Efficiency Plus

By Steve Klinkerman

Efficiency projects work best within the context of organizational renewal — not as blunt-force instruments

The banking industry has been obsessed with efficiency over the last decade. Institutions sought to lower operating expenses as a percent of revenues by several means, including massive reengineering projects and merger-driven consolidation. At one level, the crusade did have some effect: industry-wide expense ratios have come down. But revenue growth remains a challenge.

This highlights a potential trap in streamlining, namely, that merging institutions can wind up fine-tuning business models that remain out of step with the market. Efficiency programs are misplaced when they only refine processes for which demand is stagnating. There's no revenue growth, and even profitability gains will eventually fade as old business models experience further decay.

From this perspective, the larger work of efficiency is advancing the renewal of the organization. This marries the exercise with a variety of other banking priorities. Instead of blunt-force steps such as head-count reduction and branch closings, the top-level emphasis is on clarifying organizational strategy; capital redeployment; partnerships and alliances; re-engineering; digitization; and outsourcing. Expense considerations are suffused in all of these activities, of course, but they don't monopolize the discussions.

When Thomas Theobald was chief executive of the former Continental Bank Corp., Chicago, he once remarked: "Unless you have a strategy, you can't possibly hope to be efficient." That insight resonates strongly today, when even mega-banks are realizing that doing all things can translate into doing nothing particularly well. At the very least, institutions should be clear about the major market segments they will pursue. Otherwise, organizational energies are dissipated.

Acting on this concept, in turn, requires that companies weed out weaker business activities so that the stronger ones can grow. To refine a portfolio of businesses, for example, each unit can be evaluated for its growth potential, strategic significance, synergy, capital intensity, profitability and volatility. Letting go of operations that score poorly frees up human and financial resources for more productive pursuits.

The same principle is at work in re-engineering, with the difference that the portfolio is comprised of activities rather than business units. The goal here is not only to streamline internal administrative and business processes, but also to free up employees so that the best possible use can be made of their time. As Bill Gates says in Business @ the Speed of Thought, "It's just common sense that knowledge workers who are not distracted or burdened by routine matters will do better work. The benefit to customers is that your employees spend less time shuffling papers and more time on customer needs."

At the same time, companies must be careful about how they structure new ventures. Solo enterprises don't always work well in e-commerce, a volatile market that makes heavy demands on capital and expertise. Through alliances and partnerships, institutions can accelerate the pace of innovation while lowering individual risks and outlays. This approach brings efficiency to the realm of development, and it is widely used in payments-related ventures in the banking industry.

Another efficiency avenue, digitization, does in fact offer opportunities to automate traditional processes, and sometimes the exercise can be quite worthwhile. Imaging technology, for example, can help to streamline the check-clearing process. But there are other, more strategic, digital applications that replace conventional methods altogether, such as e-mail payments. Along with the appeal of efficiency, such applications have the allure of opening new markets.

Similarly, outsourcing has a role in streamlining traditional internal functions such as payroll, benefits administration and internal audit. But it also has a strong strategic aspect when it's used to augment organizational service and product capabilities on behalf of the customer.

The point in these examples is that efficiency-related pursuits work best within a strategic context. And that turns the pressure right back on senior managers to think clearly and creatively about where they want to steer their organizations. Built on this foundation, efficiency can sparkle. Built on any other, it's just a stopgap measure.

Mr. Klinkerman is Editor-in-Chief of Banking Strategies.

Copyright © 2003 by Banking Strategies, published by BAI.

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