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THE S I G N I F I C A N C E OF PLANNING R e m a r k s of W i l l i a m W . S h e r r i l l M e m b e r , Board of G o v e r n o r s of the F e d e r a l Reserve System at a Seminar on L o n g - R a n g e Planning for Banks Chicago M a r c h 5 , 1970 THE SIGNIFICANCE O F PLANNING I h a v e two p r i n c i p a l qualifications for s p e a k i n g to y o u today. I believe in planning -- and I practice p l a n n i n g . I w i l l address "The S i g n i f i c a n c e of Planning" rather than "Tlje S i g n i f i c a n c e of L o n g - R a n g e Planning," as y o u r seminar m a t e r i a l indicates. The d i s t i n c t i o n is important because the advantages of long-range planning can only be obtained w i t h i n the broader context of a total p l a n n i n g p r o c e s s . Y o u w i l l note the word p r o c e s s . To be w o r t h w h i l e p l a n n i n g m u s t be total and it m u s t be continuous -- in short -- a process -- a d y n a m i c , recycling p r o c e s s . Furthe r m o r e , it is n o t a haphazard p r o c e s s , but a systematic m e a n s of developi n g , e v a l u a t i n g and selecting among alternative courses of a c t i o n . The need for planning rests p r i m a r i l y on a v e r y c o m m o n p l a c e , even trite, observation--things change. planning w o u l d be u n n e c e s s a r y . If the e n v i r o n m e n t w e live in w e r e s t a t i c , But we need only look around us to see quite clearly that our world is just the opposite of static. It is fundamentally d y n a m i c , and in this d y n a m i c environment change is a governing force. It is a force w h i c h in the past two decades has p r o b a b l y produced a greater v a r i e t y of changes in every aspect of m e n ' s lives than have occurred during any similar period in our h i s t o r y . This increasingly rapid and pervasive change is taking place n o t only on a n a t i o n a l , but an international scale. In our o w n n a t i o n , s o c i a l , political and economic institutions are being s i g n i f i c a n t l y a l t e r e d , and there are portents of greater changes to come. It is a g a i n s t this background that w e m u s t assess the v a l u e of planning. For as the rate of change becomes g r e a t e r , so d o e s the need to have some idea of the direction in which trends are carrying u s . Even m o r e i m p o r t a n t l y , we m u s t consider w h a t w e w a n t our future to be if w e are to Page 2 have any hope of influencing the course of these trends. an organization is at the m e r c y of change. In such an organization, unlooked- for events tend to produce purely reflexive responses. jerk" m a n a g e m e n t . I call this "knee- Such m a n a g e m e n t by reflex exposes an organization to an insidious kind of e r r o r . in b i a s e s . W i t h o u t planning, Its key personnel tend to be victims of their built- And their decisions so slanted by an egocentric view can launch an organization on a course which m a y be difficult and costly to turn from even w h e n later events have proven it w r o n g . Planning is an organization's best safeguard against this kind of m a n a g e m e n t error. W i t h p l a n n i n g , there is a far better chance of antici- pating change and preparing to take advantage of it. The organization has a sense of direction; it is aware of the likely trend of events; it is ready if need be to follow any one of several alternative courses of action as these appear n e c e s s a r y . F u r t h e r m o r e , executives who have been involved in planning inevitably emerge with broadened perspectives. They have an alertness to the numerous possibilities inherent in the future. They possess an increasing ability to take short-term operational actions in the light of long-range objectives. A s the planning process p r o c e e d s , other benefits accrue. Once your organization has a sense of where it wants to go and how to get there, it becomes possible to allocate limited resources more effectively and intelligently. Planning can also significantly improve cost analysis by making priorities clearer. W h a t your organization can gain from planning is not only an overall sense of direction but a sharper insight into the usefulness of its'current operating goals and procedures. W h a t begins as a long-range vision ends by affecting your daily operating decisions. No other management tool Page 3 can give you greater leverage in controlling your organization. W i t h this general assessment of the significance of p l a n n i n g , w e can focus on the opportunities for planning within the banking business itself. The accelerating rate of s o c i a l , p o l i t i c a l , economic and technological change over the past twenty years h a s , of c o u r s e , had an enormous impact on commercial banking. It m i g h t be w e l l to refresh our m e m o r i e s of w h a t has been happening to our industry over the past two d e c a d e s . It w a s not until after World W a r II that banking really began to recover from the collapse of the '30's. Lulled by their huge wartime in- creases in liquid a s s e t s , banks did not compete s t r o n g l y , either with each other or with non-bank financial institutions. Banks did not actively seek savings and time deposits nor were they much interested in making real estate loans. Too m a n y bankers failed to recognize the competitive challenge inher- ent in the growing number and size of specialized thrift institutions. are the hard figures. Here