Increasing capacity without increasing headcount

More business, more work, more people. Wouldn’t it be great if we could break the retrench : rehire
cycle by taking on less people this time round. Then we really would have ‘more business’ with ‘more
profit’.

It doesn’t take rocket science to figure out that the only way we can do this is by eliminating work.
But, if it was that easy we would have done it already. We’ve done business process re-engineering,
we’ve done a lot of STP, we’ve done six sigma, we’ve done almost all of the fads. We’ve had some
successes, but most have not delivered what we expected let alone what we were promised. It’s
quite depressing really. Has anyone been able to deliver productivity improvements year-in, year-
out? There certainly is no generally accepted benchmark in financial services.

Increasing capacity without increasing headcount means being able to do more with the same
resources; it means increasing the speed at which business is conducted.

There are a number of approaches to reducing the time it takes to do business

• Improving the speed at which staff work - this brings to mind the good old industrial
engineering methods such as stopwatches and time and motion study and the new methods of
six sigma
• Eliminating work that adds no value to the customer, i.e. eliminating waste
• Doing the value-adding work in a different way

One extremely rich source of ideas on different ways of doing things in financial services comes from
Lean Manufacturing methods that were developed to eliminate waste in companies such as Toyota to
achieve extraordinary productivity gains year-in and year-out. Dell’s plant in Limmerick, Ireland has
been able to deliver productivity improvements year-in, year-out. It uses Lean Manufacturing
methods to increase productivity by 3-4% each quarter. Consequently, it has been able to counter
moves to a lower-cost location and is now the only plant controlled by one of the major multinational
electronics makers that still produces personal computers in Europe.

Historically most service businesses have copied industrial systems in their design, as these were
successful systems that had demonstrated ability to achieve scale. However, although Lean
Manufacturing has become the benchmark in industry, its lessons have only just begun to be applied
in service businesses, and JSK Solutions is at the forefront of this movement.

This paper looks at how Lean Manufacturing methods can be applied to achieve extraordinary results
in financial service companies. We will see how easy it is for non-engineers to understand the
methods and how effective they are in a variety of financial service business situations. They really
do prove the adage of how simple things are often the most powerful.
Lean manufacturing methods to increase capacity and improve
service
Increasing capacity without increasing headcount means increasing the speed at which business is
conducted. If one analyses the time taken to complete a transaction from the first interaction with the
customer to satisfying the customer’s needs, one will identify that only a small portion of the total
elapsed time is spent actually working on the transaction. JSK’s experience is that in most service
processes, the amount of time spent adding value to a transaction relative to the total time taken by
the transaction from start to finish (the lead time) is well below 10%. This is illustrated in the diagram
below. The somewhat surprising conclusion that should be drawn from this analysis is that if one
tries to make employees more efficient when they are processing the transaction, then one is only
attacking 5% of the time. And even significant improvements are only a large percentage of 5%. The
emphasis must therefore be on reducing the 80% waste. Key ways of attacking waste are discussed
below.

JSK drives process design from the customer’s perspective;

eliminating tasks a customer would not be happy to pay for

80% Waste 5% Value Adding 15% Sustaining

Checking Raw processing time Risk Management

Sorting Compliance
Copying Long term waste
Reworking
Batching
In and out trays
Work in progress
Authorisation
Filing
Imaging
Processes typically contain 60 - 80 % wasteful tasks
Elimination of errors
The most obvious cause of waste is the time taken for rework to fix errors. However, this does not
imply becoming ‘world class’ at error correction. It means that errors have to be eliminated at source
and a ‘right first time’ mentality has to be inculcated into the business.

Most organisations have already taken considerable steps to eliminate errors in their processes.
However, the challenge that often remains is to eliminate errors flowing from their customers. The
cost of fixing these errors can be viewed as the benefit available from working with customers to
eliminate them. The amount of the benefit implies the amount of investment that is worthwhile
making to work with customers to eliminate errors on their side. For example, poor reference data in
the capital markets industry cause failed trades that have been estimated to cost the industry $12bn
a year to fix (Financial Times, 17 August 2004). That is a pretty large budget to fix the problem to
yield a one year payback on the investment. Alternatively, the cost can be used to determine a price
to charge customers for the work that they create. Somewhat surprisingly, the experience has been
that customers often elect to pay these penalties without complaint rather than fix their systems and
processes to eliminate the charge. Once they knew the cost of fixing errors one of our pensions
administration clients used this successfully to develop a customer services strategy for errors that
originate in the customer’s payroll and HR systems. They identified that errors almost always came
from customers who provided manual records and printouts to update pension-related data. They
imposed a penalty level fee for manual processing. This resulted in most customers switching to
electronic updating, but the fees levied on the recalcitrant customers more than covered the
additional cost of manual processing and error correction.

There are rafts of techniques for error-proofing processes. A three pin electric plug is a classic
example of error-proofing – it is impossible to put it into the socket the wrong way round. In clerical
environments, techniques include drop-down lists of valid names or codes, designing input screens to
follow the flow of the manual forms, pre-filling data on forms and screens with what is already known.

But, even after the waste caused by errors has been eliminated, or at least reduced to acceptable
levels, there are still huge productivity gains to be derived from attacking the remaining causes of
waste, the 80% noted in the diagram above, by changing the way business is done. Below we
review half a dozen systemic issues that we often encounter in financial service processes.

A one-size-fits-all approach
In our opinion, probably the most significant systemic issue is the design of standardized systems so
that all transactions of the same type are handled in the same way, that is, a ‘one size fits all’
approach. For example, all motor claims or current account applications are dealt with in the same
way.

