Banks everywhere are constantly reshaping their back office operations to increase efficiency and reduce costs. But efficiency for efficiency’s sake is not the sole goal – improving customer service, complying with the growing burden of financial regulation and installing new IT systems are other good reasons for reshaping the back office.
Although it is not always easy to carry out these re-engineering projects – especially as they invariably entail working with other functions such as IT, risk and compliance, as well as with the business units – the business benefits can be significant.
National Australia Group (UK), which owns Clydesdale Bank and Yorkshire Bank, has substantially reshaped much of its back office in the past few years. This has involved not only internal technical enhancements, but also outsourcing some non-core activities.
“We have consolidated our processing sites in the past year, reducing the number from 14 to seven,” says John Campbell, head of performance and supplier services, banking delivery services at NAG (UK). “It was part of an efficiency drive, which doesn’t always have to mean reducing the number of people. Having fewer sites to process mortgages, cards and other products means that we reduce our property and infrastructure costs. We have looked for commonality and where we could join things up we either stopped doing it or amalgamated it.
“We aim to make our business more effective and ensure it is properly governed. If we simplify the way we do business, we also create an environment in which individuals can thrive. Cost is not always the main driver; it can be quicker delivery times or improving the customer experience. It is not a question of ‘cheap is best’,” he says.
Regulatory compliance has also been a driving force. When the UK’s Financial Services Authority introduced new rules on selling mortgages three years ago, NAG (UK) had to replace paper-based manual methods with a new front-end automated system to ensure compliance. The new system gave the organisation a single point of data capture for its sales and illustration procedures.
“Technology has been an obvious enabler for us,” says Mr Campbell. “It has enabled us to link the front office to the back office to arrive at a straight-through-processing (STP) solution, which has improved our mortgage-handling capability, enhanced the customer experience and allowed us to meet our regulatory requirements.”
New opportunities
The new mortgage processing system is provided by HML, part of Skipton Building Society. NAG (UK) is a big exponent of outsourcing and Mr Campbell says he is constantly looking for new opportunities to offload a process on to an external provider.
“Outsource providers are investing in key technologies and process improvements continually and banks can reap the benefits of that without having to make the investment themselves,” he says. “It makes sense if you are not a scale player in some aspects of your business. Why invest a large amount of money? You even have to consider outsourcing core as well as non-core processes.”
Other outsourcers that NAG (UK) used include Xchanging for a web-based procurement-to-pay (P2P) system that went live in August, IPSL for cheque processing, Securicor for cash movement, CFH for statement production and De La Rue for cheque book printing.
How closely does Mr Campbell work with other functions, such as IT, and the business areas to achieve the desired outcomes in the back office? “You can’t do anything in isolation,” he says. “We work out what we want to do and then get buy-in from the other areas, do the business case, do the design, build, test and implement.”
There are undoubtedly business benefits, but it can be a “long journey”, he says. “We are trying to make our business more effective and ensure the customer experience is improved, things that will differentiate us from our competitors.”
Global capabilities
BBVA, Spain’s second biggest bank, has recently reconfigured its IT and operations to take account of European regulations such as the single euro payments area (Sepa) and the Markets in Financial Instruments Directive (MiFID). “Our back office needed to become Sepa-compliant so that we could process transactions according to the new rules,” says José-María Jiménez, the bank’s head of global operations.
Regulation is not, however, the main driver of change. BBVA is developing an ambitious programme to streamline many back-office processes to improve services to customers. “We are creating a new operational model that takes full advantage of the global technological and other capabilities of the BBVA Group,” says Mr Jiménez. This has involved building a new operations centre in Málaga, Spain, which became operational this autumn.
“The clear objective is to reinforce relationships with customers while at the same time making progress towards reducing our cost-income ratio to 35% by 2010,” says Mr Jiménez. The ratio last year stood at 39.6%, well down from 43.2% in 2005. “We are one of the most efficient banks in the world but want to continue the trend. Reshaping the back office will help.”
Reorganising processes in the multinational bank has not been easy, especially because so many different stakeholders are involved. “Back-office processes cannot be seen in isolation,” says Mr Jiménez. “Success in changing them cannot be achieved unless there is a clear understanding of what is relevant for the business units and what is not.
“BBVA is structured in a way that ensures the business’s needs are always given the right priority, establishing a mutually enriching partnership between the business areas and IT and operations.”
The business benefits will be an enrichment of the customer experience. Customers are demanding better service and greater efficiency and the bank needs to make sure that its behind-the-scenes processes are up to the challenge. “What matters to our customers is what matters to us, and we make sure that our processes deliver value where it matters,” says Mr Jiménez.
BBVA has embarked on its first offshoring venture, following the Anglo-Saxon model. It set up a company in Peru four months ago to provide help-desk functions for its businesses in Spain, Mexico and other Latin American countries. If it is successful, it may open more offshore centres in the region.
It is taking advantage of the fact that there is a huge pool of inexpensive, Spanish-speaking labour in Latin America. Peru is particularly appropriate because BBVA already has a strong presence there, and labour and other business costs are competitive.
Pan-European imperatives
Erste Bank, the Austrian bank that has expanded by acquiring banks in neighbouring countries to become one of the largest financial services companies in central and eastern Europe, has been consolidating and centralising back offices across numerous banks in multiple countries. “We are going through an alignment process to improve the synergy of our group,” says Herbert Juranek, Erste’s chief operating officer.
“Our group consists of eight different banks so there is a lot of legacy in our operations and IT. The aim is to modernise and consolidate that to reduce costs and make efficiency improvements.”
