FORUM FINANCE
Middle East, Turkey and North Africa
Efficiency improvement:
Cut complexity and streamline
organization
3rd Edition
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Forum Finance Newsletter 3rd Edition, May – June 2011
Copyright © 2011 Bain & Company, Inc. All rights reserved.
Content: Alexander Iannaccone, Philippe De Backer,
Julien Faye, Bianca Leodari, Giovanni Pio, Emmanuel Yoo
EDITORIAL | FORUM FINANCE
In this edition of Forum Finance, we discuss lean
operations and cost efficiency - two critical ways
of combating complexity in organizations and
improving shareholder returns. For Financial
Services companies, organizational and process
complexity can silently accumulate with the
introduction of new products and services.
Management can address this “complexity
creep” by better understanding customer needs
and streamlining both the product offering and
organization.
This edition also features an interview with David
Martin of RAK Bank, who has led one of the most
remarkable Retail and SME Banking growth
stories in the region. He offers us lessons from 15
years of executive experience in managing growth
and operating efficiency, as well as insights on the
future of the banking sector in the UAE.
We’ve also been busy this month with the second
installment of our Financial Majlis events. This
installment, themed "Light Retail: Next Generation
Banking for the Next Wave of Growth in Emerging
Markets", highlighted how a “lean” branch format
can facilitate both rapid and efficient growth in
the customer base. These sessions, which were
held in Riyadh, Dubai, and Abu Dhabi, featured
thought-leaders on the topic from Bain’s Global
Financial Services Practice. Please contact us for
more information.
Karaca Kestelli
Partner
Turkey Financial Services
karaca.kestelli@bain.com
POINT OF VIEW | EFFICIENCY IMPROVEMENT: CUT COMPLEXITY AND STREAMLINE
OPPORTUNITIES FOR
PROCESS IMPROVEMENT:
CUT COMPLEXITY AND
STREAMLINE ORGANIZATION
Emmanuel Yoo
Partner, Middle East Financial
Services Practice
Giovanni Pio
Manger, Middle East Financial
Services Practice
emmanuel.yoo@bain.com
giovanni.pio@bain.com
With financial services (FS) companies still feeling
the effects of the global financial crisis, many have
focused on finding ways to create leaner, more
efficient organizations. While no cure-all recipe
exists, our experience with some of the leading FS
players has pointed to the importance of reducing
complexity and focusing on cost efficiency, a
critical driver of shareholders return as shown by
Bain & Company experience (see Figure 1).
Most managers recognize that complexity hurts
their businesses and tends to increase costs. When
Bain & Company recently surveyed executives at
960 companies globally, nearly 70 percent told us
that complexity was driving up costs and hindering
growth. Researching the impact of complexity on
110 companies in 17 different industries including
Financial Services, we found that complexity
substantially reduced business growth potential
(see Figure 2).
For FS companies—from corporate and retail banks
to insurers and credit card issuers—complexity
is an especially pernicious problem because it
is so hard to identify. Goods manufacturers see
tangible evidence of complexity all around them,
but at service companies, complexity is all but
invisible and can grow without restraint. Often
a new “product” can be introduced simply by
piggybacking on existing services and adding a
few new seats and scripts to call centers. It is the
very ease with which new service products can
proliferate that makes the resulting build up in
complexity so damaging.
''
Complexity substantially
reduced business
growth potential
''
To weed out complexity, managers should focus
first on two key areas:
1.
Rooting out complexity in the product and
service portfolio by better understanding
customer needs
2.
