“If we grow too fast, we’ll break from the strain.”
“If we stop growing, we’ll be eaten for lunch by our competitors.”
Beth Daniels, the CEO of Michigan’s Vanir Bancorp, sat silent as her chief human resources officer and chief financial officer traded jabs. The trio had founded their community bank three years earlier with the mission of serving small-business owners, particularly those on the lower end of the credit spectrum. After getting a start-up off the ground in a mature, heavily regulated industry, they were a tight-knit, battle-tested team. But the current meeting was turning into a civil war.
James Donnold, the CFO, had just presented an update on Vanir’s aggressive goals: expanding to 15 branches, with loans and deposits increasing threefold in five years. Having already grown to five branches and $180 million in assets, the bank was right on track. But, James warned, competitors were circling, and Vanir needed to stay on the offensive. It couldn’t let bigger banks lure away the previously underserved customers that it had brought into the financial system or let new “fintech” start-ups with digital-only banking services disintermediate its business. Luckily, James noted, the company’s long-awaited new enterprise IT was nearly ready to go live, and it promised to greatly reduce the staff’s workload—by, for example, using AI to automate tasks like calculating pricing and credit lines for customers.
That prediction prompted Mariko Wang, the CHRO, to let out an audible scoff. She felt that aggressive growth had already stretched Vanir too thin and that believing IT would lighten the burden on employees was optimistic. “When was the last time a new technology created less work for anyone?” she asked sarcastically.1
But then her tone turned serious, and she delivered her familiar—compelling—spiel: Working with new or underserved banking customers was extremely arduous. Vanir’s branches were open early and late to accommodate customers’ schedules. To make banking less intimidating, tellers and relationship managers were told to take as long as needed to answer people’s questions. They were trained to be unbiased, whereas some AI tools in the industry had come under criticism for discriminating against minority applicants. And that human touch was what drove growth; loan applicants often had such a great experience at Vanir that they transferred their other accounts to the bank, opened new ones, or recommended it to other small-business owners.
Vanir’s associates enjoyed above-market salaries but also worked harder than their peers at other banks. Considered “essential workers,” they’d even come in to the office during the worst months of the pandemic, managing all the loans that customers had applied for through the U.S. government’s economic relief package. But now employee engagement was down, absenteeism was up, and customers were starting to notice.2 Net Promoter Scores had fallen, and comments in customer surveys included complaints like “hassled-looking teller” and “unhelpful manager.”
“Our people are our strategy,” Mariko said, locking eyes with Beth. “Without them happily serving customers, we’re just another bank.”
Off to See the Wizard
Leaving the meeting, Beth felt torn. She’d started Vanir to help hardworking customers who’d been neglected by large banks and poorly served by mismanaged community-development institutions. Her father had been a general contractor, and it infuriated her that the developers he worked for seemed to have unlimited access to debt while he struggled to secure a new loan to upgrade his tools and equipment. She suspected that most of the bigger players were interested in her customers only because they needed a certain number of small-business accounts to meet regulatory mandates and keep their banking charters; after luring small clients away with introductory promotions, the large banks would give them the same shoddy service that had held her father back. Meanwhile, the fintech start-ups were low touch and untested; they could leave their clients high and dry.3
It hurt Beth’s soul to imagine that possibility, so she shared James’s fervor for quickly expanding to serve as many people as possible with the help of technology. The goal was to build a loan underwriting system that would apply proprietary algorithms to create a single score that signaled whether a loan should be approved and what the credit line and the interest rate should be. That promised to free up staff to focus on the face-to-face service that Vanir had become known for.
But building the enterprise IT had taken longer and cost more than anticipated.4 Meanwhile, associates had become accustomed to doing the calculations and decision-making themselves, and an inefficient process had become routine. The staff also enjoyed the autonomy the process provided: Lending officers were encouraged to get to know their applicants and to combine objective criteria, such as credit scores, with subjective ones, such as personal character. Still, the strain on the employees was starting to show, and Beth took Mariko’s warnings about burnout seriously.
Would a shift to the new system help or hurt Vanir’s staff? Certain elements of the transition would require lots of busywork. For instance, along with the lending algorithms, the IT team had built a customer relationship management system that would allow a review of customer profitability across multiple products. Information on that now was stored in loan officers’ heads and hard drives, and getting it into the system would be laborious. As Vanir opened more branches, it would need to hire more associates, who would have to be trained (on, among other things, the new technology) by its existing staffers, further burdening them. Beth hoped that the new system’s birth pains would be short-lived and quickly lead to greater efficiency and lighter workloads. But she also worried that in the long term, Vanir’s earliest employees would miss the algorithm-free autonomy they’d become accustomed to.
