know that lenders will do anything to avoid adding friction when a loan is on the verge of closing. Asking for that extra collateral, or the personal guarantee, or to move the deposit balances is an afterthought at best.
So why does this approach persist? The answer is essentially that it is easy. Portfolio balance is the one number that every lender knows, and since it does have a positive correlation with profitability, why not use that? Just remember that as in all industries, you get what you pay for. If you pay for loan growth, you’ll get it, but usually at the expense of profitability, or risk management, or both.
Getting Too Metric Happy
The second big mistake we see is a result of the effort to avoid misaligned incentives and unintended consequences. In trying to close all of the loopholes, banks end up incentivizing lenders on almost everything associated with their deals.
Bonuses get calculated using a massive spreadsheet that combines loan growth, loss rates, cross selling, duration, prepayments, and anything else the bank can think of to throw in. If you measure and incent on too many things to keep track of, then you really aren’t measuring anything. It has to be simple and straightforward.
The good news is that risk-based pricing will give you just that metric – a number that incents the right kind of behavior without sacrificing profitability or safety. For every deal you price, and for every account already on the books, you calculate a risk-adjusted net income. This number takes the good parts of measuring portfolio balances (the fact that more loans usually means more income) but removes the temptation to add unprofitable deals, bad structures, or risky credits. They all get dinged too much by the risk adjustments to benefit the lender.
By measuring lenders on an income number, you can get them to start thinking like owners of the business. Their portfolio becomes their own little enterprise, where they try to maximize their income each period but with an awareness that all their actions have repercussions that matter.
Taking a Short-Term Approach
Finally, we’ll leave you with one last lesson we’ve learned on aligning incentives with the desired behavior. When you get access to all of the incredible data that pricing and profitability tools generate, the temptation is to use it as the nominal starting point to make all decisions. If you see that Bob has the most profitable portfolio, the temptation will be to focus on Bob to the exclusion of your other lenders when it comes to bonus or promotion time. The same is true for profitable customers.
But, we’ve found that measuring trends tends to be far more powerful than measuring absolute levels. For any sector of your business, any customer, or any lender, you should aim for incremental progress towards your ultimate goal. This is a surprisingly effective framework, and worth digging a lot deeper on. That’s where we’ll head for Chapter 11.