Transcript Message or topic title

Realities and Myths of
Scaling Up For Growth
Transform to Outperform
Bancon plenary presentation document
December 2010
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Any use of this material without specific permission of McKinsey & Company is strictly prohibited
The next decade will see massive scale-up of Indian banks
ESTIMATES
in terms of size and complexity
Scale-up
terms
of complexity
Scale-up
in in
terms
of complexity
Scale-up in terms of size
’000 cr
2010
Assets
6000
5x
▪ Increasing diversity of product/market
30,000
5.5x
▪ More sophisticated customer needs and
interactions (e.g., integration with
corporate ERPs, supply chain financing)
Profits
60
segments (e.g., youth/retirement;
urban/rural; emerging/large corporates)
2020
▪ Increasingly expansive network of JVs,
partners and alliances (e.g., payment
specialists)
320
▪ Increasing competitive intensity (e.g.,
Market Cap
690
4.1x
▪
2,800
Performing banks will be 2-3X their
current size in assets in next 3-4
years
SOURCE: McKinsey analysis
NBFC specialists, IT, Telco, Retailers)
Increasing pace of regulatory change
and globalization
Banks will enhance structures, talent
and processes to cope with
complexity
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However banks will need to see through the myths and
realities associated with four barriers to scale-up
4
3
2
1
Balancing
operating
architectures for
scale and
responsiveness
Differentiate
customer
experience while
improving
productivity
Using IT as
competitive
weapon
Building
required
leadership &
talent
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1 Reality: Balance between need for scale and need for local
CASE EXAMPLE
responsiveness will vary by product/market
Typical operating architecture for major Indian banks by
product/market
Urban CASA
opening
Key drivers
1▪ Maturity of processing
infrastructure
2▪ Inherent riskiness of
product/market
processing sites across nation in
some cases
▪ Regionally centralized with 30-50 retail
Urban Retail
Loan
origination
loan processing sites for home loans;
servicing may be even more centralized
▪ Education and auto loans may be
processed in the branches
3▪ Last mile constraints
4▪ Availability of talent
▪ Highly centralized with typically 2-3 Centralized
▪ City-level centralized with 60-80 SME
SME loan
processing
Rural
banking
processing centres targeting 40 major
cities which account for most of the
opportunity
▪ Primarily done through branches
▪ In some select, high opportunity districts,
may use district-level hubs
Decentralized
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1 Myth: Decentralised models are more
efficient than the centralised ones
Drivers of performance
1▪ Superior coordination
from front to back
office
2▪ Standardised
processes across all
processing units
3▪ Optimised network
architecture across
front- middle- back
office
Operating
model
Scale
DISGUISED CLIENT
EXAMPLE
Mortgage Bank A –
Centralized
Single processing center
nationwide
Mortgage Bank B –
Decentralized
~20 processing centers,
located at each wholesale
branch
~20,000 loans p.a.,
processed at a single
location
~20,000 loans p.a.
processed across the
network
>3 days
1-2 days
>$1,200
<$900
Underwriting
turn-time
Unit cost per
loan1
1 <____>
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1 Reality: 5-7 major processes account for >70% of
customer interactions and operations headcounts
Typical performance focus
Major processes
Metric
Average banks
Best in class
Account opening
and deposits
Application to
issuance of
welcome kit
5-7 days
1-2 hours
Home loan
processing
Application to
disbursement
12-15
days
<3 days
Application to
disbursement
18-20
days
5-7 days
Product
specialist
Teambased
Speed
Predictability
SME loan
processing
Branch sales
Customer care
SOURCE: FIG O&T Practice
Quality of
advice
Time elapsed
for resolving
problem
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2 Myth: Inherent trade-off between customer experience
and productivity
Impact of eliminating waste in home loan processing
(composite across 3 big Indian banks)
Median across 3 banks
Best in class
Days
Sources of waste
Turn around
time
-69%
15-18
▪ Multiple and error-
5-7
prone hand-offs
▪ Complex procedures
and documentation
▪ Mis-aligned capacity
Files per day per FTE
Credit
appraisal
productivity
and demand
3-5
+167%
1-2
▪ One-size-fits all
process
Percent
Applications
lost due to
delays
-73%
10-12
<3
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2 Reality: Lean methods have unlocked capacity
and increased speed in developed and emerging markets
Percent
Country
Channel
Peru
Branch
Chile
Branch
70
US
Intermediary
70
Australia
Branch
Malaysia
Field sales
UK
Branch
35
30
Singapore
Branch
35
30
US
Direct
30
UAE
Branch
30
SOURCE: McKinsey analysis
Capacity increase
Cycle time reduction
80
60
60
50
65
40
50
35
80
40
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3 Reality: Information, not just technology will be the
strategic weapon of future
Increasing IT investments …
... with particular focus on MIS/CIS/Risk
