Bank of America's Self-Imposed Exam

Like other large financial institutions, Bank of America (BAC) was put through a "stress test" by U.S. officials last year. But it's a self-imposed procedure—one akin to Peter Drucker's "Business X-Ray"—that may ensure the company's long-term health.

Drucker, who was fond of medical analogies, thought every organization should regularly go through this kind of rigorous examination for all of its current lines: products, services, technologies, processes, and distribution channels. "The Business X-Ray is a tool for decision making," Drucker wrote. "It enables us, indeed forces us, to allocate resources to results in the existing business. But it also makes it possible for us to determine how much is needed to create the business of tomorrow. … It enables us to turn innovative intentions into innovative performance."

In the case of Charlotte (N.C.)-based Bank of America, the nation's biggest lender, figuring out how to drive innovative performance is crucial. Like other banks, it faces tough questions about how it's going to grow amid regulatory clampdowns on credit and debit cards, mortgages, reserve requirements, and derivatives.

Systematic Evaluation

The answer at which Bank of America appears to have arrived would surely please Drucker: Under Brian Moynihan, who became chief executive officer in January, the company has made clear that it isn't going to automatically leap at the next opportunity to make an acquisition or dive into a new market just because it's considered "hot." Rather, Moynihan and his colleagues have been systematically going through most every part of the business and diagnosing what to sell, what to revamp, and where to invest capital and resources to meet customer needs for the long haul.

"We continue to streamline our franchise, getting rid of things that customers just don't ask us for," Moynihan said last week at a financial-services conference in San Francisco.

For his part, Drucker advised placing each piece of the business into one of a number of categories. These include "today's breadwinners" as well as "tomorrow's breadwinners," or those products that already command a sizable market but whose best days still lie ahead. There are also the "productive specialties," which serve a decidedly narrow niche but maintain a leadership position within it. "Their net revenue contribution should be higher than their volume; their share in the cost burden, a good deal lower," Drucker explained.

Next come "development products," which are still being fine-tuned but where "hopes run high," Drucker wrote. "The number of people allocated to them should be small—though it will, of course, be larger than the revenue generated yet justifies."

Then there are the outright "failures." In a sense, things that fall into this group are the easiest to deal with. "They announce themselves and they liquidate themselves," Drucker wrote.

Tricky Categories

More complicated, by contrast, are those aspects of the enterprise that Drucker called "the problem children." Among these are "yesterday's breadwinners." "Everyone in the business loves yesterday's breadwinner," Drucker noted. "It is the 'product which built this company.' " But yesterday's breadwinners, he added, are on the verge of becoming obsolete and, in the meantime, "their gross revenue tends to be low in relation to their volume, while the number of transactions needed to keep them alive" is steadily increasing.

Equally tricky to deal with are "repair jobs." These, Drucker said, should "suffer from one—and only one—major defect," and this problem must be fairly simple to identify and correct. What's more, anything inserted into this category should have a "high probability of exceptional results" if the fix works.

The rest of Drucker's 11 categories include "unnecessary specialties," in which products are needlessly sliced into different segments instead of concentrated into one high-volume offering; "unjustified specialties," in which a product or service has been given a "meaningless differentiation for which the customer is not willing to pay"; "investments in managerial ego," where more resources get pumped into a product the poorer it performs; and "Cinderellas," or areas that might do well if only they were given a chance.

Growth Analysis

Once a company classifies all of its products and services in this manner, Drucker's X-Ray machine can be switched on. It is then that a company may anticipate when a critical change is likely to occur (such as today's breadwinner suddenly becoming yesterday's breadwinner). But this won't happen automatically. According to Drucker, the key is to make certain that every product is analyzed in terms of "the cost of further increments of growth," which will help reveal where it stands in terms of its life cycle. Is this a product on the rise? Or is it about to go into decline? And, if so, how fast is it destined to fall?

At Bank of America, its review of what's poised to grow and what doesn't really fit anymore has led to a string of significant decisions in the last nine months. Specifically, the company has shed, or is getting set to sell off, a substantial list of assets, including stakes in a couple of Latin American banks, an insurance operation, and a portfolio of private equity interests.

At the same time, it is investing in a new product line that will reduce onerous overdraft fees for its mass-market customers. It is also shifting more employees to spots where cultivating deep customer relationships is important—an integral part of Moynihan's overarching strategy to cross-sell products and services to Bank of America's retail, corporate, and wealth-management clients.

Moynihan pointed out last week, for example, that the bank's most affluent customers hold $7 trillion worth of investments at other financial institutions. This is a huge sum that, if played right, could start flowing to Merrill Lynch, which Bank of America bought last year.

Or, to put it another way, by having X-Ray vision, Moynihan might well be in the process of transforming a Cinderella into tomorrow's breadwinner.

Before it's here, it's on the Bloomberg Terminal.