Streamlining the organization by finding the
right mix of “spans” and “layers”
Careful customer segmentation can help avoid
complexity cost traps in two ways: optimizing
POINT OF VIEW | EFFICIENCY IMPROVEMENT: CUT COMPLEXITY AND STREAMLINE
Figure 1: Both revenue growth and cost efficiency drive shareholders return, but cost matters more
Incremental Total Shareholder Return
Revenue growth
Tier I
players
Tier II
players
Tier III
players
Performance focus
3.4%
13.7%
4.8%
9.1%
21.9%
85% of high performers
begin with cost focus
Growth focus
• Increasing
the revenue
without fixing
the efficiency
issues has a
limited impact
and increases
complexity
17.3%
2.6%
8.4%
14.3%
Cost Efficiency
focus
Tier III players
Tier II players
Tier I players
• Addressing the
cost issue first
allows to fix these
inefficiencies
and leverage the
full potential of
revenue growth
Efficiency
Source: Bain & Company analysis
the product and service portfolio and reducing
complexity in distribution. The segmentation
process requires companies to identify their core
customers’ needs and develop a focused value
proposition to serve them.
basic services. After introducing online transfers
and deposits, the bank was able to reduce
complexity in its distribution network, increase
branch productivity, and reduce the average time
and cost to serve a customer at branches.
In the Middle East, banks have typically adopted
a conventional approach to defining customer
clusters, focusing exclusively on metrics such as
current deposits and loans with the bank. A better
alternative is to focus on customers themselves,
taking into account criteria such as age, income,
marital status and behavioral patterns. This allows
banks to develop a deeper understanding of their
customer base and how to serve it best.
While aligning the offering with customer needs is
essential to reducing complexity, streamlining the
organization is a second key criterion for success.
As they increase service offerings, companies often
create new, specialized departments or functions.
The result is an increase in the specialization
of managers and reduction of their “span”, or
reach, as well as an increase in the “layers” of
communication between top management and
frontline employees. As organizational complexity
accumulates, costs pile up and ideas and
decisions—the life force of a strong company—
stop flowing smoothly up, down and across an
organization (see Figure 3).
By improving its understanding of customer
needs, a Middle Eastern bank found that its core
customers did not value personal interaction with
a relationship manager when using some of its
POINT OF VIEW | EFFICIENCY IMPROVEMENT: CUT COMPLEXITY AND STREAMLINE
Figure 2: Across industries, less complex companies grow ~1.5x faster than average competitors
Revenue growth
20%
• Researched complexity impact on growth
for 110 companies in various industries
19%
– B2C: Asset Management, Mortgages, Credit
Cards, Airlines, Autos, Cell Service, Cosmetics,
15
Dataset
average
13%
13%
Fast Food, Pharma, Tires
– B2B: Aerospace, Cellular Manufact., Chemicals,
Computer HW, Mining/ Construction, Medical
10
Equip., Steel
7%
• Relevant metric by industry
– E.g. mortgage product/repayment options
5
• Complexity has 7.8x more predictive
power for growth than relative size
0
High
Average
Low
Level of complexity
Low complexity is part of the pattern for a successful business
Source: Bain & Company analysis over a sample of 110 companies in 17 different industries.
High complexity is 1 standard deviation above average complexity; low complexity is 1 standard deviation below average.
Our analysis of more than 125 global companies
revealed that, on average, a manager has a span of
six to seven direct reports and the organization has
eight to nine layers between the top leadership and
the frontline employees. Best-in-class companies
in Bain’s database have average spans ranging
between 10-15 direct reports and no more than
seven layers.
In our experience, bringing spans and layers back
under control requires four steps:
Establish the baseline.
This may be difficult as best practices change by
industry and the organization evolves as people
are hired, fired, or transferred. It is nevertheless
important to arrive at a common baseline as a
first step, as it reveals the extent of the company’s
problem—as well as the potential rewards for
fixing it.
Set stretch targets.
Benchmarking against best-in-class companies
helps get to the right goal. In our experience, it
is best first to understand the mix of employees
and job types (skills-based versus task-based), set
targets by function or business area and work topdown.
Make it happen.
Agreement on the right level of spans and layers
doesn’t always translate to action. Managers
protect people or move employees to other areas
of the business. At this stage, it is thus important
to link the targets for spans and layers to key
performance metrics—and have them be a part of
senior management reviews.
Keep out the fat.
