When Is Policy Process? (A Whole Lotta Banks Wish They Knew)


Share on LinkedIn

Several years ago, state examiners gave a financial services client of ours a karate chop in the neck for “creative” lending decisions. Turns out that loan officers in different branches used varying criteria for approving loans with the knowledge and consent of branch managers, who were responsible for meeting profitability forecasts and didn’t mind bending the rules a bit to do it. In fact things got so bad that some customers with “colorful” credit histories knew which branch to visit for easier loan approval. Naturally, loan losses were higher than they should have been. But this FI was also turning away good loans. Costly way to run a business in dollar terms—but as costly in customer relationship terms, because customers experienced very off-putting inconsistencies in service.

So early in our engagement, the VP Lending asked us to formally document the “lending policy” to help rein in his errant loan officers. Because this work was out of scope for the CRM implementation in progress, we needed separate budget approval for this “little” side project—at least he thought it was little. Which explains why he nearly fainted when he saw the “more than incidental” budget number. He immediately protested that we misunderstood his request. However, after considerable conversation he trusted our opinion and approved the budget. Oh yeah, he’d asked for it in a day or two. We told him a month was more like it.
What was the difference in our perceptions of this project? The VP termed the work “documenting our policy.” We described it as “redesigning the lending approval process,” which is a whole different scale of magnitude.

What’s the critical distinction this VP Lending missed? A policy is: a statement of fact; a boundary line that tells us where to where to step and what to avoid; clear, unequivocal direction. And what’s a process? A logical sequence of work events; and in office environs (as opposed to manufacturing), a logical but variable sequence of events governed by context-related decisions. A policy tells employees what to do. In contrast, office process tells them both what to do and how to do it while instructing them how to decide what to do next, based on varying circumstance.

Clearly, lending decisions are process, not policy. And failure to distinguish process from policy gave numerous banks a full-swing hatchet chop to the neck rather than just a whack.

Think of the difference this way. A policy is a policy provided there are no exceptions. Obviously there can be a bit of give around the edges, but policies do not involve context-based, employee decision-making. The minute decision-making enters the picture, we’re talking process that has to be designed to account for all potential contingencies and define the proper decision path. And here’s where so many companies get into such big trouble.

Leaving “policies” subject to employee interpretation, as this FI had done, is a whole different ball of wax than empowering employees to make context-sensitive decisions following well-defined guidelines—and allowing a measure of extra leeway for exceptional circumstances the guidelines don’t address. The former produces very bad outcomes, while the latter produces very positive outcomes. But lots more companies take the “bad” route rather than the “good” one—which results in higher than necessary operating cost, higher training costs, reduced training effectiveness, difficulty automating divergent process, difficulty measuring comparative performance, increased customer attrition and tons of lost customer opportunity. Not bad for a “little” slip-up.

Unfortunately, taking the laissez-faire approach and allowing employees to fly by the seat of their pants isn’t the only bad choice companies make, relative to distinguishing process from policy. Many go to the other extreme and convert what could be a customer-friendly decision-making process into absolute policy. They consider this “effective risk management.” Yeah, I guess these companies are managing risk. They’re managing to put their customer relationships at risk to keep customer reps from giving away “pennies” here and there. This stuff gets so bad that once we included in a presentation of findings to a COO of another client a slide saying: “You guys are spending millions to save pennies.” He was so receptive to our case the next morning we saw copies of the slide plastered all over the executive suite.

Back to the FI case, it did take us a month. We found numerous contradictory “policies.” We also found unnecessary complexity that added no value to customers or the FI but sure cost a hell of a lot to perform. Plus, we also learned that Training’s view of “lending policy” diverged substantially from what new hires were re-taught once they hit the branches. Hey, if you’re going to confuse customers, why not confuse employees so everyone’s on equal footing?

When done, despite considerable simplification, the pile of process maps that required a binder clip rather than paper clip. And VP had envisioned the output as a one page Word file.

The cost of treating complex, decision-making processes as policies—whether by allowing employees to “wing it” or making them follow cast-in-stone rules—boggles my mind. It also begs the question: “Why don’t we fix this stuff?”

I used to attribute companies’ failure to design decision-making process where clearly called for to corporate laziness—and even more so to distaste for digging into “messy” process stuff. But over time, I’ve realized that much of the corporate reluctance to redesign process (or design it for the first time) results from significant shortcomings within the process profession itself.

Bottom line, ridiculously few process people get it about the distinction between office process design and manufacturing process design—despite about the only thing these separate process approaches have in common being the “process” label. Consequently, companies continue to drag manufacturing process approaches like Lean Manufacturing and Six Sigma into the office, so overcomplicating office process design that companies assume they’re going to spend a gazillion dollars and tie their organizations up in knots for months if they so much as touch office process. So they don’t. Which is a shame, because using appropriate process tools designed for the office environment immensely simplifies the work—and produces exceptional ROI.

The good news? The opportunity remains out there for companies that appreciate the distinction between process and policy and can distinguish between office and manufacturing workplaces. And we’re talking BIG opportunity.


Please use comments to add value to the discussion. Maximum one link to an educational blog post or article. We will NOT PUBLISH brief comments like "good post," comments that mainly promote links, or comments with links to companies, products, or services.

Please enter your comment!
Please enter your name here