We often get questions about whether the Lean management 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 approach can generate significant operational improvement and waste reduction. That’s why many financial services organizations have implemented Lean in one form or another.
Opportunity and Challenges
For process-oriented businesses such as banking, Lean has significant potential. Reduced costs and fewer errors are just the tips of the iceberg. Banks that implement successful Lean programs often see a 15% to 25% improvement in overall efficiency. Reductions in cycle time can result in a 30% to 60% improvement. Lean thinking can help leaders understand which customer segments are most profitable and where services can be enriched most cost-effectively.
With so much potential, why hasn’t Lean 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. 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 front-line. 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.
Although Lean involves reducing waste, it isn’t only about cutting costs. It’s about changing the way that people work. While the basic ideas may seem obvious, following through with them is more difficult 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 smarter about what you do.
In reality, getting Lean 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.
While extremely useful, the Lean approach is not risk-free. As systems become more efficient, quality control and risk management must improve as well. In a system with little slack, one defect can quickly snowball into a much bigger problem. In the same way that Lean manufacturers that operate on a zero-inventory basis must be sure that parts from suppliers will have zero defects, banks practicing Lean must have strict quality controls. Standardization is the key to reducing errors and reducing exposure.
The key to reducing risk in 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.
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 they can help improve the process and understand how their efforts equate to value. Lean works best as both a top-down and bottom-up effort.
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.