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Lean Banking

Lean Banking
By
Khaled Qayum SVP-CBG
Should we go lean? A lot of banks in the West are asking today. What does the word “Lean” signify? Does it mean getting rid of the employees?

Hardly! The word “Lean” or the “Lean Philosophy” has been adopted from the manufacturing industry, where it has been and is being used to effectively fight waste, improve operational efficiency, spark creativity and improve staff morale in the process.

Can the “Lean Philosophy” or what it entails be applied to banking, as these industries prima facie appear to be quite different in nature?

Yes, apparently so. At present many banks are applying the “Lean” philosophy or going lean.

The banking institutions originally were hesitant, skeptical and slow to take on the new way of thinking, as Lean thinking evolved in another industry. However, as knowledge knows no bounds and every organization craves efficiency, soon banks were joining the Lean bandwagon. A prime example is Bank of America (BOA), a large banking institution based in USA, where Lean was successfully applied.

BOA wanted to improve its quality of operations, improve customer satisfaction and thus become one of the leading banking companies in the world. It sought to implement a quality system that focused on customer needs and key business strategies. To execute its plan it came up with three point agenda.

• Focus the company on the customer by organizing around customer segments and aligning the company top to bottom, linking performance plans to strategic goals.
• Develop business process excellence by applying voice of the customer to identify and engineer the critical few business processes.
• Hiring six sigma trained professionals, getting the existing manpower trained in six sigma methodology and implementing the six sigma methodology across the businesses, eliminating waste and variation / errors in core processes.

In its first two years, Bank of America’s quality system reported the following results:
• The CEO and executive team contributed $75 million in Six Sigma annualized productivity benefits.
• Customer delight was improved by 20%, and the Bank added 2.3 million customer households.
• 1.3 million fewer customer households experienced problems – down 29%.
• Stock value increased by 52%.
• Bank of America has had ten quarters of increasing earnings per share – up 29% since 2002.
• 2002: Bank of America named Best Bank in the US and Euromoney’s World’s Most Improved Bank.
These are excellent results to boast about. What after all is Lean? What after all is six sigma, if not some obtuse statistical jargon?

“Lean Principles” have been distilled through years of manufacturing management practices on the shop floor. A number of these principles originated in West, were perfected in East (Japan), imported back to West. The “six sigma” methodology which today has been accepted world over both as shop floor practice and also as management strategy was first introduced by Bob Galvin the Chief Executive of Motorola. The same philosophy was popularized by Jack Welch the legendary CEO of GE, who implemented it in GE and made it a part of the GE culture.

Sigma, originating from Greek, is commonly used as a measure of variation. The word is a statistical term that measures how far a given process deviates from perfection. The central idea behind Six Sigma is that if you can measure how many “defects” you have in a process, you can systematically figure out how to eliminate them and get as close to “zero defects” as possible. To achieve Six Sigma Quality, a process must produce no more than 3.4 defects per million opportunities. An “opportunity” is defined as a chance for nonconformance, or not meeting the required specifications. This means we need to be nearly flawless in executing our key processes.

Are Lean Principles part of the Six sigma methodology? Not so. It is other way around. “Lean” includes a number of other principles and techniques. Primary approach to Lean thinking is the customer orientation. According to the Lean, business processes are to be designed / engineered with the customer in mind. The Customers include both external and internal customers. All members within the organization are considered Customers. Each team member and each department as a corollary within the organization is a customer of some other team member and department. A quality organization measures quality in terms of Customer Satisfaction. Hence, the external customers’ satisfaction cannot be achieved if the organization’s team members have a high degree of dissonance. Similarly, if the external customers’ needs are unsatisfied, the organization’s days are numbered.

Lean uses what is known as “Value Engineering” in evaluating the critical processes. The approach consists of critically examining each and every aspect of the business from the point of view of the customer, while asking one simple question, “Does it add value?” If the step adds value then it stays within the process otherwise its role, function is curtailed or eliminated. There are no holy cows.

While designing the processes Lean uses Poka-Yoke, a term borrowed from Japan for mistake proofing. The idea being that the process, composed of individual steps, should be such that possible mistakes are eliminated or at least minimized. This is done through better design. Poka-Yoke today is widely used in a wide variety of products which come in our daily use. Poka Yoke usages are numerous. Take for example the plastic lead which connects the fuel tank with cap in automobiles, so that the cap may not be accidently left at the petrol station. Every time the word processor is being turned off it asks if the work needs to be saved. ATM cards can be inserted in the ATM machines in only one way. The same way of thinking can be used while designing the business process.

Lean aims at eliminating “silos” of information or turfs of power, as they stand in the way of efficiency. Instead of creating walls within the organizations it aims at bringing the walls down, by giving common goals. Thus “Intra-preneuring”, or Entrepreneuring within the organization is a common theme. Task teams are created with members of different departments / backgrounds with a common goal, in line with the company strategy and a given deadline. The success of the team is the success of the whole organization. This helps in bringing the walls down.

Quality is part of process and a way of life. It is not something which can be checked in or forced in. This way of thinking develops professionalism and self pride. Typically in manufacturing, before the Lean thinking got hold, large inventories were built at each step. These were later sorted out in good and bad lots. The good parts were used whereas the bad parts were reworked. After introduction of Lean, the wastage in the process was recognized. Parts should have been touched once and only once and they should have resulted in quality products.

Kaizen is another Japanese management approach which was imported and implemented. Kaizen is a composite of two words, namely Good Change. Under the Kaizen approach all members of the organization present ideas for improvements on daily, weekly, monthly basis. Everybody is tasked to generate ideas which may lead to some positive change in the organization, however infinitesimal. Small but positive changes are believed to large changes which contribute to the health and viability of the organization. Kaizen in essence is continuous and sustained improvement brought in by the members of the organization at each level. This thinking is very close to Islamic thinking as a well known Hadith of the Prophet S A W states that anyone whose today is not better than yesterday is at loss.

Lead times are an important measure which the “Lean” uses. Lead time, or the time taken, at which the customer places an order for a service or product to the final delivery of the product or service is planned, monitored and brought under control where it appears to be wavering.

There are a number of tools which Lean-6 Sigma practitioners use, such as DMAIC framework, 5 S, Ishikawa problem solving techniques etc. These are all useful and can be used as and when required.

Where and how “Lean” can be used in Banking?

Lean can find its use in banking both at strategic level and at operational. Improving efficiency and improving the business process aimed at customer satisfaction and profitability are viable goals, achieving which can lead to rich dividends in terms of profitability and also enhanced employee morale.

 

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