The key to unlocking credit card profits lies in the proper execution of relatively simple strategy. Implementing the Ferrante Principle one company went from a $10 million annual operating loss to an after-tax $16 million annual profit, and in 36 months.
Robert Hammer, Founder and CEO of R.K. Hammer & Card Knowledge Factory, and a renowned payment card expert says the “Ferrante Principle,” is duly named in honor of the strategy’s creator, a legendary banking and payments CEO, and wonderful mentor to many. It was his idea that moved ahead a 1,600 employee organization at the time, in such a successful manner that one could not have imagined earlier, from not making the numbers to well exceeding them, month after month and year after year.
Here’s the strategy, and what it could mean to your organization, no matter how large or small. It is deceptively simple to describe; but the devil is in the details, the execution of it.
“In every operating department and division of the organization, place exactly one-third of your budgeted resources into “Efficiency” measures, another one-third to “Quality” measures, and the remaining one-third of resources to “Investment in the Future measures.”
Why do this? This planning methodology gives the company a balanced approach to growth and profit, and then not relying on only one perhaps riskier model.
For example, I know organizations that are so Efficient, so lean and mean as their sole strategy that there are few people around who actually do any work, who talk with the customers. Then, there are others so Quality-laden as a sole strategy that their operating expense became so bloated that they will never make the money they could or should have. Finally, there are others whose Investment in the Future is their sole strategy, and seem immune to using what works now, and sadly avoids any observable focus on quality or efficiency. It takes a three-part balance.
Thus, you can see how the balanced approach makes more sense. It reduced the tendency to rely on one approach, diversifies your sources of goal and objective achievement, and therefore, earnings.
Now, the tough part, execution. In the banking and card businesses, most of us operate on a CPA cost per acquired account basis, and want enough quality card accounts with low enough NPA loan losses to survive as an enterprise, to achieve set hurdle rates for ROA/ROE, IRR, and so forth. What we did was turn everything a little upside down.
We went first to marketing, for instance, whose main focus is on growth – profitable new account and portfolio growth, and said, “we want your division to only place a third of your allocated resources to growth and Investment in the Future, no less, no more; devoting the other two thirds to being more Efficient in what you do, and using Quality measures.” All three, on an evenly distributed basis, one-third in each.
Here is the rub. Every goal and objective and tactic and action plan which you develop to achieve this 3-part strategy must be directly correlated to one or more of the three parts described above.
If you cannot figure out whether a particular goal or action plan, for example, belongs in which of the three groups, that program will not be approved or funded. You have to be prepared to vigorously defend your placement of every action plan in one or more of the three strategy segments. If not, kiss it goodbye. That budget will go to someone else who can.
Then, off we went to the other major operating departments and divisions: finance, customer service, risk management, operations and technology, and others. Every single one of them had to do the same critical thinking, “How do I balance precisely the three segments: Efficiency, Quality and Investment in the Future, with no more than one-third of allocated resources to each one, when many disciplines and functions by their very nature lean more toward only one?”
No one was allowed to “stack” or over-deploy more than exactly one-third of total resources in any of the three segments. Like ten action plans in quality, but only one or two in efficiency.
It necessarily took a lot of advance planning by every department and operating division of the bank, a process which started in the third quarter of the year before to get lined up. By the 4Q it was starting to jell. It was a change of mindset, a change of strategy and a balanced approach to it all. By the 1Q of the launch year we hit the ground running. And as you can tell from the financial results first show above, we achieved what was intended like never before in the organization.
During each monthly performance review thereafter we first checked what was promised previously in each of the three strategy segments; and second, what was delivered in each of the three operating goals and objectives, tactics, and actions plans. It was a wonder to behold, as for the first time the organization was focused laser-like on balance, not over-dependence on only one strategy segment.
End result: Losses gone. Profits up significantly, unit costs down and under control, product and service and loan quality much higher, teamwork noticeably better, customer and associate satisfaction levels elevated. Moreover, unlike before, no business forecast in the organization was ever missed after this strategy was implemented. A win/win for all.
As each year of the 3-year plan unfolded with greater financial returns, higher levels of customer engagement and satisfaction, and reaching a balance in everything we did, it became clear this was the appropriate mission, the proper operating path to have taken.
Of course, literally hundreds – even thousands – of action plans are required in any organization throughout the year, they just need to be divvied up evenly in every department, every division, and every company unit, and tracked exactly with the three pronged approach: “Efficiency, Quality, and Investment in the Future.”
So, what does that mean to you? I’ll bet some of you out there may have a focus on one major strategy imperative, one which then leaves you vulnerable in the other missing segments which are not being dealt with as equally as the one you may be using.
Why not get your managers and division heads thinking about the metrics they use and the manner in which they do that in a different and balanced way.
You may also find yourselves not just meeting but crushing the numbers, meeting every promise you make to your Board or parent company (and yourself). It’s a pretty satisfying way to run an increasingly profitable business. Does wonders for the careers of your team members, too!
The winners for all this? Not only the enterprise and its future, but your associates, management, board members, parent companies, shareholders, customers and suppliers.
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