It is high time for smart CAPEX in Bank Operations (back offices)
November 6, 2018 Ivan Bulajic - Executive Director of Operations, Société Générale
Over the last two decades, technology advances have had a major impact on banking. But, not all bank functions have participated equally in this rapid evolution. Investment in new technologies has historically been more evident in front-end systems (CRM, e-banking, branch automation etc.), rather than back office functions. It was a matter of management focus. However, in the environment of eroded interest rate margins, competition between banks has changed, and so this focus has to. Loan and deposit interest rates, traditional front office levers to drive profitability, no longer represent the main decision factors in how corporate clients choose between banks. Factors like the quality of human relationship between bank’s relationship managers and corporate leaders, as well as daily banking service (operations) excellence, count ever more. So how did this change impact Operations in banking, and related bank strategies?
A bit of history
A few years ago, the natural kneejerk response of CEOs to slowing credit demand, exploding NPLs and reduced ROE resulting from the financial crisis, has been to put pressure on Operations (back office) managers to slash costs through quick-wins. Supplier contracts underwent aggressive renegotiations. The effect of whatever automation has been seeping through to Operations in the last two decades was harvested through immediate staff cuts. CAPEX has been set to “low burner”. More recently however, Serbian economy has shown signs of growth, stimulating the return of credit demand. But banking sector competition and price pressures remain, so simple solutions will no longer do. More sustainable efficiency gains are needed. The challenge now is to make sure that service quality increases, while costs continue declining, and it can only be done through significant investments in automation and digitalization of Operations, reversing the period of chronic underinvestment.
Get ready for smart CAPEX
But where should Operations managers start? I would say: corporate culture. In most large banks, Operations community corporate culture is inadequately inert, while teams are typically comprised of two very different generations. One generation are mature administrative staff that supply decades of experience and expertise. The other is a younger generation in junior positions, whose nature is more dynamic, but lacking patience and commitment. They are smart and confident, but find working in 9-to-5 administrative jobs just a stopover on the way to a more stimulating careers. The first group typically fears change and finds comfort in status quo, while the second lacks motivation to drive change in traditional structures. Although the second group is naturally getting larger at the expense of the first one, together they form a powerful mix. All they needed is some hands-on leadership to light the spark of change. Here are a few simple tips I found useful:
Don’t compromise on key managers. It is hard enough going through cost cuts with old generations of technocratic managers, try asking them to dream-up game-changers. It is in their nature to resist change and overcomplicate decisions creating an illusion of indispensability. Put brave and energetic leaders in key management positions quickly.
Talk directly to clients. No really, talk directly to clients. Far too often, Operations people are isolated, or at best focused solely on „internal clients“. There are two problems with that. One, we bankers can be incredibly stubborn in thinking we know precisely what our clients need, and too full of ourselves to have real „come to Jesus“ meetings with them. Second, when under pressure of not achieving commercial targets, front offices do not always resist the temptation of the blaming game to justify poor results. They will complain on the quality of all back office services, even those which clients consider okay (or non-critical), disorienting Operations managers in prioritization. Make sure your people see clients and talk to them in a meaningful way.
Ask why. Walk around your teams, sit next to young officers doing through their everyday tasks on autopilot, and ask one simple question: Why are you doing this task, and specifically why in that particular way? My experience is that in 90% of cases you will get the same answer „That is the way it has always been done“. Push them to think of a new, simpler way that utilizes technology. Whether it is just a new macro in Excel, or a completely new tool, it doesn’t matter. Then empower them to see it through to implementation personally, but make sure that the rest of the organization knows you are supporting them with your full authority. These youngsters like being challenged.
Reward ideas and actions. Every human activity is a result of internal motivation. Yes, some people will propose creative new ways of doing things more efficiently simply because it is in their nature (and that’s the kind of people you should be hiring). But for the rest of them, think of a reward system. A mix of monetary and non-monetary rewards work best in my opinion. For example, set a rule of paying out 5% of net efficiency gain to the employee(s) who proposed an idea and saw it through to implementation. Put your money where your mouth is! Although I am convinced this is money well spent, companies are too often stingy on sharing profits with employees. But also, follow it through with non-monetary stuff, like public recognition, dinner with the management, company newsletter etc. Make sure others hear about the innovators.
Make good things happen to innovators. If a junior team member repeatedly comes up with creative ideas that result in efficiency gains, make sure they are right on top of your promotion list. Even give an immediate, ad hoc promotion, it will turn out great and set example for others to follow. Experiment.
Open-up your organization. Working in the same role on same activities for a prolonged period of time (as it is often the case with Operations staff) can result in creativity myopia. Fresh blood in your ranks will help, but look wider than your organization by, for example, creating open days for tech startups. The rationale is that young tech startup companies know far more about how different technologies can help you than you ever will. But what they don’t know is banking and its challenges. Open up your doors one day a month/quarter, when any tech startup can walk inside your offices and talk to your teams about their jobs. Just like you are asking your team members why they are doing things in a particular way, only techs will themselves think of how to do it more efficiently using advanced IT tools.
And what about the mature administrative-type people? Use them to screen developed (not early stage) ideas, in a controlled environment. They are good at saying why something will not work, learning from past mistakes and reverting to their huge experience. They will have a better eye for details. Use this experience to fine-tune ideas, and avoid pitfalls.
These tips will start transforming your organization. It will make workplace more stimulating and fun for your teams, and steer-up their energy for change. Soon enough, ideas will turn into better service and reduced OPEX. Most importantly, it will result in proud salespeople and satisfied clients.