Believe it or not, bankers consistently turn up their noses at an opportunity to reduce operating expenses by 30%, delight current customers, and attract new ones.

The missed opportunity: quality. Too many banks have declined the opportunity to invest in their own infrastructures and, by doing so, obtain better communication, flexibility, and responsiveness.

Bankers have yet to accept three important facts: Quality is quantifiable, goes well beyond customer service at the teller level, and is as applicable to banking as to widget-making.

Expense of Shoddy Operations

The costs of poor quality are real and staggeringly high. Estimates of these costs range from 25% to 50% of noninterest expense. Most say the figure is around 30%.

These costs are found in inefficient processes; duplicated activities; complicated review procedures; communication breakdowns between functions, departments, and management layers; and in the general orientation toward departmental goals rather than the elimination of mistakes.

Imagine the impact on profitability of adding that 30% of noninterest expense back into earnings. Think further of the impact on stock price and shareholder value. The successful bank has virtually assured its independence or, if preferred, acquisition at a premium.

Studies show that more than 40% of bank customers who leave do so because of poor service.

Bankers must realize that service goes beyond customers interacting with tellers and loan officers. It is also what happens - or doesn't happen - in the back office, where statements are prepared, transactions posted, paperwork processed, and decisions made.

A typical unhappy customer will tell 10 to 12 people - 13% will tell 20 people - about his or her troubles. If the customers cannot be brought back, the downward spiral of poor quality begins. It initially manifests itself in high customer turnover, which in turn produces lower profit margins.

Lower margins mean lower bonuses, less in the 401 (k) plans, and layoffs, all of which affects employee morale. As employees leave - and it is usually the best employees who leave first - quality and customer service deteriorate further.

Satisfying customers - anticipating and exceeding their expectations of excellent bank service - starts a spiral of another kind.

And long-standing customers tend to buy more of a bank's products than new customers. The opportunities for cross-selling and generating additional fees from the same customer base are greatly enhanced.

And of course retaining customers means you avoid spending money trying to win them back or others to replace them. And a happy customer tells, on average, five people.

The merger-and-acquisition environment of banking makes efforts to enhance quality especially worthwhile.

The customer-driven, high quality bank will have a much greater chance of keeping its own customers during the crucial transition period of a merger. Such a bank would also have an excellent chance of luring customers away from banks in the process of mergers and acquisitions.

There are many reasons for embracing a strategy of quality improvement. Banc One Corp. is, perhaps, the classic example of a bank that launched quality programs in response to a crisis.

The Savings Bank of Utica, N.Y., on the other hand, has long been pursuing many aspects of quality improvement, such as customer service and process engineering, and simply pulled them all together under an umbrella of total quality.

Elements of Success

Most experts agree that there are four key elements of a successful quality improvement strategy: top management commitment, employee involvement, a structured approach, and a mechanism for incorporating the strategy into the fundamental operations and culture of the bank. All four are necessary, but the most important of them is the commitment by the management team. And this commitment must be sustained even when third-quarter profits are down, loan reserves are up, or the economy slumps.

Only a handful of banks are actively pursuing a quality improvement strategy, despite the proven benefits.

But as many will attest, it's not an opportunity to be missed.

Ms. Gray is managing director of Value Concepts Inc., Los Angeles, a bank consulting firm.

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