Profiting Through Simplification - McKinsey & Company

Profiting Through Simplification
101
Profiting Through Simplification
Coping with unnecessary complexity has become one of senior bank management’s
most difficult – but also most imperative – challenges. The rewards,
however, are considerable. Simplifying product, channels, process,
technology and organizational structure can significantly improve performance
and customer satisfaction. In an environment in which banks are seeking
to reconnect with valued customers, these are important goals.
Taking a systematic approach can not only help reduce complexity, but
instill an ongoing mindset that prevents unnecessary complexity from
sprouting back.
Coping with a complex web
Complexity pervades retail banks like a vine creeping into every organizational
crevice. We need not look far to locate the roots of the problem.
Throughout the last decade, banks pursued market share and profits largely
by adding products and services – from mortgages and home equity loans to
credit cards and money market funds. Each new offering required new support
systems, sophisticated technology, distribution plans, policies, guidelines,
training and marketing – all of which proved fertile ground for the
invasive growth of complexity. Mergers and acquisitions compounded the
problem as bankers struggled to prune and consolidate products, programs,
systems, branch networks and staffing, efforts that were often complicated
by the need to retain customers. Little wonder, therefore, that banks have
evolved into highly complex enterprises, often comprising weakly linked networks
of functional, product and geographic silos that, taken together, can
be difficult for bankers and customers alike to fully comprehend.
Complexity is often, of course, necessary. Customized private client reporting,
for example, is a necessarily complicated endeavor. However, there are many
cases in which complexity is a by-product with no clear purpose. With growing
competition for deposits and revenues, banks will need to cut costs while retaining
customers and deepening relationships. They can reduce costs through
aggressive pruning of complicated products and processes as well as staff positions
that contribute little added value. Customers are unwilling to pay for unwarranted
complexity and often it is therefore not essential to long-term viability.

102 The Future of Retail Banking
Five major factors drive complexity:
• Product portfolio. Years of operating in a product-centric mode have led
to a plethora of products, variations, special offerings and exceptions that
require systems, guidelines, policies, training and ongoing support regardless
of the value they currently add to the organization.
• Distribution channels. Technological advances continue to enable new
and more convenient channels, leading customers to gradually abandon
less convenient alternatives.
• Processes. As products and channels expand, so do processes and often
duplication of processes, as in coordinating origination processes across
product groups. Complexity can stem from unnecessary process steps,
from duplicative work and from unneeded handoffs.
• Technology. Banks depend heavily on technology systems often comprised
of multiple platforms and linkages. These typically require extensive
training, frequent costly updating, high security and 24-hour support.
• Organizational structure. As banks pursue new growth organizational
structures become more intricate, with product, back office, channel, IT
and other teams frequently involved in cross-matrix interactions.
As these key drivers illustrate, complexity is an organization-wide problem.
Consequently, a change in one area generally requires changes in some or all
of the others. Tackling the problem demands a systematic approach.
A systematic approach to simplification
Controlling complexity must be an institution-wide effort that has the full support
of senior management. Uncertainty about how and where to begin such
an extensive task undoubtedly has led most banks to largely evade it. However,
a comprehensive and systematic approach will result in gradual ongoing
improvement in customer satisfaction and bottom-line performance. Three
fundamental steps are critical for success: establishing a complexity baseline,
designing a customer-centric program plan, then diligently implementing the
plan and inculcating a simplification mindset.
• Establish a complexity baseline. This vital first step – often overlooked –
provides a solid foundation on which to build a program that will actually
be capable of rooting out pointless complexity. Identifying and applying
a series of relevant metrics across the areas that drive most complexity
can help reveal where it is most pervasive, and how it may also be driv-

Profiting Through Simplification
103
ing unneeded complexity in other areas. When creating a baseline, it is
also important to estimate the relative cost and difficulty of simplification
in those areas where it is needed. This baseline information will provide a
footing for identifying hot spots and prioritizing simplification tasks
across the organization.
• Design a customer-centric plan. The most effective approach is often one
which takes a customer-centric focus. This means starting with the product
portfolio, then moving on to address distribution channels and
processes, and lastly operations and technology. Products, versions and
exceptions tend to proliferate over time with little attention paid to discontinuing
weak performers. Is offering 25 types of credit cards, for example,
really important to maintaining the current customer base? Reducing the
number of card types would simplify marketing and back-office operations,
and would lead to bottom-line contributions from each. To gain a
clear perspective on which products are truly driving profitability, and
which are driving only more complexity, we suggest banks develop a grid
which measures products by both level (high vs. low) and kind (good vs.
bad) of complexity (Exhibit 1).
Exhibit 1
Assessing product portfolio complexity
Size of bubble indicates number of accounts
Good
70% products
with high and
bad complexity
Products to keep
Products to
migrate/standardize
Kind of
complexity
(product margin)
Bad
Low
High
Level of complexity
(Number of products in same segment, if product is actively offered, number of exceptions)
Note: Product portfolio assessed based on bank’s strategy regarding products and complexity KPIs
Source: McKinsey analysis

