Warren Buffett once famously stated: “Someone's sitting in the shade today because someone planted a tree a long time ago.” The Oracle of Omaha’s words on planning for the future are more relevant today for banks and Financial Institutions (FIs) in the wake of extreme cost pressures globally.

Declining interest rates and stringent regulatory standards have led to a dip in margins for banks and FIs across geographies. In the U.S., for instance, interest rates fell from 2.5 percent (at the beginning of 2019) to 1.75 percent (at the end of 2019), thereby adversely impacting margins. The rise of digital banks has further mounted revenue pressures on traditional banks. These trends are expected to continue in 2020, resulting in banks stepping up efforts to curb costs and improve margins.

Focusing on People & Skills

Typically, when an organization faces cost challenges, the response is to identify opportunities to eliminate redundancies and embrace / increase automation, as well as leverage offshoring. Not surprisingly, companies have been intensifying their efforts to implement robotics, artificial intelligence and process re-engineering to optimize costs. However, one key aspect that has often been overlooked is the staff and skill mix. The cost benefits that can be derived from right-skilling and right-sizing the staff are significant. The importance of organizational design, and well-defined roles and responsibilities (of stakeholders) across the value chain can never be overemphasized.

Let’s consider the commercial lending value chain that comprises multiple stakeholders such as relationship managers, relationship liaisons, portfolio managers, credit analysts and credit officers, to name a few. Each of these is a specialist role. However, many of these specialists often end up functioning as generalists, leading to inefficiencies and sub-optimal resource utilization. A great example would be a relationship manager, usually responsible for generating new business and driving client strategies, following up with customers on missing underwriting information. Another example would be a relationship liaison, considered as an extension to the role of a relationship manager, managing back-office operations that don’t involve client interactions.

A key dimension to the organizational design puzzle is the inconsistency of roles across regions or clusters. While large FIs are governed by robust systems to ensure consistency, a lot of peripheral tasks vary by region and are more people-led than process-led. This further impacts the efficiency and costs as every region views its own practices as best practices without considering the impact on overall operations.

Achieving the Ideal Mix

In essence, banks and FIs are realizing that inefficiencies are not just in processes but in the functional distribution of teams. By re-organizing roles and building Centers of Excellence (CoEs), banks can achieve 15-20 percent cost reduction through consolidation and elimination of redundant roles.

If we specifically assess the roles of relationship liaisons, portfolio managers and relationship managers, we realize that the ability to effectively communicate with customers (apart from domain knowledge) is a requisite. From a role mapping perspective, individuals with impressive communication skills can start off as relationship liaisons and progress towards becoming relationship managers and beyond. Similarly, an individual with great analytical skills can begin as a credit analyst and grow in the underwriting value chain. On the operations side, individuals with good execution skills but lacking in communication or analytical thinking can tap into opportunities across the back-office value chain. Such extensive mapping provides opportunities for creation of CoEs for specific functions, especially in credit and operations, thereby further enhancing business benefits. Moreover, improved alignment of tasks with roles leads to significantly reduced attrition levels.

To summarize, it is imperative for FIs to re-assess their organizational design every three years to seek opportunities to achieve improved staff and skill mix, and drive robust business outcomes.

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