Using lean in wholesale financial services

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After achieving success using the lean-management approach1 in retail financial services, leading institutions are starting to utilize lean-management principles in their wholesale businesses. Some early adopters we know, recognizing that areas such as securities services and the processing of trades are ripe for change, have already achieved major improvements in accuracy, timeliness, efficiency, and even risk control—for instance, a reduction in the number of “breaks,”2 open items, and errors.

Yet some in the industry remain skeptical. First, the wholesale sector’s profitability has historically depended on a constant stream of innovative expert-based, highly tailored, and high-margin products, so leaders may question whether lean’s production-based insights apply to wholesale banking. Moreover, although the processes supporting those products usually start off as intensely manual, the industry has been at the forefront in the use of automation, outsourcing, and offshoring to reduce marginal costs as products mature. An understandable concern is that lean’s process changes would upend vendor relationships or require yet another round of technology investments. Finally, some institutions we’ve seen are pursuing other efficiency initiatives that appear to incorporate similar ideas and fear that lean might interrupt them.

For a few banks, however, it is exactly this high-risk, highly complex environment that makes lean’s comprehensive approach to minimizing waste and variability so valuable. By focusing on end-to-end processes rather than on individual activities or functions, lean allows institutions to see that they have many more “factory-like” workstreams than they may have realized. They then can adapt lean’s traditional approach to each specific operation—especially improving the alignment of operating teams, the balancing of capacity and workloads, and the transparency of information flows.

These changes allow institutions to use the investments they have already made—in IT, outsourcing, or offshoring—far more effectively. The impact can be dramatic. At one large asset manager we studied, for example, new fund-accounting processes reduced costs by 30 percent as error rates dropped by 75 percent. In the confirmation of derivatives, a global investment bank increased its efficiency by 40 percent while reducing errors by 50 percent and exposure to risky clients by 12 percent (Exhibit 1).

Lean makes processes more accurate, timely, and efficient—with lower risk.

Complexity kills

In the past several years, many wholesale banks we’ve observed have discovered the limits of relying exclusively on IT, outsourcing, and offshoring to reduce costs and increase efficiency. In IT, for example, the enormous technical challenges inherent in automation left little scope for project teams to revamp processes to take advantage of the new capabilities. Likewise, outsourcing and offshoring initiatives tended to concentrate on a narrow definition of value, as institutions swapped roles and activities in London or New York for similar ones in Zagreb or Hyderabad. Reallocating staff on a job-by-job or activity-by-activity basis meant that the only significant effect on costs was to lower employee salaries. Many institutions attempted to shift broken rather than well-functioning end-to-end processes to multiple offshore locations, where they were even more difficult to manage. As a result, at most wholesale banks we’ve studied, offshoring has reduced productivity rather than offered a competitive advantage (Exhibit 2).

Offshoring alone no longer seems to create a competitive advantage.

In many cases we’ve observed, even the savings from cheaper labor were offset by new, often-hidden costs of complexity: as files move from onshore employees to offshore employees to outsourced employees and back again, every step increases the risk of error and delay. Institutions are under greater scrutiny than ever from both clients and regulators, so accuracy has become even more critical. Yet in trying to mitigate these new quality concerns, institutions impose additional controls that reduce speed or add personnel—further undercutting the returns from IT, outsourcing, and offshoring.

Resolving these conflicting pressures, we find, requires a breakthrough in managing wholesale-banking operations. Leading financial institutions are discovering that such a breakthrough is possible through the judicious application of lean principles. But that means assessing wholesale businesses from a new perspective, and the results are often a surprise. Viewed from end to end, the processes that underlie many of the most sophisticated wholesale products share essential features with factory workflows: low variability in tasks, narrow expertise requirements, predictable work, and limited interaction with third parties.

While few wholesale workflows involve all four features, many involve three—enough for lean to have a real impact. In one bank’s capital-market operations, for example, we found that about 25 to 30 percent of the workforce undertook routine “exception-based” activities, such as cash settlements: these employees intervened only when problems arose. Although this work is inherently unpredictable, it is almost exclusively internal, and the same exceptions occur repeatedly, limiting the variability of tasks and the range of expertise involved. Applying lean to these processes typically increased productivity by 20 to 25 percent. Likewise, an additional 35 to 40 percent of employees focused on “rules-based” work such as drafting documents. Tasks follow a fairly rigid set of requirements, with all the characteristics of lean except the final one, since these personnel must work closely with third parties. In this case, lean’s productivity-improvement potential ranged from 15 to 25 percent.

Thus, 60 to 70 percent of the capital-market staff worked on processes in which lean could achieve substantial savings. Only a minority of employees had the highly customized client relationships or expert roles that are difficult to standardize.

Get it done

Once a wholesale institution commits itself to lean, a successful revamp rests on three of its core principles. The first is realigning teams to reflect value streams, or the steps involved in fulfilling a customer request, from initial receipt through completion. To minimize errors and to speed work from one specialist to the next, regardless of where each is located, the new configuration also eliminates functional boundaries. Thanks to that restructuring, an institution can use resources more effectively by rebalancing workloads. Finally, managers and employees must make information and metrics fully transparent to adjust the system appropriately to changing conditions.

