Increasing capacity without increasing headcount

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1 Increasing capacity without increasing headcount More business, more work, more people. Wouldn t it be great if we could break the retrench : rehire cycle by taking on less people this time round. Then we really would have more business with more profit. It doesn t take rocket science to figure out that the only way we can do this is by eliminating work. But, if it was that easy we would have done it already. We ve done business process re-engineering, we ve done a lot of STP, we ve done six sigma, we ve done almost all of the fads. We ve had some successes, but most have not delivered what we expected let alone what we were promised. It s quite depressing really. Has anyone been able to deliver productivity improvements year-in, yearout? There certainly is no generally accepted benchmark in financial services. Increasing capacity without increasing headcount means being able to do more with the same resources; it means increasing the speed at which business is conducted. There are a number of approaches to reducing the time it takes to do business Improving the speed at which staff work - this brings to mind the good old industrial engineering methods such as stopwatches and time and motion study and the new methods of six sigma Eliminating work that adds no value to the customer, i.e. eliminating waste Doing the value-adding work in a different way One extremely rich source of ideas on different ways of doing things in financial services comes from Lean Manufacturing methods that were developed to eliminate waste in companies such as Toyota to achieve extraordinary productivity gains year-in and year-out. Dell s plant in Limmerick, Ireland has been able to deliver productivity improvements year-in, year-out. It uses Lean Manufacturing methods to increase productivity by 3-4% each quarter. Consequently, it has been able to counter moves to a lower-cost location and is now the only plant controlled by one of the major multinational electronics makers that still produces personal computers in Europe. Historically most service businesses have copied industrial systems in their design, as these were successful systems that had demonstrated ability to achieve scale. However, although Lean Manufacturing has become the benchmark in industry, its lessons have only just begun to be applied in service businesses, and JSK Solutions is at the forefront of this movement. This paper looks at how Lean Manufacturing methods can be applied to achieve extraordinary results in financial service companies. We will see how easy it is for non-engineers to understand the methods and how effective they are in a variety of financial service business situations. They really do prove the adage of how simple things are often the most powerful.

2 Lean manufacturing methods to increase capacity and improve service Increasing capacity without increasing headcount means increasing the speed at which business is conducted. If one analyses the time taken to complete a transaction from the first interaction with the customer to satisfying the customer s needs, one will identify that only a small portion of the total elapsed time is spent actually working on the transaction. JSK s experience is that in most service processes, the amount of time spent adding value to a transaction relative to the total time taken by the transaction from start to finish (the lead time) is well below 10%. This is illustrated in the diagram below. The somewhat surprising conclusion that should be drawn from this analysis is that if one tries to make employees more efficient when they are processing the transaction, then one is only attacking 5% of the time. And even significant improvements are only a large percentage of 5%. The emphasis must therefore be on reducing the 80% waste. Key ways of attacking waste are discussed below. JSK drives process design from the customer s perspective; eliminating tasks a customer would not be happy to pay for 80% Waste 5% Value Adding 15% Sustaining Checking Sorting Copying Reworking Batching In and out trays Work in progress Authorisation Filing Imaging Processes typically contain 60 Raw processing time Risk Management Compliance Long term waste - 80 % wasteful tasks