In 1946, savings and loans shares represented only a small percentage of the liquid assets held by the public. During the late '40's and the '50's S and L shares increased by about 600 per c e n t , while time deposits of commercial banks only doubled and demand deposits increased by only 50 per cent. Of the several reasons for commercial banking's failure to seize the initiative, Clark B e i s e , former head of the Bank of A m e r i c a , in a speech in the early '60's, laid the blame largely on the lack of planning. I cannot help but agree with him. This trend toward increased competition could have been identified--with planning. appreciated--with planning. Its significance could have been But there was none. Page 4 L e s t you be tempted to view the growth of S&L's as an isolated phenomenon rather than the beginning of a trend toward increased competition for commercial banks, let me mention a few more developments since that time. You have observed the growth of finance companies, the expansion of insurance company investment techniques and lending innovations — the growth of financial markets with wide acceptance of commercial paper and small denomination treasury bills--and finally the entirely new level of competition between commercial b a n k s . Motivated by customer demands and the new profit opportunities opened in part by technological c h a n g e , banks have expanded their operations. offer data processing services, enlarged travel agency Banks now facilities, equipment leasing, and commingled trust funds, to name only a few. T h i s trend toward increased competition is still b u i l d i n g . To determine its likely scope and direction you must have p l a n n i n g . Let's examine another trend which is well under way and will have a far-reaching effect on commercial b a n k i n g . T h i postwar era has brought with it a steady erosion in the importance of demand d e p o s i t s . At the end of 1947, demand deposits con- stituted 73 per cent of the commercial banking system's deposit resources; a decade later they were 69 per cent, and by mid-1968 only 51 per cent. principal factors were involved in this d e c l i n e . F i r s t , higher Two interest rate levels, with the attendant shift to a preference for interest bearing forms of holding liquidity. Second, the advent of the computer and the data processing r e v o l u t i o n . Corporate treasurers were quick to seize upon Page 5 these new tools, and they used them during the '50's and '60's to manage their cash flows with increasing skill. As a consequence, many corporate demand accounts have come to be maintained at m i n i m a l levels. Banks belatedly discovered that m o s t of the growth potential had disappeared from this basic element of their business. How m a n y of you in banking during the '50's recognized the implications of w h a t w a s happening? won't embarrass you by asking for a show of hands. I X strongly suspect that there were few bankers then who saw their demand accounts dropping and understood that this was the beginning of a trend. Stepping to a parallel trend, how m a n y bankers were there who recognized in the early'50's what computers would come to mean? m a n y as you would Not as think. M o s t of us now agree that automated processing and MICR encoding have virtually saved the present check collection system from sinking under a rising tide of paper. to the larger banks. Automation has perhaps been of most value Without automated bookkeeping it seems unlikely that they could have grown at a l l , let alone at the rate they h a v e . These developments were anticipated by a fairly large number of bankers. But banks in general are far from ready for the real significance of this technological revolution an electronic payments mechanism.' The electronic payments mechanism promises to produce more headaches than profits for bankers who have not planned properly for it. It implies lower demand balances and thus even more difficulty in m a k i n g m o n e y from money. T h e r e f o r e , this traditional source of bank income appears a rocky road in the long term. Page 6 The corollary implication of this new technology is a very large increase in the customer's demand for services. With automated data processing aggressive banks can offer a wide variety of services--such as total a c c o u n t i n g , personal b u d g e t i n g , automatic bill p a y i n g , and so forth. W h e n the customer finds it convenient and satisfying, you w i l l have to offer it. If m a r g i n s on lending m o n e y trend downward as the deposit m i x changes due to demand balance atrophy--and at the same time customer services must be expanded--what are you to do? The answer seems obvious--charge fees for the new services. W i t h a planning process y o u can determine for yourself whether or not the answer is obvious. F u r t h e r m o r e , you can anticipate when the services should be introduced and w h a t amount should be charged. Do you have a planning process? One final trend of banking change that I want to mention is the structure of industry. The decline in the number of b a n k s , the expansion of branch s y s t e m s , the sharp rise in m e r g e r s , the rapid increase in the '60' s in the number of m u l t i - , and especially one-bank holding c o m p a n i e s , and the dramatic expansion of overseas banking activities have drastically altered the very nature of banking in the United States. Some aggressive banks have expanded their operations into novel service areas through banking