Companies need to invest in management
processes and systems that prevent the
POINT OF VIEW |EFFICIENCY IMPROVEMENT: CUT COMPLEXITY AND STREAMLINE
Figure 3: A lean, flat organization is made of wider spans and fewer layers
Improve structure
Improve ways of working
• Less ‘over the shoulder’ supervision – empowered
associates
Fewer layers
Managers
(at least one
non-admin
direct report)
• Quicker approvals and decision-making process
• Management closer to customer
• Elimination of hierarchy
• Potentially substantial cost savings
Staff
(no direct reports)
Wider spans
Average span
of control*
=
(Total # FTEs) -1
(# Managers)
Reduced hierarchy
Greater productivity
Lower cost
*This calculation is best used to estimate spans for an overall group when not conducting detailed analysis. If conducting detailed analysis, average spans can be calculated from the actual spans of each
manager within the group
- “Total # FTEs” = excludes admin and PA employees
- “-1” = removes the CEO or head of group, as that person is not “managed” and inclusion will throw off calculations
- “# Managers” = # of people who have direct reports (excl. admin/PAs)
organization from sliding back to its old size.
Some smart preventive tactics include setting
up a human-resources dashboard that allows
the organization to track the right metrics, and
holding managers accountable for spans in their
department.
Combating complexity requires this two-pronged
approach of weeding it out in both products
and organizational structures. As the market
environment for financial services firms continues
to be a tough one, focusing on complexity is a
winning way to build a leaner, profitable and fitfor-purpose organization.
INTERVIEW | DAVID MARTIN, HEAD OF BUSINESS DEVELOPMENT, RAK BANK
'' Two winning
factors: keeping
things simple,
and focusing on
service quality
''
INTERVIEW
David Martin,
Head of Business Development,
RAK Bank
INTERVIEW | DAVID MARTIN, HEAD OF BUSINESS DEVELOPMENT, RAK BANK
Julien Faye: After over 15 years as an
executive in the UAE banking industry,
what is your view on the future of the
UAE banking sector?
I will focus on the consumer and business
banking sector in the UAE, RAK Bank’s
core business. There are 30 banks covering
these segments in the Emirates today: there
is obviously room for consolidation. Political
sensitivities exist and will continue to exist in the
future, but consolidation will be forced upon the
banking industry by economies of scale. There
are around 2-2.5 million bankable customers
in this country. Competition among the players
will become more and more intense, which
will drive prices down, which in turn will force
consolidation. The continuing drive toward
increasing regulation in the banking sector will
be another catalyst of change and strategic moves
amongst banks. I see four or five major local
commercial banks emerging in the coming years.
''
I see four or five major
local commercial banks
emerging in the coming
years.
''
Emmanuel Yoo: RAK Bank is one of
the UAE’s most remarkable banking
growth stories. How would you characterize your business model, and how
are you different from your many challengers?
I think we are quite unique in the region for our
extremely narrow focus. This is also a relatively
dangerous path, because your business mix is
critically dependent on two streams: 78% retail,
22% SME (with the mix changing to 60/40 over
the next 2 years). Other banks have tried to replicate RAK Bank’s focused approach, but no player
has managed to develop a sustainable retail fran-
chise. The reason being that, most banks tend to
have three or four main business streams: corporate, treasury, retail, and investment banking. A
maximum of 25% of their income derives from
retail, which therefore accounts for up to only a
quarter of the “mind space” of the executives that
decide on the vision for those banks.
We, in contrast, are absolutely focused on these
areas as our core business. We employ the best
people and develop the best products and services for retail and business banking. This is how
we have been able to grow from a 0.5% market
share in the retail and SME business in 2000 to
15-20% across our major customer and product
segments today. Each month, we acquire 10,000
new banking customers and 5,000 new credit
card customers.
Emmanuel Yoo: In terms of the product
and service offering, what’s your
“secret sauce”?
