The way Frank A. Petro sees it, bank back Offices today are costly, inflexible, and not up to the challenge of competing against nonbank financial services companies.

Mr. Petro, president of the Asia/Pacific practice of CSC Index, the international management consulting firm, argues that U.S. banks are burdened with back rooms that resemble more an obsolete assembly-line factory than an infrastructure for the information age.

Mr. Petro, along with his CSC colleague, Leo V. Redmond, managing associate in the San Francisco office, say past drives to gain productivity also have resulted in "dumb" branches, where intelligent functions have been moved to the back office. That design, they say, is illequipped for the age of clientserver computing.

What banks need to do, they say, is define themselves by the services at which they excel -- as primarily a distribution company, a servicer of a particular market segment, or a product innovator. And that will force changes in the back office.

Further, as retail banks move to offer more distribution channels, bankers will be faced with new challenges.

"Any manufacturer that has to sell through multiple channels has to manage separately those channels, their products, and their customers," said Mr. Petro. "These are new levels of complexity for banks -- essentially unprecedented."

Some of the things they say banks need to do are better train workers, so they can be shifted from task to task as needed Banks need to build data bases that will provide a more comprehensive look at customers' financial situations. And jobs need to be redefined so that a single employee will have responsibility for a total customer relationship.

Bankers will ignore the operations "crisis" at their peril, said Mr. Petro and Mr. Redmond, for nonbank financial companies have already ahead of the game.

In a recent interview, the CSC consultants talked about these issues.

Q.: You say that banks are ill prepared to handle competition from nonbank financial service companies. How can they meet the challenge?

Petro: Banks have to sit back and come to grips with what is it they want to offer the marketplace as their distinct value added [service].

A bank could choose, for example, to be a real effective distribution company. A Bank of America or a Bank One, say, would focus on creating [exponentially more] points of customer access.

That is the way McDonald' s and Taco Bell think about it, because they are distribution companies.

Another approach is for a bank to be very distinctive in how it services particular customer segments. Its distinct competence would be around some form of service, like private banking.

Third, a bank could be excel in either one product or a set of products. A bank could focus on originating mortgages, securitizing them, and doing lots of swaps in that arena, and so on. It would not focus on distribution but let others sell the products for it.

Q.: Are any banks excelling at these three areas?

PETRO: I'd say the answer is no. Banks have been sort of average at everything. They have left themselves vulnerable to the Schwab's, to the Fidelity's, and to other nonbanks that have said they can create a broader distribution network by, for example, using telemarketing effectively.

Q.: What are the implications for a bank's operations?

PETRO: I would start with the value-added proposition that the bank wants to provide the market. That begins to drive how you configure your distribution system and what you might do in terms of a factory.

Q.: What is wrong with the banks' distribution system now?

PETRO: First; the architecture of institutions as they presently operate is obsolete. Banks have stripped most of the intelligence out of the branches and moved it to the back office. They did that because they were designing their branches to leverage the processing capabilities of mainframe computers.

Today, the technology platforms of choice are client-server based. Which means you put decision making and intelligence at the point of customer access, not somewhere in the back office.

REDMOND: One thing is the swings in volume. This is analogous to manufacturing operations.

The mortgage application volume in the U.S. has come down something in the order of a third in the last nine months.

If you had the back office geared up at a given volume in January, by October you are going to have to cut a third of the capacity, or the people, or the machines, or whatever.

If the banks are geared up in that traditional mode -- which says everything is going to flow into us in a steady growth pattern -- there is a great risk of being caught with overcapacity in the wrong areas and with undercapacity in the fight areas.

PETRO: If a bank chooses to be a world-class distributor, that has implications for how it would configure its back office. It probably would outsource many of its secondary products, and it would actually look to start operating like a Wal-Mart. Wal-Mart doesn't make its own soap, it deals with Procter & Gamble.

You cut a deal with a Schwab, you cut a deal with a Fidelity, that sort of thing.

The architecture then is just a network that links into a Fidelity, a mortgage company, and so forth.

If you do that, you change how your workforce works. Maybe you have a little old lady to greet you at the from entrance, like Wal-Mart does, to make it more friendly. Or maybe you use a lot of electronics to say 'Anytime somebody wants money, we're there.'

Q.: But bankers today insist they are moving in this direction. Huntington Bancshares, for example, recently opened its first so-called virtual branch in Columbus, Ohio.

PETRO: That is the stuff of the future.

When you start creating virtual branches and kiosks, the tecnnology and the concept enables you to dramatically increase your points of customer access.

But it is one thing to say, 'This is what's necessary.' It's another to see it actually happening. In our experience, we have seen very little.

Most bankers look at these things as productivity gains. Go back 15 years ago, when automatic teller machines came along. Most bankers looked at ATMs as a way to bring transaction costs down. What in fact ATMs did was fundamentally change how people bank, although the banks really didn't understand that then. I think the virtual branch idea is the same kind of issue.

REDMOND: If you look at distribution-oriented companies and the distribution function in nondistribution companies, it is a ruthlessly efficient operation. A lot of companies have begun to outsource.

Or perhaps they retain control, but they move their logistics and distribution functions near to the freight airline hubs. In essence, the distribution function is the one of the first things to become independent of geography.

Clearly, banks are going to have to become pretty independent of theft historical geography. If Bank of America moves from just the West Coast to everything west of the Mississippi, then it has a lot of strategic choices to make about where it puts all of its huge computer centers and customer service centers.

Does it build brick and mortar branches in all of the states west of the Mississippi? Or does it buy them? It's questionable whether you would want to buy all of the existing brick and mortar branches throughout all of those states to try to serve them.

You may want an entirely different model, which is built more along the lines of a Federal Express or some other distribution company.

Q.: What is going to drive banks to redesign their operations, if they haven't yet done so?

PETRO: Interstate banking may be the final shaw that will cause the economic pressures to come to force the institutions to operate differently.

I just can't imagine an era of interstate banking that a Bane One can remain economically viable with the administrative architecture it has. I can't image that.

Interstate banking is going to change the nature of the game. If you really want to be a distributor, the issue isn't how many branches you have; it is: How can you create many multiples beyond what you have now as points of customer access?

Q.: Many banks have been undergoing reengineering projects in recent years. Have these efforts failed to include the kind of change you are talking about?

PETRO: We do a lot of research around reengineering. There are no examples in banking we have been able to find.

Either our research is poor or they aren't there. There are, however, a lot of examples of insurance companies and consumer products firms [that have redesigned the distribution channels.]

Schwab started out with a very intensive use of telemarketing. And then it began to fill in branches behind it. It has a much thinner branch distribution system with more points of customer access.

REDMOND: Schwab is virtually giving away software now, on the premise that they are going to create a relationship with the customer at virtually no cost to the customer.

PETRO: A lot of the reengineering thrusts the banks have taken have been around productivity. The real question that is left to be done is rethinking how the whole financial institution would operate.

I have seen some work in Asia with some global banks that have attempted to do these' things. I have not seen anything in the U.S. along these lines.

Last year, we looked at 30 or 40 West Coast banks and spoke to executives about what they have done in reengineering, or what they see as the potential for business.

Most people we spoke to had a very limited vision of what they could do. They were pretty much trapped in a productivity mindset.

REDMOND: I think now [with interstate banking] would be a key time to start from scratch. Frank has been talking about trying to break out of the old mindset.

There is no better time to do that when someone has not only figuratively but literally changed the rules in your industry. And that doesn't happen in most industries except once every 50 to 70 years.

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