The Benchmarking Report

13.1

The Savings Bank provides the loan applicant with a comprehensive report (effectively a strengths and weaknesses analysis) advising in very considerable detail the results of the loan appraisal, but not including the factoring elements. In order to make the information easily understandable, the scores are converted into visual ‘tachometers’. The information is accompanied by useful com- ments and recommendations as to where and how improvement can be achieved.

13.2

It also includes data set out in graphical format as to how the applicant’s performance data com- pares with the peer group in the relevant industrial sector. The results for the case study company are set out below:

Parameter Company Mean for Sector

Financial Performance Cash Flow I 2.9% 13.3% Cash Flow II 1.6% 10.4% Return on Capital −2.6% 3.0% Interest Ratio 2.7% 1.4% Equity Ratio 36.3% 30.6% Capital Ratio 32.1% 14.1% Fremdkapital Structure 47.8% 47.4% Stock Ratio 44% 27.4%

Financial Performance

Parameter Company Mean for Sector

Management of the Business

Strategy 100% 80% Quality of management 90% 85% personnel management 80% 70% products 90% 80% market position 85% 80% Specific Risks 85% 80% organisation 85% 85%

Research & Development 85% 85%

purchasing & Stock Control 85% 80%

production & process 85% 85%

Sales & marketing 85% 85%

Financial Performance

Company Mean for Sector

−10% 0% 10% 20% 30% 40% 50% 60% 70% 80% 90%

Cash Flow I Cash Flow II Return

Management of the Business

14. Summary

In order fully to appreciate the thought processes that inevitably play an important part in the loan decision process set out above, it is essential to understand first the framework under which the Savings Bank operates. Quoting from the Commentary: ‘They provide not just finance but are ob- ligated by their constitution to support the sustainable development of the total economy within their defined geographic business area. They also have very significant social responsibilities that extend well beyond provision of banking services. The Savings Banks are not state banks but are essentially credit institutions operating under public law. Their responsible public bodies (but not owners) are the local municipalities. Savings Banks are not a consolidated group; each Savings Bank is an independent credit institution and is highly autonomous.’ They are, however, entirely reliant on their ability to generate profits, which are then transferred to the reserves that are their only source of funds for future loans. The basic principle is that local deposits are transformed into local loans.

The second point to consider is the extraordinarily close relations, seen from a British perspec- tive, that exist between the Savings Bank and its business customers. They are all part of the same community and often went to school together. As was seen above, the bank has an in-depth understanding of the businesses and is in regular close contact so that they experience the chal- lenges and opportunities at first hand. In an in-depth interview with the director of one Savings

Management of the Business

Company Mean for Sector

Strategy Quality of

Bank, who is responsible for credit control, the question was asked as to what actions were taken in the event of a company encountering serious financial difficulties. The first response was ‘well you need to remember that probably half of the employees will hold current accounts with us’. But if the impression is gained that this reflects a cosy, almost parochial, relationship, this has im- mediately to be rejected. The Savings Bank management is highly professional and well qualified: they cannot afford high levels of write-offs that would otherwise destroy their reserves. There are stringent overriding controls monitoring their operations. The extraordinarily low level of failures encountered within all the Savings Banks is clear evidence of how effectively these controls work. The penalties that are imposed on Savings Bank management if they transgress may well be de- scribed as draconian.

The third point is more difficult to articulate, but is of fundamental importance. There is a pervad- ing atmosphere of ethics and a high moral code. on a visit to one of the other Savings Banks, the managing director presented a small book13 _{on Christian ethics, written by a Benedictine monk,}

as a memento of the visit. It was clear that this was a small gift for all his visitors and is regarded by both donor and recipients as a perfectly normal action. To the reader, it may be regarded as an isolated example; but in the experience generated not only with this project, but over many years of working in Germany, it is believed this is a reflection of the general climate in which much of the business by and with the mittelstand is conducted.

Seen from a British perspective, the financial performance of the company would be regarded as poor in the extreme. The current performance is in part a reflection of the very difficult trading conditions from which they have emerged. The very high levels of R&D maintained during the recession also contributed to the losses. In more normal periods, R&D investment also contributes to the company’s relatively low profitability levels. These low levels of profit, however, provide owners, management and employees with a standard of living that in a British context could well be described as one of affluence. The overriding objective of this company is not profit maximisa- tion – although they need profit to ensure survival so successfully over 50 years of operation – but (far more important) to grow the business. The order book and market share are the main drivers. This company and thousands like them in the mittelstand have no outside shareholders requir- ing them to pay ever increasing dividends, nor are they obliged to pay inordinate fees to bank- ers, lawyers and accountants. Funds that are available are immediately invested in research, new product development and training. They achieve high levels of productivity due to efficiency and investment in automation. They are immune from takeover. They have the Savings Bank for finan- cial support. This is how this company, subject to the most intense international competition, has become a world leader in its sector.