“The only things that evolve by themselves in an organization are disorder, friction and malperformance.”

Peter Drucker

A note from Jack Hubbard, Chairman,
St. Meyer & Hubbard

The number of positive calls, flattering e-mails and kind notes Bob St. Meyer & I have received about the December 2004 Conversation Signposts newsletter have been most gratifying. Congratulations to Linda Benjamin and Holly Sansone for crafting a truly marvelous edition about becoming a Performance Bank.

I’ve made the editorial decision to swap Linda and Holly’s subject matter with my thoughts on trends on small business for one specific reason – revenue. Your revenue that is. Banks have done increasingly good work attempting to reach this vitally important segment but there is still much to be done. The information contained below might spawn some ideas and I wanted to be certain we brought it to you as soon as possible. Happy 2005!

Jack Hubbard
Chairman, St. Meyer and Hubbard

Small Business Gets Bigger

Attend an industry conference, read a trade publication article or just live on our planet and you’ll hear the staggering number of small businesses that operate in the USA. It’s huge; millions and millions.

Barlow Research (www.barlowresearch.com) indicates there are approximately 6.1 million companies from $100,000 to $10 million in sales, 67.3% of those in the $100,000 to $500,000 range. About 1.23 million firms top the $1 million revenue line. This number is on the rise. A recent survey commissioned by Capital One and Consumer Action reveal that 40% of Americans dream of starting their own business. It’s also interesting to note that the U.S. Census Bureau reported in 2003 that 4.5 million Americans work from home. That is a 32% increase over 1990 data. A good majority of the more than 500,000 company start ups in 2005 won’t make it. Those that do will add great value to the balance sheets of the banks that earn their business.

Small Business America continues to be a confident lot. An October 2004 Greenwich Associates study indicates that 55% of $1 - $10 million enterprises plan to increase their number of employees in 2005, 47% will purchase capital equipment and 55% will purchase information technology. Good for us. The banks that have created energy and focus around this key demographic have found that small business is generally 4-10 times more profitable than the consumer customer.

There is an interesting challenge in this mix for 2005 and beyond. The Business Banking Board reports that 27% of CEO entrepreneurs plan to retire over the next five years and 26% more will exit the business in the next 6-10 years. This presents a huge risk to banks if changes are not made to sales conversations.

Bankers that are focused simply on hitting their short term numbers (usually because they are forced to push products by their sales manager) are missing an opportunity to keep the business in their account base for the long haul.

As we get behind those numbers there are several things to ponder:

• How can our bank find, touch and do business with SOHOs (Small Office, Home Office)?
• How can we pinpoint the type of start up enterprises that will make it past the three year hurdle where most business owners wipe their brow and go “Whew! We Made It.”
  
• How do we need to segment so that our bankers are contacting and working with the kinds of businesses that will provide a return on their time investment?
  
• How does our strategy reflect the needs of the marketplace to do business in a relationship mode? How do we create a culture where a customer and demand strategy replaces the typical product strategy?
  
• How can business banking work in a team orientation to look at the total business – including owner(s) and employees – and look beyond the DDA and Line of Credit to a total Trusted Advisor focus?
  

Women Owned Enterprises – It’s Not a Niche Anymore

According to the Business Banking Board women owned businesses outdistanced their male counterparts on the revenue side by three to one from 1997 to 2000. The number of women owned firms is expected to exceed eight million by 2012. It’s not enough, however, to be able to articulate that women make 89% of the financial related decisions or that their companies employ 19.1 million workers. How do we reach them and what does that sales conversation sound like?

It’s 2005 bankers. Think about the fact that women entrepreneurs:

We also need to know that many businesses begin in, or even stay in the home. Something we’ll see more of in 2005 is the “Mommytreneur.” These well educated, highly motivated career women have had children and are now prepared to integrate business ownership to their lives, perhaps working from home to begin with.

The Pampered Chef, for example, is a 23 year old business located in Addison, Illinois. Doris Christopher, the firm’s CEO got the idea for the business while she was a stay at home mom. Now, with an 800,000 square foot corporate headquarters and 70,000 independent consultants nationwide, the Pampered Chef has made its mealtime mark worldwide.

Finally, while women, like their male counterparts, want to be made to feel special as your customer, they don’t necessarily want special treatment. That means that while we will see more and more Women Entrepreneurs Divisions within banks, it does not necessitate that women bankers always call on women owners or that special products need be developed especially for women.

