Profit in the Drink: in today's recessionary environment, more than ever, marketers need to understand the mechanics of managing profitability and mitigating profit risk.

• Author: Weissman, Rich
• Position: Profit Management

As we look hack at how the financial services industry fell into the recession, we cannot help but wonder: How did. so many banks miss the mark?

For an industry heavily steeped in managing risk, everyone seemed to have overlooked something important.

You may think that the crisis was all about credit risk, right? But it wasn't.

Huh? Isn't that why the industry cratered because of overextension of credit? In part, yes. But the mess cannot be fixed by simply improving credit risk. It requires an understanding of 'risk" in a new light--something that we call "profit risk."

Research has been done on profit risk that can be used by financial institutions to mitigate the potential for future financial meltdowns.

Let's share our insights on what the industry can do differently.

How did it happen?

You can divide the history of the financial services industry during the last 80 years into three distinct cultural phases.

Phase 1 began with the Great Depression--we call it the "Pre-Deregulation Phase." The industry operated under strict regulations, and the notion of marketing or selling was not in the equation. Financial institutions did not compete with each other on products, price or the ability to sell more. The government determined, by and large, what institutions could offer, and the way in which institutions differentiated themselves was through branch networks and providing quality service to customers (and maybe a toaster or electric blanket every now and then!).

This phase ended, with the Depository Institution Deregulation Committee and an act of Congress (Banking Act of 1980, which rolled out in the early and mid-1980's). Enter Phase 2, where the industry quickly adopted the concept of marketing and selling as fundamental. We call Phase 2 the "Sales Culture Phase," where every institution got on the marketing and sales bandwagon big time. The goal was to aggressively market and sell products, compete on price, and focus on three key measures for assessing marketing and sales, and hence institutional success:

* Sales volumes.

* Cross-sell ratios.

* Deposit and loan growth.

It was a culture of 'Just bring in more." And as institutions got on board, they unknowingly were creating a bubble in their income statement that few understood until recently.

When an institution understands the income statement bubble that Phase 2 creates, it becomes clear that there is a need to rethink current practices. Enter Phase 3--we call it the "Profitability...