If you could articulate one common goal shared by most businesses today, it can probably be summed up in one word: growth. But what does “growth” mean, and what does it look like in practice? What is the best way to achieve growth? It may seem counterintuitive, but sometimes an organization needs to shrink to grow. Bigger is not necessarily better, and that becomes evident when you’re talking about financial institutions and the ways in which they can achieve growth through improving efficiency.

Profit Resources Inc. (PRI) Consultant Brian Boardman’s experience driving revenue growth through operational efficiency at every level of financial institutions has taught him that growth comes in many forms and looks different to different institutions.

The “Shrink to Grow” Strategy: Belt-Tightening or Repositioning?

When the goal is growing an institution, financial leaders typically look at several measures, including:

• Financial performance (ROI, ROA)
• Assets
• Deposits
• Net income

The “shrink to grow” strategy often includes the willingness to shed unprofitable products and customers to invest in more profitable ways to grow revenue. For example, in a quest to grow deposits and provide value to the customer, the institution may decide to change their checking, savings and money market account products. In the process, established customers may decide that they cannot or don’t want to meet new requirements and may close their accounts. Technically, the bank’s customer list is “shrinking,” but if the institution is attracting new, more profitable customers or increasing existing customers’ engagement with the bank, then the net result is a win.

“Eliminating or reducing costs in unprofitable or barely profitable businesses frees up capital that enables investment in higher growth opportunities such as new technology, digital banking or new branches in better markets. This is not a belt-tightening exercise but rather a repositioning,” Boardman said.

Implementing a “Shrink to Grow” Strategy

Thoughtfully looking for pockets of opportunity to shrink to grow can give valuable insights into an entire organization. Some initial steps may include:

• Focus on core competencies. Accepting that a community bank cannot be all things to all customers naturally begs the question, “What do we do really well for a targeted segment of our potential customers?” By determining the institution’s niche markets and high-margin segments, banks can begin to understand their customers more deeply, design products that solve their real problems and leverage technology to remain agile and responsive to their changing needs.
  
  

  “Most community banks are already serving a niche, whether they know it or not. Niche banking simply means that the institution has recognized its ability to serve a particular segment of the customer base better than anyone else in the market. Taking it a step further requires a deep understanding of customer needs and the development of products and solutions designed specifically to solve their problems.” — PRI, “The Rise of Niche Banking: What Can Your Bank Learn from the Specialists?”

• Consolidate and/or close branches. Another example of “shrink to grow” may involve closing physical, less profitable branches to focus resources, technology and talent on more profitable ones with a better overall return. Again, becoming more efficient in the use of institutional resources can lead to improved profitability in the long run.
  
  
• Review expenses for elimination, reduction or renegotiation. Look at every major expense (and even the minor ones!) to ensure you are paying the best rates for the resources you do need and eliminating or reducing expenses that are no longer serving your strategic plans and goals. Some examples of expenses to review with a sharp eye for efficiency and ROI include:
  
  
  • • Employee benefits 
    • Vendor contracts
    • Real estate
    • Workforce, where appropriate and prudent
      
      
• Identify opportunities for efficiency gains. Efficiencies can be gained in many places in an institution’s operations. For example:
  
  
  • • Workflows: Using automation and artificial intelligence (AI) to streamline workflows and free up employees for higher-level tasks saves money and time. The PRI article “Harnessing AI and Automation: Practical Use Cases for Community Banks” highlights high-impact, low-lift opportunities to make workflows more efficient.
    • Use of technology: It’s important for the institution to know how they can optimize their technology stack to be sure they have a good framework in place for growing after they shrink.
      
      
• Design or re-design products that provide a value exchange. Although you may lose customers or a segment of customers who are unwilling or unable to participate in the value exchange, if the overall result is growth, then you must be willing to meet the moment. Redesigning products and designing new products can open space for a greater focus on digital banking improvement and expansion and can provide the opportunity to eliminate grandfathered products that are dragging your profitability down.
  
  
• Clean up data. Because good data is needed to make good decisions, banks need to control their own data and have confidence that it’s not flawed. Use the “shrink to grow” mentality to identify and correct the root causes of data errors and anomalies.

Knowing and Managing the Risks

The “shrink to grow” strategy is not without risks, but if leaders are aware of them, they can work to mitigate any negative outcomes. For example, shrinking to grow can lead to losses that include:

• Loss of scale advantages: For example, service items such as courier contracts, which are based on the size of the customer, could get more expensive if a bank closes several branches.
  
  
• Loss of talent: Closing branches could lead to the loss of some great team members. However, if leaders exercise forethought and planning, they may be able to “reshuffle the deck” and find other slots for their stars that, in turn, help with attrition at other branches.
  
  
• Loss of customers: Institutions should give plenty of thought to which customers they may be losing during “shrink to grow” transitions, and even if they decide these are losses that make sense now, treat those customers with respect and plenty of communication. “Don’t burn bridges unnecessarily,” Boardman said.

Shrink to Grow Strategy: The Keys to Success

The keys to success in implementing a “shrink to grow” strategy hinge ultimately on whether it fits the institution’s growth plan — specifically, if it fits how you want to grow. For example, if your strategic plan says focus on growing loans, then don’t dilute your team’s actions by focusing on deposit growth also. Prioritize clear and timely communication, even with customers who you are likely to lose. To protect the institution’s reputation, minimize the perceived negative impacts and give plenty of advance notice of changes in strategy and products. Finally, reinvest the dollars you’re saving by shrinking into digital banking and other appropriate technology, your employees and your long-term partners. The result will be the growth you’re aiming for, in the way you have determined most valuable to your institution.