Jeff Judy

Jeff's Thoughts - February 7, 2018

Reality Check

In general, our national (and even international) economy is strong. Unemployment is low, profits are good, consumers are buying, and growth is likely to continue for a while.

Against that background, you are going to meet potential credit customers that are ready to take advantage of current conditions to record some outstanding growth of their own. But you will make a little reality check before you hand over the money. Even in a good economy, not every borrower's growth projections can be accepted at face value.

After all, even a really great economy is likely to struggle to achieve 3% annual growth. So when a potential borrower comes in and says that, with a little help from you, they are going to grow by 5%, 6%, 7%, you want to hear more. They may have a great plan that leverages general economic conditions to achieve their goals. Or they may be pulling numbers out of a hat, based mainly on the current general economic optimism.

Naturally, you'll look for an explanation of how they are going to grow faster than the general economy. Perhaps they have a great new product line that will transform sales. Perhaps expenses will drop significantly in sync with a long term reduction in the cost of certain commodities.

Maybe they have entered a new geographic or demographic market space, and, once the foundation is laid, that new market will generate a lot of business. Maybe there is just an exceptional combination of wise management moves that are finally going to pay off, big time.

Or maybe not. You will decide on how realistic your borrowers' growth targets are on a case-by-case basis. Some will turn out to be great customers who outperform the surrounding economy. Others, under questioning and analysis, will have to scale back their growth claims, with a corresponding adjustment in any credit you extend to them.

Now, I remind you of all of this because I've become aware of an industry where there seem to be frequent unrealistic growth targets being bandied about, namely:

Our industry, financial services.

As most of my readers know, I spend most of my time on the road interacting with credit staff across the country. I give presentations at conferences, deliver training workshops, consult on processes, and in the midst of all of that, I have hundreds of conversations with all levels of employees, from credit analysts to managers to C-suite players.

And I cannot believe how often these people tell me their institution is aiming for annual growth of 8%, 9%, even 10%. They are telling me they are going to grow at two or three times the rate of the general economy.

Again, maybe you can do it. But I would want to hear a pretty good story about just how you are going to do that before I believe it.

After all, product innovation is hard in our industry. That's partly because the main options are more or less set, and partly because regulatory and litigative constraints make it hard to create truly new credit products.

Sometimes mergers and acquisitions may help. But in the short-term, they often bring unexpected costs and disappointingly slow adjustments before the expected benefits are seen.

Ambitious targets sound nice when you are talking to investors, of course. But missed targets don't sound at all nice to these same people. And unrealistic goals can be a real drain on employee morale, as most of the staff in the trenches can tell the difference between a realistic target and a pie-in-the-sky delusion.

You are accustomed to analyzing the growth goals set by your customers. You prefer smaller numbers that can actually be achieved over larger, dazzling targets that are never going to be hit.

Take the same objective, realistic approach to your own goals. Actually hitting targets, instead of making excuses for missing them, is good for your staff, good for your reputation, and good for your long term business.