Planned future IT spend
% of CIOs who selected the option
Future priority investment areas for IT
% of of CEOs that ranked a given choice
in Top 3
Future IT spend
…will make
information a
strategic weapon
CEO response
MIS/CIM/Risk
management
Decrease
20
Alternate retail
channels
Keep
same 7
43
Core Banking
System
73
Increase
54
29
Support function
systems
(e.g., F&A, HR)
11
Specialised
product systems1
10
1. Create an ondemand
information
architecture
2. Establish
information
governance
3. Build information analytics
capability
1 Examples include cash management, trade finance, treasury systems and others
SOURCE: 2010 Transforming Banking through IT Survey of Indian banks
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3 Reality: The main barrier to scaling with IT is not
technology, it’s people and mindsets
Challenges faced in using IT effectively
% of CEOs who ranked
given choice in Top 3
Business processes and practices do not
change enough to fully realise the benefits
of IT and automation
86
Limited understanding in the business
managers on how to use and manage IT
43
Revamping legacy systems
43
Organisation structure of IT is not aligned
to support business units effectively
60
50
Gaining access to technical talent
Difficult to justify economic benefit of IT
% of CIOs who ranked
given choice in Top 3
29
21
SOURCE: 2010 Transforming Banking through IT Survey of Indian banks; McKinsey analysis
87
40
27
33
33
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3 Reality: Architectural simplification is key to scalable IT
platforms
SOURCE: Corporate and Press releases
▪
Single technology platform –
PARTENON
▪
2 Regional IT development
centres: Madrid and Chile
▪
Four regional operating centres
– Madrid
– Milton Keynes (UK)
– Queretaro (Mexico)
– Sao Paulo (Brazil)
▪
Significant cost savings: 25%
reduction in transaction costs
▪
Rapid product delivery
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4 Reality: Massive leadership gap – especially in public
CASE EXAMPLE
sectors
Estimation for officers of the rank of AGM and above
Index=100
10
Non-retiring
pool
280-300
70-80
300-350
Others
(faster
promotions,
direct hiring)
The bank needs to
aggressively
accelerate capability
building of its senior
executives to enable
them to lead a bigger,
more complex
organisation
100
Addl.
required
in 2015
Baseline
in 2010
SOURCE: McKinsey analysis
Gap
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4 Reality: Adult learning research suggests learning is
most effective when embedded in real life application
Learning
through
Effectiveness
measured after
3 weeks
3 months
Formats
Explanation
(listening)
70%
10%
Example
(seeing)
72%
32%
▪ See someone doing
Experience
(doing)
85%
65%
▪ Role play
▪ Practical application day-
▪
▪
▪
▪
Presentation/speech
Manual/flyers
Video
Discussion
It is crucial to embed
new leadership skills
by applying them in
the fields, otherwise it
is just theory that will
soon be forgotten
to-day
Experience
(teaching)
100%
100%
SOURCE: Pesquisa IBM; Whitmore, Coaching
▪ Leading others to do
▪ Coaching own team
▪ Teaching other leaders
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4 Myth: Higher compensation will guard against attrition
Above average players
Agent compensation
US$/annum
6,108
Proportion of team leaders, ops
managers grown internally
Percent
Below average players
88
61
3,542
Attrition
Percent
33
27
Cross-skilling ratio
Percent
35
20
SOURCE: P360
benchmarking
Team leader attrition
Percent
24
15
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4 Higher employee tenure does not ensure higher
productivity
Variation in employee productivity
Example 1: Email customer
service
Months
< 12
12-18
18-24
>24
Average
processing time
Minutes
Example 2: Credit card customer
service
Cost per
transaction
INR
56
133
48%
61
72
Cost per call
INR
104
341
42
Productivity
Calls/day
652
6.5
29%
114
98
9.2
1 Average time taken to service a request / answer a call
2 Only agent compensation is considered for calculation
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If you are 7 or below on the 10-point self-test, it is time …
Question
1. Hand-offs across functions in all major processes are few and error-free
2. Network of processing sites has the right balance between centralization
and de-centralization
3
Limited variance in productivity and TAT across processing sites
4. Ability to meet customer expectations at key moments of truth is
monitored and at acceptable levels

5. Productivity of key resources (e.g., credit officers, RM) in major processes is
competitive
6. Internal leadership benchstrength to manage larger and more complex
businesses is sufficient
7. Your ability to recruit high quality talent and retaining it is high
8. Your training programs are working effectively in delivering the skills and
mindsets you need
9. Your IT platform can scale effectively in supporting new products,
channels and expected business volumes
10. Your ability to manage information for effective decision making is high
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