104 The Future of Retail Banking
Exhibit 2
Evaluating complexity/cost of distribution channels
Main key
performance
indicators
Internet
VRU
Products/channels to consider discontinuing
Mail
Call
center
Branches
Product 1
Percentage of transactions
75%
20%
0%
5%
0%
Cost per transaction
$0.7
$1
$2
$20
$50
Product 2
Percentage of transactions
80%
5%
0%
5%
10%
Cost per transaction
$0.7
$1
$2
$20
$50
Product 3
Percentage of transactions
75%
0%
0%
0%
25%
Cost per transaction
$0.7
$1
$2
$20
$50
Product 4
Percentage of transactions
65%
5%
0%
0%
30%
Cost per transaction
$0.7
$1
$2
$20
$50
Low
Level of complexity
High
Note: Level of complexity was based on variability of channels (e.g., number of channels used) and cost of channel used
Source: McKinsey analysis
Banks should also consider whether the use of all channels for all products
and services is necessary. Discontinuing channels that are seldom
used for a particular products or services can bring immediate gains in
simplicity (Exhibit 2). Similarly, processes often have unnecessary steps,
duplicated efforts and relatively pointless handoffs to certain areas or
departments; weeding out this type of complexity will streamline
processes, and thereby save both time – including the customer’s – and
expense (Exhibit 3).
Simplification in the product, channel and process areas will underscore
related opportunities in the bank’s technological and organizational infrastructures.
Experienced IT managers know that platform redundancies,
frequent systems updating, ongoing technical training and system incompatibility
issues often add needless complications and expense to
bank technology systems. Moreover, organizations frequently grow new
limbs in these core areas to accommodate additions in products, channels
and processes. Uprooting unwanted complexity in technological
and organizational infrastructures is therefore usually much easier after
eliminating it in other areas.

Profiting Through Simplification
105
Exhibit 3
Measuring complexity of key processes by product
Activities
Performance
indicators
Account
openings
Transactions
Periodic
transactions
Administrative
Product 1
Throughput time (days)
10
1
Number of exception cases
30,000
70,000
N/A
6,000
Product 2
Throughput time (days)
5
1
6
Number of exception cases
45,000
50,000
60,000
3,000
Product 3
Throughput time (days)
20
8
1
Number of exception cases
60,000
100,000
60,000
30,000
Product 4
Throughput time (days)
5
53
Number of exception cases
100,000
300,000
N/A
45,000
Source: McKinsey analysis
Increase STP rate mainly
by process (not IT)
changes (e.g., allow fewer
exceptions in forms)
Complexity level
Low
Medium
High
• Implement and sustain simplification. With a clearer view of the bank’s unnecessary
complexity, management can prioritize simplification efforts, establish
budget allocations, assign task responsibilities and evaluate progress.
Unless there is a sustained effort to curb its re-growth, unwarranted complexity
will rapidly grow back and erase hard-won simplicity. Success
therefore demands an ongoing institution-wide effort to prevent the addition
of unnecessary processes and systems. Senior leadership can assign
ownership of simplification efforts, set management objectives and budgets,
and develop tools to track improvements. These steps are critical to
ensure simplification will remain a priority.
* * *
Bank managers know that complexity can impede both organizational performance
and customer satisfaction. By adopting a holistic perspective of
complexity’s five leading drivers, financial institutions can give customers
the banking experience they want while also simplifying processes, channels
and products.

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The following McKinsey consultants and experts contributed to
this compendium:
Whit Alexander
Daina Graybosch
James McKay
Greg Phalin
Philip Bruno
Tommy Jacobs
Howard Moseson
Leonardo Rinaldi
Robert Byrne
Piotr Kaminski
Sudip Mukherjee
Pablo Simone
Liam Caffrey
Rami Karjian
Fritz Nauck
Vik Sohoni
Prasenjit
Chakravarti
David Chubak
Marco De Freitas
Benjamin Ellis
Akshay Kapoor
Catharine Kelly
Nick Malik
Robert Mau
Sandra Nudelman
Marukel Nunez
Pradip Patiath
John Patience
Dorian Stone
Sarah Strauss
Ameesh Vakharia
Tim Welsh
Contact
For more information, contact:
Nick Malik
Director
(212) 446-8530
nick malik@mckinsey.com
Christopher Leech
Director
(412) 804-2718
chris leech@mckinsey.com
Marukel Nunez
Principal
(212) 446-7632
marukel nunez@mckinsey.com

Financial Services Practice
November 2010
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