realities and myths of scaling up for growth transform to outperform december 2010 confidential and...

Realities and Myths of Scaling Up For Growth

Transform to Outperform

December 2010

CONFIDENTIAL AND PROPRIETARYAny use of this material without specific permission of McKinsey & Company is strictly prohibited

Bancon plenary presentation document

McKinsey & Company | 2

The next decade will see massive scale-up of Indian banks in terms of size and complexity

SOURCE: McKinsey analysis

ESTIMATES

Scale-up in terms of size

▪ Increasing diversity of product/market segments (e.g., youth/retirement; urban/rural; emerging/large corporates)

Scale-up in terms of complexityScale-up in terms of complexity

5x

5.5x

4.1x

▪ More sophisticated customer needs and interactions (e.g., integration with corporate ERPs, supply chain financing)

▪ Increasingly expansive network of JVs, partners and alliances (e.g., payment specialists)

▪ Increasing competitive intensity (e.g., NBFC specialists, IT, Telco, Retailers)

▪ Increasing pace of regulatory change and globalization

Assets

Profits

Market Cap

6000 30,000

2010 2020

60 320

690 2,800

’000 cr

Performing banks will be 2-3X their current size in assets in next 3-4

years

Banks will enhance structures, talent and processes to cope with

complexity


However banks will need to see through the myths and realities associated with four barriers to scale-up

Balancing operating architectures for scale and responsiveness

1Differentiate customer experience while improving productivity

2Using IT as competitive weapon

3 Building required leadership & talent

4


Reality: Balance between need for scale and need for local responsiveness will vary by product/market CASE EXAMPLE

1

Key drivers

▪ Maturity of processing infrastructure

▪ Inherent riskiness of product/market

▪ Last mile constraints

▪ Availability of talent

1

2

3

4

Urban Retail Loan origination

Typical operating architecture for major Indian banks by product/market

SME loan processing

Urban CASA opening

Rural banking

▪ Highly centralized with typically 2-3 processing sites across nation in some cases

▪ Regionally centralized with 30-50 retail loan processing sites for home loans; servicing may be even more centralized

▪ Education and auto loans may be processed in the branches

▪ City-level centralized with 60-80 SME processing centres targeting 40 major cities which account for most of the opportunity

▪ Primarily done through branches

▪ In some select, high opportunity districts, may use district-level hubs

Centralized

Decentralized


Myth: Decentralised models are moreefficient than the centralised ones

DISGUISED CLIENTEXAMPLE

Mortgage Bank A – Centralized

Mortgage Bank B – Decentralized

Operating model

Single processing center nationwide

~20 processing centers, located at each wholesale branch

Scale

~20,000 loans p.a., processed at a single location

~20,000 loans p.a. processed across the network

Underwriting turn-time

>3 days 1-2 days

Unit cost per loan1

>$1,200 <$900

1

Drivers of performance▪ Superior coordination

from front to back office

▪ Standardised processes across all processing units

▪ Optimised network architecture across front- middle- back office

1

2

3

1 <____>


Reality: 5-7 major processes account for >70% of customer interactions and operations headcounts

Major processes

Typical performance focus

Average banks Best in classMetric

Account opening and depositsAccount opening and deposits

Application to issuance of welcome kit

5-7 days 1-2 hours

Home loan processingHome loan processing

Application to disbursement

12-15 days

<3 days

SME loan processingSME loan processing

Application to disbursement

18-20 days

5-7 days

Branch sales Branch sales

Quality of advice

Product specialist

Team-based

Customer careCustomer care

Time elapsed for resolving problem

SpeedPredict-ability

SOURCE: FIG O&T Practice

1


Myth: Inherent trade-off between customer experience and productivity

Median across 3 banks

Best in class

5-7

15-18-69%

3-5

1-2

+167%

<3

10-12-73%

Credit appraisal productivity

Impact of eliminating waste in home loan processing (composite across 3 big Indian banks)

Applications lost due to delays

Turn around timeSources of waste

Days

Files per day per FTE

Percent

2

▪ Multiple and error-prone hand-offs

▪ Complex procedures and documentation

▪ Mis-aligned capacity and demand

▪ One-size-fits all process


Reality: Lean methods have unlocked capacity and increased speed in developed and emerging markets

