Lean 2.0, to the rescue of banking back offices March 2016

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Bank transfers in a single click

mobile payments,

personalized online offers,

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…are some of the many experiences offered by banks to fulfil the expectations of their customers.

But how do they go about satisfying these customers when check deposits or loan approvals require processing time which is reminiscent of the “paper only” years?

“An answer to this problem….Lean 2.0”

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‘Back offices’, differentiators of tomorrow’s retail banking � The competition from new entrants such as online banks

and the proliferation of new technologies have pushed banks to develop their physical and digital distribution channels, sometimes at any cost. The initiatives have multiplied: online assistance provided by virtual advisors, implementation of electronic signature at bank branches (BPCE group), development of easy to use and ergonomic mobile applications… So, what is the objective of these brands? Their goal is to meet the increasing demand for instant gratification / immediacy so as to capture new customers and to increase customer loyalty, but also to harness the data collected in order to develop dedicated and personalized offers. Thus, in June 2013, “Crédit Agricole” (a major French bank) launched the “e-immo” (or real estate) online platform in order to facilitate

and speed up the process of subscribing to a housing loan by providing an instant response, given by the regional branch of the Internet user’s catchment area.

� These initiatives have mainly been driven by marketing strategies aiming to “always offer a little more” (in terms of response time, accessibility, etc.) to customers, and have therefore, focused on developing customer interfaces (the ‘front office’). However, it’s difficult to honour these “new customer promises”: thus, although it’s possible to stop a cheque in 2 clicks, the customer may have to wait for more than a week to receive his / her new card. The customer experience thereby gets impacted even in this day and age...

However, alongside developing their ‘front offices’, banks have also embarked upon back office transformation programmes for over 10 years now. This transformation, driven primarily by the desire of achieving significant economies of scale was carried out in 2 stages:

1. Concentration of operations around a restricted number of ‘service delivery’ centres (sometimes combined with off-shoring), combining size and critical mass to reduce costs.

This movement was carried out around 2 dimensions, which were often combined:

� A strategy of having specialized back offices by business function,

� A strategy of grouping activities by geographical area – national or international

2. Industrialisation of operations, relying mainly on operational consolidation and task automation.

Depending on the banks’ past practices and the transformation strategy chosen, this common momentum has led to multiple organisational models. Today, the strategy of pooling operations, particularly off-shoring, is being continued, but at a slower pace (social impact, ROI not significant enough compared to the efforts to be invested, etc.).

Dimension 1: Specialisation by business function1

Banking back offices specialized by business function

Back office: securities processing

Geographical zone 1 Geographical zone 2 Geographical zone A

Geographical zone BGeographical zone 4 Geographical zone 3Back office: bank credit

Multi-functional banking back offices

Dimension 2: Pooling by geographical area 2

Banking back offices centralized by zone

Regionalized banking back offices

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‘Back offices’, differentiators of tomorrow’s retail banking

� Despite these changes and the numerous performance improvement programmes carried out, back offices today are still not in a position to fulfil the “promises” made by the ‘front-office’. As a result, competition among retail banks is constantly changing and is “knocking at the door” of back offices... In fact, while the main differentiator for banks lies in the quality of service provided, back offices are at the heart of the value chain since they are the ones who “deliver” these services: they are accountable for processing customer requests not only in terms of the response time, but also in terms of the quality of service provided (providing an appropriate response to each customer while integrating his / her specific requirements). Moreover, as the ones “in charge of delivering” services, banking back offices should have the required flexibility to adapt themselves to the rapidly and constantly changing customer demands. In this sense, banking back offices are the differentiators of tomorrow’s retail banking…

There is a real disconnect between the front and back offices

Assessment Our recommendationsAn overall transformation approach is required to deal with this disconnect

Banking Back Office

Lean Management & digitization(Lean 2.0)

Banking Front Office

Banking Back Office: outdated tools, lack of flexibility, very high processing time

Banking Front Office: digital, agile and quick

� In order to deal with the challenge of “instant gratification”, retail banks must fundamentally change their banking back offices from a structural point of view based on multiple levers: updating information systems, process optimisation, task automation, changes in the organisation and governance, ramping up the skills of their employees, etc. In this sense, it is essentially an overall transformation project, and this alone will enable retail banks to “stay in the race” in an environment which is increasingly competitive.

