Reengineering is acknowledging that the way things have been done in the past is not sacrosanct, and that a new competitive environment and new technologies require radical new ways of doing things.

In institutions both large and small I have seen the reinvigoration of staff and corporate culture once employees are empowered to look at the bank from a "blank sheet of paper" perspective.

Reengineering focuses on the only significant, controllable lever that can be used to manage bank costs: redesigning the web of interlocking processes that drive them. Processes are sets of inputs that create an output of value to the customer. Tasks, on the other hand, are the numerous, discrete activities that fulfill demands of each process. Reengineering operates at the process level, in order to redesign the organization to do better things, rather than doing the same things in a better way or at a lower cost.

Moreover, a true bank reengineering examines all the bank's processes. Restructuring individual processes or functions does not work in banks, given the interdependencies among the various functional, process, physical plant, and systems cost levers and across the strategic, organizational and management levers of customer, product and geography.

Many "restructuring" programs focus, instead, on individual processes or tasks. This causes them to be performed more cost efficiently (at least in the short term), but does nothing to challenge the underlying assumptions of the interlocking processes within banks that generate these costs.

When a comprehensive approach is taken to redesign, however, the organization ends up streamlined from a cost perspective but, more important, better disciplined in credit decision-making, more customer service oriented, and culturally refocused outward to its market and competitors.

Reengineering bank processes. Reengineering processes requires a redesign of the bank's cost processes, driven from both the top down and the bottom up.

The top-down approach requires the senior management of the bank to identify basic structural redesign ideas for each area on the cost side - branches, retail credit, wholesale, trust, systems, operations, and administration - to evaluate.

The bottom-up element draws upon all the resources and staff of the organization, as employees brainstorm ways to remove redundancies and inefficiencies from their day-to-day activities.

Branch networks are perhaps the best place to illustrate the top-down redesign and bottom-up efficiency.

Branch redesign ideas. A structural theme within the branch network is to provide more of a customer orientation by removing back-office-type processing and administrative activities from the branches, which commonly account for over two-thirds of branch staff time.

Several redesign ideas that accompany this theme include: creating a centralized customer service center, centralizing deposit operations, and regionalizing transaction processing. For each of these redesign themes, a rigorous costing methodology should be devised using external competitor performance benchmarks for the reengineered process.

Branch efficiency ideas. Efficiency ideas generally allow employees to take more responsibility for their functions and remove supervisory layers that "control" the interaction between the staff and customers. Although, individually, they may not generate tremendous savings, in the aggregate they instill a new customer-oriented culture that yields significant results.

Examples of efficiency ideas include: raising overdraft approval levels, eliminating the second approval on large deposits, using one signature card for customers with multiple accounts, utilizing an express deposit/payment line, and streamlining the identification procedures on new accounts for existing customers.

Thus, reengineering is not arbitrary, across-the-board cost cutting, as is often disguised behind euphemisms like "restructuring," "total quality control," "downsizing," or "horizontal management." Arbitrary programs simply do not work.

Nor does reengineering always result in staff reductions in all areas. Costs in banks are dominated by personnel expenses. Fundamental economic redesign, therefore, does often result in substantially lower employee numbers. Such reduction is selective, however, reflecting the relative value-added of the processes served by each position.

When a reengineering approach is perceived as an effort to create a truly new bank - and not as a knee-jerk "fire drill" to meet unexpected earnings downturns - employees become enthusiastic and involved.

The potential for reengineering costs. As a result of banks' efforts to expand geographically and technologically, while increasing product offerings, operating costs per bank employee in the United States have increased 25% from 1988 to 1994. Clearly, if this trend continues, it will be difficult for banks to compete in the increasingly specialized markets of the 1990s and beyond.

Reengineering is designed to revamp a bank's cost structure by getting to the root of the problem. Since costs ideally do not "creep back," reengineering produces an annuity impact to earnings. For the industry as a whole, the potential is roughly $20 billion, or over 30% of estimated 1994 pretax earnings.

The financial impact. Two banks demonstrate in concrete terms the impact of reengineering: Star Banc Corp. of Cincinnati, Ohio, and CoreStates Financial Corp. of Philadelphia, Pa.

By redesigning each process within the organization, Star Banc identified cost improvements of about $27 million, CoreStates $180 million. Additionally, undertaking a systematic repricing approach produced $13 million in additional revenue for Star Banc, and a substantial impact for CoreStates.

