A recent study supports the popular notion that many bank reengineering efforts are failing to bring about their promised performance improvements.
Reengineering - defined as a fundamental redesigning of processes aimed at achieving dramatic performance gains - has been in vogue among bankers for the last few years.
According to Financial Institutions Consulting, reengineered banks - excluding those that had been acquired - underperformed a control group of financial companies in stock performance and revenue growth.
New York-based Financial Institutions Consulting looked at a sample of banks that have recently done reengineering projects. The sample included Fleet Financial Group, CoreStates Financial Corp., Riggs National Corp., Star Banc Corp., Michigan National Corp., and Midlantic Corp.
The group's financial performance was measured against a control group of financial services companies, such as Charles Schwab & Co., Fifth Third Bancorp, and Synovus Financial Corp., which have consistently strong growth in revenue and net earnings, low operating efficiency ratios, and strong stock price performance.
The stock performance of reengineered banks was mixed, and revenue growth was often hurt by reengineering, the study found. The control group, meanwhile, expanded revenue at an average rate of 25%, and increased net income by between 14% and 67%.
Charles Wendel, president of Financial Institutions Consulting, said one of the reasons reengineered banks had such poor results was because they focused too much on cost reduction and largely ignored opportunities for revenue growth.
"Cost cutting is important and valid, but, in and of itself, is not enough," he said. "It's not true reengineering."
A notable exception was CoreStates, which built its reengineering project around improving customer service and enhancing revenue, said Mr. Wendel.
As a result, CoreStates was the only bank that measured up to the growth of the control group, increasing its revenue 13% one year after starting its reengineering project.
Mr. Wendel said that banks could learn from the different management approach used by the financial services companies, which focus more on cost control, as opposed to cost reduction.
"These companies are disciplined," he said. "They don't try to be all things to all people, but have very specific market niches and directed strategies."
Jennifer Warner, an associate at Financial Institutions Consulting, added that control group companies such as Countrywide Funding Corp. and Fifth Third, use technology to define their customers, tailor distribution systems accordingly, and use their leverage in existing relationships.
The growth companies also have in place an ongoing cost management and improvement culture, whereas banks try to complete massive changes in a matter of months, said Ms. Warner.
Banks should focus on improving specific areas - such as retail, corporate, or back office - over a longer period, and "build on the successes of these smaller projects," she said.
In addition, banks should tie cost reduction to revenue enhancement, focusing predominantly on offering new products, entering new markets, and getting products to market more effectively, Ms. Warner added. "Banks need a mind-set for growth, not shrinkage."
Ms. Tucker is a freelance writer based in Hazlet, N.J.