subsidiaries or holding company affiliates. A l l these changes h a v e , of c o u r s e , taken place within the framew o r k of equally significant revisions in the statutes and regulations relating to banking. And they h a v e , in p a r t , been responses to shifts in Page 7 these regulatory controls as w e l l as to changing economic and technological pressures. On the one h a n d , there were the chartering and other instituted by Jim Saxon. liberalizations On the o t h e r , there have been the restrictions imposed by the Bank Merger and Holding Company A c t s , by interest rate c e i l i n g s , and by the expansion of m a n y of the Reserve Board's r e g u l a t i o n s , especially D and Q . These regulatory shifts have been inextricably involved in creating not only the type of b a n k i n g , but the very environment of banking we see today. With planning, m a n y of these changes could have been foreseen. The past two d e c a d e s , then, have been filled with change: banking's slow start in the race for time deposits; the declining importance of demand deposits; the growing pressures generated by automation; the dramatic alterations in banking structure; and the influence of regulatory changes--these are the principal factors which have had bankers scrambling in order to maintain their share of the financial m a r k e t . W h a t I have been attempting to do by reviewing w h a t must be familiar ground to all of u s , is to emphasize how very much change the nature and environment of banking have undergone in the relatively brief span of twenty years. If the commercial banking industry or your bank is to m a i n t a i n , let alone e x p a n d , its current position relative to others who share your m a r k e t s , you m u s t continue to innovate. future m a y hold And to innovate with insight into what the to innovate so as to shape that future you m u s t do three things. j F i r s t , you must have a process which identifies trends at an early stage and interprets their significance. S e c o n d , you m u s t provide a vehicle for converting this interpretation into a program. Such a program w i l l shift 1 1 1 1 Page 8 the resources and m a n a g e m e n t efforts of your organization in the appropriate direction without unnecessary dislocation or disruption. T h i r d , you must lay out a detailed budget and schedule of efforts for the immediate future to begin m o v i n g in the d i r e c t i o n of your program. The three steps I have just described are the three types of planning which I believe m a k e up the total planning process: p l a n n i n g , program planning and action planning. process have no rigid time spans. advance These phases in the Their duration must instead be based on such elements as the nature of a given organization's industry, market and general economic environment. For some c o r p o r a t i o n s , advance planning m a y cover a 20-year p e r i o d , for others it may be 15 or 30 years. What would be an appropriate time span for a women's clothing designer would be too short for a paper manufacturer. It might be important here to point out that m a n y current decisionc have an impact on the full range of time spans. For e x a m p l e , when a banker decides not to join a credit card group or to issue one of his o w n , he is m a k i n g a decision which affects more than just his bank's current p r o f i t a b i l i t y , or the scope of its customer service, or its competitive position. It should be obvious that his decision w i l l affect h i s bank's share of the m a r k e t for years to come. He is also saying something very significant about his view of the rate of change in the payments system and the role of credit cards in that system. If he is unaware that he is doing and saying these things about the future, then he cannot be acting intelligently; and his bank will be likely to suffer for i Page 9 Let's go through a quick overview of the three stages of total planning with a closer look at advance planning. Its particular function is to provide our banker with the broad perspective he needs to m a k e his action decisions. How does it do this? First, advance planning m u s t deal with a future far enough distant from the present so that current conceptions w i l l not act as constraints. This stage of planning is concerned with the future as it w i l l b e , not just as an extrapolation of current trends. m u s t , t h e r e f o r e , examine the widest range of possibilities. flexible because it deals with u n c e r t a i n t i e s , not facts. It It m u s t be It m u s t be open- e n d e d , because events w i l l probably require extensive restructuring of any conclusions it may reach about the future. It m u s t place the present in perspective in order to separate temporary from long-term trends. Above a l l , it must be a "there to here" type of planning and not a "here to there" view. That is, it m u s t be a process which works backward from the future to m e e t program planning as that stage extends the present toward the future. If this sounds difficult to d o , that's because it is. But it is w e l l worth the doing. One example related to banking. In advance planning you do not assume that the commercial banking business some 20 years from now w i l l be what it is today, except m o r e so. Y o u don't even assume that commercial banks w i l l exist as a distinct type of financial intermediary. Y o u first try to decide what the economic environment is likely to be and w h a t sorts of financial services it