The Dec. 27 American Banker reported that 10 of the nation's largest 25 banks are installing new retail branch automation systems. No surprise there. The financial services industry spends more than any other sector of the economy on technology. And for most U.S. banks, retail services are among the most important lines of business.

However, missing from reports and studies of technology investments is the answer to a fundamental question: What is the effective payback from these investments?

Wharton's research on retail delivery systems suggests that large and small banks have a great distance to go. They must improve the effectiveness of investments in retail delivery systems in terms of both the functionality gained and the degree to which these investments pay off.

In 1995, Wharton did a detailed survey of U.S. commercial banks representing more than 70% of retail banking assets. A key component of the survey was an analysis of the investments made in branch automation systems.

In general, retail banks reported spending 17% to 20% of noninterest expense on technology. More than half of discretionary expenditures planned in this area are aimed at increasing the sales capabilities of branches and phone centers.

Overall, the study showed virtually no relationship between the amount invested in platform automation and sales teams' perceptions of the functionality gained.

Surprisingly, the rigor of the process for making decisions about technology is quite low compared to the norm in other industries.

Some of our findings are disturbing. Here are a few samples:

Perceived functionality at the point of sale is not consistent with the level of investment.

We expected that most branches would be well on their way to being automated. Not so. While more than 65% of the banks surveyed had automated cross-selling prompts for the platform, fewer than half could change a customer's address on-line.

The typical sales process is inefficient and leaves customers with a bad feeling about their "high-tech" bank.

For some, running to catch up with the sales and service capacity of peers is the predominant goal. But what about the large number of banks embarking on second generation branch automation?

The data suggest that only a few carefully match investment in functionality with accurate forecasts of volume gains, average account size growth, or both.

For too many banks, additional investments in branch automation increase the cost-to-deliver at the point of sale, thereby diminishing the overall efficiency of the sales site and the network.

Increased functionality is frustrated by inconsistent or even contradictory human resource practices.

Incentive pay is a hot issue for most retail banks. Yet our research suggests that the ones that get high marks for efficiency offer either no incentive pay or not enough (10%-13% of base salary) to be meaningful. The results make intuitive sense.

Unless incentive payouts are meaningful, volume and balance gains do not offset the associated incremental cost of an incentive program.

Human resource practices frustrate investments in functionality in other ways, too.

Examples abound of situations in which a bank invests large sums in state-of-the-art sales technology to empower front-line employees, yet prohibits these employees from waiving even a $5 fee!

Flexibility at the point of sale is meaningful only if sales teams have the authority and willingness to use sales tools to increase customer satisfaction, to cross-sell, and to deepen the bank's market penetration.

Using technology investments to generate added-value product and service features for customers is a tricky proposition.

Our research uncovered three types of practices that generate the highest levels of efficiency when used consistently.

The first set of practices characterized what we called value-adders. These are banks whose strategy is to add value for customers in terms of cycle time, convenience, and related benefits. Their high efficiency scores suggest they matched appropriately their investments in people, systems, and process design to their transaction volume and account balances.

The second set of efficient banks are the basic bankers. These institutions streamline their processes to provide basic "meat and potatoes" services very efficiently.

The last group of efficient banks has struck a balance between the first two strategies. In some product areas, they provide high value. In others, they provide only the basics. As might be expected, this strategy poses a very tough balancing act for most banks, particularly those with large branch networks.

Our study also found that bigger banks are not necessarily the most efficient. In our analysis of checking account processes, 75% of the efficient banks had assets of less than $5.6 billion.

What differentiates efficient banks from their peers is their ability and willingness to organize delivery channels consistently.

Investment payback for call centers is equally dependent on the bank's ability to align sales and service strategies with the appropriate technology platform, product process design, and human resource practices.

Wharton's study of call center performance portends bad news for banking companies that practice inadequate sales and service planning.

Most call centers begin with a service-based strategy - support branch inquiries and provide service capabilities to a variety of customer segments at a lower average cost than is available through the branches.

In addition, most call centers have been quite successful in recruiting and training a work force that is effective and efficient.

