Challenging headwinds confront financial institutions, including compressed profit margins, regulatory uncertainty, and competition from fintechs and nonbanks. They are picking off banks’ market share, from lending and mortgage refinance to wealth management.
New technologies, such as blockchain, are disrupting everything in traditional banking, from payments transactions to how money is raised in the private market. Add to those challenges the struggle to attract and retain talent in today’s fast-paced business environment.
Headlines tell the story: “Banking bureaucracy is suffocating” and “Bureaucracy and banking – barriers to success.” They underscore a common thread: A top-down organizational design defines many banks’ DNA.
It doesn’t have to be that way. McKinsey research finds that, like other nonfinancial companies, banks can unlock organizational simplicity and effectiveness across their enterprise. Within their traditional siloed operations, they can mobilize cross-functional teams, free managerial time, speed decision-making and, in general, address inhibitors to make themselves flatter, faster and poised to compete.
We find that three core imperatives can form the foundation for a streamlined and speedier approach:
- Simplify organizational structure. Make roles and reporting structures clearer to hasten decision-making. Determine how to organize functional activities to ensure they are effective and efficient. When one U.S. regional bank discovered that 30 percent of its IT activity took place outside of IT and within other business units, it built an IT center of excellence to capture scale, manage demand and build next-generation capabilities.
- Simplify people policies. This unlocks productivity and creates more satisfying and durable career paths. Look for opportunities to co-locate both employees and activities to promote effectiveness and maximize access to talent. Compensation is also key; it should be calibrated across the enterprise with incentives and governance to limit variance. When one payments company analyzed use of contractors by type and their relative benefit vs. full-time employees, it found that over 60 percent of contractors were performing ongoing work functions at a nearly 30 percent cost premium to full-time equivalent employees.
- Speed up decision-making. Faster decisions require redesigning processes to focus on rapid, repetitive cycles of innovation, impact and learning.
Ten core principles of organizational simplicity help banks become flatter, faster and smarter:
- Fewer layers with broader leadership roles to get closer to the market, make faster decisions and execute effectively.
- Clear, consistent role titles and parallel organizational structures to help make them easier to navigate.
- Right-sized and organized centers of excellence with appropriate scale and scope.
- Reduced fragmentation and removed shadow work to eliminate duplication and to clarify roles.
- Interpretive roles identified and rooted out as processes are simplified and demand is managed across the enterprise.
- Maximized location footprint for labor quality, cost, proximity to customer and co-location (e.g., to foster apprenticeship, team-building and coordination).
- Distinct talent paths for managers and individual contributors to avoid stranded roles.
- Calibrated compensation enterprise-wide with incentives and governance to reinforce behaviors that limit variance.
- Total cost of ownership mindset on contractor spend, with systems and governance to promote discipline (e.g., time bound, no outsourcing of critical capabilities, minimal high-cost locations).
- Efficiencies pursued with an eye toward automation potential of each area to ensure sustained impact in the next 3-5 years.
For banks, this organizational redesign is a tall challenge. But the concrete steps outlined can enable them to free up capacity and resources while bringing their culture up to speed in today’s data-rich, fast-paced environment.
*With assistance from Kunal Modi and Ashwin Acharya