"May you live in interesting times." This ancient Chinese proverb continues to describe the nature of banking. The banking community is going through the most challenging period since the Great Depression. Not only is the economy unsure, but flat interest rates, coupled with new regulation and increased consolidation, have caused massive structural changes within the financial industry. In brief, the task of management has become more difficult. It has changed from a maintenance task to one of survival. Today’s banker must be more sensitive to marketing, pricing, resource allocation, and productivity than at any time in the past. He/she must sharpen their business expertise, marketing skills, investment sense, and develop a tougher attitude toward expense control. To accompany all this, you must have the appropriate informational tools that allow you to assimilate and evaluate the impact of possible changes to the institution’s current and future income.

The planning process can provide the method, while the computer is the tool. Used together, these will give the banker who is willing to work, the edge needed not only to survive, but also to succeed under all conditions.

Let’s examine the planning process more closely and discuss what it is and what it is not, as well as take a closer look at the computer and its potential as a management tool.

There is a wide misconception that the plan presented to the Board each year should be a detailed statement of fact, a precise prediction of the future. Because of this ‘cast-in-stone’ nature, some bankers believe it is impossible to change this plan during the year. Somehow, over the years, bankers have merged the concepts of goal, plan and budget and made them synonymous. Other industries, however, have long considered it good practice to establish a goal and not change that goal; but rather, endeavor under any circumstances to achieve it.

A goal is not a plan, nor is it a budget. A goal is the desired result and a plan is one course of action to achieve that goal. As this discussion proceeds, let’s establish some rules that will help to enhance the planning process.

RULE #1 – ESTABLISH A GOAL AND STICK TO IT

The goal must be clearly stated and easily identifiable. In this way, management will know what is required, and when it has been accomplished. It may also be a combination of several components, as in the following example.

Goal: The bank will achieve a net interest margin of 3.5% and a return on average assets of .75% by the end of the year.

It is assumed in our example that the management team believes this is a realistic goal and that the Board of Directors has established the fact that .75% return on average assets will provide an adequate return to the shareholders. Please note this goal is clear and specific. It provides management the opportunity to be measured, yet the flexibility to achieve the goal using whatever methods are necessary and appropriate. The stated goal gives the end-point and the timetable, without telling management how to get there. Management must then develop the plans to meet the goals set forth.

The purpose of the plan then is not to predict the future, but to provide a road map to reach the goal. This concept of a road map is critical. A road map, as you know, shows the many routes that connect your current location with any other location. By examining the map, you will realize that you have many options to consider as to how you reach your destination. The best route, however, is a matter of choice. It could be the fastest, the most direct, the most scenic, or the one that takes us past a point of interest. If can also reveal alternatives to account for unforeseen circumstances along the way.

So, the plan is like our road map. It should layout many alternatives to reach our goal; keeping in mind that we cannot predict the future and we must be ready to change course as conditions change. This then leads us to establish our second rule.

RULE #2: DEVELOP SEVERAL ALTERNATIVES OR CONTINGENCY PLANS

Many organizations arrive at three basic plans – the best possible case, the worst possible case and the most probable case. This does not mean that they only develop three plans. In fact, they examine many different scenarios before the three are selected. Dwight Eisenhower is often quoted as saying, "The plan is nothing, the planning is everything." It is in the planning process that management will gain the most benefit. By considering different scenarios, management forces itself to develop contingency plans to deal with an uncertain future. Many times the planners will have to search for and find strategies that will succeed in a variety of economic environments.

All plans have one thing in common; they reflect the willingness of the management team to accept a degree of risk. This degree of risk will vary from bank to bank and must be compatible with the shareholders’ attitude toward taking such risk.

It is in the contingency planning process just described that a computer can assist management most dramatically. The computer cannot do the thinking for your, but will do the tedious and time-consuming computational work. The computer and the software used provides speed, accuracy and consistency to your analysis and planning. Planning and analysis provide continuous education and motivate creative change. By weighing all the factors and quickly seeing the result, planners are more eager to test alternatives. They gain valuable experience over a wide variety of conditions.

As an example, consider the following typical question: "What is the effect if rates increase at mid-year?"

Using a good computer model, we might discover that it will be disastrous to the net interest margin. Now we must ask, "What then could be done to protect the margin?" Answer: Find a resource allocation plan or a pricing strategy that will minimize the risk of rate swings. With this in mind, we can test specific approaches and different rate scenarios to find that special combination. Once it’s found, management will have to develop a marketing plan that will achieve the desired balance sheet structure.

It is important to note that in the contingency planning process, management is trying to gain control of many controllable elements. Many outside forces govern the balance sheet and management must understand these forces when planning the institution’s balance sheet structure.

As an example, by pricing mortgage loans high, the bank can limit the new mortgage activity. Or, by linking commercial loan rates to the prime rate and combining this with an active marketing program, the planner can structure the bank’s balance sheet to ride rate changes more effectively than with long term fixed rate mortgages.

In addition, many banks find themselves with narrowing net interest margins and so the industry looks to higher service charges. This is an example of banks believing they have little control over their interest margins, so they looked to areas where they do have control. If however they had planned and tested for these rate conditions, they may have discovered that may have discovered benefits from restructuring the balance sheet for greater liquidity and more flexible pricing.

The planning process is dynamic. As the environment changes, your plans should change to meet new challenges, overcome new obstacles, or take advantage of new opportunities. The more you plan, the better you will understand what works and what doesn’t work, and you will be better equipped to deal with change.

Check back for Part 2!