w i l l be likely to require. O n l y then do you begin to consider the possible shape of the financial institutions Page 10 that w i l l be needed to m e e t these demands. A d m i t t e d l y , not all banks will h a v e the resources to do detailed research into the issues that even this single example raises. But any bank can consider these types of issues. In doing s o , a bank develops the long-range plans it needs to deal adequately w i t h the alternatives the future w i l l surely present. The new ideas, the new ways of looking at things generated by this process w i l l be of invaluable benefit. I m u s t emphasize that the results of long-range planning are not intangibles. Coherent priorities and overall guidelines for the organiza- tion's development are direct results of this planning. Without them no organization can face the future with real confidence that it will remain viable. Now let's examine the second stage of planning. Program p l a n n i n g , or intermediate p l a n n i n g , of c o u r s e , covers the time period between longrange planning and action planning--usually about five years. Program planning serves to tie together the long-range objectives and action components Oi planning. It allows the organization to change direction in a graceful curve rather than by a sharp corner. Its output is a set of intermediate g o a l s , an ordering of p r i o r i t i e s , a n d , through program b u d g e t i n g , a suggested resource allocation. W h i l e program planning is still a forward planning effort and therefore m u s t , like long-range p l a n n i n g , be both flexible and o p e n - e n d e d , it is m u c h m o r e constrained by the present than advanced planning. Consid- erations of resource a l l o c a t i o n , incorporation of feedback from current o p e r a t i o n s , and the development of targeted goals and time schedules have become significant n o w . These are n o t , h o w e v e r , as detailed as they w i l l become in action planning. Page 11 The third stage, action p l a n n i n g , is the one we operating m e n are most familiar with because it is an operating man's type of planning. Here carefully detailed p l a n s , final b u d g e t s , and operating schedules for o n e , or at m o s t two years are developed. These budgets and schedules are designed to begin m o v i n g your organization towards its intermediate goals. It is in this phase that the efforts of the other two stages bear fruit and thought finally becomes action. Now I have described the total planning process — advance planning program p l a n n i n g , and action planning. planning m u s t be continuous. But—in addition to being total-- It m u s t include a review or recycling process, The purpose of review is to m a k e certain that the three stages are at all times properly integrated to form a total and coherent whole and to take account of change. This recycling must be a continuous process powered by a steady flow of feedback information. Review cannot be restricted to systematic annual or semi-annual studies of all planning stages. reviews of this kind are valuable they are limited. Although To really assure that your plans are still viable o n e s , and are still consistent with your own planning a s s u m p t i o n s , the review procedure m u s t be primarily event-oriented. By this I mean that the review process m u s t be geared to a continuous examination of events as they occur. An organization cannot a f f o r d , any more than a m a n , to wait for a 6- or 12-month checkup to roll around when all the symptoms indicate that something is dreadfully amiss. Having elaborate alternative plans is pointless if you are not aware of w h e n the time has come to implement them. A continuous review procedure can save an organization from this considerable embarrassment. Page 12 I would like to examine with you briefly some of the other basic elements of a successful planning effort. To be p r o d u c t i v e , planning m u s t be something more than a largely intuitive process carried on by a few executives and staff personnel in comparative isolation from the mainstream of an organization's activities. F i r s t , planning m u s t be committed to p a p e r , it cannot be carried about in the h e a d . Even the most m o d e s t planning e f f o r t s , to be of any use at a l l , m u s t be written d o w n , otherwise they cannot be adequately defined or reviewed and no one can be quite certain of their real n a t u r e . S e c o n d , coherent organizational planning cannot be limited to providing the overall sense of direction which comes with having commonly agreed on o b j e c t i v e s . If planning is to be e f f e c t i v e , it m u s t in the final analysis be action-oriented. ment decisions. It m u s t culminate in affecting current manage- And it m u s t m a k e managers more aware of what Peter Drucker has termed the "futurity" of their decisions: that i s , the likely impact of those decisions on the future interests of the organization. Giving planning an a c t i o n - o r i e n t a t i o n , of c o u r s e , means it cannot be an "ivory-tower" o c c u p a t i o n . executives. that Planners ought to include operating There are m a n y reasons for this: your operating officers know better than anyone else the details of how their organization really They know where its true strengths and weaknesses lie. functions. W i t h o u t such informa- t i o n , planning can easily go astray; it can over- or under-rate organizational capabilities. The result