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Lean Banking: Managed Improvement in Financial Services

Posted by Jeff Roussel

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Dec 20, 2021 12:36:15 PM

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We often get questions about whether the Lean process improvement methodology can be applied in the financial services industry. Because of its manufacturing roots, many people assume that it doesn't apply to banking or other services-oriented sectors. However, because banking is very process-intensive, the Lean continuous improvement approach can generate significant operational improvement and waste reduction. That's why many financial institution organizations have implemented Lean in one form or another.

Opportunities and Challenges Related to Lean in Financial Services

For process-oriented businesses such as banking, Lean has significant potential. Cost reduction and fewer errors are just the tip of the iceberg. Banks that implement successful Lean programs often see a 15% to 25% improvement in overall efficiency. Reduced cycle time can result in a 30% to 60% improvement. Lean thinking can help leaders understand which customer segments are most profitable and where customer services can be enriched most cost-effectively.

With so much potential, why hasn't Lean banking been more rapidly adopted in the financial services industry? Unfortunately, many people readily accept that Lean is perfect for manufacturing but deny that Lean will work in their sector. But the truth is that finance is just a different type of factory. It's a factory that processes information, and there is a lot of waste. The principles of Lean do not change.

Becoming Lean involves minimizing the seven wastes in processes: overproduction, waiting, transportation, over-processing, inventory, defects, and motion. It also means maximizing human potential. People practicing Lean are trained to spot and eliminate wasteful practices. As a result, unnecessary steps are managed away, and the entire flow becomes more efficient. When waste disappears, processes happen more quickly, and costs go down.

Another essential part of the Lean philosophy is to focus on what matters to the customer. If a process or activity doesn't deliver value for which the customer is willing to pay, it should be eliminated if possible. Understanding what provides value to customers isn't always easy, especially when employees are isolated from the frontline. It is easy for people to develop ideas about what is essential to the customer based on an incomplete understanding or limited knowledge. Lean thinking helps solve this by eliminating silos and examining the flow of value from a broader perspective. Customer satisfaction is a key performance indicator for Lean organizations.


[Watch Now] How to Leverage Lean for Long-Term Success

 

Evolving Mindsets

Although Lean involves reducing waste, it isn't only about cost-cutting. It's about changing the way that people work. While the basic ideas may seem obvious, following through with them is more complicated than it may seem. It's similar to your diet. You probably have an excellent idea of which foods are healthy and nutritious; it's not hard to know. Sticking to the stuff that's good for you consistently, on the other hand, is hard to do. Habits are hard to break.

Some of the resistance to Lean in financial services has to do with its manufacturing origins. Executives sometimes equate Lean to "dumbing" down a job. Still, others think that Lean requires standardizing every element of a process, but it's actually about getting more intelligent about what you do.

In reality, becoming a Lean manager requires innovative thinking. For example, the steps of a financial process are usually performed in sequential order, even though they could be done in parallel. Instead of applying an assembly line methodology, many cycles can speed up dramatically if a race-car pit crew approach is used instead.

Changing the mindset often exposes a significant amount of waste. In their work, Matching Supply with Demand, Gerard Cachon, and Christian Terwiesch found that only 40% of the work that went into underwriting loans added any value at one large consumer bank. The rest was wasted on unproductive tasks such as processing old loan requests that were unlikely to be accepted by the customer or processing loans that would be rejected because of the applicant's credit score.

Value stream mapping has enormous potential in the financial services sector. It involves visualizing each step in a process and how it connects with every other step. Once the current state is well understood, process operators and leaders can look for gaps or unnecessary steps that might be targeted for elimination.

Another factor driving the adoption of Lean in financial services is the availability of Lean software that allows organizations to measure the impact of improvement work in hard numbers that leaders in banking like to see. For example, you can measure and report on cost reduction, customer satisfaction, processing times, and other KPIs that are important to the organization's goals with the right technology.

Minimizing Risk in a Culture of Change

While extremely useful, the Lean approach is not risk-free. As systems become more efficient, quality control and risk management must improve as well. One defect can quickly snowball into a much bigger problem in a system with little slack. In the same way that Lean manufacturing encourages organizations to operate on a zero-inventory basis and sure that parts from suppliers will have zero defects, banks practicing Lean must have strict quality controls. Standardization improves operations by reducing errors and reducing exposure.

The key to reducing risk in a culture of constant change is ensuring that change is managed and implemented thoughtfully. Lean software helps by creating a repository for knowledge and a dashboard for tracking many current efforts to innovate.

The first step to risk management is implementing standard work. When the current best practice for each activity and process is documented and communicated, you form the foundation upon which change can be built. The standard is only adjusted after a completed improvement cycle such as PDSA.

Another risk mitigation approach is strategy deployment. When every employee is clear about the organization's strategic direction and understands how their work relates to the most critical breakthrough goals, they are better positioned to make good decisions and embark on improvement projects that move the organization closer to its primary objectives.


Major Strategy Dashboard

 

Lean Puts People First

While the Lean theory is pretty simple, the execution is complicated because it's a people process that requires a significant shift in the culture and the way activities are managed. Although Lean may seem like an operations issue, it's really a management practice that requires organizations to interact with workers in new, unfamiliar ways. For example, the Lean principle of engaging employees in improvement means that workers involved in a process must be asked how it could be improved. The people dimension of Lean can not be an afterthought. Changing the way people behave must be addressed from the start. Employees are more likely to resist change if they don't know how to help improve the process and understand how their efforts equate to value. Lean works best as both a top-down and bottom-up effort.

One common Lean practice that centers people is the Gemba Walk. Leaders go to the workplace to observe, ask questions, and show respect. Changes are not made during the Gemba walk. However, if an opportunity for improvement is identified, an improvement cycle may be started at a later time.


[Watch Now] Components of an Employee-Led Lean Initiative

 

Lean must be tailored for the banking industry, but the fundamental principles hold. When organizations have a common goal, a well-defined set of expectations, and executive commitment, they are well-positioned for success.

Topics: Lean, Improvement Process

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