ENHANCED PERFORMANCE MANAGEMENT

Transcription

1 Financial Services POINT OF VIEW ENHANCED PERFORMANCE MANAGEMENT DRIVING BREAKTHROUGH PRODUCTIVITY IN RETAIL BANKING OPERATIONS AUTHORS Amit Bhandari, Partner Kenan Rodrigues, Partner

2 INTRODUCTION Retail banking operations covers a myriad of activities including onboarding clients, decisioning credit, fulfilling loans and processing transactions among others. Given its increasing scale and scope, the operations function has been relentlessly targeted for efficiency improvements. Amongst others, transformational levers such as centralization, automation, process reengineering, out-sourcing and offshoring have been used to improve the efficiency and effectiveness of operations. As a result of such intense and sustained industry scrutiny, there remain few residual opportunities to drive transformational savings in operations without diluting service quality. Oliver Wyman research indicates that one such breakthrough opportunity does still exist. The central theme is that of latent productivity. Our studies indicate significant variability in performance across comparable individuals in operations functions. This variability is often masked and propagated by the lack of transparency of results at the individual and team level, and weak alignment between performance and pay. To address this inefficiency, Oliver Wyman has developed a solution framework called Enhanced Performance Management (EPM), which improves the way institutions manage and pay for productivity. EPM improves productivity by objectively measuring organizational value-add, setting measurable targets for individuals and teams based on opportunity to perform, and explicitly aligning variable compensation to performance. The impact of applying this approach is significant, typically around 20% productivity improvement 1. Importantly, this improvement can be driven rapidly and with few technology dependencies. THE CASE FOR CHANGE Retail banks are increasingly looking for intelligent cost reduction methods to trim costs while maintaining or improving service quality and revenues. EPM fits this mold, given its ability to enable doing more with less. Banks have traditionally focused EPM-like improvements on sales functions given the potential for significant revenue lift. Conversely, manufacturing companies have traditionally focused similar performance management improvements on operations functions given the productivity and quality benefits. We have found that the principles that have worked in both of these situations can be combined to improve operations productivity in the banking industry. Moreover, the timing is right for banks to deploy EPM in operations. First, retail banking profit margins are under continued pressure, creating the right impetus for change. Banks are increasingly looking for opportunities to structurally reduce and variabilize the cost base. Second, the culture within operations functions has seen a shift. Operations has traditionally been viewed as a back-office, transaction-oriented function. However, with operations playing an increasingly important and visible role in improving the client experience, the culture within the function has become increasingly open to change. Third, the systems and data environment within banks has matured enough to enable the granular level of performance measurement required for EPM to work effectively. Additionally, technology like workflow and imaging enables dynamic capacity management with work intelligently routed based on skill alignment and available capacity. Together, these conditions create an environment in which EPM can successfully deliver the direct cost and quality benefits the operations function strives for. 1 After normalizing for other factors. Copyright 2013 Oliver Wyman 2

3 THE OPPORTUNITY The core issue with most performance management systems in operations is that they try to do too much. Take the example of a leading North American bank (see Exhibit 1). Exhibit 1: PERFORMANCE MEASUREMENT MODEL 60% 30% 10% Productivity Multiple criteria >10 KPIs Client experience 4 criteria Risk balance 3 criteria This bank used a balanced scorecard approach to measure employee performance in operations. The illustrated example for a transactional function had three categories of performance productivity, client experience and risk balance, with weights of 60%, 30% and 10% respectively. Productivity comprised both qualitative and quantitative criteria, with the latter including more than 10 KPIs, some overlapping and beyond the direct control of the individual. The client experience and risk balance criteria were highly subjective with no clear linkage to measurable goals. These measures were then somehow aggregated to come up with an overall performance rating at the end of the year, which drove 70% of variable compensation. The remaining 30% was driven by business unit and bank performance. Given this complex measurement model, the relationship between an individual s incentive payout and their real value-added contribution (which we will define shortly) was nearly non-existent (see Exhibit 2). Managers were only using two or three of the available five performance bands. There was hesitance to use the highest and lowest performance bands, thereby implying that all individuals were performing at an average level. Everyone in the middle bands received a similar annual incentive, keeping the average employee happy but not rewarding outstanding employees for their performance nor providing non-performing employees motivation to improve. Employees with very different productivity levels got the same reward and, perhaps most importantly, the capped incentive structure did not encourage superior performance. Exhibit 2: PERFORMANCE PAYOUT MODEL OPERATIONS AGENTS INCENTIVE VS. PRODUCTIVITY ANNUAL INCENTIVE ($) 10,000 8,000 6,000 4,000 2, Source: Oliver Wyman analysis Different reward for same level of productivity Same reward across wide range of productivity ,000 AVERAGE CREDITS PER DAY Copyright 2013 Oliver Wyman 3

