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Organizational efficiency and effectiveness: The winning bank’s secret weapons

For banks in a challenging environment, improved productivity and an engaging employee experience need not be competing aims.
Ashwin Adarkar

Advises a diverse range of financial institutions on driving transformational change through strategic innovation, step-change operational performance improvement, and building organizational agility.

Gregor Jost

Brings passion and analytical rigor to transformational organization-redesign efforts, fostering stronger business performance, greater efficiency, and agile ways of working

Zubin Taraporevala

Serves financial institutions globally on strategy, productivity improvement, and digital and analytics transformations

Serves financial institutions on organization, people and strategy topics to increase their efficiency and effectiveness

In the current challenging interest-rate environment, banking CEOs face the dual challenge of reducing people costs and simultaneously energizing employees. They have to do this while addressing the pressing need to embrace new technologies. And they must do all this in a social setting which demands banks think through the reskilling implications of their actions. A complex mission, but one which we see many banks successfully navigate—creating leaner, less hierarchical structures and cultures. We see winning banks deploy a number of proven levers in a way that not only reduces costs but also empowers employees, simplifying structures and increasing the speed of decision-making. Efficiency and effectiveness can both pull in the same direction.

Efficiency-challenged banks are a familiar story. Middle management roles expand, with organizations having more layers and managers smaller “spans of control.” This slows decision-making, creates unnecessary work, and distances top executives from customers and the front line. As the pace of data and technology progress accelerates, no successful organization can afford this.

The path to address the “spans and layers” challenge is also well-worn: a simplistic benchmark-based exercise that focuses on “boxes and lines.” This approach can yield significant reductions in the number of managers and generate substantial near-term cost savings. But without changing ways of working and decision-making, the savings do not stick. Time is invested in identifying best practices from others, but only 15 percent of companies say they significantly learned from, or adopted elements of, other organizations’ designs. The costs invariably creep back as the fundamental ways of working have not changed. Others flounder when trying to achieve change with insufficient buy-in from stakeholders, and can ultimately destroy more value than they create.

We observe winning banks taking a different approach. These banks seek agreement on the starting point, and obtain clear buy-in from stakeholders. They go after the spans and layers opportunity, reducing the number of layers of hierarchy and creating flat hierarchies with broader spans of control. But they rightly spend most of the exercise concentrating on “rewiring the organization” to run with a smaller managerial workforce. This means understanding the root causes that initially led to imbalances and correcting those as well as the way work gets done. This is crucial so that costs don’t just creep back. Reducing managers’ spans to reflect the work done improves efficiency and delayering. This empowers employees, and facilitates faster decision-making. Banks have found significant and sustainable managerial headcount savings of 10 to 25 percent through this approach.

Technology can help in running such efforts efficiently and effectively. Through our work with more than fifteen global banks on their delayering efforts, we developed a web-based platform for organizational diagnostics and design that used existing HR data, matched them against granular benchmarks, and enabled interactive, real-time redesign. At one bank, detailed analysis revealed a 22 percent reduction opportunity in managerial headcount. This opportunity was addressed through distributed design teams that worked on the “rewiring” in each business unit and function. In parallel, the teams identified and started addressing underlying root causes (for example insufficient performance and consequence management) to ensure cost reductions were sustainable. Over five to six months the majority of the initial opportunities were realized.

Transformations on this scale may also require bold thinking such as “zero-basing” your organization (ZBO). Too often banks plan incrementally on the previous year, allowing redundant activities to continue. Zero-basing uses a clean-sheet approach to design. It begins by asking “what is required to keep the lights on?”—the “survival minimum.” In a second step, activities are added back in only if they have a compelling rationale based on return on investment (ROI), to achieve a strategic optimum of activity. Zero-basing leads to a leaner, more efficient organization, with clear roles and responsibilities. And the financial benefits can be massive: ZBO frequently reduces costs by 20 to 40 percent, especially in the middle and back office.

So, you are on your way to a more efficient organization. But how do you make sure that the fewer managers you now have can make better, faster decisions than before?

Successful banks do four things. They start shifting the mix of capabilities that they have, so that tomorrow’s work can be done more effectively. This means developing a clear, data-rich view of the new mix of skills and capabilities they will require as a first step, building a strategic workforce plan. This will almost certainly mean a combination of reskilling, upskilling, hiring, and renting of capabilities. A European bank reskilled and redeployed some 9,500 employees over three years, and at the same time achieved a 70 to 80 percent increase in employee satisfaction.

Secondly, they improve the speed and quality of decision-making. This is perhaps the most important element in ensuring organizational effectiveness. Fast, high-quality decision-making matters—while 54 percent of executives say they spend more than a third of their time on decisions, 61 percent go on to say most of the time spent on decisions is ineffective. Eighty percent say their organizations do not excel at decision-making.

Leading banks distinguish different types of decisions. Big bet decisions are infrequent, high-stakes decisions made by senior executives that affect the organization broadly. Examples are large acquisitions, large capital investments, and large allocations to research and development. Cross-cutting decisions are frequent, often a series of smaller decisions across a process, typically made by executives that involve multiple areas across the organization. Examples include budgeting, pricing, and operations planning. Delegated decisions are smaller, day-to-day decisions typically made by individuals (for example mid-level/frontline managers) or working teams within the organization. The journey to improved decision-making often begins with an immersive simulation to help executives pinpoint challenges and identify improvements.

Some banks go further, concluding that the best way to pursue efficiency and effectiveness together is to move to a fully agile operating model. This means creating a series of high-performing, dynamic tribes and squads that “own” a particular mission or customer and business outcome, and have the end-to-end resources, capabilities, and accountability to deliver them. Our experience with more than 20 agile transformations in banking is that this improves customer focus, increases efficiency by 20 to 30 percent, improves pace of delivery by 2 to 5 times, creates more accountability at the front line, and increases workforce engagement.

Thirdly, leading banks make sure that performance management helps rather than hinders performance. This means emphasizing conversations over documentation, making sure that individual goals are aligned to the bank’s priorities, and creating differentiated consequences for very high and low performance. We typically find that simplifying and focusing performance management in this way boosts both productivity and employee engagement.

Finally, leading banks are increasingly improving their organization by simplifying grading and job families to support a new way of working. Focusing employees on development within bands, rather than upgrading, reduces a hierarchical culture. This also provides more flexibility to pay differently for different role types within broader bands, while remaining internally consistent, leading to more effective attraction and retention of top talent in manager and expert paths.

Improved productivity and an engaging employee experience need not be competing aims. Leading banks should ask themselves: How can we respond to our efficiency challenge by rewiring the organization and rethinking the key processes that develop and energize employees (for example, performance management)? Banks that boldly pursue this transformation agenda can deliver a simpler, leaner, faster bank that delights customers, employees, and shareholders alike.