As we approach fall 2020, the chance that you are still on track with your master plan that you started the year with is probably 0%. Heck for all of us, the plan we started the year with went out the window in March! This year reminds me of a quote from Mike Tyson, “Everyone has a plan until they get punched in the mouth!”
If there is any trait of leadership that 2020 shows we need, it is flexibility. Quite often, things don’t go quite as planned. It is then that we need to see if we need to keep pushing forward on the same plan, modify the plan a bit, or scrap it totally.
John Boyd was a young airman flying F-86 Sabre fighters during the Korean War. He noticed that American pilots were downing Soviet MIG-18s with greater frequency than the Soviets were destroying U.S. fighters. Sometimes this differential was as much as 10 MIGs to every single F-86. This differential intrigued John as the MIGs were known to be technically superior to the F-86s in most categories and the fighter pilot training on both sides was similar.
After the war, John continued to serve his country in the Pentagon. He studied this phenomenon and discovered there were two slight advantages the F-86 had. First, F-86s had a bubble canopy for the cockpit that allowed a larger field of vision than the MIG planes. Second, the F-86 had easier hydraulic controls; this allowed our pilots to not exert themselves physically when aiming guns at the enemy. These two combinations gave the Americans an incredible advantage.
John continued to expand on these insights by crafting the OODA loop. OODA stands for Observe, Orient, Decide and Act. This is a program for leadership which after the last step is repeated. The first step is to Observe. This is taking account of circumstances, outside information, implicit guidance and control, and unfolding interaction with the environment. If the loop was completed in the past, then the results of those actions are reviewed. The pilot who is searching the skies, a quarterback viewing the defense at the line of scrimmage, or a leader assessing the market are all examples of this first step.
The initial Observation leads to the next step which is Orient. This step mixes cultural traditions, heritage, past experiences, and new information together to analyze and synthesize the observation through these filters. Here think of the pilot moving into position behind the enemy, a quarterback dropping back for a pass, or the business leader getting ready to respond to various market segments.
After Orientation, the next step is to Decide. Decision uses what was learned in Observation and Orientation, under the governance of implicit and control, a decision is made. This decision is fed back to the original observation. At this point the pilot has the bogey in the crosshairs, the quarterback has spotted the receiver about to break open in the slot, or the business leader sees the unique ability to advertise to a particular market.
The last step is to Act. After OOD, Action has feedback immediately with the observation when the action is executed and after the action occurs once unfolding interaction with the environment from which the action occurs. In this step the pilot has fired on the enemy, the pass is released from the quarterback’s hand or the advertising campaign has started.
The cycle repeats after Action. What impact has the Action had on the environment? What changed from the initial Observation? Was the information in your input correct? What are the next steps to re-orient your organization after the present action? Leaders who march at breakneck speed are able to process the loop quickly and turn it again and again throughout the OODA process. There is danger in stopping at various points in the loop and not moving forward. Too much observation can lead to analysis paralysis. Deciding, before orienting yourself to execute on the plan, can create a misfire. Failure to decide and act will never lead you to grow. Failure to observe the environment can cause you to think you are accomplishing great things, yet no one is following your lead.
What do you observe now in the economy in 2020? Some areas of the country, like my beloved South Dakota, are open with no restrictions from the state. Other areas remain shut down or in some stage of impaired liberty with rules imposed by governmental leaders. Prolonged shutdowns will have a devastating impact on commercial real estate and business. You probably have moved some loans temporarily to interest only or skipped payments completely for a while. The nature of work is also changing as many jobs have moved to remote or distance work and may not move back to the office. Financial institutions have closed lobbies, and some have moved staff to remote working. Some of us have worked incredibly long hours to help supply business with the SBA’s PPP loans.
Most CUs are flush with deposits. Investment options provide little yield. Lenders are hesitant to extend credit. They are under pressure to lower interest rates on existing credits, even those which would normally not qualify based upon the performance of the business. How we judged risk at the beginning of the year does not seem to apply to our current situation. Management and leadership skills of the borrower are of more importance today.
As we emerge from the pandemic, there are several ways we can position our CU better for success and as a valuable resource for your communities.
- How do we judge risk going forward? Have you placed extra funds into loan loss reserve for expected losses?
- Do you have the staff to adequately handle the complexities of problem loan workouts? Do you need to hire more people or seek contracted outside help?
- How will you find new, good relationships during this time? Good credits are available as other institutions are shut down for lending or are distracted with their own problems.
- How do you handle the pricing pressure from your borrowers and match this with their business performance?
- What can you do to gain better value from your outside credit risk review and asset-liability management? These are pushed by the examiners and most of them do not identify systemic strengths and weaknesses of the institution.
The five above do not make an exhaustive list, but are very key in a start for the decisions you need to act on. Then moving to the beginning of the OODA loop, continue to reassess the next plays necessary for continued success.