Good truly is the enemy of great. Good community-based financial institutions dot the landscape. Sometimes their position is such because they cannot overcome certain regulatory hurdles. Sometimes it is because they are simply not motivated to be any better than good. Other times it is a lack of good structure, strong competency, and fruitful stratification and domination of a market.

A myriad of other reasons can result in goodness and not greatness. Competitive advantage is somehow lost in today's rough and tumble, marginalized financial services market. It can, however, be achieved through optimal determination and execution of a sound, meaningful organizational structure.

Financial institutions have long been hindered by their stoic, compartmentalized management structures. It is time to think about organizational design and structure through a new set of lenses while keeping in mind both internal and external operations.

The first item of business is the fundamental apparatus, or basis, of our structure. Michael Porter, in his book Competitive Advantage, proffered the Value Chain. The Value Chain, as represented in the chart, suggests there are two major activities within the firm, primary and supporting. The primary activities begin with Inbound Logistics and end with Service. The other activities are supporting in nature. They support the entire enterprise.

Due to its highly-regulated environment, the modern financial institution differs from most firms studied by Porter. Because of this, it is important to consider a third key activity: primary, supporting, and financial, also referred to as “safety and soundness”. Of utmost importance is that no primary activities are more or less important than supporting or financial activities. Competitive advantage can be created within all of those entities and organizational structure will drive it there.

The organizational structure recommended consists of four key players:

Chief Operating Officer

The COO manages the Primary Activities in Porter's model. He or she leads the sales and servicing components of the business. Within this set of activities fall the branches, lending, servicing, and other business units (insurance, investments, etc.). The COO, broadly speaking, is responsible for front-to-back management of the member. Metrics such as member satisfaction, products-per-household, and deposits per branch are key elements of the COO dashboard, among others. The COO works in tandem with both peers, the CAO and CFO, to understand:

-What internal, support services will be required to enable the COO team, and;

-The costs, revenue, and ultimately, net income by product/service.

By leading all the operations functions, the COO leads the effort to bring together sales and service cultures as well as credit and deposit cultures. With one individual accountable for these various teams, the silo mentality begins to dissipate. The member becomes the sole focus.

Chief Administrative Officer

This role is fairly new in the financial institution realm, particularly amongst smaller, community financial institutions. The CAO is responsible for advancing the Supporting Activities and leads all those functions that support the enterprise:

-Marketing

-HR

-Training and development

-Facilities

-Technology

-Legal

This particular individual must be talented in not one individual area but also in leading a disparate group of individuals towards one goal: enabling those that enable the member! What a wonderful goal to have! This focus demands that the CAO and COO plan, execute, and work well together. Note: oftentimes, compliance can be integrated into the CAO's span of control. Several institutions have done so successfully. Having compliance outside of the COO's purview allows for better oversight and objectivity.

Ultimately, the CAO should be able to provide their services to the enterprise for the best economic value as compared to those same functions outside of the organization. Otherwise, the institution should seriously consider outsourcing these functions.

Chief Financial Officer

Safety and soundness–parameters a financial institution should not neglect. The CFO ensures the institution stays within the parameters dictated by the respective regulatory body. This is an enterprise-wide function. However, because of the highly regulated nature of the industry, it is cast as a separate entity. Its primary role in assessing its two siblings is the following:

1. COO

a. Determine the net income generated from products and services currently in place

b. Assess costs of facilities, overhead, and marketing for specific products and services

2. CAO

a. Determine the tangible value added to the institution compared to other functions at similar firms

b. Determine if internal marketing, technology, and other support services are cheaper and better than going outside of the firm

Also, the CFO will broadly interpret the institution's aggregate financial performance and seek ways to influence, and ultimately, improve performance.

Chief Executive Officer

Achieving marketplace effectiveness, or even dominance, in the modern economy can be a difficult road, at best. The CEO must lead a group of professionals entrusted with supporting and accounting for a sales and service effort that absolutely thrills members. The modern, community financial institution CEO cannot be tied down by too many direct reports. He or she must be able to reach out to the community and gain the best relationships that can be had for the institution. The foursome described is the beginning of moving the executive leadership team of the community financial institution from good to great and beyond. Key projects and change management initiatives will also play a crucial role in making this happen.

Instant Insights /

Organizational Design and the Modern Financial Institution

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