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HOW TO IMPROVE PRODUCTIVITY BY 25% IN A BANK OPERATING AT A 35% COST-INCOME RATIO A CASE STUDY
AUTHORS
GREG RUNG
IVAN KIRICHENKO
THE CHALLENGE
A mid-sized regional bank with strong revenue growth wanted to get better control over
its rising operational costs. The bank’s growth strategy, including network expansion and
retail transformation, had led to sustained top-line growth (13% CAGR from over the 5 years
prior to the engagement). However, that growth had not been accompanied by a significant
lift in operational productivity. The cost-income ratio was low (less than 35%) which meant
that this was already a pretty lean organization. However, the bank had significantly higher
than market operating costs per customer, which led to a slower than expected decrease in
cost-income ratio, although it was already at a healthy level of 34%. In addition, expected
worsening economic conditions would limit future revenue growth and demand a change in
business mix, adding even more pressure. So the bank engaged Oliver Wyman to perform
an end-to-end review of back-office operational efficiency. Its goal was two-fold: to increase
flexibility in its service delivery to both internal and external customers and to build a
scalable operational unit. We achieved 25% productivity improvement in full year leading to
a cost-income ratio of about 30%.
Copyright © 2016 Oliver Wyman
THE APPROACH
Oliver Wyman employed a three-step approach
1. We performed an objective front-to-back assessment to fully understand the bank’s current situation and to determine gaps in performance
2. We detailed and prioritized initiatives in order to define recommendations for improvement across operation departments and processes
3. Finally, we conducted business case modeling and road-mapping in order to detail prioritization of initiatives based on their impact and on the complexity of implementation (See Exhibit 1)
Exhibit 1: Project approach and deliverables
Objective front-to-back as-is assessment
• Comprehensive assessment using our front-to-back complexity framework and detailed local and regional industry benchmarks
• Prioritization of initiatives through stakeholders workshops
• Design of top 10 initiatives to close the gaps with the target operating model
• Business case and roadmap to be built hand-in-hand with client management team to ensure full buy-in and ownership (one-on- one meetings and workshops)
• Operational e�ciency assessment per operating model component (i.e. business model, operations and processes, IT, governance and organization, MI)
• Initial list of remedial initiatives
• Detailed list of initiatives with quantification of impact (cost, quality, scalability, risk reduction)
• Prioritization of all initiatives based on impact and ease of implementation
• Identification of quick wins
• Overall operational e�ciency program business case including 3 year targets on main operational e�ciency KPIs
• Detailed operational e�ciency program roadmap including detailed activities, timelines, owners, risks and dependencies
Approach
Deliverables
Initiative detailingand prioritization
Business case and roadmap1 2 3
3
THE SOLUTION
To define proper efficiency improvement measures, we de-constructed operational
efficiency into its sub-components. In other words, we explicitly recognized that improving
efficiency, or processing greater volume with fewer resources, could be achieved either by
• Increasing productivity (e.g. faster processing)
• Or minimizing demand (e.g. fewer non-business related transactions)
Productivity could be further improvised by exerting less effort per transaction (e.g. less time
to process) and achieving higher resource utilization (e.g. optimize organization structure to
remove redundant management layers and setup proper capacity planning tools).
For each component we defined efficiency improvement levers (see Exhibit 2)
Exhibit 2: Operational efficiency improvement framework
EFFICIENCY ISSUE TREE TYPICAL EFFICIENCY LEVERS
Reduce resource requirement
Boost productivity
E�ort per transaction
Process E�ciency
Resource utilization
Reduce demand
Org. and performance management
Demand management
A
B
C
Process automation
Process simplification
Centralization (redundant capacity)
Org. redesign (span of control)
Performance culture
Outsourcing/insourcing
Robust capacity planning
SLA/controls simplification
Product rationalization
Step 1: Objective front-to-back assessment
Benchmarking is a basic yet important tool of efficiency assessment. For example, it’s
relatively easy to compare the STP rate of client processes with best practice examples — as
well as the span of control, the number of management layers, the usage of outsourcing and
centralization of operations.
However, accurately assessing other efficiency levers requires more creativity. For example,
to assess capacity planning and resource availability by units, we analyzed working hours of
staff. We determined that some units had redundant capacity, as a substantial share of their
employees work fewer than 8 hours.