As your bank seeks to partner with Women Entrepreneurs here are several things to ponder:

• How do we create networking opportunities for women business owners in the markets we serve?
• What would our return on investment be if we created a Women’s Division that makes female owners a higher priority?
• How do we arm our bankers with the kinds of questions that focus on the needs of women business owners that transcend products and banking services?

The Silos Must Fall And The Blurring Will Continue

Internal politics continues to hold the industry back from taking full advantage of revenue opportunities in the small business space. In 2005 more banks will realize that small business should be its own line of business yet synergistically linked to every other division of the bank.

Mortgage counts on realtors for referrals. Cash management, of course, is a key player in serving the needs of small businesses. Even phone centers at larger banks have special segments devoted to exceeding the expectations of small business clients.

Finally, there will continue to be a blurring of the line between small business and the middle market. In some banks, small business is focused at the $1-$3 million in sales mark. In others it rises to $5 million and $10-15 million or even higher is not out of the question in more urban environs. Many middle market bankers don’t want to be put into the small business bucket. Pride won’t allow that. However, due to the shrinking number of middle market firms, commercial bankers are many times forced to “poach” at the lower revenue levels to hit their numbers.

Account transfers will always be a fact of life. The branches get the micros, small business gets the castoffs from middle market which, in turn, tries to grab the upper crust from small business. This will be an ongoing occurrence but when it is done poorly the only winner will be your competitors. We know a bank that recently transferred 150 clients from commercial to small business with absolutely no plan as to how to communicate with the customer, how to make joint calls with small business to hand the relationship off, nothing other than a generic letter.

Each of those 150 relationships is now at risk. On the other side we see commercial “stealing” accounts simply because they reach a size larger than where the branches or small business tread. Little or no thought is given to how long the relationship has resided with the current RM, who brought the relationship in or even if a particular banker was responsible to help the business get started and grow. The customer is in the middle of this fight in the short term but in the long run the bank loses – the relationship.

One final key player in this process is the Call Center. Several banks have gained a clear understanding that the customer touch does not have to be face to face. It can be voice to voice. Whether the contact center is tens or hundreds of seats one thing that will become more predominant in 2005 and beyond is putting business banking specialists into the center to deal with the unique needs of entrepreneurs. There are three key areas to consider.

• First, make certain that customer service associates have the knowledge and skill to deal with the specialized challenges faced by the small business owner.
• Second, deck proactive sales associates on the telephone against an assigned portfolio of customers to regularly touch.
• Finally, have someone at the Call Center available to answer operations, technical and logistical questions for field calling officers.

Each skill is unique so don’t make the mistake of trying to make one banker into all three people just to save on FTE.

Infrastructure – Hiring, Paying. Packaging, Report Actionizing

Banks’ success in the small business arena results from a focus on blocking and tackling. One key issue is getting the right people on the team. In this regard banks will continue to migrate toward sales acumen testing in 2005. It is nearly impossible to take someone without a desire to sell and put them through sales training program after sales training program and suddenly make them into sales animals.

Pre-employment testing gives the bank a sense of whether this person can cut it in the field. The Predictive Index and the Chally Group’s battery of behavioral evaluations are two resources that help managers get a better understanding of whether they are renting the time of a business development officer or a portfolio manager.

Behavioral interviewing techniques will also be much more widespread in the coming year. One question candidates will hear more often is whether they built their book or inherited it. This is due to banks understanding that customers are much less likely to move banks over and over again as the banker changes jobs and that the bank only receives a return on their human capital when the human can sell.

Another area of hiring that will occur more in 2005 is for Sales Assistants. Banks falsely believe that an SA is nothing more than overhead. Quite the contrary. A support associate possessing sales acumen will not only help the RM with marketing, pre-call prep and tailored presentations, they are very much up to the task of helping to deepen current relationships. That will, of course, necessitate the need to hire “up” when the bank is looking for a Sales Assistant.

In fact, since most small business RMs have 150 clients or more in their portfolios, several large banks are now teaching their Sales Assistants to proactively work with the clients that the banker will never reach out to due to time constraints.

This leads to our discussion of incentives. In the brokerage business, top performers are rewarded by receiving an administrative assistant. Banking will begin to see the wisdom of this approach in 2005. The ratio of RM to Sales Assistant is now about 3 to 1 in small business banking. An incentive we will see more and more in 2005 is that if an RM can pass a high sales hurdle, he or she will receive an admin of their own. This will help them become even more effective and the SA will win since they will be able to play in the RM’s incentive program. And why shouldn’t they?

