What can banks learn from an old school fighter pilot?

You probably don’t know this, but during the Korean War, American fighter pilots were outnumbered and out gunned.

Col Ben O. Davis leads F-86 flight (51st FIW, Korea)" by USAF - USAF website photo 070727-F-2911S-580. Licensed under Public Domain via Wikimedia Commons - http://commons.wikimedia.org/wiki/File:Col_Ben_O._Davis_leads_F-86_flight_(51st_FIW,_Korea).jpg#/media/File:Col_Ben_O._Davis_leads_F-86_flight_(51st_FIW,_Korea).jpg
Col Ben O. Davis leads F-86 flight (51st FIW, Korea)

At the time, the Air Force’s state of the art fighter jet was the F-86 Sabre, and the North Koreans were using the Soviet produced MiG-15.

The MiG-15 was the world’s first swept-wing fighter, and it had superior range, speed, turning radius, climbing ability, and weapons.  However, despite flying in what appeared to all experts to be inferior equipment, the American Sabre pilots racked up a kill ratio of nearly 14:1 against the MiGs in the world’s first ever all jet dogfights.  So, what was it about the American pilots that allowed them to completely dominate with slower planes?  The answer may surprise you, and can teach us a lot about how the world’s highest performing banks are putting distance between themselves and the competition.

By U.S. Government (U.S. Government) [Public domain], via Wikimedia CommonsOne of the brash young pilots of those F-86 Sabres was John Boyd.  Although he was too young to get much combat experience during the war (he actually dropped out of high school to join the military), Boyd wanted to figure out the reason for the lopsided kill ratio.  While the MiG-15 was superior in the ways planes had traditionally been measured, the F-86 Sabres had two important differences.

First, they had a large canopy with clear visibility in all directions.  Second, they had a hydraulic boost to the flight control system (the “stick” in pilot terms).  These two advantages allowed the American pilots to better see what the enemy was doing, and start counter maneuvers.  By the time the enemy reacted, they would be starting a new maneuver.  The enemy was reacting too slowly to old information, and after several iterations, they would find a Sabre close on their tail in the kill zone.

Boyd took this insight and perfected a new technique.  He became an instructor at the exclusive Fighter Weapons School (FWS), which was basically Top Gun in the late 1950s.  Most of the world’s best pilots eventually came through FWS, and Boyd had a standing bet for all of them.  Starting from a position of disadvantage, Boyd would have any taker dead in his sights in less than 40 seconds, a bet he called “40 seconds for 40 bucks.”  In reality, he rarely needed more than 20 seconds, but liked the idea of winning $40 a lot more than winning $20.  In more than 3,000 hours of flight time at FWS, Boyd NEVER LOST THIS BET.  He was a combination of John Wayne and Doc Holliday.

Boyd formalized his approach, which he called the “Boyd Cycle”.  It later became known as the “OODA Loop”, which stands for Observe, Orientate, Decide, and Act.  The OODA Loop became (and still is) the standard for all fighter pilots, and has since been used in broader military and business strategy.

Full diagram originally drawn by John Boyd for his briefings on military strategy, fighter pilot strategy, etc
Full diagram originally drawn by John Boyd for his briefings on military strategy, fighter pilot strategy, etc

The basic concept is that if you can “get inside” the competition’s loop, you can quickly form a hypothesis, test it, observe results, and form another hypothesis before the competitor can get through their first loop.  Instead of worrying about getting the action exactly perfect, the goal is to quickly make the best possible decision and test the outcome.  More iterations will get to the right outcome much faster (and better) than stubbornly trying to perfect a hypothesis before it ever goes to market.

For example, in the software business, instead of spending 18 months on perfecting the next release (all while the market continues to evolve) and finding out your product isn’t exactly what customers want, the successful companies are making their best guess at what customers want, building a minimum viable product quickly, and then releasing it to be tested every 18 days (or less).  That minimal product can then be perfected and improved in stages, all with constant feedback from real paying customers.

How does this compare to the banking world?  Are banks good at making quick decisions and learning from them?

I have spent enough time on committees in banks to answer that.  For the vast majority of banks, the answer is a resounding NO.  Just by the nature of the business, bankers are generally more concerned about being wrong (and losing money) than being right (and at best getting paid back with a small interest rate).

The incentives of a highly leveraged business make us overly cautious.  In many cases, this is the right approach, such as when making credit decisions.  But what about rolling out new technology?  Or trying new products?  Or changing loan and deposit pricing?  Are we moving fast enough, or are we about to be outmaneuvered by more nimble competitors that are constantly testing new ideas on our best customers?

Stay tuned for future posts that will expand on this idea, as we will look at specific cases where banks can use the OODA Loop process to drastically improve performance.  Heck, we might even be able to cut out a few committee meetings!

Coffee is for Closers – Using Pricing and Structure as a Sales Tool to Grow Loans


In the immortal words of Alec Baldwin's Blake from Glengarry Glenn Ross, "coffee is for closers, only."  Have you given your lenders the tools to be closers, or are you incentivizing them to continually lower your margins? The Wrong Way to Use … [Continue reading]