Days of Thunder is an iconic early 1990s movie starring Tom Cruise, Nicole Kidman and Robert Duvall. The movie follows the racing season of an upstart car racing team and highlights the human drama set around a race car driver, his crew chief, race car team and of course intense competition. This classic movie is obviously about racing, but at its essence it illustrates how most competitive fields operate. Most industries are faced with the same set of fixed variables that they then use to create products, build teams, formulate strategies and compete. Just replace cars with capital for the lending business. At least in racing there are only about 40 teams compared to commercial finance it can feel like many more. The author chose car racing, which he admittedly knows nothing about, as a forum to talk about lending as a fast-paced, team-driven sport that relies on many facets going right. This volume is the first of what the author hopes will be an ongoing series that talks about the trials and tribulations of running a bank or non-bank commercial finance company mostly, but not always, through the eyes of a BDO.
The goal of this series is to explore many of the dynamics lending groups face from both an inter-personal and professional perspective. The people and the professional are intertwined and much of what creates successful teams is centered around culture so it’s hard to separate the two. To build a great commercial finance or banking team you need originations, underwriting, portfolio management and great leadership, among other things. You might have professionals who can execute one or two of these skills sets, but to build a scalable business with longevity you need to excel in all of them. If credit is the crew chief then the BDO is the driver, but the entire team is split into separate divisions that need to operate as one. The teams that tend to win consistently have a symbiotic trust and communication between the crew chief and driver ie credit and originations. The crux of this relationship as it so happens was prominently featured in the movie as the race car driver had the most conflict with his crew chief.
The best lending teams have the strongest credit and sales relationships. A driver is only as good as his or her team and a team is only as good as their driver. Sales needs to know how far it can push the team to the edge to win and know the car is going to perform. Credit needs to trust sales to know the limits of just how fast they can drive without crashing. When these relationships are off teams perform poorly. Even worse, when these teams are out of sync and book bad deals the entire organization comes under stress because the lack of communication translates into a portfolio problem. A portfolio problem then becomes both a financial and human capital issue. Financial from the perspective when capital gets frozen and human from the perspective as resources need to get shifted to deal with a critical issue. Lending in many ways is stock picking in so far as each team needs to place their bets on which clients to pick. To get to this point though many things have to go right internally more so than externally. The key topic of this first volume is competition, namely internal competition.
Ask any BDO who their biggest competitor is and he/she will say internal credit vs. external competition. We are all competing against ourselves to some degree. It’s one thing to lose to a bank if you are a non-bank, but if a bank loses to a bank or a non-bank loses to another non-bank then one team either creatively executed to make a good loan or took excessive risk that will soon create a portfolio headache. At the crux of these outcomes is the talent of the BDO as presumably each constituency – bank and non-bank – has the same or similar cost of capital. The BDO lives in a world where cost of capital is the variable that is always fixed so the variable to flex is risk. To that end, a successful BDO knows their product and focuses on opportunities that fit their product while quickly passing on deals that are not a fit. You can start to see the parallels with racing as the BDO needs to know how to push his car at the right time and be patient when the time is not right. New race each week, new deal each week against many times with only winner.
This partially explains why veteran teams in both sports and business have the most success as there is a trust and continuity factor. It's too easy to see how many different lending teams can approach a deal when structure and corresponding risk are the main drivers. This is the market we live in and the BDOs and credit groups face enormous pressure to get this right week-in-and-week-out. Where things go wrong, which will be explored in future volumes, is when a BDO feels there is not consistent decision-making or understanding of the market. This leads the front of the organization literally twisting in the wind in the marketplace. Depending upon the organization, a BDO will spend significant internal time lobbying to get aggressive in what still is a very competitive market. The bigger the internal struggle, the harder it is to compete in the market and have a team that operates as one.
Welcome to the Days of Thunder where rubbin is racin!
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