Going ‘Lean’ Can Boost Efficiency

CU360
March 5, 2010 | COMMENTS

The financial services sector has been slow to adopt “lean” practices during this recession, perhaps thinking those practices apply only to the manufacturing sector. But those attitudes are slowly changing, and more financial institutions are discovering the benefits of lean operations—lower costs, fewer errors, and greater efficiency.

For process-oriented industries such as financial services, lean practices hold potential. Financial institutions often see a 15% to 25% improvement in efficiency, according to a recent report from Knowledge@Wharton and the Boston Consulting Group (BCG).

Given this potential, why haven't more financial institutions adopted lean practices? Human nature often blocks progress, according to Christian Terwiesch, a professor of operations and information management at the Wharton School—the University of Pennsylvania's business school.

Most service companies tend to be in denial that lean practices apply to their industry, Terwiesch says. Typically, everyone agrees it's great for manufacturing, but they don't think it applies to their business. It's not until something happens—perhaps a competitor shows success with a lean approach—that managers concede that lean could work.

In fact, lean for manufacturing and lean for finance are not all that different, says Deepak Goyal, a BCG partner. “Finance is just a different kind of factory. It's a processing factory, and there's a lot of waste. The basic philosophy doesn't really change.”

Becoming lean involves eliminating the “seven deadly sins” of waste in a process:

1. Overproduction.
2. Waiting.
3. Poor logistics.
4. Over-processing.
5. Sub-optimal inventory control.
6. Rework.
7. Unneeded movement.

People exposed to lean thinking are trained to see and remove these wasteful practices. As superfluous steps are managed away, the process becomes more efficient. Waste begins to disappear, speed improves, and costs drop.

Another key principle of lean is to focus on what matters to the customer, and what delivers value. Almost everything else should be cut. But understanding what customers value isn't always easy, especially when functional silos isolate employees from the front line or the marketplace.

Changing Attitudes

Lean thinking is nothing new, but more financial institutions have talked about it than actually tried it. A common mistake is to cut costs without undertaking an actual lean program. "Lean isn't simply about cost cutting, it's about changing the way you work," says Christophe Duthoit, a BCG senior partner.

Some finance executives mistakenly think that lean requires standardizing every part of a process. “It doesn't—it's really involves getting smarter about what you do,” Duthoit says.

In fact, getting lean often requires creative thinking.

When paperwork moves online, for example, the steps of a financial process are often still performed in a sequential order, even when they could be done simultaneously. So forget the assembly line approach and start thinking more like a race-car pit crew, and process speed can improve dramatically.

Managing Risks

Like any major improvement effort, lean is not risk-free. As systems grow more efficient, quality control and risk management must improve along with them.

Financial institutions with lean operations must put in place strict quality controls. In particular, automatic systems must be watched closely to ensure they don't exacerbate a difficult market by, say, withdrawing credit at the wrong time.

But Goyal believes that lean most often reduces risk. "Lean is one of the very effective ways to actually mitigate operational risk, much of which arises from errors at the front line," he notes. By standardizing processes—cash reconciliations, for example—and empowering front-line people, managers can cut risk and reduce errors.

The best way to start a lean program is to map an entire end-to-end process, then look for ways to streamline it. "Focus first on some pragmatic, easily implemented, and meaningful applications of change," says Duthoit. "Once these are shown to be a success, you can build momentum. It's not a sprint, it's a marathon."

The execution of the change is complex because it's a people process, and it requires a big change in the culture and in the way executives manage activities.

Although implementing lean practices begins as an operations issue, it quickly becomes a change-management exercise that requires management to deal with employees in new, unfamiliar ways. Employees involved in a process must be asked how it might be simplified or improved. "You can't just implement change and worry about the people dimension later," notes Duthoit.

Be sure to engage employees early on. "Lean initiatives work best as a balanced top-down and bottom-up effort," Duthoit explains. The organization needs to share common goals and expectations of what the lean program will deliver. Encourage employees to share their ideas. Let them know they should drive the definition, testing, and validation of the new process.

Done right, lean isn't a one-off project—it's a pervasive approach to operations that brings lasting cultural change. It transforms the way employees view their work by encouraging them to continually think about ways to improve it.

Limits of Lean

Lean has its limits. One of the challenges of adopting a lean approach in a service business is that the customer becomes much more closely connected to what's being produced. In effect, the customer is often the object moving through a service process, and that complicates matters.

For many financial institutions, the first item on the lean agenda might be to increase value and productivity during a merger. As business units or whole enterprises face integration, it's an opportune time to look for next-generation efficiencies in operating models and work processes.