Beth knew she needed to talk to “the wizard,” her white-haired, tie-dyed-T-shirt-wearing chief technology officer, Bruce Richards. “What’s the update?” she asked as she entered his office.
“Do you want the good news or the bad news?” he replied, chuckling. Beth frowned and crossed her arms.
“OK,” Bruce continued. “The good news is that the entire stack is ready to go. We can roll out tomorrow.”
“And the bad news?” Beth asked.
“The bad news is that the pilot we ran in the Lansing branch uncovered some, well, resistance.”
“Go on.”
“The staff hated it,” Bruce said. “The feedback was that no one had time to learn a complicated new system. Some people refused to attend the training. Others brought their laptops to class and worked the entire time.”
“Oh,” Beth said.
“This isn’t unexpected!” Bruce interjected. “Learning a new system takes time and can be frustrating. You can expect a period of negative labor productivity before we see any gains, but that doesn’t mean the gains won’t come.5 What matters is that we’re finally ready to launch. We can pull the trigger next week if you give us the go-ahead.”
“No,” Beth replied. “Hold off for now. We might have to delay. I need to think this through.”
Some Frank Feedback
Beth checked her watch as she collected her coat from her office—8:30 PM. So much for bankers’ hours. As she headed out of the branch where the executive team worked, she saw relationship manager Chantelle Williams, one of her first hires, at her desk, turning over pages in a file. Beth knew that Chantelle had two sons who’d been homeschooling through most of the pandemic.
On Chantelle’s desk was one photo of her kids and another of her first Vanir client—a bakery owner who’d had trouble obtaining a loan at other banks because of his prior issues with credit card debt. Following company protocol, Chantelle had looked more closely at his situation and realized that the debt had coincided with his wife’s illness four years earlier. Since that time his credit history had been spotless. Vanir had given him a loan, and in return he not only made his monthly payments on time but accompanied them with deliveries of his delicious cannoli. “I don’t stay late for you,” Chantelle had once told Beth after she’d thanked the manager for her long hours. “I stay late to earn school tuition for them”—she nodded to the picture of her sons—“and,” she added, shifting her gaze to the photo of the baker, “to make sure people like him can stay in business.”6
“How are you holding up, Chantelle?” Beth asked.
“I’m living the dream, boss!” Chantelle joked, gesturing to the open file on her desk.
“No, really. How’s morale?”
“Well,” Chantelle said, “a lot of people are struggling. You combine the long hours with challenges on the home front, and it’s tough.”
“I know,” Beth said. “But I just spoke to Bruce Richards, and he said the tech solution is almost ready. Help is on the way.”
Chantelle sighed.
“What is it?” Beth asked. “Are you worried about the transition? There will be some work up front, but I assure you that—”
“That’s not what I’m worried about,” Chantelle interrupted.
“Well, then, what?”
“Look, what makes this bank special is that we are run by people, not by formulas. We can make a human connection with our customers. I just don’t think an algorithm can replace that. Truthfully, I’m worried that we’re going to end up double-checking the algorithm all the time or, worse, that it will end up hurting our customers.”
“Absolutely not,” Beth said. “I wouldn’t let that happen.”
“You know how you call Bruce ‘the wizard’?” Chantelle continued. “Well, have you actually looked behind the curtain? Are you sure this technology won’t just end up discriminating against the very customers we strive to serve?”7
Case Study Classroom Notes
After thanking Chantelle for her candor, Beth wished her a good night and headed for the exit. She knew she faced the biggest decision of her tenure as CEO. Should she rethink the implementation of Vanir’s new IT system, knowing full well that her employees were stretched thin but that a delay might allow competitors to pounce on Vanir’s current and future customer base? Or should she risk her employees’ trust and dedication by pushing past their concerns, sticking to her tech-enabled strategy, and forging ahead? She opened the door and stepped out into the cold Detroit night.
The Experts Respond: Should Beth go ahead with the bank’s expansion plans and IT rollout?
Anuj Shrestha
Bob Rivers is the chair and CEO of Eastern Bank.
The bank’s key differentiator is at risk. Beth should hit pause on the expansion. The clincher for me is that Vanir’s Net Promoter Scores are falling. Superior customer service is the foundation of the bank’s value proposition and the source of its competitive advantage. Beth should delay the enterprise IT rollout for at least a year.
