Budgeting is typically the same in every industry. It runs on a 12-month cycle and begins to take shape around Q3. By Q4, budgets are finalized, and in the first half of the year, everyone executes, making small adjustments along the way.
Banks generally follow the same model with an emphasis on their biggest revenue driver: interest income. They factor in interest rate predictions, borrowing appetites, and other activities at the Federal Reserve for the year ahead. It may be as ambiguous as farmers trying to predict the weather for the season ahead, but attempting to plan for your biggest money maker is good business.
The trouble comes when planning for resources. In a manual work environment where teams, not technology, are the sole executors of the work, departments must “bid” for the number of full-time employees they’ll need in the coming year to scale their operations. The problem is, management is trained to prioritize the highest revenue-generating activities, leaving outlying teams in the lurch. Those on the sidelines are asked to achieve more with the same people, while the technology and processes they use stay the same.
We understand what it feels like to be let down by poor budgeting and planning. It makes sense for leaders to aim for maximizing efficiency and minimizing expenses for the good of the company. But it’s frankly unrealistic and ignorant to expect these results without changing other variables.
That’s because people don’t scale. Technology does. People need regular rest, fuel, and interaction, while computers were designed to complete repetitive tasks over and over. The revenue-generating line item they should be budgeting for? Headcount that never tires: automation.
Necessary Pillars of Successful Budgeting
In our opinion, strong budgeting and planning requires adherence to three pillars:
- Tech-Forward Mindset
More than two decades beyond the start of the internet era, the banking industry still treats technology as a line item on the budget instead of an investment in a future of unlimited potential. When lenders do adopt automated loan origination technology, they approach it from a risk-averse mindset, opting for locked-in, multi-year contracts instead of models with variable pricing, despite potential cost savings.
|Old SchoolTechnology changes require new infrastructure, servers, networks, and service packages.||New SchoolCloud-based technology at usage-based pricing can save money and increase ROI.|
Adopting a tech-forward mindset is not a fad. It’s the reason why other industries (e.g., e-commerce, travel, healthcare, etc.) have continued to thrive despite their storied pasts. It’s also what keeps talented candidates knocking on their doors. Just as consumers expect savvy, digital experiences, employees are looking for meaningful roles that use helpful, current technology that makes their jobs easier and more rewarding.
- Bottom-up Budgeting
Top-down budgets rarely work. That’s because they dole out funds and headcount without any input or insight from the teams below. Bottom-up budgeting either allows departments to set their own budgets or request funds from leadership based on their most pressing needs. They allow teams to paint a more accurate picture of their available resources, as well as what they need to achieve company goals.
Bottom-up budgeting also gives individual departments the freedom to invest in technology versus making do with limited headcount and legacy systems. They can select a platform that will scale with their team instead of developing work-arounds for outdated systems chosen by distant stakeholders or teams of long ago.
- Agile Implementation
Agile methodology prioritizes ideation and action above all else. This is how tech companies are able to launch new products so quickly. They execute “sprints” of necessary work to produce a minimum viable product that can always be improved later.
Banks and other risk-averse industries have traditionally operated under a “waterfall” approach that prioritizes due diligence and preparation first, action second. The problem is, the world doesn’t work that way anymore. Rigid budgeting leads to unwillingness to make adjustments throughout the year — even if it’s what’s best for the bank. To see the pay-off of innovation and cloud-based technology, stakeholders and decision-makers in lending must adopt a more flexible approach that accounts for snags along the way.
Budget for Innovation This Year
It takes money to make money. Ignoring the deep-seated problems of legacy banking will never go away, especially by simply assigning more headcount. Investing in the old ways of budgeting will not only prolong the issues of inefficiency and scale, but continually decrease ROI by throwing more money at old systems every budget cycle. It will also continue to deplete employee motivation as they cobble together spreadsheets, unsanctioned apps, and disjointed processes to make things work.
Our team at SPARK has been where you are. We know the frustrations that come with yearly budgeting — and the pay-offs that digital transformation provides for long-term financial success.
This budget planning season, take a look at the next five to 10 years instead of the immediate future. How much will legacy tech cost you in the long run? Factor in investments like cloud-based lending software to project the potential ROI, scale, and revenue growth it could bring.
Contact us today to learn more about the next generation of lending.