New regulations, such as Basel II, Sepa and MiFID, are also drivers of change in the back office. “We have programmes across the group to meet the requirements of new regulations,” says Mr Juranek. “For example, we are proud of being the first bank in Europe to get approval from the regulators for the advanced internal ratings-based [IRB] approach to credit risk management under Basel II.”
Local programmes are being implemented, too. In Slovakia, for instance, systems are being replaced in preparation for the adoption of the euro in January 2009.
One of the toughest change programmes is taking place in BCR, Erste’s Romanian bank. “We have 40 different projects going on and we are reshaping the whole bank,” says Mr Juranek. “BCR was many banks within a bank so we are now centralising the processes to increase efficiency.”
Mr Juranek stresses that projects cannot be carried out in isolation by the operations team. “You need to involve the business and have common project teams,” he says. “Each and every project we do has a good business reason for doing it, such as reducing costs, speeding up processes or providing extra services to customers.”
Erste is in the fortunate position of having to manage huge business growth in central and eastern Europe, but it is difficult to control costs. “We are having to find ways of reducing costs in some areas to release capital to invest in other areas,” says Mr Juranek.
Model transformation
Grupo Santander, Spain’s biggest bank, which runs banks in the UK, Portugal, South America and elsewhere, is nearing the end of an operational efficiency programme. In charge is Juan María Olaizola, executive director of manufacturing, whose responsibilities encompass operations, IT, property, change management and a number of other functions.
“Across the group we are well ahead with the transformation of our back-office model,” says Mr Olaizola. “It is almost fully implemented in Spain and well advanced in Abbey in the UK and in Totta in Portugal.
“About 80% of the work that a traditional back office does is unnecessary or error remediation. You need people to bridge systems and to make manual checks on customer information, but we believe that most back-office work can be removed using technology and automating the processes.”
Mr Olaizola says that Grupo Santander’s back-office model bears three key characteristics:
- It uses technology intensively.
- It is “flat”, which means that it can support business growth without increasing the number of staff, because staff are used to control processes rather than conduct them.
- In certain circumstances, manual intervention is required.
“Our back-office model is technology intensive. It relies on our core system, Parthenon, which was designed to facilitate STP. We use it to streamline processes, with very little human intervention required. Reducing manual processes is crucial. We have been streamlining processes for 10 to 15 years to increase STP and avoid human intervention.
“Implementing Parthenon has given us this flat back office. This means that no matter how much work there is, you do not have to increase the headcount. A labour-intensive back office might need 100 people to manage one million cardholders, and nearly 200 people to process two million cardholders. With a flat model, you need fewer than 100 staff to do one million or two million cards. Technology takes care of the volume increase,” says Mr Olaizola. His philosophy is to manage more processes without using more people.
However, staff still have a crucial part to play (the third key characteristic). They are needed to analyse and supervise processes and to look for discrepancies or mistakes. Their role is one of control and supervision rather than processing.
“There are always processes that have to be done manually and cannot be replaced by technology. Even with physical processes, you can still become more efficient. We use highly specialised global factories to do a lot of the work – such as issuing credit and debit cards, or anti-money laundering checks – in one place,” says Mr Olaizola.
Outsourcing is not on Grupo Santander’s agenda, he says. “We don’t outsource our back-office operations. We have our own company, Geoban, which performs all the back-office functions in the global factories I mentioned. It’s not because we don’t like outsourcing; it’s because conceptually we believe there is more strength in leveraging our own capabilities.”
A CIO’s perspective
UK bank Lloyds TSB has been pursuing ever greater levels of operational efficiency for many years. “Our organisation has been focusing on lean manufacturing processes for some time,” says Clive Whincup, divisional chief information officer (CIO), UK retail banking and general insurance at the bank. “We have consolidated the back office into common shared environments and focused on ‘lean sigma manufacturing’.” On the insurance side, for example, last year the bank completed the automation of its claims processes, using SAP.
Mr Whincup believes that the main drivers of change in the back office are cost, customer service and efficiency. The need to comply with new regulations is not, in his view, much of a push factor.
The biggest difficulty faced is usually in re-engineering end-to-end processes. “The back office is relatively straightforward. It’s an internal operation. But streamlining the end-to-end processes requires a much better engagement with the business,” says Mr Whincup.
The benefits of improved operational efficiency in back-end processes are clear, he says. “We have made significant cash savings, improved service quality and accuracy and made fewer errors per transaction. There is more to be done, though. We are looking at more automation and more processes being re-engineered so we have more STP.”
A consultant’s view
Andy Stewart, a partner in the European financial services division of Fujitsu Services, has broad experience of what banks are doing in this field. “The reason for reshaping the back office is not usually to comply with regulation or update IT, but to build, reduce costs, become more flexible and facilitate growth,” he says. These objectives require building a more resilient and stable platform with outputs containing fewer errors.
“Banks don’t improve back-office processes for the sake of updating IT or meeting regulatory requirements, though better IT and regulatory compliance are outcomes,” says Mr Stewart. “The only exception – where regulation is a driver – might be Sepa, which is having a big impact on banks and causing them to rethink their architectures for payments.”
Outsourcing and offshoring will continue to grow in popularity for processing payments, mortgages, cards, personal loans, securities and many other products and functions, “although chief operational officers and CIOs are taking a more sophisticated, ‘in the round’ view of sourcing rather than just opting for a basic outsourcing model”, says Mr Stewart. “They are fundamentally assessing processes, decomposing them and reconfiguring them in different sourcing models, which is leading to more sophisticated sourcing regimes.”
