Profiting from |Best Practices' Analysis
More and more bank executives are finding significant value in looking at the "best-practices" concept of performance measurement.
The concept has the benefit of being simple and straightforward while offering a remarkably powerful management tool.
Equally valid for a wide range of retail and wholesale businesses, the best-practices theory can be illustrated in the context of branch banking.
Initially, best practices requires determining the key "drivers" of performance, quantifying the drivers, and then comparing individual performance, first within your own bank, then with performance at other banks and, possibly, at nonbank competitors.
Benefit of Others' Ideas
The ultimate benefit is in examining how different organizations do similar tasks and sub-tasks and, to the extent possible, adopting the most successful approaches in your business.
For example, in examining branch productivity, two cost drivers - the number of transactions per teller and teller expense per transaction - are among those that should be quantified.
In one instance when we benchmarked and ranked each branch's performance at a particular bank, we found a gap greater than 25% between the best and worst performers. Tellers in the best branches were processing, on average, 25% more transactions than those at other branches.
Clearly, quantifying and ranking performance is simply the first step in this process and, often, the easiest part.
The focus must turn quickly to developing an understanding of why the variance exists and what management can do to close the performance gap. What are the controllable factors that management can change?
Examining Elements, Practices
This step requires picking apart the elements that effect performance. In most cases, including teller efficiency, there are simply not that many different controllable elements to examine. They include: the staffing mix between full- and part-timers, intraday staffing policies, and type of person hired.
Identifying the practices used to influence controllable elements of the performance mix, and evaluating them based on quantified benchmarks, helps focus on potential changes.
In addition, some factors (for example, location or branch throughput) cannot easily be changed. However, if working with the controllable variables fails to change a branch's below-par performance, that may indicate a more basic problem within a branch and with its long-term value to the bank.
Another key part of this process is quantifying the bottom-line impact of moving subpar performers up to the average and moving average performers up to best practices.
Increasing teller efficiency leads to a defined range of dollar savings. That could mean a meaningful improvement in the branch's bottom line and, ultimately, the parent bank's profit.
A best-practices analysis within a branch or across regions requires examining multiple areas, not only teller and platform productivity but also deposit volumes, deposit and loan pricing versus the market, fees generated, and so forth. Depending upon the bank's organizational structure, eight to 10 key numbers can usually be focused on.
However, eight to 10 numbers or areas are simply too many.
Quantifying the potential savings or the revenue that can be increased, or both, from performance improvement in each area is an essential part of making this process work.
Showing the clear dollar impact of changing the performance of each driver focuses management attention on the high-payoff areas that merit a spotlight.
That sets a clear target for the bank's action plans to focus on. And depending on the situation, it can be a key element in creating incentives to achieve the desired changes in performance.
Getting Employees to Buy In
But without a goal-setting and action-plan step, a best-practices approach will be viewed internally as an academic exercise and not as a valuable management tool. Therefore, follow-up and institutionalizing of this process are essential.
That said, goals must be realistic and, initially, even a bit modest so that managers and staff buy in, experience some successes, and come to believe that best-practice performance is attainable rather than pie in the sky.
One of the most exciting aspects of examining best practices comes from the opportunity to look outside your own bank at how other institutions are doing similar tasks. The process is much the same as that used internally: collecting key revenue and cost-related performance statistics and then "peeling back the onion" to understand why differences exist.
The typical concerns about obtaining external information are twofold: First, how do you get competitors to share information? Second, how can you assure the comparability of data?
Obtaining the Figures
Not-surprisingly, getting numbers from direct competitors is unlikely to happen; understandably, banks are concerned about confidentiality. Nonetheless, industry associations, special-interest groups, and consultants can all be information clearing-houses. In effect, they "sanitize" numbers and maintain privacy.
Furthermore, banks operating outside your market are usually less reluctant to share data.
Again, not surprisingly, comparability of data is a tremendous problem; no two companies categorize their activities the same way. All too often, comparative statistics fail to be valuable. The problem can be addressed by carefully crafting the data collection process. The value of information gained from a mass mailing questionaire is doubtful.
In many instances, however, the spotlight may be shifted from a comparison of numbers to a process or organizational-structure comparison.
For example, when comparing teller performance across multiple institutions, we should focus attention on staffing, hiring, and management practices of the various banks to truly understand and learn from different approaches.
Issues to consider include:
* How are tellers given incentives to stay with a bank?
* What types of people have been found to make the best employees?
* How can a staffing hub-and-spoke system be instituted to maximize flexibility.
Looking at how others approach these issues can lead to very real performance improvements.
The intent here is not to suggest that, by following this process, you can or should become exactly like a competitor. Culture and tradition, among other factors, are clear barriers to that.
In addition, market differences prevent the complete adoption of some practices developed out-of-market. Nonetheless, many approaches and processes can be adapted and made part of your own bank.
A best-practices approach can be instituted across your bank, no matter your asset size or product complexity.
Results on Profit Line
The branches, processing centers, and lending teams within your bank perform differently. Coming to a detailed understanding of why performance varies should not be considered unnecessary or "a nice thing to do sometime."
In an increasingly competitive environment, making this approach part of the way your individual business or overall bank manages will establish near-and long-term goals for continuing improvement. And achieving that improvement, in turn, will generate more profit.
Mr. Wendel is vice president of Strategic Planning Associates Inc., New York.