The Case for Business Process Improvement

At Cornerstone Advisors, GonzoBanker’s mother ship, we have a client that recently used business process improvement techniques to reduce its mortgage origination time by well over 30%. Having achieved that, with the addition of improved technology another 20% reduction is expected. Wish you could do the same? You can. Read on.

BPI Defined

Business process improvement, or BPI, as used here is a catch-all term for any number of workflow improvement methodologies such as Six Sigma, Total Quality Management, Business Process Reengineering, Lean systems, Kaizen, Continuous Improvement Process, etc. These “reengineering disciplines” have roots in the manufacturing world, going back to the early 20^th century (wasn’t Henry Ford really doing business process improvement when he implemented the first assembly line in 1908?). Much back office work in financial institutions is information-intensive and document driven, but widespread adoption of these techniques has never really caught on in other than the very largest financial institutions. As community bankers, this is to our detriment.

The Need for BPI

Much of the internal workflow in the typical financial institution is based on historical, paper-driven processes. No matter that it is now possible to completely eliminate paper transactions within a community bank; many processes still adhere to the workflow and sequencings developed decades ago, when paper was king. Furthermore, banking is often considered a commodity business, and in the past merely copying industry best practices enabled a certain degree of efficiency. But the future does not belong to the copycats! The future belongs to those banks that (1) have a distinctive strategy, and (2) couple it with operational excellence in executing that strategy, so that true strategic differentiation exists. The ability to create and deliver superior value — new products and services — will be the secret to the future. Long-term competitive advantage requires more than constant cost reduction. Establishing a BPI function is an excellent, albeit long-term, strategy to start being more of an innovator and less of an imitator. 

Evaluating a BPI Methodology

First, look at the bank’s strategy. BPI cannot be successful without a clear understanding of the markets, competitors, strengths and weakness of the organization. Then, against the context of that strategic analysis, find those processes that appear to need improvement, whether via customer complaints, striking inefficiencies, competitive disadvantages, etc. It’s not important to determine what is possible, but it is important to determine what will be cost-effective. That seems self-evident, but we have seen clients dedicate significant effort toward optimizing, say, accounts payable. Even if the process is made 25% more efficient, how many new customers can be attracted or full time equivalents saved? We’re in favor of optimizing any process, but given that the typical bank will have one accounts payable person for every 356 FTE, unless the bank is very large, the savings from a BPI project in A/P will probably never justify the cost of the project. But consider any bank’s branch network, where a 10% gain in efficiency could result in better customer service and/or numerous FTE savings. Processes that are either strategic differentiators or that have a high and immediate payback are best-suited for BPI.

And that A/P analogy leads to another critical point: All too often BPI is perceived as “reengineering,” or a code word for layoffs. BPI is so much more than that! Done well, BPI delivers:

• Better customer satisfaction
• Faster customer service
• Reduced risk
• Greater employee job satisfaction
• Reduced costs

So while using benchmarks to identify areas of inefficiency is important, it is equally imperative to look for customer service improvement. BPI is sometimes at its best when it does not deliver one nickel in direct cost savings but measurably improves customer satisfaction.

Initial Implementation Steps

1. BPI requires an organization-wide commitment. It can’t be done well if, say, the CIO sees the necessity but the COO hasn’t bought into the concept and the rest of the management team is lukewarm. Leadership from the top is important, but understanding and acceptance by management at all levels is equally important.
2. BPI initiatives must align with organizational goals. When BPI can make a direct and visible contribution to a key strategic objective, the likelihood it will be used again is much more assured.
3. Turf battles cannot be allowed to interfere with the process. If managers spend time guarding their turf rather than making a commitment to the greater good (even at the expense of their department or division), BPI will probably fail.
4. I.T. is a key enabler of BPI but seldom can it be the driver. This is unfortunate, because many times the I.T. staff is the first to see the potential of new technology. But if business units cannot embrace the need for improvement, rarely can I.T. push it through successfully. I.T. typically doesn’t have access to, or control over, the other ingredients required for success (staff resources, subject matter expertise, training schedules, expense budgets, etc.) in BPI initiatives. BPI works best when technology provides the vehicle for the business units to use in creating their own success.
5. Start slowly (and with a high-value project, if possible). An early success with BPI can often provide the spark that causes an entire management team to see the light. Conversely, an early failure may cause future BPI initiatives to never get off the ground.
6. Never overlook the need for worker empowerment when performing BPI. Make it a team effort from the ground up.