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� In this context, Lean Management 2.0, a combination of Lean Management and the possibilities offered by digital technologies, seems to be a success factor for these projects:

It integrates the cultural dimension of transformation, relies on “field intelligence” in order to build and sustain the identified solutions, and is enriched by the possibilities offered by digital technologies so as to augment the ‘transformation capacity’ of organisations by facilitating disruptive innovation…

Lean 2.0 thus helps overcome the opposition that prevailed up until now between operational optimisation programmes on one hand and digital programmes on the other.

Until now, operational excellence projects considered IT Systems mainly as an obstacle to performance. How many Lean projects have been carried out to “simplify the process of retrieving data from complex legacy IT systems”? At the same time, digital tools were deployed without involving business teams, with standard processes that were not very flexible, and often far removed from operational reality. Worse still, these two types of projects often succeeded one another… Which bank hasn’t undertaken an optimisation project for 6 months and has later decided to deploy a new workflow tool for the said process?

On the contrary, Lean 2.0 is based on the possibilities offered by digital technologies at 2 levels, resulting in :

- Increasing the relevance of the operational assessment and increasing the impact of the solutions chosen Digital technologies and ‘big data’ have now made it possible to harness the data accumulated by companies on a large scale and to thus facilitate the exercise of carrying out an operational assessment: identification of bottlenecks, processing delays, understanding the expectations of internal and external customers, etc. Furthermore, other solutions of mass data processing (Proxem) and process performance simulation (OnMap) can also be used (especially) to simulate the impact of the identified solutions before deploying them.

- Leveraging the digital lever as an optimisation lever in its own right (in addition to the operational, organisational levers, etc.) in a bid to

improve process performance The deployment of tools not only helps simplify and optimize processes (task automation, digitization of operations, reduced wait times), but also helps strengthen activity and performance monitoring and makes teams more agile (for example, ‘predictive analysis’ tools have now made it possible to anticipate the upcoming workload and to achieve significant gains through better resource allocation).

� But today, the industrialization of back office activities, which relied heavily on the possibilities offered by IT systems (workflow tools, EDM, etc.), is now facing two limitations: a high degree of obsolescence of IT systems and the inadequacy of interfaces between the front office and the back office. These limitations therefore require that banks reinvest in a new breed of IT tools to facilitate the processing of operations. Thus, the transformation of banking back offices depends on the digital lever.

� New solutions offered in the market help optimize processes significantly. For example, they can be leveraged to optimize documentation processes which have become particularly complex with the growth of multi-channel strategies; this can be achieved by using unified platforms for acquiring, processing, storing and distributing documents. These solutions will enable banks to achieve gains (mainly in terms of quality and processing costs) with relatively quick returns on investment (for example, the ROI of a “standard” electronic invoicing project takes less than one year).

� While the digital lever is essential for the transformation of banking back offices, it is not enough, explains a Back Office Manager of a major French bank. “The implementation of a new tool for the recovery process enabled us to cut down the processing time by 30%. However, with the automatic task allocation system, we lost the overall visibility of our processes and the versatility of our managers”. Merely being content with setting up tools for existing processes: that is the pitfall to be avoided when digitizing your back-office.

� This transformation, driven by Lean 2.0, relies on the synergy of 2 additional levers for the digitization of processing operations: the optimisation of ‘front to back’ operations… supported by a “de-siloed” and “agile” organisation.

An overall transformation driven by the Lean 2.0 approach

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Lean 2.0 or what can be done to optimize ‘Front to Back-office’ processes � Transforming banking back offices on the

basis of Lean 2.0 requires a paradigm shift: transforming operations throughout the value chain.

