Feature – Watching the lean machine

More and more financial services companies are embracing ‘lean’ processing. Neil Warman, chief commercial and finance officer at HML, explains what lean means and why it is advantageous for firms

One of the consequences of the recent market downturn is that financial institutions are now placing even greater emphasis on enhancing value for customers and reducing wasteful and inefficient processes.

And one of the ways of doing that is through lean processing. The concept isn’t new to the UK financial services industry; a number of leading financial institutions have implemented lean processing principles with great success. However, it’s an approach that hasn’t been universally adopted, despite the considerable benefits it is capable of delivering.

Some senior managers view ‘lean’ as the latest management fad and dismiss it as being only relevant to the manufacturing industry, but nothing could be further from the truth. In a market where it’s very difficult for financial institutions to create highly differentiated products and services, lean processing ensures the focus remains on delivering customer value, which not only helps increase sales but also ensures that non-essential and wasteful processes are eliminated.

What is ‘lean processing’?

So where did the concept originate and what is ‘lean processing’?

Lean manufacturing was first developed by Toyota shortly after the Second World War. Chief engineer Taiichi Ohno visited a supermarket in the US and was impressed by the way the store was able to reduce waste and improve efficiencies by focusing on actual sales rather than projections and targets. He applied the lessons from what he saw to car manufacturing back in Japan and was able to generate immediate improvements.

This new approach, which became known as the ‘Toyota Production System’ (TPS) was quickly adopted by other Japanese companies and, ironically, given that the idea stemmed from a visit to an American supermarket, US executives then travelled to Japan to study the method so they could adopt TPS techniques themselves. The term ‘lean’ manufacturing was coined when James Womack published his book ‘The Machine that Changed the World’ in 1990, which compared and contrasted US, European and Japanese car manufacturing processes.

Value

Although lean was developed by car manufacturers, it is equally applicable to any industry, be it manufacturing or service based. The basic principle behind lean is that any use of resources for anything other than the creation of value, where ‘value’ is defined as an action or process for which a customer is willing to pay, is wasteful and should therefore be eliminated.

Put another way, it’s about preserving value while at the same time reducing the work involved and therefore eliminating waste. If customers don’t place value on a process then the obvious question is ‘why do it’? The logic is irrefutable, but applying lean principles within an organisation that may not readily accept it is being wasteful, is not at all easy.

A number of wasteful processes have evolved in financial services companies as a direct consequence of the adoption of traditional, vertical, departmental structures. Consider, for example, a mortgage application, where marketing activity leads to sales opportunities that generate customer enquiries and applications, which are then underwritten and administered. At each stage one department hands off work to another, which creates highly complex processes, duplication of effort, lots of wasted time and, ultimately, errors. All of which adds no value for customers and cost banks and building societies millions of pounds.

Workflows

The next step is to analyse business flows. Financial institutions typically use large computers to process big batches of data that are pushed out to the workforce for processing. However, ‘pushing’ work at employees can cause inefficiencies and unnecessary delays. Lean processing turns this on its head and puts the emphasis on ‘pulling’ customer requirements into the business, which not only eliminates efficiencies, but also ensures that resources are focused on activities that deliver customer value.

The analysis of value streams and workflows can have profound effects on a business, not just in terms of how it’s structured but, most importantly, how it thinks about what it does. When lean is initially introduced within a business, it tends to be seen as an event; a new activity which is imposed on the organisation. However, when lean becomes embedded in a business, it becomes part of its culture. This transition from ‘event’ to ‘culture’ is far more important than it may at first appear, because when business strategy and culture clash, it’s usually ‘culture’ that wins!

Business culture

Making lean part of business culture depends on winning over employees and answering that fundamental question: ‘what’s in it for me?’. The sub-questions that follow are frequently ‘will it make my job easier?’, ‘will it get rid of problems?’ and ‘will it increase my job security?’. The challenge is to ensure people don’t feel threatened by lean processing and one way to help them recognise the benefits is to place the focus firmly on customers. Most employees like helping customers and if they recognise customers benefit, then they’re usually more willing to embrace the changes lean processing introduces.

As far as lean processing is concerned, customers are not simply the buyers of products or services; they can also be internal customers. When employees start treating each other as customers, then an organisation knows that lean principles are truly embedded in its culture!

At that stage, the emphasis then switches to the pursuit of perfection. But, as we all know, perfection is an elusive ambition and the challenge is therefore to implement a state of continual improvement, in which staff are always seeking opportunities to reduce wasteful activities that don’t ultimately add value.

Explaining how lean principles can be introduced to and developed within an organisation goes well beyond the capability of this article. Many books have been written on the subject and courses and consultancies exist with the sole objective of helping businesses understand the many benefits of lean (if you would like further information, a useful starting point is the lean forum, which has been jointly developed by HML and specialist lean consultancy, OEE. The lean forum website can be found at: www.oeeuk.com/oeecommunity-leanforum.asp).

Benefits

What is indisputable, however, is the benefits that lean can and does deliver. In a study undertaken by the US-based Financial Services Operation Council, companies implementing lean techniques reported cost reductions of between 20 per cent and 40 per cent in the first 12 to 18 months. But cost reduction is not the only positive outcome. In the financial services industry lean reduces transaction times, improves customer satisfaction, helps businesses differentiate their service propositions and drives up the quality and dependability of customer service.

Regulation

Implementing lean within a highly regulated industry is not without its challenges and it’s easy to understand that some activities may be viewed as unnecessary from a lean processing perspective, but are necessary in order to comply with regulations. However, that doesn’t mean lean doesn’t work in a regulated market; regulation has to be taken into consideration and compliance viewed as an essential output. Lean can also be applied to regulatory processes, which often benefit from being streamlined and improved. The Financial Services Authority has no qualms with the concept of continuous regulatory improvement!

Companies constantly change and evolve; they always have and always will. The recession has accelerated the speed of change and processes that were once perfectly appropriate and acceptable now need to be reviewed and updated. Lean is all about continuous improvement and really understanding how a company does what it does and how it can make improvements for the future.

When the economy does pull out of recession, as it will do, those businesses best placed to take advantage of the upturn, will be those that understand how and where they are able to add value to what they do for their customers.

Executive Summary

• The concept of lean processing started in the car manufacturing industry but is easily transferable to financial services. Lean focuses on delivering customer value, which helps to increase sales and eliminate waste.
• The basic principle behind lean is that any use of resources for anything other than the creation of value, where ‘value’ is defined as an action or process for which a customer is willing to pay, is wasteful and should therefore be eliminated.
• When lean is initially introduced within a business, it tends to be seen as an event; a new activity which is imposed on the organisation. However, when lean becomes embedded in a business, it becomes part of its culture. This transition from ‘event’ to ‘culture’ is important because when business strategy and culture clash, it’s usually ‘culture’ that wins.
• In a study undertaken by the US-based Financial Services Operation Council, companies implementing lean techniques reported cost reductions of between 20 and 40 per cent in the first 12 to 18 months. Lean also reduces transactions times, improves customer satisfaction, helps businesses differentiate their service propositions and drives up the quality and dependability of customer service.
• Companies constantly change and evolve. The recession has accelerated the speed of change and processes that were once perfectly appropriate now need to be reviewed and updated. Lean is all about continuous improvement and really understanding how a company does what it does and how it can make improvements for the future.