Among the wonders of recent automated teller machine (ATM) technology is the ability to recycle deposited cash. But if your bank has recently installed such ATMs, have you also reviewed your cash forecasting models and altered your armored-car delivery schedule? After all, the point of recycling cash is that you can be more efficient about replenishing it. However, you gain that benefit only if you actually change your replenishment practices.
And yet working across functions and capabilities – in this example, having the ATM people talk to the forecasters and those who manage the armored-car service – is proving surprisingly difficult for many banks. Opportunities to cut costs or improve customers’ experience prove elusive, often because they aren’t even seen due to operational silos and independent cost buckets.
With increasing pressure on revenues, today’s banks need to go beyond traditional cost cutting. One great way to provide more value at lower cost is with an integrated, cross-functional approach that identifies these previously unseen opportunities across end-to-end value chains. We call it a “connect-the-dots” mentality. In our experience, this integrated approach can help a bank reduce its cost structure by 12% to 20% and, more importantly, build an integrated and responsive operation that is more adaptable to changes.
Over the past decade, banks around the globe have cut costs, often quite bravely. They’ve outsourced and offshored. They’ve pursued industrialization of operation and economies of scale in external spending, and winnowed networks of branches and ATMs.
But they’ve generally done so in one of two ways: either massive reengineering/ outsourcing efforts or slashing within silos. Neither approach is good at understanding and dealing with interdependencies. The massive, “holistic” efforts often fail to combine focus on details with the creativity to make disparate linkages. And the siloed efforts, focused on individual cost metrics, produce multiple separate point solutions – or, multiple unconnected dots.
For example, it’s great to outsource armored-car operations to a firm that can more efficiently accomplish all your cash processing and transportation activities. But as a banking executive once told us, “Look, my goal is not to shift the work to outsourcers. My goal is not to have the work at all.” In other words, the biggest savings often come from reducing or eliminating the demand for activities. But focusing only on “outsourcing” or “transportation” can make it hard to connect the “dot” of armored cars to dots in the service areas that create the demand for them.
Connecting the dots means instilling the intramural transparency that enables you to take a fresh look with an integrated focus. By removing organizational divisions and silos, you examine how a business process or service fits into an end-to-end value chain. What are the key operations that need to be addressed? Where are the constraints, and what drives waste and inefficiency? How do we ensure solutions address all the interconnected operations?
When you’re connecting the dots, you’re determining what the problem is and then solving it. By attacking problems rather than traditional measurement metrics, you’re more likely to focus on unmet customer needs, for either internal or external customers. You thus have the opportunity to not merely cut, but actually improve and transform operations for a better customer experience.
Diagnosis and Analytics
Implementing such a solution requires that leadership commit to questioning longstanding practices using an end-to-end assessment. It needs to start with a robust diagnosis phase informed by superior analytics. Advanced analytics can help uncover hidden inefficiencies and shortcomings beyond just focusing on the cost metric. Then, the best vehicle to drive success is a cross-functional task force full of people who understand processes and their business implications.
With this business knowledge employed against a coordinated, end-to-end view, the team’s recommendations will be better able to clear implementation hurdles, cascade across operational areas and demonstrate meaningful long-term value. The universe of benefits arising from new ATM technology, for example, should include higher uptime, fewer out-of-cash incidents plus lower costs of machine maintenance, automated check processing and improved route sequencing.
A bank employing this approach would examine cash processing in general covering the end-to-end value chain of cash processing, transportation and storage while reviewing target service level agreements (SLAs) for ATM availability, the safety margin of cash inventories in branches and vaults, residual balances in the ATMs, the number of cash/coin bags being carried and the capacity per-bag, and protocols for eliminating unplanned deliveries. Service demand drivers would be examined by the cross-functional team to understand why work units (cash volumes, armored car trips, cash replenishments) are generated and how they can be reduced or eliminated before finding solutions for optimizing the process.
The outcome of such an exercise is alignment of different operations: ATM channel, cash forecasting, cash transportation and cash processing. Demand drivers are better understood. One side benefit of such a comprehensive review is that it accurately identifies costs at a very detailed level. In our experience, many commercial banks’ service offerings (in this case, cash management) are priced incorrectly because the banks haven’t understood true cost-to-serve.
Another great example is digitization. Digitization of processes was once considered the holy grail for speeding up processes, albeit within a very narrow scope: scan loan documents, image checks, or image everything related to a specific workflow. But if you were to connect the dots, you would examine all paper-based workflows in service and operations. You would examine every customer interaction point that results in paper flow to determine digitization potential and straight through processing. A connecting-the-dots approach would look at digitization across business units, functional silos and at every point in the customer journey and process value chain – from customer interaction to fulfilment, servicing and documentation.
An adjacent, but connected area is document management, or the physical and digital archiving of documents and the related storage and retrieval costs. You could also look at courier and postage costs to understand what is being carried and how urgent it is and ask how imaging can also improve your transportation efficiency.
This sort of comprehensive review does more than identify additional potential savings: enterprise-wide digitization standards can improve service while comprehensively addressing legal and compliance aspects.
For example, a large bank with over 5,000 branches identified and mapped out the various documents that are handled and transported in their network, both those originating from the customer and those that are generated internally. We looked at the document map in two ways. First, we challenged why documents should exist at all and if they are required, why they exist in a physical form. We eliminated some and we transformed many into smart forms that could be processed digitally.
For those documents that needed to be moved between locations, we used advanced analytics to conduct a network optimization exercise. We built a model of the network and studied constraints – time, urgency, document types, distance between locations, risk, etc. The model optimized for these dimensions saved the bank over 15% in costs. Elimination of the demand for services such as couriers, postage, storage and retrieval resulted in total savings of over 30% in total costs.
In our experience, many banks fall into one of two extremes: some are too careful and could eliminate 30% to 40% of their current costs, while others fail to keep documents long enough to comply with regulations. The visibility derived from connecting the dots can thus improve the benefits of digitization, archive management and compliance.
To be sure, a connect-the-dots approach can face implementation challenges, including resistance to change, reluctance to work across divisions and a “quick win” mentality that puts attention on the trees rather than the forest. But for banks we’ve worked with, overcoming those challenges is more than worthwhile.
Mr. Singh and Mr. Siromani are partners in the financial institutions practice of A.T. Kearney, a global management consulting firm. Singh can be reached at [email protected] and Siromani at [email protected].
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