Copyright © 2016 Oliver Wyman
Exhibit 3: Client example – Percentage of staff working fewer than 8 hours per day
Potential under-utilization is 6% of man days
Potential under-utilization is 7% of man days
Potential under-utilization is 2% of man days
Potential under-utilization is 8% of man days
30%
70%
May June July Aug Sep Oct
74%
26%17%
9% 17%
Head of operations
High potential to free-up capacity Average potential to free-up capacityLow potential to free-up capacity
Department 1 Department 2 Department 3 Department 4
13%
May
44%
June
42%
July
16%
Aug
14%
Sep
16%
Oct
15% 21%20%
May
48%
June
49%
July
23%
Aug
13%
Sep
26%
Oct
36%
76%88%
56% 56%
May June July Aug Sep Oct
51%40%
Step 2: Initiative detailing and prioritization
Proposed initiatives were prioritized based on the business value it would achieve and on the
complexity of implementation.
Exhibit 4: Client example – Initiatives and prioritization matrix
LIST OF ACTIONABLE INITIATIVES
Retain beneficiary information
Proc
ess
e�ci
ency
Org
.& p
erf.
mg
mt
Dem
and
m
gm
t.
Relationship
Deprioritized
Prioritized
Automate client/beneficiary information validation
Implement Loan Origination Systemt
Integrate front-o�ce and back-o�ce system
Develop e-document management system
Centralize part of operations
Streamline lengthy and redundant processes
Increase span of control & reduce management layers
Implement productivity based KPI, MIS
Align compensation scheme with productivity
Outsource/Insource non-core and non-critical activities
Define capacity planning tool for all units
Eliminate non-value adding products
Facilitate client migration to digital channels for all operations
Rationalize service levels considering client segmentation
INITIATIVE PRIORITIZATION ASSESSMENT MATRIX
Ongoing
Prioritized
Easy
Com
ple
xity
Impact/Business value
Hard
1
A
B
C
2
1513
11
4
5
8
6
7 3
109
14
12
Quick wins
Strategic initiatives
1
2
3
4
5
6
7
8
9
10
11
12
13
14
15
5
Step 3: Business case modeling and road-mapping
A set of 27 KPIs were proposed to steer operational efficiency in the back office. To ensure
that the bank could monitor progress, we chose KPIs that were feasible, measurable and
could be automated.
Exhibit 5: Client example – KPIs used to track operational efficiency improvement
14
15
16
17
18
19
20
21
22
23
24
25
26
27
Average STP rate
Process automation
Process simplification
% of errors
# of processes related cust. complaints/# of customers
Centralization (redundant capacity)
% centralized processes
Org. redesign (span of control)
Average span of control
Total number of layers
Performance culture
% of units covered by performance driven compensation
% of Departments/FTE below performance threshold
Outsourcing/insourcing
Temp. FTE/Total FTE
Outsourced FTE/Total FTE
Robust capacity planning
Average turnaround times
Average queue processing time
SLA/controls simplification
% of SLA compliance
Product rationalization
# of products vs. target
E�ort per transaction
# transactions per FTE
Cost per transaction
Cost per FTE
Boost productivity
Reduce resource requirement
Ops costs as % of Total operating cost/Revenue/Assets
Ops FTE as % of FO FTE
Total Ops FTE/Ops CAPEX/Ops OPEX vs. target
% of non-client driven transactions
# of transactions vs. target
% of non-digital channel transactions
Reduce demand
Resource utilization
12
13
8
1-3
4
5-7
9
10
11
Copyright © 2016 Oliver Wyman
CLIENT BENEFITS
• Taken in combination, the initiatives led to an operational efficiency increase of 15-25% in year 1 and 25% realized in year 2. This would be translated into substantial annual savings (up to 20% of existing budget in monetary terms)
• Required investments were limited to adding a workflow system for KPI tracking (MIS), E-documents management system and additional management time
• Additional operational expenses were in the form of additional resources for business process management and optimization; capacity planning and model maintenance; and MIS development
Exhibit 6: Total savings in % of budget
Retain beneficiary information 0.7
Automate client/beneficiary information validation 0.7
Implement Loan Origination System (LOS) 4.9
Develop e-document management system 1.7
Centralize part of operations 0.7
Streamline lengthy and redundant processes 0.2
Overall process e�ciency initiatives 8.9
Increase span of control & reduce management layers 4.6
Implement productivity based KPI, MIS 2.0
Align compensation scheme with productivity 2.0
Define capacity planning tool for all units 2.8
Overall org.& performance management initiatives 13.1
Eliminate non-value adding products (e.g. IPO, PFP) 0.2
Facilitate client migration to digital channels for all operations 2.8
Rationalize service levels considering client segmentation 0.3
Overall demand management initiatives 3.4
Total savings 25.3
Outsource/Insource non-core and non-critical activities 1.7
Experience at other clients
The success encountered at this client has led us to offer the proposed initiatives more
widely. The operational efficiency solutions can be offered in a variety of formats. To make
the experience more tangible, relevant and educational, the suggestions are tailored to the
situation of each client and are set up to use company-specific metrics, including cost to
income ratio and back office to total operating costs.
7
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