Driving banking productivity without mergers
by Brad Liebmann, Managing Director, Xbridge Ltd
Business Money, June 2004
During the last decade, the UK banks enjoyed unprecedented gains in productivity through consolidation. That phase is now over. The Takeover Panel is unlikely to allow any of the five largest banks to merge with each other again. Future productivity gains must come from doing business more efficiently. This will be particularly important as operating income derived from retail and small business customers comes under pressure from rising interest rates.
UK banks should look toward the US for lessons on how to increase productivity. During the last decade labour productivity in the US retail banking industry grew at an annual rate of 5.2% - more than twice as fast as labour productivity in the overall US economy. During this period US banks invested heavily - frequently more than 10 percent of revenues -- in IT systems to drive these productivity gains. McKinsey & Co. examined IT spending during the period and found very mixed results. Many projects created enormous productivity gains while others squandered cash. Some of the key lessons from the US:
- Tailor new projects to specific business process improvements. The projects most consistently effective in improving productivity were those designed to increase automation (e.g., lending systems), create or support alternative sales channels (e.g., call centre, internet), or to realise merger synergies. These projects were designed to streamline specific processes. Call centre software (enabling more efficient customer contact) and underwriting systems (enabling higher application volumes, lower processing costs, and faster, more consistent decision making) delivered particularly strong productivity increases.
- Build only upon a customer-centric architecture. Customer-centric architecture provides an integrated view of the customer across all channels and all products. CRM projects implemented by US banks generally delivered flat productivity gains because sophisticated software platforms were layered upon accounting-centric or product-centric architectures that were unable to provide a multi-channel, multi-product view of the customer. Customer-centric systems should be the foundation for almost all other productivity projects. If the infrastructure is not customer-centric, it will most likely be replaced it in the future; requiring the substantial redevelopment of anything built on top of it.
- Ensure key IT dependencies are already in place. Software is only as good as the information that feeds it. McKinsey found that investments in CRM systems generated some of the lowest returns for banks because important customer data were not available across all channels. A holistic, cross-channel customer view is key to understanding your customer and delivering higher value, tailored solutions.
- Focus on execution. Performance management was critical to the successful execution of each project. Many projects failed because business processes were not changed in parallel with the IT enhancements. Technological innovation rarely works without managerial innovation. And people can be highly resistant to change. Ensure the people are committed and prepared to invest the time to make the project work.
Focused, incremental IT investments in projects that are tightly aligned to making specific business processes more efficient will drive future banking productivity. Banks that build these projects upon customer-centric architectures will leverage their IT investments more efficiently and in doing so build competitive advantage.