Is Yours Still Changing on the Fly?
In order to survive in today’s competitive landscape, community banks must be inherently flexible. They must introduce new products or enhance existing ones to increase their market share, implement new technology to automate processes for increased efficiency, and adjust workflow processes to optimize resources—all without creating gaps in their overall operational risk.
That’s a tall order for institutions with limited budgets, which is why using a formal change management process and structure—rather than just winging it—has become an absolute necessity for today’s banks. Not to mention, regulatory agencies require it.
Signs Point to Renewed Regulatory Focus on Change Management
Change management has long been a regulatory requirement in the FFIEC IT Handbooks, but many banks incorrectly believe it only applies to system changes. In fact, it is applicable to any product, process, channel or system change that could affect a bank’s operational risk. Blame it on fallout from the Great Recession that exposed a variety of operational risks at banks of all sizes, but federal regulators seem poised to make change management a higher priority.
Late last year, the Basel Committee on Banking Supervision brought the topic to the global forefront after conducting a survey of how “systemically important” banks were incorporating the Committee’s Principles for the Sound Management of Operational Risk. To the Committee’s concern, Change Management was identified as one of the four least thoroughly implemented principles.
Closer to home, in its Spring 2015 Semiannual Perspective, the OCC highlighted change management as a top priority, indicating the agency would be carefully “assessing each bank’s plans to respond to increasing operational risk through the introduction of new or revised business products, processes, delivery channels, or third-party providers.”
Speaking to The Clearing House’s First Operational Risk Colloquium, the OCC Deputy Comptroller for Operational Risk warned institutions of the danger of making changes in order to be more competitive, but doing so without structure: “In periods of high velocity and volumes of change, execution risk increases because resources and capacity are strained, and there is a temptation to shortcut or by-pass established change processes.”
Change Management and Your Institution
The need for organizational change, and the corresponding resistance to that change, are not new dilemmas for banks. But because smaller and less complex banks are told through the IT Handbooks that they “may successfully operate with less formality” regarding change management, those institutions may be less familiar with its philosophies and methodologies—to their detriment.
Understanding Your Options
Applying scientific management to business processes dates to the early 1900s, but it wasn’t until the 1940s that Kurt Lewin proposed the first change management model, which today is still one of the three most popular frameworks for guiding organizations through change:
- Lewin’s Model: Recognizing peoples’ comfort in the status quo and corresponding resistance to change, Lewin developed a three-stage framework for change management.
- Unfreeze the active resistance by motivating people to “thaw” their grip on the status quo
- Transition into the change through strong leadership and continual reassurance
- Refreeze once the change is accepted and all are fully operating under the new paradigm
- McKinsey’s 7-S Model: Developed in the early 1980s by consultants at McKinsey & Company, this holistic approach to change posits that there are seven organizational factors that must be fully aligned in order for change to successfully occur. With Shared Values at the core, the other six factors are Strategy, Structure, Systems, Style, Staff and Skills.
- Kotter’s 8-Step Model: The newest model of the three was the brainchild of Harvard University professor John Kotter. Its eight steps make it a bit more concrete than the other two models, so it’s a favorite of many organizations and change agents:
- Leadership creates a sense of urgency
- A project team is formed
- The Change Vision and Strategy are developed by the team
- The team communicates to the entire organization to build understanding and buy-in
- Others outside of the project team are empowered to act to help build momentum
- The team shoots for short-term wins to continue to build more momentum and support
- The team “doesn’t let up,” meaning it continues to implement the change
- And finally, a new culture is created
Incorporating Change Management into Your Institution
The models above illustrate the overarching philosophy of change management, and it’s a helpful exercise for any organization to choose a change management framework that fits its profile.
But as with all strategic ideas, there must also be a tactical process. This is likely where community banks are going to fall short in the eyes of regulatory examiners, since many don’t have a tight enough change management process to correspond to their risk profile. Further, even those with a tight process may be tempted, as the OCC warns, to shortcut that process in order to more quickly introduce a new product, process, channel or system in today’s highly competitive environment.
The American Bankers Association identifies a “clear process” as one of the four critical success factors for organizational change. Here’s a look at what a clear change management process should include:
- Your Institution’s Definition of Change Management: Before your bank can do anything else, it must formally define what it considers change management. In other words, what types of change will require the use of your change management process? As an example, here’s a broad definition: any change to a product, process, channel or system affecting the entire institution or affecting entire business lines, support functions or third-party providers or affiliates requires the use of the change management process. This clear definition ensures all major changes are managed in a consistent, controlled way.
- Identifying Your Institution’s Change Management Team: If your bank is implementing a tremendous amount of change or is routinely adjusting its approach, consider establishing a permanent project oversight committee or project management office. For banks that only occasionally make systemically important changes, assigning a specific project team when the need arises should suffice. Either way, the team manager should be experienced in project management, and the following areas should be represented: Audit, Compliance, Corporate Communications, affected business lines, Information Security and Technology, Legal, Marketing and Risk Management.
- Implementing the Change Management Workflow: When a change is needed, does everyone in your institution know the appropriate way to make it happen? Probably not, if you don’t have a change management workflow illustrated in your Change Management Program. At a minimum, the workflow should define and delineate the following:
- Change Request Form: Identifies where to submit the request and requires a full description of the business need and all systems and processes that would be affected
- Systemic Change or Not: Determines whether the request meets the institution’s definition of change management, thus requiring full use of the change management process
- Change Sponsor: Designates a member of management to champion the cause of change
- Project Requirements: Defines the full project scope and all monetary, personnel and technical resource requirements
- Project Plan/Task List: Ensures the project’s scope, timeline and budget are kept in line
- Communicating for Success: As the models above suggest, communicating the specifics of the change are crucial to successfully implementing any change. Developing a comprehensive communication plan ensures that key stakeholders are proactively and routinely updated on the project’s status.
Applying Change Management to Your Institution’s Compliance Programs
Everyone in our industry has become accustomed to the near-constant cycle of regulatory compliance changes, but that doesn’t mean all are incorporating those changes effectively. In many cases, new or updated compliance guidance or laws require significant, enterprisewide change to banking products, processes and systems—making them perfect candidates for your change management process.
Formal change management also is an effective way to create a cultural shift at your institution, where the focus of change is more on an idea than a specific function. It’s been about a year since FinCEN prompted banks to make sure they were promoting a culture of compliance. If your bank has made little progress on this front, your window of allowance may be closing quickly. Consider using formal change management to help you avoid a potential landmine during your next regulatory exam.
Change for the Better
To experience change for the better, ditch the ineffective, on-the-fly mentality and adopt a formal change management approach. This not only provides your institution with detailed documentary proof of compliance for regulatory examiners, but also leads to higher success and adoption rates for newly implemented products, systems, channels or processes. That, ultimately, produces a strong competitive advantage.
Keith E. Monson serves as chief risk officer for Computer Services, Inc. (CSI). In this role, Keith maintains focus on CSI’s compliance initiatives to establish and build out an enterprise-wide compliance framework for risk assessment and reporting, issue management and other key components of CSI’s corporate compliance program. He also works closely with CSI’s Board of Directors Audit Committee as well as other compliance teams across the organization to promote a culture of engagement and connectivity while implementing and advising on practices and related standards.