But when the results of competitive pressures are factored in, this rosy picture begins to darken.

Over the next 12 to 18 months, most banks, if they have not done so already, plan to make their call centers more sales-oriented in order to increase revenue and further circumscribe the role of the branch delivery system.

What happens to the efficiency equilibrium they created? Our early work suggests that it evaporates into added expense for technology, greater demand for access to applications systems, new and broader training investments, and less revenue.

In sales-oriented call centers, talk times increase, referrals to other specialists increase, demands on the system for access to multiple applications and for longer periods heightens the need for greater functionality and speed, and the center overall can serve fewer customers with the same expense structure.

Our research suggests that sales and service in the same center spell less revenue.

Poor technology results are fueled by inadequate attention to the way decisions in this area are made.

Because bank technology investments average 17%-20% of noninterest expense, the most for any U.S. industry, rigor in assuring that investments fit the bank's strategies and goals should be of paramount importance in decision-making.

Unfortunately, this is not the case. Fewer than 23% of the banks surveyed have a committee or other oversight structure for technology investments.

Management committee oversight probably works well for very large investments (those over $50 million). But what about the smaller investments that create specific service-level values - address changes (only 50% can be done on-line today), account transfers (less than 55%), or on-line small business loan document processing (less than 12%)?

By themselves, these decisions aren't big ones. However, when part of an integrated package of tools for the front line, they improve customer satisfaction and efficiency measurably.

Only if investment oversight groups continually look for such integration opportunities will effective technology systems be created. Such systems mesh with the strategy, human resources, and delivery channel value choices of the organization.

The important issue for retail bankers is how to use effectively the results of our study - which is an impartial and representative survey of industry practices. We believe the questions to be addressed by retail executives are clear.

Pay attention to product process design; it matters.

Why do banks not know the details of process design for traditional or new products? Operating effectiveness is possible only if banks understand that the design of the process is a major element of their technology base. In many ways, the process design is the technology of the company.

Create only functionality that will be used effectively. No matter how well branch automation and call center technology are designed, if sales and service teams do not understand the functionality, cost, not value, is added for customers and shareholders.

Don't be timid with human resource strategies; be consistent.

Much is said about the value of new concepts in human resource management - high-involvement workplace practices, team management structures, and incentive compensation for sales and service teams.

Other industries use these practices effectively to increase productivity and quality. Will they work in banking? In part, it is difficult to say conclusively, given the massive amount of restructuring and consolidation in the industry. What is clear, however, is that mixed systems that select a few practices from the Chinese menu of human resource management innovations may make management feel more "progressive" but do not pay off in shareholder value.

As with most practices, consistency and alignment with customer value strategies is fundamental to human resource practices that differentiate performance in individual businesses.

Be bold in using value-added concepts (or not using them) to differentiate the company for customers. Inconsistent strategies are not economically meaningful.

One of the most provocative strategic challenges that emerges from Wharton's work in retail delivery systems is clarifying the design and purpose of individual delivery channels.

Nonbank competitors have a distinct management advantage over banks in an important way: Product lines and delivery channels are much simpler. Nonbanks can and do focus enormous energy on creating efficiency and service effectiveness across a smaller set of product areas.

Bankers historically believed that breadth of product line and delivery options were distinctive advantages. They may continue to be. The question is whether banks can afford and can deliver distinctiveness in terms of price, convenience, and quality in delivery systems that try to sell all products to all types of customers.

Wharton's research shows that many banks have not made consistent choices regarding their strategies, human resource practices, product process designs, and technology investments.

There are well known and valid reasons for these inconsistencies - consolidation, legacy systems, regulatory pressures, earnings pressures, and competitive pressures.

At the same time, Wharton's researchers believe the future will be about making choices that are consistent with one another. Banks cannot afford investments in technology and people that in turn do not lead to shareholder value.

In retail banking, the high-performing, efficient banks appear to be those that understand the devil is in the details. Managing effectively and consistently may very well be the success formula for the winners.

Mr. Harker is a professor of systems engineering at the University of Pennsylvania. Ms. McClave is a managing director at the Wharton financial institutions center.

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