While we remain in the dark ages of incentives, banking in 2005 will begin to join the ranks of other industries that have cracked the pay for performance code. Harder looks will be taken at making programs easier to administer and to understand, paying more often than annually, removing the caps, paying overrides for sales managers that help exceed expectations and making both the upside potential and downside risk come more into focus. Incentive compensation is both a technical and highly emotional issue. It is never an exact science but if we do nothing to improve the pay structure, banks will continue to lose top sales performers to other financial services firms such as American Express, Merrill Lynch and others that are active players in small business as well.

One other key initiative banks will tackle in 2005 is Report Actionizing. Receiving rafts of paper during the year is unimportant unless something is done with it. One key report banks will act on in 2005 is what some call The Money in Motion Report.

When bankers have data that tracks the inflows and outflows of deposits on a weekly basis it becomes easier for them “proact” to these situations. Bankers should consider receiving this report for the top 20-30% of the clients in their portfolio.

Then, when significant activity occurs a contact should be made since there is clearly money in motion. This gets at the issue of diminishment – a concept that in essence means that customers tend not to close their account with the bank they are unhappy with since they may need that bank in the future. Rather, businesses have begun leaving the minimum in the current DDA and taking the rest to another provider. This gives the incumbent bank the false sense that it has “retained” the account. In fact, the relationship is now with another bank. Looking at, and acting upon, a Money in Motion Report can potentially mitigate some of that diminishment.

Finding New and Better Ways to Add Value

Listen to business owners and you’ll hear that having knowledge of their industry and adding value are two ways to cross solve (we don’t believe in cross selling) the relationships you have and to acquire more of the business you don’t. Our challenge in the past is being able to articulate what “value” really means.

Juxtapose that with the fact that while most banks do something to honor their COIs (lunches, golf, ballgames) few do anything to help their CPAs earn the 40 hours of annual CPE credits they need. Simply working with the local or state CPA association and holding a two-hour breakfast meeting on an educational topic can do double duty. In addition, while corporate taxes are due March 15, most bankers make a big deal about taking lunch to their CPAs on April 15. Have we missed something here?

Bankers are also beginning to realize that if it takes six calls to make a sale on a prospect then there is no reason to either take bank literature on call one or even present a product for that matter. Banks in 2005 will begin to get this and will have their bankers take relevant articles as first call leave behinds versus the dreaded “pitch book.” Some of our clients are now leaving a book list containing titles of sales books that can help the business make more money. Now there’s value!

We’ve discussed First Research in a previous issue but its worth bringing up again. Founded by a former banker in 1998, First Research (www.firstresearch.com) delivers critical knowledge about more than 150 industries. First Research industry profiles are the right blend of industry jargon and plain English to help the sales professional gain confidence in knowing the current state of an industry, business issues that are keeping executives up at night, and important occurrences in the industry during the past quarter. This is an affordable way for small business bankers to stay current and to help their clients understand best practices.

Finally, we know of two banks that are attempting to help business owners network better. One is offering Networking Dinners where entrepreneurs meet, eat and exchange business opportunities. Another is called PRO, the President’s Resource Organization.

Monthly meetings are held where CEO’s meet with a small business consultant to discuss issues and challenges in a peer-based setting.

Each of the above are tangible “value adds.” Think about “value starts” though. When bankers make early cycle calls, the questions they ask (smart ones) help articulate value Socratically. It is not uncommon for a banker to invest 80% of their planning time based on what they will SAY and only 20% about what they will ASK. That equation needs a facelift in 2005. When it comes right down to it, adding value simply means to decomoditize the bank. Your differentiators don’t come in your products, the color of your money, the size of your vaults or the service of your people. All those are givens to small business owners today. Value must be more than a proposition. It’s all in the execution.

Winning the Big Battles for Small Business Hearts and Minds

Sales managers must execute routines daily, weekly and monthly to help sales associates optimize finite face time with small business owners.

Clearly this is a marathon not a sprint. Recognizing that and committing resources toward creating a systematic approach is a good first step if the bank hasn’t done so already. Having someone own small business inside the bank is next. That will become more and more the norm in 2005. Finally, realize that talking about “small” business inside your organization is fine. Articulating a “small business” branding approach to the marketplace may be deadly.

No one can see terribly well into the future. One thing is for certain. Small business is here to stay as one of the top revenue opportunities of this year and every year going forward.

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