Overall, in 1994, Star Banc improved its return on average assets from 1.0% to 1.4%, its return on average equity from 11% to 17%, and its efficiency ratio from 63% to 54%. The stock market has rewarded it with a 50% stock price improvement. CoreStates' stock price likewise has risen 50% since November 1994.

Both banks are proof that though the challenge of reengineering an already top-performing bank is greater, it often produces more lasting results than for a "basket case" turnaround.

The impact on the bank culture. When the chief executive officers of reengineered banks were asked to describe the top five results of a bank reengineering program, the most frequent responses included:

*Significantly improved customer service.

*A reinvigorated corporate culture focused on sales.

*A de-layered management structure, with senior managers closer to customers.

*A new economic profile, with an efficiency ratio of about 55%.

*Significantly improved stock price, up between 30% and 50% within six months of completion of the reengineering program.

The goals of reengineering are to create an institution with superior customer service, with a focus on profitable sales opportunities, and with a culture of "can do," not "can't do because..."

If properly structured, and led by committed senior management, these objectives are achievable, and also fundamentally enhance economics through sustainable, recurring earnings.

Implications for the industry's future. The pessimism of many banking pundits - not to mention bankers themselves - in discussing the future of the industry is astounding. Take, for instance, the number of times terms such as "obsolete," "unnecessary,""disintermediated," and "out of date" are being used in the media. This alone would lead one to believe that all U.S. banks are on the verge of collapse.

Bankers have many competitive advantages on which to capitalize, including a unique distribution network of branches and automated teller machines; a loyal, highly trained sales force; sophisticated transaction processing; securities and foreign exchange trading technologies and skills; superior credit underwriting capabilities; and, most important, the exceptional loyalty and inertia of consumers, small-business owners, and the like.

For the past 20 years, industry "experts" have been predicting the demise of banking. And in some ways, the industry has been its own worst enemy, whether because of developing-country loans, high-leverage transactions, real estate credits, or other expensive product fads such as discount brokerage, and potentially, mutual fund acquisitions. Based on its competitive strengths, however, the industry has always bounced back.

Nevertheless, U.S. bankers are under siege. They cannot afford to be complacent about the record earnings of the past three years, nor about their underlying business advantages.

Nonbank competitors are becoming fierce intruders into what have traditionally been the most profitable core banking markets. Credit cards, auto loans, and mortgages are being supplied by firms like Dean Witter, GMAC, and Lomas Mortgage, with cost structures designed specifically for product niches.

Bank forays into mutual funds and brokerage businesses are challenged by the likes of Fidelity Investments and Charles Schwab, which have national brand franchises. And even control of the payment system is challenged by firms like Electronic Payments Systems and electronic data interchange firms like Geisco.

Pricing pressures are mounting, as evidenced by the collapse of the credit card interest rate umbrella. The supernormal spreads of 1992-94 are not sustainable in the medium term, as the "earnings crunch" caused by the factors above squeezes traditional earnings.

All these trends point to one key message: The industry has to get its house in order by adjusting its economics to meet the challenge of product specialists.

This is not a matter of incrementalism. It is not a case of minor fixes to marginally improve efficiency to do the same old things of the past at a slightly lower cost. Banks need to radically redesign their basic processes and business approaches to reflect the realities of competition in the 1990s. They must reengineer themselves in order to survive and thrive. And examples of successful reengineering prove that this is not wishful thinking.

CEOs with the vision and courage to face the economic realities of their industry are empowering their staff to redesign the bank. They are using the resulting improvements in stock value to fund acquisitions, and then capitalizing on the discipline instilled throughout the bank as a result of a reengineering to realize consolidation benefits so often lost in the past. They are tackling the new entrant intruders head on and they are winning.

True reengineering is not easy. It involves challenging each precept of traditional banking and remolding an institution's culture. Yet if structured and managed as outlined, it can be an exciting and reinvigorating experience that binds the institution - whether large or small - more tightly together, while returning its focus to customer sales and service.

Banks can be winners in the 1990s and beyond. They can meet and overcome the challenges they face. To do so, however, they must step up to the plate and confront the reengineering imperative now.

Mr. Allen is chairman of Aston Limited Partners, a New York-based bank investment and reengineering firm, and author of "Reengineering the Bank: A Blueprint for Survival and Success" (Irwin Publishing).

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