� The transformation of back offices in a bid to speed up the processing time only makes sense if operations throughout the value chain are considered: from acknowledging the customer request until the delivery of the service / product. ‘Crédit Agricole’ carried out this exercise for the subscription and approval of housing loans. It’s by analyzing the process in its entirety that they could come up with disruptive solutions: the “e-immo” (or real estate) platform, instant responses, call backs through a shared platform which has all the data…

� Analyzing the entire value chain also provides an opportunity to “balance the workflow and the associated workload”. Too often, the work carried out on optimizing only one part of an activity ends up obstructing the upstream or downstream stages of the process. It is this paradigm shift that the solutions chosen by Axa (Mon Axa) or by ‘Crédit Agricole’ fully exemplify (PacifiCA): for example, after analyzing the claims handling process in its entirety, we could find ways of reducing the declaration time. Henceforth, it is the customers who take care of this via an application available on their Smartphones!

� If the approach is a disruptive one, the results are even more so. From a goal of achieving productivity gains of about 15% by applying a “classic” approach to operational optimisation, we can henceforth see gains of up to 40%. A major French bank achieved similar results by adopting Lean 2.0 to improve its cheque encashment process. “The cheque processing process had been improved over and over again, but without ever considering the problem from a cross-functional perspective” says the Director of Operations. Thus, even

though scanning technologies were implemented in back-offices, cheques were still being transported in trucks from branches. This project helped optimize the entire process: from depositing a cheque at a bank branch to the amount being credited into the account. The result: a 40% reduction in the workload and processing time cut down by 30%*. How was this possible? By identifying low value-added steps throughout the process and implementing digital levers in a bid to optimize ‘front to back office’ processes.

Does the transport of cheques impact the timelines? Are there dedicated employees within the back office for scanning these cheques? Most of the cheque deposit boxes at bank branches were replaced by automatic machines that directly scan the cheque at the time of deposit. This cheque is then processed automatically in an integrated application within the back-office. The result: the cheque is already in the process of being encashed while the customer has not even left the branch! “Even though we continue the process of archiving paper cheques for legal reasons, this physical flow is henceforth completely desynchronised from the encashment process”. Back-office employees only get involved in very rare cases where the IT system is unable to process cheques automatically. The resources allocated for this activity were cut down by half and we could redeploy these employees to other remote banking activities that are on the rise.

* Results obtained for the boxes replaced by automatic machines

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� Process optimisation, within the context of a ‘Front to back office’ strategy, would not be able to bring sustainable gains without an organisation and managerial engagement that support it. Given the current practices, it is necessary to ‘break down silos’ and to make banks ‘more agile’, not only within banking back offices, but also (and perhaps especially) between the ‘back office’ and the ‘front office’. Here again, Lean 2.0 provides disruptive and sustainable solutions.

Instil ‘cross-functional management’ within the organisation

� Matrix management involves “steering and managing resources that belong to different reporting structures, but are pooled as part of a common activity or project. Matrix management, a technique that appeared in the late 1980s, did not however achieve the desired results because it was never instilled as part of governance nor as of part of the managerial culture. “In principle, everyone agrees, but in reality, we work in silos and we all have objectives that are restricted to our respective perimeters, and which are sometimes even contradictory…” reveals a BU manager.

� However, in an unstable and changing environment, matrix management provides the agility needed to maintain service quality and to achieve our performance goals in the long term. This ambitious management technique is based on 3 key principles:

- Assigning a limited number of common and shared objectives to all employees involved in ‘front to back office’ processes

“We carried out a quality improvement initiative for improving the quality of requests forwarded to us by “upstream” teams. The results were far beyond our expectations: +40% of the requests processed were “first time right”!”. This was only possible because we were all assigned the same objective, i.e. the total time taken for processing requests” says a team leader.

- ‘Workload & capacity’ management on a regular basis to secure the “handling capacity of teams” for the entire process.

Here again, digital technologies offer new possibilities: (without even going as far as big data and business planning capabilities based on predictive models) there are new tools that can be used to manage resource allocation live based on upcoming activities and the available capacity.

- Management by results of ‘front to back office’ activities, along with the teams in a transparent manner.

Activity management, particularly that of ‘front to back office’ processes, should be carried out with the teams involved. It is the only condition that helps unite teams around a common activity; you will come across difficulties, but you will also meet success! And the use of digital tools now makes it possible to overcome the difficulties faced frequently: distributed delivery teams, work from home, etc. “My team’s interactive whiteboard not only displays our performance in real time, but also that of the “upstream” teams that we work with. This allows me to manage and track the activity in real time without losing sight of the overall picture and thus enables me to coordinate with the other teams” recounts an Operations Manager.

