Where did it all go so right?
Just a few decades ago, Spain's retail banking industry was a conservative, closed circle of gentlemen bankers. Now it is one of the world's most efficient and competitive.
Why this miraculous metamorphosis?
With their curiosity thus piqued, IESE professor Kimio Kase and the researcher Tanguy Jacopin set out to find the answer. In their home countries - France for Jacopin and Japan for Kase, which had both once boasted outstanding financial institutions - the outcomes had been much poorer. So, why did Spain succeed where, say, Italy or Portugal failed? And how did two Spanish banks, namely Santander and BBVA, manage to outperform both the Spanish financial sector and their European competitors, emerging as key global players?
More importantly, was a new and unique business model at work? If so, could it be copied in other countries or contexts? The answers, according to Kase and Jacopin's new book, CEOs as Leaders and Strategy Designers: Explaining the Success of Spanish Banks, are yes and maybe.
The Great Leap Forward
The backdrop to the emergence of Spanish retail banks as world-class competitors was deregulation triggered by Spain joining the E.U. First there was mayhem, then mergers and modernization.
The new, favorable regulatory environment, in turn, spawned a generic business model, which most Spanish banks follow to a greater or lesser extent. This model focuses on cash-flow generation, largely through emphasizing day-to-day operational efficiency supported by strategic use of IT systems and a penchant for growth.
This model also happens to be compatible with a modern management concept known as the Profit Arithmetic (PA) approach (Kase, Sáez-Martínez & Riquelme, 2005), which similarly focuses on the short-term and cash flow. An equally successful alternative is the corporate culture-based, big picture-oriented Proto-Image of the Firm (PIF) approach.
Hence, this generic Spanish banking model/PA approach prioritizes increasing revenue in the immediate future ahead of pursuing a long-term vision. As the saying goes, look after the pennies and the pounds will look after themselves.
One of the other main features of the Spanish model is the strategic use of IT. Spanish banks combine the higher capillarity of their customers with the lowest number of employees per branch - an average of six versus 13 in Italy and 45 in the U.K. - largely thanks to being equipped with the best technology base.
Not that they rush at breakthroughs. The giants Santander and BBVA, for example, prefer proven to pioneering technology.
Santander is reaping the fruits of a 500 million euro investment in the custom-built IT platform Partenon. The system, which allows it to offer clients customized financial products and special deals on consumer products, is estimated to save the bank 265 million euros a year. It also has huge spin-off benefits in another key prong of the Spanish model - growth - allowing Santander to transplant this IT advantage to the foreign banks it acquires.
The Spanish Masters
Yet the question remains: How has Spain been able to produce best-of-class retail banks where other countries with equally clever business models and favorable regulations have failed? Look no further, the authors say, than to the personalities and excellence of Spanish CEOs, their chief operating officers and their management teams.
"The personality and his cognition process are actually the cornerstone of our book," they write. "The existence of outstanding business people is a major and essential ingredient."
Excellent CEOs resemble artists, the authors say. Like Picasso and Velázquez, they are a product of their time, education and happy chance. Why key "change masters" appeared on Spain's banking scene when they did is impossible to explain. That many hailed from the Basque region and studied at the same universities may offer some insight. Other reasons may include the banking crisis at the end of the 1970s, the turbulence caused by mergers among Spanish entities, and their unmapped inroads into less mature markets in Latin America.
Whatever the real reason, Spain has produced excellent business leaders, and their role is pivotal. The PA approach underpinning the success of Spanish banks was driven from the top down and filtered directly from the mindsets of these CEOs and executives. This is exemplified by Botin and Sáenz for Santander, and Ybarra and Uriarte followed by Gónzalez and Goirigolzarri for BBVA. They all configured their strategies based on the PA scheme - chiefly, a focus on the maximization of cash-flow generation, operational efficiency and IT technology, enabling their survival by fine-tuning their road map.
Continuing success will hinge largely on these CEOs identifying and coaching suitable new leaders to replace them. Incidentally, whether their successors continue the PA approach or switch to a PIF one depends on the environment they face, the authors write. Whatever the approach, it must be applied with gusto.
"If top executives adopt the business model only half-heartedly, their staff will almost certainly sense this lack of commitment and the attempt will be doomed to failure," they warn.
Risks for Copycat Competitors
Should foreign banks try to imitate the Spanish model? The authors predict insurmountable hurdles if a bank with a different approach tried to transplant the Spanish model. Conflicts with existing corporate culture would be among the obstacles. For instance, it took years before the president of Japan's Suruga Bank was able to overcome a cold shoulder from middle and lower management and implement a model similar to Spain's. (The case is covered in the book's appendix.)
As for entering other countries, including the emerging markets of China and India, as well as other banking businesses, such as investment and corporate banking, even the Spanish banks would have to reconsider their strategy. As the authors point out, there may be cases where a longer-term PIF approach would be more prosperous abroad than the PA model favored at home.
On replicating that all-important human factor, there is little advice. Cloning this impressive new breed of bank barons does not seem to have been considered.