4 THE CHANGE Oliver Wyman architected an Enhanced Performance Management solution to transform the way performance was measured and rewarded at this organization. Enhancing the performance management model started with a change to the way performance was measured. For each major functional area within operations, all value-added activities were identified and weighted based on relative effort or value. As an example, within a transactional group focused on loan fulfillment, a credit grid was designed depicting each value-added activity performed by the group and the credits associated with each activity (see top half of Exhibit 3) based on relative effort. In this case, processed applications is assigned a value of 30 credits while reviewed applications is assigned 10 credits since the former activity takes about three times as long as the latter. Importantly, errors are also on the grid and are assigned negative credits. This ensures that due attention is paid to service quality in a model that motivates faster throughput. At the end of each measurement period, an individual s credits are summed and then compared to a pre-decided hurdle for that same measurement period (see lower half of Exhibit 3). Exhibit 3: ENHANCED PERFORMANCE MEASUREMENT MODEL ACTIVITY CREDITS PER UNIT Processed application 30 Reviewed application 10 Edited application 20 Serviced dealer call 10 Errors -30 Individual Single hurdle Value-added credits Pay-out CREDITS HURDLE PERFORMANCE Exhibit 4: ENHANCED PERFORMANCE PAYOUT MODEL OPERATIONS AGENTS INCENTIVE VS. PRODUCTIVITY ANNUAL INCENTIVE ($) 10,000 8,000 6,000 4,000 2, No incentive if hurdle is not met Source: Oliver Wyman analysis Significant upside for high performers ,000 AVERAGE CREDITS PER DAY The difference between credits accumulated by an individual and the hurdle become the value-added credits, which are then converted into an incentive payout using a fixed, pre-assigned dollar value per credit. For example, let s say Employee A worked 8 hours in a day, has a hurdle of 500 credits and achieved 750 credits. Employee A earns 250 value-added credits which are converted into an incentive payout at say 10 cents per credit, which translates into $25 in earned incentive for that day. Employee B may be on a part-time schedule and therefore worked only 4 hours, so their hurdle is halved to 250 credits. This improved performance measurement model ensures that individuals focus on value-added tasks, that they work harder and smarter to achieve their hurdle and that there is a direct relationship between productivity and incentive payout (see Exhibit 4). Individuals who do not meet their hurdle get no incentive, while there is significant upside for the best performers. Most importantly, such a reward model does not cost an organization anything incremental for a given amount of work performed. Rather, incentive dollars are distributed differently to align with individual performance. Copyright 2013 Oliver Wyman 4

