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How Alloy Labs Banks are Making a Big Shift in the Finance Function

Remember the Amazon Fire Phone?


It was supposed to be an iPhone competitor but was quickly labeled a failure; a flop; even disastrous. Fire cost Amazon a $170 million write-off in 2014, which included the cost of disposing of millions of unsold phones. The whole affair would’ve crippled another business. But Amazon is agile, so it pivoted.


The company pulled the plug on the phone quickly. That enabled Amazon to redirect Fire Phone resources to two other initiatives that were growing faster than the annual budget had accounted for: Amazon Web Services and Amazon Prime. These strategically important levers were able to blossom in the ashes of the flamed-out Fire Phone.


The ability to adroitly direct resources is an important capability for any business. But the budgeting processes of most banks don’t allow for this kind of flexibility.


No one wants to defund the project they’re championing, even if it becomes obvious it’s not going to work. Everyone pushes for more funding while committing to minimal results. And it can be incredibly difficult — if not impossible — to attain resources for new projects when priorities and opportunities shift mid-cycle. But the world is moving too fast for the traditional budget process to last; at least, it can’t last in institutions that prioritize innovation.


How Alloy Banks Budget For Innovation

We’ve been looking at how members of the Alloy Labs Alliance are working to change this status quo within their respective institutions.


Some Alloy Labs members have spun off separate entities with their own profit and loss statements to manage innovation initiatives. One example is First National Bank of Omaha, whose Gen6 Ventures arm is tasked with product development. Although it’s a separate team, Gen6 is intimately connected with the bank, receiving support from departments like risk, compliance, and legal.


Other Alloy Labs banks carve out dedicated funds for innovation initiatives. Chris Nichols, Director of Capital Markets for SouthState Bank based in Winter Haven, Florida, stated in a recent Alloy Labs discussion that while the bank still has a typical 12-month planning process, there’s strong alignment between strategic goals and budgeting.


At SouthState, some managers are allotted a number of projects or proofs of concept (POC) they can complete in a year if they include the POCs in their operating budget. Generally, so long as each project stays below a specific budget threshold, involves no more than two departments, and has a limited risk scope it can go forward exempt from more formalized budgeting and vendor approval procedures.


Institutions without a standalone P&L or line item for innovation can still get creative when it comes to funding unplanned opportunities. This situation arose for one of the banks that forged a partnership with a technology startup through Alloy Labs’ Concept Lab program this year. The partnership was a direct fit with the bank’s mission, but the opportunity arose outside of the normal budgeting process. The bank felt that the project was so important to their strategy that they found a way to pull from other budgets such as marketing to make it work. Details on this partnership will be announced later this fall.


Stage Gates and a Bottom-Up Approach

John Epperson, Managing Partner for Financial Services at Crowe LLP, says there are aspects of agile budgeting that banks of any size can adopt. His team has been advising banks to focus on using “stage gates” with defined outcomes to fund discrete portions of a project as it hits milestones.


For example, Epperson says, projects can be broken down into three stages: Vision, Offering, and Traction. In the Vision stage, a bank might set out to determine whether there’s an unmet need, whether there’s a market opportunity, and what the value proposition of the new product or service might be. “There’s a pitch behind each of those elements,” Epperson explains, “and before we start working on the offering — building an MVP, having pricing discussions, or anything like that — there’s an allocated budget that allows us to run experiments to make sure we are headed in the right direction and meet the required outcomes.”


This format helps to de-risk innovation and, Epperson says, typically helps CFOs have a higher level of comfort with budgeting for innovation. Making the process more comfortable for CFOs is important because all of these changes require a culture shift.


As Trey Maust, Executive Chairman of Oregon-based Lewis & Clark Bancorp, explained in a recent member discussion, “traditionally, it’s the finance function that drives the budgeting planning process. That process feeds into resource allocation, driving how these resources get deployed. But CFOs are working from a very different perspective than business line leaders, CEOs, or innovators.” Maust concluded, “really, we need to start with how customers and counter-parties should experience the services we deliver to them, and then work backward from there. Finance should act as the enabler.”


"We need to start with how customers and counter-parties should experience the services we deliver to them, and then work backward from there. Finance should act as the enabler."

Tempering a top-down approach to budgeting with a bottom-up process could feel like a seismic shift to CFOs in a typical command-and-control organization. But the role of finance is changing for innovation-focused banks.


The finance team at SouthState focuses on reconciling and documenting financial decisions. “It's really executive management that sets the goals and priorities, growth rates and profit rates for every division,” Nichols says, “and then the divisions go to town and put a tactical plan and budget together, which is then approved at the executive level before it goes to finance.”


Epperson sees opportunity in letting the people who are closest to the work build the budget because this allows them to be held accountable for both expenses and revenue. “They have to define their budgets, but they also have to come with a commitment,” Epperson says. “The CFO’s job, in my eyes, is looking at the investments that each business unit has made and making sure that it's viable to the organization.”


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