Leveraging Lean in Financial Services: Making It Work

Banks can learn from the automobile industry's success in applying Lean production practices to gain efficiency and improve quality.

Beginning in the 1940s, Toyota developed a new manufacturing philosophy, the Toyota Production System (TPS), which changed the way the company's automobiles were built. In the 1990s, this philosophy took on the generic name of Lean production. This strategy was based on two simple principles: the elimination of any step in a process that did not directly add value to the product, and the smoothing of the flow of work necessary to build the product, (continuous work as opposed to batched processing). The goal was to create better value to the end user of a product while eliminating all waste in the process and thereby cutting the manufacturing cost.

Financial institutions operate many areas that resemble automobile manufacturing plants. The processing involved in loan origination or payments operations, for example, involves multiple steps, carried out by specialized staff, and chained together to create a meta-process that can span the whole enterprise. The end product has two values associated with it: the value to the customer, and the value (cost) that the institution placed on the work to create it. Unfortunately, in many cases, the latter cost is higher than the value placed on the product by the customer.

Gaining the Benefits of Lean

The similarity between automobiles and banking is good news for the financial services industry because it implies that Lean production practices can be applied to complex operations at the bank to gain efficiency and improve quality. Lean production has been proven to gain efficiencies and increase quality across multiple dimensions that can benefit banks, including:

Finding Waste: Wasted processing and manpower immediately come to light using a Lean analysis. Excess work, unnecessary re-work, and idle time due to "choke points" (where one department cannot proceed until the preceding group releases work to it) are identified and can be eliminated, many times with minor changes and drastic improvements.

Eliminating Variances: Variances between work arrival and staffing levels are revealed, leading to better workforce capacity planning. Managers can accurately staff for anticipated work periods without overstaffing in order to ensure that service levels can be met. In some cases, the actual work processes are found to have steps that contain large variances. These can be reengineered to smooth the work flow.

Quantifying Cost & Value: Cost-to-value is now quantifiable, allowing accurate analysis for returns on investments for new programs or process changes. Empirical data collection is used to model changes with a high level of confidence, before the changes are executed. This data can also be used to improve pricing for existing and new products in the market.

Improving Workforce Performance: Individual and departmental staff performance is improved. Using empirical and consistent data, staff and managers can have objective and transparent discussions about individual performance, leading to improved work quality and the creation of best practices using real life experiences. Lean practices also place an emphasis on a holistic view of production, so individual staff members feel more like a critical part of a bigger process.

The resulting improvements lower the cost to "produce" the end product while increasing the value to the customer, through faster production and increased quality.

A Lean Case Study

One $60 billion, U.S.-based full-service bank learned how well Lean is applicable in financial services. With more than 9,000 employees -- including 1,500 staff in the back office -- the bank created models in order to estimate the workforce's efficiency. The models revealed significant waste in the bank's back office. An analysis of one area in the back office showed a 10 percent difference between payroll and actual productive work by that department -- staff was being paid 40 hours for only 36 hours of work. Worse, there were some areas in the bank's back office that had no data on where the workforce was actually spending its time.

The bank created a disciplined workforce management strategy, using Lean at its core, to improve the value it was providing to the customer through cost reductions and improved customer service. Former auto engineers were brought in to leverage their experience in Lean production strategies within the bank's operations areas. The Production Management Engineering (PME) group, made up of engineers and bank executives, started with Activity-Based Costing (ABC) to quantify the inefficiencies reported by the earlier models. ABC determines exactly what every widget costs to make -- or in the bank's case, what every activity in a process costs in terms of full-time employee (FTE) hours or payroll dollars.

In order to gather the data critical to ABC, the bank implemented a comprehensive workforce management solution consisting of software and new processes. This included touch-screen kiosks where staff checked in and out every day to collect workforce performance and process data. Prior to the introduction of the kiosk, workers clocked in and out but there was no centralized accounting for what the staff did during their day. By tying this to production systems, the result was an exact measurement of workforce productivity and the efficiency of the processes overall. Combined with payroll system data, it provided insight into costing, individual and departmental productivity and performance, capacity, and more.

ABC was the key to the successes that ensued. With what the bank now called the "single source of truth," forecasting modules to determine labor demand, automated scheduling algorithms to optimize fit and dashboard reporting and analytics to improve visibility, the PME could now identify changes that led to significant improvements in efficiency. The integrated scheduling system, part of the workforce management solution, optimized the workload fit by tightly coupling individual worker profiles (available hours, skills, etc.) with the work to be done, eliminating significant waste. The schedules guided staff to specific activities every time they checked in, even suggesting appropriate break times. The bank was able to immediately recover the 10 percent variance between payroll and actual work and ultimately optimized workforce effectiveness in their operations by an average of 30 percent. In areas where additional staff was needed, management now had the tools with which to justify the increases.

But more than just reducing costs, the bank applied Lean principles to be able to put the right people in the right places, and at the right times and doing the right things. As a result, customer satisfaction (and value) increased as well. For the bank, Lean just worked.

Next (or First) Steps

By translating Lean principles from the original manufacturing lexicon to the back office, banks can create a powerful infrastructure to identify waste where it exists and to quantify the cost of doing business. The three critical components of a Lean production program are: a program office that can train and deploy Lean practices across the enterprise, the consolidated and consistent activity data, and an automated scheduling solution that leverages that data. Activity-Based Costing is an important first step -- without the "single source of truth," improvements can't be made with any certainty as to the outcome. Ultimately, Lean production leads to a win-win-win situation, with the consumer reaping a higher-quality product, the bank staff benefiting from higher performance and more objective appraisals, and the bank itself performing better and producing (or servicing) at a lower cost.