Corporate Finance, DeFi, Blockchain, Web3 News
Corporate Finance, Fintech, DeFi, Blockchain, Web 3 News

Strategic Planning: Stacking the Odds in Your Favor

It’s midyear already.

JP Nicols
JP Nicols

Two quarters down and two to go for 2016. For many financial institutions, it’s also the start of the 2017 strategic planning season. That time when boards and senior leadership teams sit down to hash out next year’s budget; working together to set aside silo politics and internecine battles to focus on what’s best for the customers, and the overall enterprise as a result.

Haha– just kidding!

It’s that time when business line leaders are calculating what they need to spend quickly so they don’t lose it in next year’s budget. It’s that time when executives start currying favor and jockeying for position by letting their bosses know how much more worthy their business unit is for additional funding compared to their peers.

As silly as it sounds, it’s all pretty rational behavior, really.

Much of the strategic planning process, especially the budgeting aspects of it, are pretty much a zero-sum game. All of the bottom-up funding requests sent out to frontline leaders from the top of the organization (with varying degrees of sincerity) invariably tally up to far more in expenses and far less in current revenues than what the C-suite has already telegraphed to investors. The resulting negotiations, horse trading, and unsatisfying compromises usually end up with limited resources being spread across the organization like a thin layer of peanut butter. Starving no one, but providing the necessary energy to few.

Lessons from Las Vegas?

Unlike many Wall Street investment bankers and traders, most commercial bank and credit union leaders are inherently risk averse. Las Vegas would seem to provide few practical lessons for the latter group, despite the risk of not taking risk, as I have pointed out before.

But if you’re really serious about reaching a new level of performance, this should really be the time for doubling down on a small number bets that show promise for outsized returns. That also means taking a few bets off the table if the odds don’t look so good.

Spreading your money around the roulette table seems like a way to hedge your risk, but thanks to the house edge, your expected loss over the long run is a minimum of 5.26%, the same as betting it all on black. Or red.

Moving from House Edge to Player Edge

The only people in Las Vegas who can make money over the long run (besides the house) are blackjack players, but not just any blackjack players– just those who:

- Know the odds of every possible bet,
- Understand when the odds have shifted in their favor, and
- Vary their bets accordingly.

Learning the odds of every possible bet in blackjack is time consuming, but not incredibly difficult. Casinos sell wallet-sized basic strategy cards in their gift shops. But millions of gamblers will ignore them and bet on ‘hunches’, ‘streaks’, and ‘strategies’ more grounded in wishful thinking than the mathematics of probabilities and statistics.

Understanding when the odds have shifted requires the ability to count cards, a practice made famous in Ben Mezrich’s 2003 book “Bringing Down the House: The Inside Story of Six M.I.T. Students Who Took Vegas for Millions” (later made into the 2008 movie “21”, starring Kevin Spacey). Counting cards is a way of carefully tracking what happened in the past in order to better predict what might happen in the future. (Predictive analytics, anyone?) This is only true when dealing from a finite number of decks, and not true for a spin of the roulette wheel or the rolling of a pair of dice, where any one outcome is independent of all others. Card counting is not illegal, but it is against the rules of every casino in the world, because it reveals when the house edge has temporarily become the player’s edge.

All of this information can be leveraged to bet more when the odds are in the player’s favor. If most the cards that have been dealt so far have been smaller values, then there is a greater likelihood that more of the cards to be dealt next will have higher values. This tends to favor the player over the long run (partially because it tends to cause the house to bust more often), so the player should increase their bets.

These factors will almost never combine to create a sure bet, with a win locked in 100%. As in business and in life, blackjack still has a significant amount of randomness involved. All of those tens left in the deck that you hope will allow you to draw to 21 and the dealer to bust her 12, can just as easily do the opposite.

Still, utilizing all of these strategies together can help create more winning sessions, and that’s a good thing.

Turning the Tables in the Boardroom

How can you take the lesson from the blackjack table to the conference table? How can you stack the odds in your favor this strategic planning season?

1. Know the odds of your existing bets. Are there any slow-growing products or business lines where you know deep down that you are unlikely to grow any faster? Especially if they are not strategically important or do not represent a significant share of ongoing profits?
2. Understand where the odds have shifted. Are there emerging businesses, products, or services that you’re not investing in today that you should be? Are there outside partners you should be working with to capitalize on new opportunities? Have changes to the competitive landscape exposed new weaknesses you should be shoring up?
3. Be brave in making your bets. One of your most important jobs as a leader is the allocation of resources. Don’t be fooled by history, legacy, and sunk costs– where is the best place to invest the next dollar? Where should you take bets off the table so you have more to put where the odds are better?

The odds can always move against you in the short run, but taking this approach can help position you to have more wins, and to win more over the long run.

May the odds forever be in your favor.

JP Nicols, CFP®

Internationally recognized as a leading voice for innovation, strategy and leadership for the future of financial services, JP combines 20+ years of experience with a fresh perspective on combining high-tech with hightouch. His work has been featured in some of the industry’s top publications, including American Banker, BAI Banking Strategies and Investment News.

He is the founder and CEO of Clientific, and the co-founder of the Bank Innovators Council.

Les médias du groupe Finyear

Mercredi 13 Juillet 2016