� And the results are as expected, explains a member of the leadership team, who deployed this approach in a French bank: “Even though it wasn’t easy at first, the implementation of these principles enabled us to focus our energies towards achieving a common goal while setting aside our “individual differences”. We thus managed to reduce the processing time of customer claims by 25%”.

Lean 2.0 or what can be done to ‘break down silos’ and to make banks ‘more agile’

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Lean 2.0 or what can be done to ‘break down silos’ and to make banks ‘more agile’Accelerate the ‘time-to-solve’ (the time required for resolving problems)

� Several organisations fail to initiate a virtuous cycle of continuous improvement to sustainably improve their performance because the time consumed between identifying and resolving an operational problem is too high. Consequently:

- When solutions are actually deployed within teams, they no longer address the given situation (the organisation may have changed, the processes may have changed, etc.);

- The teams involved in resolving the given problem get demoralized and little by little start questioning the continuous improvement drive.

� To get out of this rut, banking back offices need to increase their ability to resolve problems by sharing a common methodology, based on an approach of ‘short testing cycles’ and on their ability to involve “experts” for each problem they face.

Lifecycle of an improvement project and main difficulties faced

Project launch Problem analysis Identifying and building solutions

DeploymentSustainability (ending the project mode)

Scope of analysis unclear “Conventional” solutions that don’t generate gains

Impact analysis carried out randomly

Results not being monitored

Deployment not brought to fruition

Lack of coordination with other projects

Superficial analysis of the problem

Lack of factual elements

“Experts” not involved in the project

Occurrence of the problem to

be handled

Difficulty in deploying within teams that are outside the project manager’s sphere of influence

Lack of sponsorship

Imprecise objectives

Examples of dif�culties faced

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Every day

Weekly A3 meeting

Daily / biweekly A3 meetings

Daily / biweekly A3 meetingsUpdate of operational

procedures

3 months to implement (on average)

Identify operational issues / opportunities of improvement

Every week

STATE OF MIND

A3 methodology

1

Implement and track benefits 5

Prioritize and implement improvement actions

2

Clarify the problem, align stakeholders on the objectives,

define the KPIs to monitor

3

As-is situation and solutions design

4

Solution identification

Solutions (re) prioritization

Results assessment

Solution implementation

Solutions adjustments

Solution testing

Solution detailed design

Testing plan

Solution testing

A common methodology : A3 thinking

Short testing cycle

Digitized solutions (VVM, Redpepper, obeya, etc.) are the answer: virtual analysis and brainstorming tools for conducting workshops remotely, virtual “obeya room” for monitoring the progress of A3 work streams… These solutions help overcome organisational barriers not only for investigating cross-functional issues, but also for deploying best practices within teams.

Experts mobilisation

This operational agility (linked to the mobilisation of “experts” and the testing approach) guarantees success, but requires a change in the company culture. In this sense, some people speak of “cultural agility” (the ability to question things and to explore new ways of doing things), which itself requires strong “managerial agility”… This agility can’t be partial / fragmented, and therefore, must be driven by a strong ambition for the entire organisation.

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Back office transformation is imperative for meeting the challenges of the market, largely driven by

the customer need for instant gratification or immediacy. The solution for this can not be partial… and

requires an overall transformation because it is digital, operational and cultural in nature. To face this

challenge, back offices can rely on a transformation approach driven by Lean 2.0 which combines all

these levers in a bid to ensure continuous performance improvement.

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About Capgemini and the Collaborative Business Experience

Capgemini Consulting is the strategy and transformation consulting brand of Capgemini Group. The information contained in this document is proprietary. © 2016 Capgemini. All rights reserved.

Valérie GitenayVice President Banking servicesCapgemini Consultingvalerie.gitenay@capgemini.com

Antoine GeninManager – Lean ServicesLean BankingCapgemini Consultingantoine.genin@capgemini.com

Bastien Jourdan Principal – In charge of Lean Services departmentLean BankingCapgemini Consulting bastien.jourdan-de-la-passardiere@capgemini.com

Cécile AndréVice PresidentBanking servicesCapgemini Consultingcecile.andre@capgemini.com

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