30

30

35

35

40

65

70

70

80

40

80

30

30

35

50

50

60

60

Australia

UK

UAE

Peru

Chile

US

Malaysia

Singapore

US

Branch

Branch

Branch

Cycle time reductionCapacity increaseCountry Channel

Branch

Branch

Intermediary

Field sales

Branch

Direct


Percent

2


Reality: Information, not just technology will be the strategic weapon of future

SOURCE: 2010 Transforming Banking through IT Survey of Indian banks

7

73

Decrease

20

Keep same

Increase

Future IT spend

Planned future IT spend % of CIOs who selected the option

Future priority investment areas for IT% of of CEOs that ranked a given choice in Top 3

Alternate retail channels

Core Banking System

Support function systems (e.g., F&A, HR)

CEO response

10

11

29

43

54

Specialised product systems1

1 Examples include cash management, trade finance, treasury systems and others

MIS/CIM/Risk management

Increasing IT investments … ... with particular focus on MIS/CIS/Risk

1. Create an on-demand information architecture

2. Establish information governance

3. Build informa-tion analytics capability

…will make information a strategic weapon

3

McKinsey & Company | 10 SOURCE: 2010 Transforming Banking through IT Survey of Indian banks; McKinsey analysis

Challenges faced in using IT effectively

% of CIOs who ranked given choice in Top 3

% of CEOs who ranked given choice in Top 3

21

29

43

43

50

86

Organisation structure of IT is not aligned to support business units effectively

Difficult to justify economic benefit of IT

Revamping legacy systems

Gaining access to technical talent

Limited understanding in the business managers on how to use and manage IT

Business processes and practices do not change enough to fully realise the benefits of IT and automation

33

33

27

40

87

60

Reality: The main barrier to scaling with IT is not technology, it’s people and mindsets

3


Reality: Architectural simplification is key to scalable IT platforms

SOURCE: Corporate and Press releases

▪ Single technology platform – PARTENON

▪ 2 Regional IT development centres: Madrid and Chile

▪ Four regional operating centres– Madrid– Milton Keynes (UK)– Queretaro (Mexico)– Sao Paulo (Brazil)

▪ Significant cost savings: 25% reduction in transaction costs

▪ Rapid product delivery

3


Reality: Massive leadership gap – especially in public sectors

Addl. required in 2015

300-350

Others (faster promotions, direct hiring)

100

280-300

10

70-80

GapBaseline in 2010

Non-retiring pool

Estimation for officers of the rank of AGM and aboveIndex=100


CASE EXAMPLE

The bank needs to aggressively accelerate capability building of its senior executives to enable them to lead a bigger, more complex organisation

4


It is crucial to embed new leadership skills by applying them in the fields, otherwise it is just theory that will soon be forgotten

3 weeks 3 monthsLearning through Formats

70% 10%Explanation (listening)

▪ Presentation/speech▪ Manual/flyers▪ Video▪ Discussion

72% 32%Example (seeing)

▪ See someone doing

85% 65%Experience(doing)

▪ Role play▪ Practical application day-

to-day

100% 100%Experience(teaching)

▪ Leading others to do▪ Coaching own team▪ Teaching other leaders

Effectivenessmeasured after

Reality: Adult learning research suggests learning is most effective when embedded in real life application

SOURCE: Pesquisa IBM; Whitmore, Coaching

4


Myth: Higher compensation will guard against attrition

6,108

3,542

3327

20

35

61

88

24

15

SOURCE: P360 benchmarking

Above average players

Below average players

Percent

US$/annum

Percent Percent

Percent

Cross-skilling ratio Team leader attrition

Agent compensationProportion of team leaders, ops managers grown internally

Attrition

4


61

12-18 42

< 12

18-24

>24 72

56 104

133

98

114

Higher employee tenure does not ensure higher productivity

Variation in employee productivity

652

341

48%

6.5

9.2

29%

1 Average time taken to service a request / answer a call2 Only agent compensation is considered for calculation

Average processing timeMinutes

Cost per transaction INR

ProductivityCalls/day

Cost per callINRMonths

Example 2: Credit card customer service

Example 1: Email customer service

4


Question

If you are 7 or below on the 10-point self-test, it is time …

1. Hand-offs across functions in all major processes are few and error-free

2. Network of processing sites has the right balance between centralization and de-centralization

3 Limited variance in productivity and TAT across processing sites

4. Ability to meet customer expectations at key moments of truth is monitored and at acceptable levels

5. Productivity of key resources (e.g., credit officers, RM) in major processes is competitive

6. Internal leadership benchstrength to manage larger and more complex businesses is sufficient

7. Your ability to recruit high quality talent and retaining it is high

8. Your training programs are working effectively in delivering the skills and mindsets you need

9. Your IT platform can scale effectively in supporting new products, channels and expected business volumes

10. Your ability to manage information for effective decision making is high

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