In Operational Efficiency

In 1806, at the Battle of Jena-Auerstedt, the Prussian Army got crushed by Napoleon. Using carefully planned and flexible troop dispositions, Napoleon was able to run circles around the slower Prussians. As a result, the French were able to deal a critical blow to the Kingdom of Prussia leading to its subjugation for the next six years.

The King of Prussia and his Generals during Franco-Prussian War

In response to this disastrous defeat, the Prussians rethought their military approach. Napoleon had beaten them because his army was so disciplined and flexible that it could implement his orders before the Prussians even know what happened. Knowing that they didn’t have a single tactical genius to rival Napoleon, the Prussians decided to build a similarly flexible military structure that didn’t rely on the brilliance of a single commander. They came up with an entirely new set of military tactics called “mission-type tactics”. The idea behind mission-type tactics is that a commander gives their subordinates a clearly defined goal, the resources necessary to accomplish it, and a timeframe. The subordinates then have the flexibility to create and implement tactics to achieve that goal however they see fit. The advantage of this approach is that it allows organizations to move quickly and adapt to changing circumstances before their opponents can. By not having to wait for orders from high command, the commanders in the field can take advantage of the latest information from the field to make better decisions. By abandoning the traditional command and control model that depends on a few individuals to make all the decisions, the organization can take advantage of the collective creativity and expertise of their whole team.

So what does this have to do with the financial industry?

Banks are finding themselves in a difficult position. As the economy slowly improves and consumers start spending more, the demand for financial services is increasing. Banks need to get back into growth mode or risk losing market share to their competitors. However, in the wake of the recession, banks cannot compromise the stringent risk and cost management policies implemented during the height of the recession.

So the question is how can banks compete for market share while controlling their costs and risk?

As the Prussian Army once demonstrated, organizational agility can be a tremendous competitive advantage. Organizations that can move quickly can recognize and seize opportunities that others don’t even see. This enables them to succeed without having to take big risks or compete over price.

Creating that level of agility isn’t easy. It requires the commitment to give up some central control and trust subordinates to make the right decisions to achieve the organization’s goals. It also requires an infrastructure that enables this level of speed and flexibility. Too often, financial institutions’ competitive strategies are handicapped by legacy technology that isn’t flexible enough. Zoot recently spoke with a top-5 bank who was interested in the lift their customer acquisition strategies could gain if they incorporated alternative credit data. Unfortunately, when we started talking about integrating these new data sources, they stopped us and said that due to the limitations of their current origination system, it would take them one year and one million dollars to integrate a new data source. This level of inflexibility doesn’t just slow banks down; it actively discourages their employees from proposing creative solutions to their biggest problems.

Fortunately, financial institutions are starting to push back against these limitations. They are developing new technologies and methodologies to help balance the need for flexibility with the need for centralized control.

There’s one new methodology in particular, that’s gaining traction in the financial industry, and it reminds me of the mission-type tactics invented by the Prussian Army—it’s called publish & subscribe. The idea behind a publish and subscribe methodology is to centralize as many enterprise functions and processes as possible while still enabling the institution’s different divisions to operate independently. By centralizing common tasks like attribute calculation and risk modeling, the financial institution can minimize the costs of redundant work and ensure that they are using a common risk policy across the entire enterprise. New business logic or risk policy developed at the enterprise level can then be “published”—thereby making it available to the institution’s individual divisions. However, each division has the flexibility to “subscribe” to these published updates on their own schedule. This allows each business unit to maintain control over the tactics they are using to meet the institution’s growth goals and the flexibility to adapt their strategies as the market changes.

No organization can afford to give complete control to the people on the front lines. Big decisions on strategy, risk, and direction always need to come from the top. However, it’s also abundantly clear that there is a competitive advantage to be gained by giving tactical control to the people that are fighting the battle. As market conditions continue to change and non-traditional competitors continue to enter the fray, financial institutions need to do a better job balancing the desire for centralized control with the need for divisional flexibility.

Using mission-type tactics, the Prussian Army went from being the butt of every French joke to the dominant military power in Europe within ten years. New methodologies such as publish & subscribe stand to give banks a similar competitive advantage.

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