The Route to High Performance: Industrializing the Bank To grow in a fast-changing marketplace, banks need to be more cost efficient and flexible. To do so, they must confront and unravel the complexity in their business, while at the same time establishing a clear competitive edge among their target customers. And they need to execute all this without disrupting "business as usual." At Accenture, we have developed a perspective and approach that enable banks to reconcile these three seemingly conflicting imperatives. We call it "industrialized banking"—and it is already starting to happen. Industrialized banks will be well-positioned to be the high performers—the competitive winners—in the future worldwide markets for banking products and services. While they will have widely differing strategies, they will each share three core characteristics. First, they will be more differentiated than their competitors in the eyes of their customers. Second, they will be more simplified on the inside in terms of their operating model. Third, they will be outstanding at execution, demonstrating not only superior operational performance but also excellence in the delivery of complex business change. Industrialization: It's Already Here Some banks are exhibiting these characteristics already. The most far-sighted of these have grasped the need to break up their value chain into smaller, more flexible parts—and have opened up a vast range of opportunities as a result. For example, some are introducing "white labeling" providing products for their competitors to brand and sell. Others are identifying capabilities—such as fund management and personal lending—outside their core competence, and sourcing them from third-party specialists. And still others are outsourcing enterprise functions, such as HR and procurement. But while many banks have used elements of industrialization to become high performers in one or more areas, no bank has mastered every aspect—yet. The banks that get industrialization right will be those that successfully restructure their business model to optimize it from end to end, while maintaining a clear focus on delivering what the customer wants, at the right price. Here is a more in-depth look at the characteristics of high performance, along with some examples for banking and other industries. - Differentiation. High performing banks can set themselves apart through the customer experience that they deliver via the various channels through which they distribute their products. The main distinction among banks' product manufacturing models is the extent to which they standardize the product design and development process and centralize its management.
Historically, banks have tended to let their marketing function drive product development, resulting in a wish list approach that has led to product proliferation and complexity, together with a lack of focus on internal cost or external price. Industrialization encourages manufacturing based on standardized components that are assembled and reassembled in different ways to meet customer needs. This has the effect of reducing complexity and cost; increasing efficiency and responsiveness to customers; and enhancing the ability to deliver a consistent customer experience through each channel at a competitive price.
A good example of this type of differentiation is Dell, which has used a relentless focus on manufacturing speed not only to achieve costs savings and lower prices, but also to create a differentiated offering. Over 10 years Dell increased throughput and reduced inventory from weeks to only a few hours, ultimately eliminating the need for warehouses. Alongside the resulting benefits in terms of cost and working capital, this enabled Dell to make rapid changes to model configurations in response to changing customer requirements, competitor activity and advancing technology.
- Simplification. High-performing banks have standardized products, processes and systems across the bank, enabling improved cost efficiency and flexibility. This involves some degree of functional specialization, for example, separating distribution from the back office and enabling consolidation of related operations into a single group-wide platform.
The automotive industry provides some good examples. Toyota was able to transform its business through lean manufacturing and the adoption of embedded quality management, process innovations such as just-in-time production and supply chain integration, and shop floor problem solving. Through separating what could be controlled short term on the inside the plant from what happens outside (customer demand), Toyota was able to optimize production schedules, reduce rework, increase utilization and drive significant cost efficiencies. Almost paradoxically, this increased process and quality control gave it much greater manufacturing flexibility, enabling it to compete more effectively in the 1990s as product ranges proliferated, produce life cycles reduced and customers demanded ever more value added features.
- Execution. High performers are also great at execution. There are two elements to this. The first is strategic execution—high performers are good at managing the risks of change programs. When they buy another company, they consistently achieve the anticipated benefits. The Royal Bank of Scotland and Bank of America represent good examples of organizations that have built reputations and significant business value through their ability to execute change effectively.
The second element is operational execution; their people know what they need to do day by day to drive the strategy forward. Some banks such as BBVA and Grupo Santander have created very efficient operations and achieved enviably low cost/income ratios. However, few, if any, banks today can approach the level of production control, process discipline and workforce skills of a world class manufacturer such as Dell or Toyota.
Targeting a rapid reduction in operating costs is clearly the first priority both in IT and the business. But three structural economic benefits must come into the equation as well. The first is the revenue growth opportunities resulting from a more competitive cost structure, greater flexibility to innovate, faster speed to market and improved customer experience. The second is a permanent reduction in the cost of change, thanks to a simpler business and technology architecture that will significantly reduce the cost of many future projects, particularly cross-enterprise initiatives. And the third is flexibility—the organization's enhanced simplicity and ability to change more easily opens up fresh options with intrinsic value at both the strategic and operational levels. Nobody can predict the future, but leaders need to position themselves to respond quickly as events and opportunities arise.
