A successful reengineering effort needs to look beyond cost-cutting and focus on the overall picture.
For banks and other financial services companies, reengineering has regrettably become a code word for cost cutting.
Banking executives need to understand that reengineering efforts that focus only on reducing expenses do not significantly increase and sustain shareholder value.
A recent study of the Fortune 1000 industrial and service companies, for example, found that investors more highly value firms that produce greater profits by generating revenue growth as opposed to boosting the bottom line through cost reductions. According to the Mercer Management Consulting survey, market value for the profitable-growth companies grew 15% from 1989 to 1993, compared with 10% for the cost-cutting corporations.
A successful reengineering effort needs to look beyond cost-cutting and incremental process improvement and instead focus on the overall picture. Restructurings require financial services companies to consider not only who can be eliminated but, more importantly, what can be eliminated or redefined. Organizations will find success from reengineering once they view the business as a set of processes that cut horizontally across the company to serve the customer. Never forget that it is the customer, and only the customer, who is the source of shareholder value.
Once this simple but powerful principle is understood, management will be able to utilize processes, people, and technology as levers to interactively engineer change. Reengineering then becomes an effort focusing on resources where real value is created while eliminating or reconfiguring work and procedures that don't add value.
A successful reengineering process always begins with the customer. The first step is to identify who the desired customers are and how valuable they might be. Today's banking leaders are pursuing demassification - the recognition that no two customers are alike. This has a profound impact on reengineering. No longer can processes be tailored to serving a mass market at the lowest cost. Instead they must be flexible enough to serve each individual customer the way he or she requires. The bank must acknowledge this before it can begin to reengineer itself around customers' needs.
Charles Schwab & Co. did just that when it developed and launched its Schwab One Source product. The company has changed the entire concept of funds management by providing one-stop shopping for the "average" investor, a group Schwab saw as a growing client base. By uncovering this group's desire for one firm to manage its entire personal investment portfolio, Schwab was able to design a product that the customer wanted and, in the process, identify a key new market. By streamlining existing operations and taking advantage of new technology to link those operations, Schwab was able to develop this profitable market with limited investment. Schwab currently has more than $10 billion in assets under management and is opening a significant number of One Source accounts each day.
Bankers, in fact, should be looking outside their industry to find examples of successful reengineerings - like Nike, for instance., many successful reengineering efforts have occurred outside the banking industry and have direct applications to the financial services community. In the late 1980's the company, then basically a manufacturer of athletic shoes, realized - in the words of chief executive Phil Knight - that "the most important thing we do is market the product." Nike restrucutured its business by outsourcing manufacturing and redefining design and marketing. Design now begins with a fashion statement, and marketing takes the form of professional sports licensing, intensive brand building, and national advertising. Nike realized that it was not a sneaker manufacturer, but really a fashion leader.
Other examples outside banking further illustrate the dramatic effect demassification can have on the reengineering process. Time magazine has reengineered its manufacturing process to customize the content and advertising in each issue. Dell Computer has developed custom configuration centers around the world to combine production and delivery at the point of sale. The challenge for banks is to reengineer themselves to provide products and services with individually customized features and delivery.
In each of these cases, reengineering was much more than a cost exercise. Management focused on the customer and then evaluated the underlying processes and roles of the business. We have discovered that true reengineering insight is achieved by decomposing the business into the critical profit-maximizing functions. This effort focuses management on the underlying capabilities necessary to succeed. Each role (or value-chain link) can be redefined, outsourced, streamlined, or eliminated based on its economic value to the customer. This type of structured value chain analysis allows management not only to compare its activities to immediate competitors but also to leverage expertise from outside the industry.
The financial services industry, by its very nature, is increasingly converging with the computing, telecommunications, information, and manufacturing sectors. Knowing how they and others manage and build capabilities will provide future competitive insights. We increasingly believe that the reengineering process is best delivered by combining the insights of your company with organizations in other industries.
Once the target customer group's needs have been identified, the next step is to assess how well the organization is delivering what customers want. Assessment needs to answer several fundamental questions: How well are we meeting the target group's needs? How well are our competitors meeting them? How efficient are we in each step of the value chain? What core competencies are required to successfully meet the target group's needs? Do we currently possess these competencies?
One company that has gained a deep understanding of these fundamental questions is USAA, which reengineered information management and direct marketing competencies to be able to leverage its affinity group customers. The organization has gone from targeting direct sales efforts of its auto insurance products aimed at armed forces personnel and their families to becoming a major player in the insurance business. It's also offering a range of services from credit cards to mutual funds. Another example is a money-center bank that reengineered the way it acquires new clients for its private banking group. The bank actually increased its acquisition costs. Why? Because management learned that with more screening, they could identify more valuable client relationships.
Only after intensive assessment can a bank truly begin to redesign its businesses. Reengineering demands thinking about how to grow the business before changing the processes. It requires a reevaluation and redistribution of roles among all value chain linkages. The result is that rules are rewritten and the reengineered institution gains a competitive advantage.
Scott Birnbaum is a vice president and Nick Winter a principal in Mercer Management Consulting's Financial Services Industry Practice. Both are based in New York.