Two winning factors: keeping things simple, and
focusing on service quality. In terms of product
offering, we aim to meet basic consumer and
SME customer financial needs: depositing money
in a reputable organization with a decent return,
transferring money safely and conveniently, and
borrowing money at a reasonable cost. In terms
of service, I have a team of 55 people in service
quality, which trains staff to meet and exceed
exacting standards. We have realistic service
standards targets across the bank, and regularly
measure them through mystery shoppers and
external agencies.
Julien Faye: Looking ahead, what new
areas of growth do you see in terms of
markets or business lines?
We observe banks overseas and a couple of local
banks attempting the path of international expansion; our preferred growth strategy is to remain
focused and become stronger in the UAE. We
intend to launch an Islamic offering in April
2012, through a platform similar to what other
INTERVIEW | DAVID MARTIN, HEAD OF BUSINESS DEVELOPMENT, RAK BANK
conventional banks have set up. We want to bring
the same level of service quality that we have in
conventional banking into the Islamic banking
space. We believe we have a natural customer
base in the Northern Emirates, where hundreds
of thousands are waiting to bank with us.
Additional areas of growth we are looking at
include the development of RAK Bank Direct online sales platform and social media platforms;
with 70% of UAE residents having access to an
Internet connection, we strongly believe in the
growth potential of this channel.
Emmanuel Yoo: In a growth story like
yours, operations are a critical node.
How high does operating efficiency
rank today in your agenda, and what
recent initiatives have you undertaken
to scale up your platform?
We have been running the bank on operating
efficiency measured by Cost/Income ratio, so far
at 42% (an excellent level for a retail bank). But
this is now changing. We are currently upgrading
our core banking system, and will need to again
reengineer our processes. We already went
through one major reengineering exercise in
2002, when we centralized our back office
operations into one center. Now we are entering
the field of straight-through-processing. Going
forward, we hope to maintain our Cost/Income at
around 40%.
We do cost control, not cost reduction: we have
never made any member of our staff redundant,
and announced again this year that we will not
have redundancies this or next year. Our staff
has grown from 130 people in 2,000 to around
4,000 today; we are a major retail and SME
player, and we intend to remain so.
Julien Faye: Thinking back to your
business challenges and how you have
tackled them, what would be your advice to other CEOs in the region? What
does it take to build a success story?
customer is your
'' Your
Mercedes, and as such
needs to be treated like
one: keep polishing it!
''
First, you formulate your vision and strategic
objectives. Second, you try to find in the market
the best team leaders for the business you want
to create. Third, you implement gradually and in
a disciplined way. In 2000, when the RAK Bank
story began, the clearly outlined strategy was to
become the service leader and most profitable
retail and SME bank in UAE. If you look at our
bank’s evolution, growth rhythm was modest
during the first four years. For example, when
we launched the credit card business, we focused
only on established customers, restricting ourselves to 4,000 credit cards in the first year – a
much slower pace than our board and management had appetite for. Slowly, we then widened
the customer base to non-banking customers,
and now, with 350,000 credit card customers, we
are one of the largest players in the UAE.
Most importantly: you need to understand the needs
of your customers, employ the best people you
can find to satisfy customer needs, and provide
customers with easy access to your services. Your
customer is your Mercedes, and as such needs to
be treated like one: keep polishing it!
Bain's business is helping make companies
more valuable.
Founded in 1973 on the principle that consultants
must measure their success in terms of their clients'
results, Bain works with top management teams to
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and acquisitions and organization. Where appropriate, we work with them to make it happen.
How we do it
We realize that helping an organization change
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practical actions.
Contact information for Bain Middle East, Turkey and North Africa Financial Services Practice
Julien Faye
Partner
Bain & Company
Telephone: +971 4 365 7350
julien.faye@bain.com
Philippe De Backer
Partner
Bain & Company
Telephone: +971 4 365 7360
philippe.debacker@bain.com
Emmanuel Yoo
Partner
Bain & Company
Telephone: +971 4 365 7380
emmanuel.yoo@bain.com
Karaca Kestelli
Partner
Bain & Company (Turkey)
Telephone: +90 532 3377 670
karaca.kestelli@bain.com
For more information, please visit www.bain.com
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