is unrealistic objectives and interim goals. W h i l e planning is immeasurably improved by having operating executives among the p l a n n e r s , these executives also benefit. Their daily Page 13 decisions w i l l inevitably become m o r e future-directed. The result will be decisions which are sounder and m o r e valuable in the long run. W i t h o u t the involvement of your line e x e c u t i v e s , planning runs the considerable risk of not being accepted. It is n o v e l . It is untried. established and tested ways of thinking and doing. It threatens longIt m a y also seem m e r e l y a device for carving new principalities out of other m e n ' s h a r d - w o n d o m a i n s . But the dangers of rejection are considerably reduced w h e n the executives who will ultimately be m o s t affected by planning are included among the planners. With familiarity should come reassurance that planning is no threat but m e r e l y a very u s e f u l , very d e s i r a b l e , and very v i t a l instrument for better m a n a g e m e n t . There i s , h o w e v e r , one group which is even m o r e crucial to the success of planning than operating executives — senior m a n a g e m e n t . Without the interest and e n t h u s i a s m , the support and m o s t important, the involvement of senior m a n a g e m e n t , no planning effort has the slightest hope of success. If other executives see that their superiors have only a token interest in p l a n n i n g , what sort of interest can they be expected to take? Senior m a n a g e r s m u s t themselves be among the planners if their organization is to treat planning as more than simply a n o v e l exercise. By their own intimate involvement, top management indicates (as they really can in no other way) that planning is a major corporate undertaking worth the considerable time and effort it d e m a n d s . M o s t important of a l l , only if senior managers have been active participants in this planning process can there be any real assurance that the m o r e significant proposals generated by planning w i l l actually be implemented. cannot be effective. W i t h o u t this c e r t a i n t y , planning Page 14 The range of personnel who should be involved in the planning process m u s t then be b r o a d . senior m a n a g e m e n t . It m u s t encompass operating executives and It m u s t , of c o u r s e , include professionals as w e l l . It is these professionals who w i l l carry on the greatest part of the research and w r i t i n g which are inherent in planning in larger organizations. But I cannot emphasize too much that if the process is to succeed, these professionals cannot be the sole planners. The impact of planning on an organization's personnel reaches w e l l beyond those directly involved in the planning effort. W h e n planning is optimally e f f e c t i v e , all levels of key personnel are "planning-sensitive". Their t h i n k i n g , like that of the line executives I have spoken a b o u t , is f u t u r e - o r i e n t e d , not narrowly circumscribed. Their thinking habitually goes beyond daily decisions to their m o r e distant ramifications. a sense of long-range direction and purpose. They have W h e n an organization is staffed top-to-bottom by individuals of this k i n d , it makes a very tough competitor. I would be derelict in talking about bank planning this morning without m e n t i o n i n g the industry planning currently under w a y . The A . B . A . is now engaged in a m a j o r industry planning e f f o r t , spear-headed by its M A P S , or M o n e t a r y and Payments S y s t e m , Committee of which I have the privilege of being an O b s e r v e r . Task forces of that committee h a v e been engaged in examining the future from several vantage points: m a r k e t i n g ; operations and technology; economics; legal and legislative. I commend its efforts to y o u . They are deserving of your active interest and support because every bank has a vital stake not only in its own progress but in the banking industry's as w e l l . Page 15 Now to summarize very briefly some of the things I have been saying about planning and banking. Planning is essentially a process for m a k i n g today's decisions in the light of our best estimates of what their ultimate future effects w i l l be. To do this we m u s t think long and hard about the fairly distant future. If we do this w e l l , we w i l l develop a sense of balance in our daily o p e r a t i o n s , a broadness of perspective and a sensitivity to change. W e m u s t possess these qualities if we are to help insure that in the m i d s t of a rapidly and dynamically changing e n v i r o n m e n t , we will n o t simply s u r v i v e , but w i l l prosper. F i n a l l y , planning is of particular significance to commercial banking because it is an industry which has been vastly altered in the past 20 years and promises to change even m o r e dramatically in the next 20. With p l a n n i n g , banks need not miss trend changes in the economy and i n d u s t r y , and suffer as a result. it. They can not only be prepared for c h a n g e , they can shape The history which I recited e a r l i e r , of the clear failure of commercial banks to recognize important competitive trends and react vigorously to them teaches a valuable lesson of the desperate need for planning by banks. Your presence at this m e e t i n g is a strong indication that that lesson has indeed been learned by a growing n u m b e r . J
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