5 Exhibit 5: EPM FRAMEWORK BY ACTIVITY Efficiency focused Mix of efficiency and effectiveness Effectiveness focused TRANSACTIONAL PROCESSES RISK-BASED OPERATIONS CALL-BASED OPERATIONS EXPERT SERVICES Definition Highly codified, repeatable, predictable, controllable processes Repeatable processes, however, risk judgment required which impacts predictability Client facing phone-based activities that are somewhat routine based but need to be flexed based on client situation Ad-hoc services which are outcome oriented and less routine, limiting the predictability and controllability at the unit level Performance management dimension Throughput Quality Risk Client experience Relative focus of dimension is low Relative focus of dimension is high To ensure that EPM focuses on team performance adequately, the EPM payout model includes a team component, which is measured by aggregating the value-added credits earned by all members on a team. For individuals, a small portion of their overall incentive (say 20%) is driven by the team component. For team leaders, a significant portion of their overall incentive (say 80%) is driven by the team component with the rest driven by higher-order goals, e.g., performance of the entire department or function. This team component ensures that individuals are motivated to collaborate with their peers and team leaders are rewarded based on the aggregate performance of their teams. The example just described is for a transactional function in operations, where throughput is the key measure of productivity, subj ect to a certain minimum quality standard. Oliver Wyman has developed EPM models for risk-based, call-based and expert-based operations functions (see Exhibit 5), each varying slightly to emphasize the performance management dimensions most critical for that particular function. As an example, risk-based operations like adjudication or fraud emphasize risk as the foremost performance management dimension, with quality, client experience and throughput being additional but secondary elements. Similarly, call-based operations such as inbound contact centers focus primarily on the client experience and throughput, the idea being that performance for individuals in these functions should focus on ensuring a positive client experience on every call while maximizing the number of calls handled. Expert services include head-office functions or more knowledge-based activities like business architecture or program management. The EPM model for expert services is not as formulaic as the other categories given the broad and unpredictable nature of the underlying activities. EPM tries to strip out subjectivity and behavioral elements and instead, focus on measurable and controllable outcomes. THE IMPACT The impact from transitioning to an EPM model is significant. We have observed productivity improvement of 20+% in pilot groups across transactional, risk and callbased operations within 6 to 12 months of implementing EPM. The jump in productivity is driven by a combination of two factors. First, EPM enables improved visibility and understanding of performance by measuring true organizational value-add. Second, EPM ties compensation directly to performance, thereby creating the right motivation for team leaders and individuals to improve their productivity. Additionally, we have observed that EPM-driven productivity lift is consistently accompanied by a parallel improvement in quality, with the best Copyright 2013 Oliver Wyman 5

6 Exhibit 6: IMPLEMENTATION APPROACH 2-3 months 2-3 months 4-6 months PHASE 1 DEVELOP FOUNDATION AND DESIGN PHASE 2 DEPLOY PILOTS PHASE 3 EXPAND AND MATURE Governance and executive steer Foundation Pilot design Program expansion Operational readiness/ communication Pilot implementation performers typically making fewer errors than before. Team management also improves, with team leaders becoming more engaged with their team and using value-added credits as an objective way of discussing individual performance while highlighting opportunities for improvement based on learning from the best. The team component of EPM also creates the right incentives for team managers to keep the capacity of their teams aligned with volumes. Situations of over or under-capacity compromise the opportunity to earn value-added credits. This creates the right tension in the system for team managers to make the appropriate capacity management decisions keeping in mind the overall productivity of the team and the available or expected volumes. More broadly, EPM also serves as the foundation for other structural improvements. For example, the productivity lift observed within the bank via EPM can be extended to outsourcing firms that provide operations services. Banks can push third parties to conform to the same productivity standards as inhouse operations functions and can also variabilize their third party spend by paying on a per transaction basis, based on EPM-generated productivity standards, instead of a per person basis. Additionally, EPM serves as the driving force to re-think and streamline the organization structure in operations. By deploying a consistent performance management model across each activity bucket, EPM enables resource sharing and organizational synergies, pushing banks in the direction of organizing like functions together. IMPLEMENTATION Implementing EPM is an eight to twelve month journey for most banks. Assuming an operations headcount of a few thousand employees spread across multiple locations and sub-functions, the best way to initiate an EPM program is to develop a foundation (i.e., current state assessment) while concurrently designing pilots to test EPM in a few functions (see Exhibit 6). The foundation helps create a compelling case for change by demonstrating the variance in performance across comparable individuals and highlighting the overall misalignment between productivity and pay. Pilot design focuses on developing an EPM model in a few functions or sub-functions that are relatively high on the maturity curve, i.e., their leaders welcome the change and the basic foundational data exists to quickly enable a transition to EPM. Once pilots are designed and underway, the positive results from pilots typically build the momentum required for EPM to be implemented across the organization. The program expansion phase can be realized fairly quickly as long as the program is resourced appropriately. Of course, the entire journey of EPM needs to be enabled by strong governance and top- Copyright 2013 Oliver Wyman 6

7 down steer from executives, which helps critically with change management. Importantly, EPM can be implemented with little to no technology change. The key information requirement for EPM is tracking of individual and team performance, which typically leverages existing performance management systems and reports. CONCLUSION Operations continues to be scrutinized for cost and service improvement opportunities, however few residual opportunities remain. EPM fills this gap by dramatically increasing employee throughput, while simultaneously improving risk, quality and the client experience. Organizations that have embraced EPM have witnessed a 20+% improvement in employee productivity. Most importantly, these benefits have been realized rapidly given that for most organizations, EPM has few dependencies on new technology. 7

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