The CFO is worried that this will provide an opening for fintech and large bank competitors. I don’t agree. Big banks are built for efficiency, so they typically do very little hand-holding for small-business customers and transfer much of the paperwork to them through self-service. The fintech approach is even more extreme—a customer might never interact with another human. And Vanir’s technology isn’t what’s most important, because it’s not what its clients are buying. What they want is great personal service and advice, and small-business owners in particular will stay loyal to a bank that provides it. That’s why Vanir must address the uptick in customer complaints before anything else.
How do you bring NPS numbers back up? Ultimately, Beth can take care of her customers by taking care of her staff. She’s already paying above-market salaries, but that goes only so far. Even the most dedicated employees may decide that well-paying jobs aren’t worth it if they’re being overworked and can’t see a light at the end of the tunnel.
So far the bank’s strategy of “character lending” and considering qualitative measures of creditworthiness has been successful. But many banks have taken a similar approach and failed, because human judgment isn’t always reliable, and as a rule of thumb banks need more than 95% of their loans to be repaid to stay solvent. Beth seems to have found loan officers who can exercise their own judgment to make good loans. But I wonder how sustainable and scalable that is. We recently acquired a bank that made loans in a similar fashion—what senior executives described as “working in the comfortable shades of gray.” That bank did this well, but it took more than 15 years for it to grow to $1 billion in assets. Vanir’s growth plan is far more aggressive than that—so its risk profile concerns me. I also question whether its goals are even realistic. The algorithm-enhanced IT system might be a welcome addition to the process, but it should be implemented thoughtfully and carefully when employees are ready, not in a rush right now.
Although Vanir’s CTO will be frustrated by a decision to halt the rollout, Beth can emphasize that she’s not killing it, just delaying it until employees are less stretched and the NPS figures come back up. Yes, IT-enabled scale will eventually offer advantages to Vanir and help make it more sustainably profitable. But the bank can’t relinquish what makes it competitive today.
Chris Yeh is a cofounder of Blitzscaling Ventures and the Blitzscaling Academy.
Beth should move forward with the IT rollout and business expansion. A fledgling bank can’t risk being outflanked by its competitors. She’s understandably worried about the new algorithms and the stress that implementation will cause employees, but I think she can assuage their concerns with a more measured, inclusive approach and better messaging that emphasizes the system’s augmented—rather than artificial—intelligence.
Vanir is at a pivotal moment. When a company starts out, its employees all know exactly what’s going on because they’re literally in the room when decisions are made. But this bank now has five branches and probably dozens of employees. Beth needs to change her management and communication strategy to handle the increased complexity.
First, there doesn’t seem to be any consensus on the desirability of the new tech or who’s in charge of rolling it out. James, the CFO, is an advocate but isn’t involved, while Mariko, the CHRO, is against it but is probably overseeing the training for it. Bruce, the CTO, seems to have designed the system without adequately involving the loan officers and relationship managers who will use it. These are flashing red lights. When a project is this far along, the team should be on the same page about it, and each person’s role should be clear and explicit.
The frontline workers who will use the system should have been consulted throughout, providing feedback to refine the product. Chantelle should not be worried that it will harm her connection with customers or be discriminatory.
Although competitive pressures call for Beth to implement the system, she needs to do so thoughtfully. She should characterize the launch as a beta release, slowly introducing the system in two branches and having employees work with the technology team to test and improve it. She should reassure staffers that it’s meant to be a tool to make them better at their jobs, not to replace them or change the culture of the company.
At the same time, she needs to lift morale by being both a comforter and a commander in chief. It will take sincere public expressions of empathy and compassion—to the entire workforce and individual employees—to address the extreme toll taken by the pandemic. But Beth must rally the troops around the growth plans, too, because people also want to feel they’re part of a winning team. She must explain that Vanir is currently in a sprint to ensure that it delivers on its promise of high-touch, technology-enhanced personal service even during the most trying of times.
The dynamic on her executive team also needs work. Her cofounders should not be sniping at each other. Disagreement is healthy; conflict isn’t. Given the trio’s history together, I suspect that the strain of operating during a pandemic is getting to them too. Beth should be up-front about addressing this with her executive team.
As Beth works to calm the current crisis and roll out the new tech, she must also undertake the harder and more important work of changing how she leads. I recommend that she start writing a weekly email to the entire staff or launch a private internal podcast with other team members so that people can get to know their coworkers, raise concerns, and perhaps most important, share stories that inspire them to keep going.
HBR’s fictionalized case studies present problems faced by leaders in real companies and offer solutions from experts. This one is based on the HBS Case Study “Athena Bancorp” (case no. 919517-PDF-ENG), by Leonard A. Schlesinger and Sarah L. Abbott.