BPI Best Practices

Most of the improvement methodologies at the beginning if this article can be made to work satisfactorily. Purists and academicians debate the merits of each, but so few institutions are doing anything with BPI that any step in that direction is a good thing!

Industry-wide metrics are one way, but in some areas (I.T., call center) metrics that are broader-based than just the financial industry may be relevant. The important point is to figure out where the inefficiencies are and perform a cost-benefit analysis to determine the probability that the potential for savings exceeds the cost of the analysis and whatever other investments will be required.

• Examine the way in which strategy and business processes complement each other. If growing mortgage volume is an important part of the banks strategy then looking at mortgage origination makes a lot of sense. If the bank sees mortgage lending as nothing more than a necessary evil why spend time and money improving the process (unless it is highly inefficient)?
• Put the customer first in the process. Go for “once and done” wherever possible. Redesign processes to maximize front-line performance, not back office procedures.
• Create an atmosphere of trust. Strive for worker empowerment. Give employees the tools and authority to complete most transactions. Controls are necessary in a financial institution—but they are also often anathema to good customer service.
• Avoid fancy workflow or modeling software. Most BPI in banks can be done quite satisfactorily with trained staff and off-the shelf flowcharting software such as Microsoft Visio.
• Installing new core processing software just to achieve BPI is usually unwise. If new core software is required for other reasons, BPI can usually be performed more efficiently post-conversion—after the upgraded software is in place. That’s not to say that there won’t be low-hanging fruit which should be gathered before the new core system is installed, but the more difficult business process improvements tend to also require improved software. It is far easier to implement a new executive dashboard with a state-of-the art data warehouse than by re-writing queries for a second-generation report writer.
• For smaller BPI projects that do not require changing core or other major systems, analyze and improve the process and then acquire the software that best matches the needs of the improved process.

No BPI effort will be successful without retraining the people who will ultimately work with the revised processes. If the people most affected by BPI are afraid for their jobs, or if they believe that their years of experience count for little, those obstacles will be difficult or impossible to overcome. Conversely, if those who are most affected have their suggestions listened to and adopted, the odds of success are dramatically improved.

BPI Worst Practices

• Never assume that the BPI team knows more about a process than those who do it every day. This is the height of arrogance and is sure to lead to disaster.
• Beware of industry analysts run amuck. An over-obsession with efficiency can lead to a lowering of standards such that everyone is adversely affected. It can be argued that up until 2007, the mortgage industry’s focus on volume at the expense of quality was a factor in the Great Recession. Did it ever really make sense to make six-figure mortgage loans without actually verifying an applicant’s income? Call that a case of reengineering gone wild!
• BPI undertaken only to slash costs usually fails. BPI is about making processes better in several dimensions, not just reducing costs.
• BPI must have a clearly articulated timetable. Three to six months is best, so that the bank is not “frozen” while the analysis and implementation occurs. If it takes longer than six months, question its value.

Conclusions

Some financial institutions have been able to achieve striking efficiency ratios without the use of formal BPI analysis and structures, usually by leveraging extremely low wage and cost structures and without a fundamental reevaluation of the underlying business processes. BPI requires a fundamental, ongoing reevaluation of what is done and why. It is a long-term strategy that requires a long-term commitment. In the future, those organizations that have embraced BPI on an enduring basis will find themselves much more agile and better able to compete than those whose strategy for performance improvement is “Me, too” for whatever the competition is doing.
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Disciplined BPI Initiatives Yield
Long-Term Value

A well designed process improvement effort in your organization can result in long-term value for the organization by providing:

• Smoother work flows, fewer errors and re-work, and greater productivity
• More efficient delivery systems that that can accommodate growth and expansion
• Improved operating and production synergies through delivery standardization and centralization
• Knowledge transfer of proven change management methodologies facilitating a culture of continuous improvement
• More effective use of existing technology
• Improved management tools, reporting, service level agreements and Scorecard® metrics to measure productivity and service on an ongoing basis

Cornerstone Advisors helps organizations develop a disciplined approach to process improvement that can identify not only short-term financial improvement opportunities but, more importantly, improvements that are in alignment with your organization’s overall strategy.

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