Realign teams

The inherent complexity of wholesale processes raises challenges. At a given moment, managers may have only a limited view of basic operating conditions, such as the incoming workflow, the capacity of any work group, or total productivity. Backlogs form quickly, with significant rework arising from errors at earlier process stages. Units lack the flexibility to respond to new requests—for example, to treat top clients differently or to process new products quickly. The fact that workers do not see each other may exacerbate the problems by weakening the sense of mutual accountability.

Nevertheless, geographic dispersion is a critical element of the solution. A typical lean move is to organize employees into teams, or “work cells,” whose organization more closely matches the process steps they undertake and fosters stronger relationships—and responsibility—among team members. Under this structure, one group of employees from related job functions, who typically would have separate reporting lines, is responsible for every step involved in fulfilling a customer request. While the employees in such a cell often work in the same location, wholesale banks can take advantage of their current outsourcing and offshoring models to create “virtual” work cells that maximize talent cost advantages. In short, outsourcing and offshoring let institutions find the right talent at the right price, while lean allows them to use talent in the most effective way.

In our experience, lean can also help institutions identify targeted opportunities to use outsourcing and offshoring more effectively. An international bank, for example, cut across organizational and physical boundaries in a unit responsible for processing dividends, stock splits, and the like. It created new cross-functional teams that reduced the average age of the unit’s breaks by almost 20 percent and the related risk by more than 50 percent.

What’s more, by applying lean’s end-to-end perspective in revamping the underlying processes, the bank found that one of its offshore facilities had become so experienced in several necessary tasks that it could become a “center of excellence.” The bank therefore shifted about 30 percent of the unit’s full-time-equivalent positions to that facility. As a result, several of the original unit’s oversight functions became redundant. The number of full-time-equivalent employees in it fell by 14 percent.

Rebalance workloads

Once the new teams are in place, managers can start balancing workloads much more productively and thereby address chronic mismatches between the supply of and demand for labor throughout wholesale financial processes. A global investment bank we studied was typical: breaks in derivatives settlement were accumulating faster than it could resolve them, allowing needless risk exposures and undermining client service guarantees. At a large US asset manager, fund accountants found themselves in a daily fire fight, rushing to integrate data before reporting deadlines, although low-value tasks consumed the rest of their work hours.

The techniques involved in readjusting workflows mostly apply familiar lean themes, starting with a detailed analysis of employee activities and of production demands. Once managers eliminate obvious waste, they can assess the capacity and capabilities of an operations staff, identifying opportunities to shift less urgent tasks to less busy time slots or to create separate channels for activities involving larger risks or requiring greater judgment. Such changes increased the productivity of the global investment bank’s back office for settlements by 15 to 25 percent (depending on product type) and helped it reduce its error rate by 15 percent. The asset manager freed up more than two-and-a-half hours of each fund accountant’s day, enabling these employees to meet their deadlines more consistently and speeding up their work by over 40 percent.

Make data transparent

The final requirement is to review the way work status updates proceed through the organization. In complex operations, an employee whose work relies on earlier stages in a process often has no way of knowing if the team responsible for completing them has run into obstacles and been delayed. A critical component is therefore to improve communication between up- and downstream information flows, regardless of location. The asset manager realized this goal by using a new system of video screens that help each employee track the status of a particular task at a particular time. Such visual techniques allow managers and employees to respond quickly to problems as they arise. If, for example, a data feed goes down, all team members relying on it know in real time and can cooperate on finding alternatives that enable everyone to meet their deadlines.

An integrated solution

One institution’s derivatives confirmation operation illustrates how the three components come together. Before a lean transformation, the execution of a “plain vanilla” equity derivative required an average of 37 days as it slowly progressed from one functional group to the next, crossing several time zones along the way. The institution started by reorganizing its processing front line into virtual work cells that assumed responsibility for particular groups of clients. It also simultaneously implemented new workload-balancing tools that enabled it to shift tasks among the work cells as demand volume changed, thus preventing the backlogs that had been a crucial source of error. The third component was a continuously updated, fully transparent performance-data system that enforced accountability by allowing each employee to see where the cell stood at any time compared with its targets. These changes together allowed the institution to reduce delays by 40 percent and to increase client satisfaction significantly.

Build buy-in

Because of the sensitivity of the processes involved, managing such changes will be especially demanding. Two factors are critical.

The first need is a deep commitment from the leadership. Although we find that designing and implementing a lean program is often far less expensive than alternatives based on IT or on outsourcing and offshoring, internal resistance to lean can be even greater because employees may fear that by “industrializing” operations, it will diminish the value of their contributions. Leaders must therefore emphasize that waste prevents employees from fully using their skills.

Thorough prototyping is the second requirement. To be comfortable making risky changes in processes, we find that organizations must experience a prototype operating in a live, working environment, with ordinary employees doing actual work on actual products. By demonstrating what lean can achieve, this sort of pilot generates excitement at all levels of an organization as people recognize how lean can improve their jobs. At the asset manager, for example, before the lean transformation most accountants handled about 11 funds each. Employees who worked with the prototype eventually reached 16 funds, while errors dropped by 75 percent and total reporting cycle time declined by 25 percent.

The first step in achieving these sorts of improvements is for leaders to look hard at wholesale operations, particularly those where cost pressures may be rising as returns from IT and outsourcing and offshoring projects diminish. Reimagining these workstreams can wring new value from long-standing investments and create new opportunities.

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