3 Elimination of errors The most obvious cause of waste is the time taken for rework to fix errors. However, this does not imply becoming world class at error correction. It means that errors have to be eliminated at source and a right first time mentality has to be inculcated into the business. Most organisations have already taken considerable steps to eliminate errors in their processes. However, the challenge that often remains is to eliminate errors flowing from their customers. The cost of fixing these errors can be viewed as the benefit available from working with customers to eliminate them. The amount of the benefit implies the amount of investment that is worthwhile making to work with customers to eliminate errors on their side. For example, poor reference data in the capital markets industry cause failed trades that have been estimated to cost the industry $12bn a year to fix (Financial Times, 17 August 2004). That is a pretty large budget to fix the problem to yield a one year payback on the investment. Alternatively, the cost can be used to determine a price to charge customers for the work that they create. Somewhat surprisingly, the experience has been that customers often elect to pay these penalties without complaint rather than fix their systems and processes to eliminate the charge. Once they knew the cost of fixing errors one of our pensions administration clients used this successfully to develop a customer services strategy for errors that originate in the customer s payroll and HR systems. They identified that errors almost always came from customers who provided manual records and printouts to update pension-related data. They imposed a penalty level fee for manual processing. This resulted in most customers switching to electronic updating, but the fees levied on the recalcitrant customers more than covered the additional cost of manual processing and error correction. There are rafts of techniques for error-proofing processes. A three pin electric plug is a classic example of error-proofing it is impossible to put it into the socket the wrong way round. In clerical environments, techniques include drop-down lists of valid names or codes, designing input screens to follow the flow of the manual forms, pre-filling data on forms and screens with what is already known. But, even after the waste caused by errors has been eliminated, or at least reduced to acceptable levels, there are still huge productivity gains to be derived from attacking the remaining causes of waste, the 80% noted in the diagram above, by changing the way business is done. Below we review half a dozen systemic issues that we often encounter in financial service processes. A one-size-fits-all approach In our opinion, probably the most significant systemic issue is the design of standardized systems so that all transactions of the same type are handled in the same way, that is, a one size fits all approach. For example, all motor claims or current account applications are dealt with in the same way. The benefits from a control perspective are obvious, because you only have to worry about one system, but the impact on productivity is like a hidden tax. Some transactions are more complex than others and some customers are more important to the business than other, yet they are all handled

4 the same way. Simple transactions go through the same routines as the complex ones. In other words, far more effort than is necessary is applied to the simple transactions and they take far longer to process than necessary. However, on an 80/20 basis, the simple transactions are most likely to be the majority of transactions. The cost of this hidden tax can be easily computed, but our estimates show that it is often of the order of 30% of transaction processing costs. This cost is then compounded by poor service to key customers because the process does not differentiate or stream the transaction by the importance of the customer to the business. Hand-offs Hand-offs (where the transaction is passed from one person or department to another) are a key source of delay and error. Delays occur because the transaction goes into a queue or an in-tray, which we discuss below. Errors and unnecessary effort occur during the start-up of processing a transaction when the new person has to learn about the status and circumstances of the transaction. The more that existing information about a transaction is required to continue processing, the greater the start-up effort and the higher the risk of error. As a matter of principle, hand-offs should be avoided. When they are essential, the timing of the hand-off to minimize the carry-forward information is critical. Excessive control Excessive control is often caused because all transactions have to go through the same process, so the simple transactions go through the same control procedures as the complex transaction (for which the controls were designed). In addition, controls are often added to processes to cater for specific circumstances, but when these no longer apply, the controls often remain. Similarly, controls are often demanded by internal auditors or compliance people. The risk-reward profile for this type of role in a business leads the incumbent to a safety-first interpretation of the situation or the regulations and hence more controls. A classic example this has been the gold-plating of know your customer procedures that has even caused the FSA to comment on their excessiveness. A less obvious example of a pretty useless/ineffective control is the typical supervisory review. The supervisor is required to use their experience to determine what, if anything is wrong with a transaction. Many times it is not at all obvious what might go wrong, what the risk is or how significant the consequences could be, or even how to establish these. This can result in the ludicrous situation where documents are compared to prove validity but they actually come from the same source. An effective review is one where a risk analysis has identified the potential for error and the likely cause of the error. Effective supervisory review specifies what to check and how to identify an error. Pending work In-trays or queues of work waiting for a person or team in a workflow environment are also sources of capacity constraints. In industry, the approach to allocating work pieces in advance of the work is known as a push approach. The drawback is that should a person or team hit a complex transaction

