Managers of all stripes in all industries rank greater efficiency as a perpetual priority, not least those running the operations of the world’s big banks. CEB FS Operations members have identified improving process efficiency as an important priority each year since 2012.
In this battle to keep costs down, operations managers have used the lean approach as one of the most important weapons in their arsenal. With the promise of reducing cycle times and costs, institutions have adopted lean principles and developed “lean teams” en masse. The proportion of institutions using lean climbed from 38% to 86% between 2006 and 2010, and with the lofty aim of reducing operating costs by 20% to 40%.
But results have fallen well short of everybody’s hopes. Data from 2010 indicate that more than 85% of institutions implementing lean have reduced costs by less than 15%. And things haven’t improved in the following years either: on average throughout the world, bank efficiency ratios deteriorated by 9.5% between 2011 and 2013, and total revenue-per-employee for asset managers and insurers declined by 18% and 14% over the same period (see chart 1).
Chart 1: Global efficiency performance at the world’s financial institutions Source: Company financial reports; CEB analysis
Lean Times for Lean
While these problems are hardly the fault of lean philosophies alone, it is clear that the existing tools are no longer adequate, if they ever were. Academic work suggests three reasons for lean principles not living up to their promise.
A dual mandate has emerged: Operations teams must increasingly handle service-oriented work, with 72% of operations managers saying that improving customer loyalty is an important priority. This expansion of Operations’ purview requires teams to adapt to changing customer needs.
But often, operations talent and processes – originally designed for supporting colleagues only – underperform with these new responsibilities. The result is both customer dissatisfaction and stubbornly sticky costs.
Services are different from manufacturing: In 2009, John Seddon and Brendan O’Donovan argued that lean has failed in service industries because services, intangible and inherently difficult to standardize, cannot be scaled and managed in the same way as physical manufacturing – the original source of lean.
And so, using lean to reduce costs and increase economies of scale have actually hidden waste rather than rooting it out, keeping overall costs higher than expected.
Not agile enough: Marc Lankhorst and other scholars contend that service organizations are frequently designed (or “architected” to use the language) to be standardized and run at scale, which impairs Operations’ ability to experiment and learn the best way of solving ambiguous problems.
With the rise in ad-hoc customer requests, new regulatory requirements, and the introduction of new products, this lack of agility (not the IT development methodology, but the ability to quickly accommodate expected and unexpected changes) requires managers to apply standard solutions to nonstandard problems – a recipe for inefficiency.
CEB FS Operations will work with members this year on drawing up a “post-lean” agenda, and looking at how operations teams can become more efficient and more adaptable.
For more on CEB’s work with financial services operations teams, see these pages.