Delivering Industrialization Making the transformation to industrialized banking is a major undertaking requiring a great deal of thought over many years. Based on our experience with leading banks around the world, Accenture has developed a framework of fundamental elements to help banking executives identify the most appropriate actions and approaches: - Leadership and governance
- Financing
- Stakeholder management and communication
- Business optimization
- Performance management
- Sequencing and rollout
Making the case for the structural benefits from industrializing the bank isn't easy, since it requires the leaders in an organization to sell a vision. This involves ordering the program in a way that creates a compelling storyline but is also pragmatic and aligned with the bank's operating model, takes account of its constraints and delivers some benefits early on. Aside from the challenging investment decisions, designing and executing industrialization involves surmounting some major roadblocks such as embedded operational and IT complexity, and the social and workforce implications of industrialization, since the biggest single cost benefit may well spring from the opportunity to redeploy staff. Another challenge is the need to communicate the industrialization story to different stakeholders with divergent agendas. The short-term perspective of analysts and investors does not sit easily with a program where pay-back takes several years. Banks also need to manage the expectations of employees and customers about the need for changing the way things are done today. However, our research shows that one of the major characteristics of high performing banks is indeed their willingness to prepare for the next downturn and make strategic investments when profits are healthy, rather than wait for performance to decline. A Journey, Not a Single Step The key to meeting these challenges lies in strong leadership: the CEO's ability to define a clear and persuasive vision and build buy-in for a strategic investment perspective. This can only be achieved if executives' performance management and rewards are structured so as to encourage them to embrace the change program and participate actively in the journey. CEO's must remain focused on the long-term prize. If a program of industrialization is launched now, it will open the way to major process efficiencies and a permanent step-change in the cost base within four or five years. Additionally, it will bring some banks the opportunity to evolve their operating model flexibly in line with the changing demographics of their workforce. Banks that have not industrialized their operations will find themselves locked into high fixed costs in a new world of ever fiercer competition and relentless cost pressures. So industrialization is not a single step, but a journey. It is also a mindset that replaces incrementalism with a dedication to a vision of becoming a high performance bank. Breaking Out of the One-Year Mindset
CEOs seeking to create a high performance bank should take three steps: - Break out of the one-year budgeting cycle.
- Establish tight and highly focused control over the bank's portfolio of investment programs.
- Aggressively communicate and justify the strategic investment perspective to shareholders.
In terms of the budgeting cycle, most banks are now able to hit their next-year investment and return targets with unerring accuracy. However, medium-term financial goals often represent a triumph of hope over realism. This is partly a response to analysts' unrelenting focus on next year's figures. To effect real transformation, the CEO should consider breaking out of the one-year cycle and establishing a budgeting horizon of three to five years, complete with explicit and committed milestones which plot out the journey ahead. This in turn has major implications for the management of the bank's investment portfolio. The traditional portfolio is made up of a collection of mandatory and tactical initiatives, as well as strategic investments. Over a five-year period, tactical projects can require a huge investment—money that later can seem like it was spent just to enable the bank to stand still. In tandem with adopting a longer timeframe, the CEO could seek to limit demand for tactical change and refocus investment on strategic programs with significant returns. The rationale for this shift has to be sold proactively to the analyst community, which is more accustomed to easily digestible, one-year blocks. This means creating and communicating a credible story both internally and externally, with differences in emphasis for the two audiences. However, the underlying message is the same: this industrialization journey will transform the bank and position it to outperform its competitors. Becoming a High Performance Bank  These benefits of industrialization are facilitated by a new operating model—one that separates distribution from the manufacturing operation, which becomes a centralized "factory" providing products to channels and brands across the group (see Figure 1)
Moving to this operating model has several implications. It vastly simplifies the traditional "spaghetti" of product-based silos. At the same time, the shift to centralized manufacturing reduces costs, opens the way to economies of scale and enables seamless sharing of technical expertise and market intelligence across product areas. These attributes, in turn, help banks build differentiation at low cost—positioning them for high performance in their target markets. This structure also creates greater flexibility in areas of strategic restructuring such as mergers and acquisitions. By separating manufacturing and distribution, the operating model enables new elements to be plugged in or disposals to be unplugged far more easily. In the case of an acquisition, the centralized product set could be flowed through the newly-acquired distribution network, removing the duplication of multiple manufacturing centers.  In the past, banks commonly sought to "build" rather than "buy" every element of their value chain, and retain most of their systems and processes in-house. With the move towards industrialization, banks are increasingly sourcing their capabilities from a growing array of different arrangements, ranging from traditional in-house control and ownership (captives), through alliances in distribution and co-operative models, to full outsourcing. The choice in each case depends on the characteristics of the capability in question, and the degree to which it delivers competitive advantage to the bank. A simplified matrix of these options is shown in Figure 2.
This approach to sourcing enables an industrialized bank to optimize its operating model continually by accessing capabilities through the most appropriate route in each case. The result: lower costs, market-leading capabilities and greater cost and operational flexibility to scale up and down in line with market cycles. Whether you call it "industrialization" or something else entirely, few people would question the idea that the next generation of high-performance banks must be differentiated in the marketplace and must create an efficient and simple operating model. The challenge for today's CEOs is to plot their bank's route to that future. Sidebar If you answer "yes" to any of these questions, industrialization could provide a solution: - Can the majority of our customers explain why they believe we are different and offer better value to them than our competitors?
- Do a majority of our innovative ideas get defeated by unworkable investment cases?
- Is our operational and IT model constraining our ability to compete or enter new sectors at speed?
- Is the burden of regulatory compliance overwhelming our investment in strategic capabilities?
- Would an acquirer find ways to create new economic value from our business better than the incumbent management?
- Is the stock market failing to understand and believe our growth story?
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