5 or other delays, then items could still be in their queue when other people have no work to do. There is an imbalance in the workload. The alternative is a pull approach where each person pulls a transaction from the pool of transactions as they complete the previous one. A pull approach also enables key customer transactions to be inserted at the top of the queue to be dealt with by the next available processor, with the obvious benefits for customer service. Peak workloads How to handle peaks in demand is always a challenge. Lean Manufacturing uses a number of strategies to cope, without increasing headcount. One method is to use the pull approach to ensure critical transactions are handled during the peak, whilst others are held back for later processing. This approach works well in the fund management arena where there is a daily processing window. High value purchases and sales are handled during the peak whilst low value transactions are processed later. Another method is multi-skilling. For example, in many call centres the people who handle the calls are in one area whilst the people handling the correspondence are in another. Combining the two skill sets in multi-skilled teams enables the correspondence processors to handle calls during peak times (albeit with a lower skill level), whilst call-handlers can do correspondence work during their lulls (albeit, again, with a lower skill level). Multi-skilled teams also have the benefit of being able to minimize the disruption of the hand-off from call-handler to correspondence person because the hand-off is within the team. The correspondence person can look across the work area to ask more questions of the person who took the call. Co-location Multi-skilling achieves one level of improvement but co-locating multidisciplinary teams provides a real step-change in customer service and lead-time reduction. For example, one of JSK s insurance clients located underwriters in new business and service teams. The ability to put a client on hold or promise a call-back and then be able to discuss additional information requirements, terms and even premium amounts with an underwriter there and then and get straight back to the client has a stunning impact. The person who handles the call can now take full responsibility for satisfying the customer s request. This increases staff morale immensely, dramatically improves customer service and delivers a significant increase in conversion rates and sales. Lean Manufacturing and people and organization structures Lean manufacturing is not just a number of techniques and methods that change the way that people work. To be really effective one also has to modify the way that the staff are managed, motivated and rewarded and the way in which the organization is structured. In planning a move to Lean Manufacturing, there are 4 key factors that have to be addressed from a People/Organizational Perspective:

6 Rewards and Recognition In many organizations the staff are paid for turning up, clocking in and clocking out; that is, no change from the old industrial model. Performance, if it is driven at all, is targeted on numbers of transactions handled in some timeframe i.e. rewards are based on transaction numbers rather than service quality. In a Lean Manufacturing environment, the emphasis is put on getting better increased efficiency and effectiveness is rewarded and this in turn leads to a continuous drive to become more efficient. The approach to work that this engenders is considerably different. In the old model it is about working harder, in the Lean model it is about working smarter. So a move to the Lean Manufacturing model requires a radical change in the reward system at all levels of the business (both financial and non-financial rewards), to support a work smarter environment. Management The impact of Lean Manufacturing is not restricted to the workers. Management also has to change. For a variety of reasons most managers only concentrate on their small area. They very seldom have a process wide perspective let alone an organization wide perspective. They manage what is in front of them. For Lean Manufacturing to be successful, this silo mentality has to change. Managers have to manage and cooperate across the few hand-offs that might have to remain in the process for control, time or geographical reasons. In addition, the continuous improvement ethic that one wants to instill in the workforce requires a different management approach to a meet the target approach. Managers are also going to have to think out of the box to be able to accept some of the recommendations for improvement that are going to come from their staff. Organizational Design The elimination of hand-offs changes organization boundaries. The elimination of errors at source often forces change in different organization units to where the impact is felt. This provides challenges for cooperation across traditional organizational boundaries. Managers need to be open to input from colleagues they need an agenda set by the CEO that clarifies the requirement for a team first, me second stance, so that the business can be organized in the most efficient way possible for the end result. Multi-Skilling As we discussed, Multi-skilling is a big part of Lean Manufacturing to ensure that capacity is not wasted by job specialization having people on hand that can t do the work available. This approach raises a few key questions: Are the existing workforce is capable of multi-skilling or not? If not how will this be dealt with in the most supportive way possible? If yes what combination of training, mentoring and coaching will be required to bring about the change in skill levels?

7 What management and HR approaches need to be changed/developed to support successful multi-skilling? How will the multi-skilling concept be sold to the workforce? In summary, unless the people side of Lean Manufacturing receives as much emphasis as the process side any apparent capacity gains will not be realized even medium-term. Increasing capacity without increasing headcount is all about eliminating work. Lean Manufacturing provides a rich source of methods that can be adapted profitably by financial service businesses. But these new ways of working require management and staff to change commensurately. JSK Solutions have extensive experience in what it takes to successfully design and implement Lean Manufacturing in a wide range of financial service businesses and functions to deliver step-change results in a rapid timeframe..