Internal challenges exacerbate current economic and financial market conditions.

Proudfoot Consulting, a global operational management consulting firm, has noted significant operational opportunities in mid-tier financial institutions that are exacerbating the widely documented financial market challenges. On the heels of the FDIC’s takeover of two additional financial institutions in late July, Proudfoot recommends that banks pay increased attention to their internal operational practices, sales effectiveness and overhead cost structure, as they may be undermining their performance. According to Proudfoot’s interactions with numerous mid-tier banks, a tremendous amount of opportunity exists for them to streamline operations, reduce overhead and increase deposits.

While some mid-tier banks (generally defined as institutions with assets in the $1 billion to $6 billion range) are weathering the storm relatively unscathed, many are feeling the pinch of the global credit crunch and US housing market fallout. On the heels of Bear Stearns and IndyMac, financial experts are speculating as to who the next casualty will be. “Our analysis of the operational practices and financial efficiency ratios of mid-tier banks reveals a mixed bag,” said Cay Mims, vertical manager at Proudfoot. “Some appear to be performing quite well, while others are struggling. Fundamentally, however, they share the same operational hurdles to progress.”

John Hayes, managing director of financial services at Proudfoot, says, “It is imperative that financial services firms take aggressive action to manage change, process demands and costs to adapt to the current economic environment. During our work in banking, we’ve witnessed convoluted processes, questionable loan criteria and cycle time blowouts. All of these issues must be addressed to ensure sustainability.”

Although many of these operational issues are nothing new, they intensify the effect of current financial challenges and may undermine future growth and recovery efforts. Hayes continued, “Proudfoot finds that many bank branches are simply not optimized. They must be transformed from simple transaction centers to revenue-generating sales channels. Perhaps the biggest challenge is to change the culture within the branch so that employees are empowered, listen to customers and understand their needs.”

Signaling further challenges, the FDIC’s list of troubled banks has now risen to 90 institutions, with that number expected to escalate in the next report, due out later this month. This reporting reveals that nine banks have failed over the past 12 months, whereas not a single bank failure was reported in the 2.5-year period preceding February 2007. When one combines these indicators with the recent collapse of IndyMac and Federal Reserve Chairman Ben Bernanke’s prediction to the Senate Banking Committee of more bank failures among small and upstart banks, there is ample evidence for concern.

In order to succeed in these challenging times, Proudfoot finds that mid-tier financial institutions can benefit enormously from:

o Simple, effective tools and information systems that provide management the ability to tightly monitor progress towards strategic and tactical goals while controlling risks (such tools also ensure that branch managers and loan officers are held accountable for meeting these goals and balancing the trade-offs inherent to the banking industry)
o Operating expenses that are tightly controlled as close as possible to the point of execution
o Appropriate behavior models for front-line personnel that support chosen strategies and policies
o Improved processes and streamlining of operational systems to improve interaction quality and customer satisfaction while reducing cycle time
o Increased sales effectiveness via enhanced targeting, sales skills development and management of the sales effort (by doing so, banks can grow their loan portfolio quality without reducing volume)

Beyond grappling with financial market issues, banks must consider underlying internal, operational solutions, which may prove to be the difference between their success, mere survival or demise.