The benefits from a control perspective are obvious, because you only have to worry about one
system, but the impact on productivity is like a hidden tax. Some transactions are more complex than
others and some customers are more important to the business than other, yet they are all handled
the same way. Simple transactions go through the same routines as the complex ones. In other
words, far more effort than is necessary is applied to the simple transactions and they take far longer
to process than necessary.

However, on an 80/20 basis, the simple transactions are most likely to be the majority of transactions.
The cost of this hidden tax can be easily computed, but our estimates show that it is often of the
order of 30% of transaction processing costs. This cost is then compounded by poor service to key
customers because the process does not differentiate or stream the transaction by the importance of
the customer to the business.

Hand-offs
Hand-offs (where the transaction is passed from one person or department to another) are a key
source of delay and error. Delays occur because the transaction goes into a queue or an in-tray,
which we discuss below. Errors and unnecessary effort occur during the start-up of processing a
transaction when the new person has to learn about the status and circumstances of the transaction.
The more that existing information about a transaction is required to continue processing, the greater
the start-up effort and the higher the risk of error. As a matter of principle, hand-offs should be
avoided. When they are essential, the timing of the hand-off to minimize the carry-forward
information is critical.

Excessive control
Excessive control is often caused because all transactions have to go through the same process, so
the simple transactions go through the same control procedures as the complex transaction (for
which the controls were designed). In addition, controls are often added to processes to cater for
specific circumstances, but when these no longer apply, the controls often remain. Similarly, controls
are often demanded by internal auditors or compliance people. The risk-reward profile for this type of
role in a business leads the incumbent to a safety-first interpretation of the situation or the regulations
and hence more controls.

A classic example this has been the ‘gold-plating’ of know your customer procedures that has even
caused the FSA to comment on their excessiveness. A less obvious example of a pretty
useless/ineffective control is the typical supervisory review. The supervisor is required to use their
experience to determine what, if anything is wrong with a transaction. Many times it is not at all
obvious what might go wrong, what the risk is or how significant the consequences could be, or even
how to establish these. This can result in the ludicrous situation where documents are compared to
prove validity but they actually come from the same source. An effective review is one where a risk
analysis has identified the potential for error and the likely cause of the error. Effective supervisory
review specifies what to check and how to identify an error.

Pending work
In-trays or queues of work waiting for a person or team in a workflow environment are also sources of
capacity constraints. In industry, the approach to allocating work pieces in advance of the work is
known as a ‘push’ approach. The drawback is that should a person or team hit a complex transaction
or other delays, then items could still be in their queue when other people have no work to do. There
is an imbalance in the workload. The alternative is a ‘pull’ approach where each person pulls a
transaction from the pool of transactions as they complete the previous one. A pull approach also
enables key customer transactions to be inserted at the top of the queue to be dealt with by the next
available processor, with the obvious benefits for customer service.

Peak workloads
How to handle peaks in demand is always a challenge. Lean Manufacturing uses a number of
strategies to cope, without increasing headcount. One method is to use the ‘pull’ approach to ensure
critical transactions are handled during the peak, whilst others are held back for later processing.
This approach works well in the fund management arena where there is a daily processing window.
High value purchases and sales are handled during the peak whilst low value transactions are
processed later.

Another method is multi-skilling. For example, in many call centres the people who handle the calls
are in one area whilst the people handling the correspondence are in another. Combining the two
skill sets in multi-skilled teams enables the correspondence processors to handle calls during peak
times (albeit with a lower skill level), whilst call-handlers can do correspondence work during their
lulls (albeit, again, with a lower skill level). Multi-skilled teams also have the benefit of being able to
minimize the disruption of the hand-off from call-handler to correspondence person because the
hand-off is within the team. The correspondence person can look across the work area to ask more
questions of the person who took the call.

Co-location
Multi-skilling achieves one level of improvement but co-locating multidisciplinary teams provides a
real step-change in customer service and lead-time reduction. For example, one of JSK’s insurance
clients located underwriters in new business and service teams. The ability to put a client on hold or
promise a call-back and then be able to discuss additional information requirements, terms and even
premium amounts with an underwriter there and then and get straight back to the client has a
stunning impact. The person who handles the call can now take full responsibility for satisfying the
customer’s request. This increases staff morale immensely, dramatically improves customer service
and delivers a significant increase in conversion rates and sales.

Lean Manufacturing and people and organization structures

Lean manufacturing is not just a number of techniques and methods that change the way that people
work. To be really effective one also has to modify the way that the staff are managed, motivated
and rewarded and the way in which the organization is structured.

In planning a move to Lean Manufacturing, there are 4 key factors that have to be addressed from a
People/Organizational Perspective:
Rewards and Recognition
In many organizations the staff are paid for turning up, clocking in and clocking out; that is, no change
from the ‘old’ industrial model. Performance, if it is driven at all, is targeted on numbers of
transactions handled in some timeframe i.e. rewards are based on transaction numbers rather than
service quality. In a Lean Manufacturing environment, the emphasis is put on getting better –
increased efficiency and effectiveness is rewarded and this in turn leads to a continuous drive to
become more efficient.

The approach to work that this engenders is considerably different. In the ‘old model’ it is about
working harder, in the Lean model it is about working smarter. So a move to the Lean Manufacturing
model requires a radical change in the reward system at all levels of the business (both financial and
non-financial rewards), to support a ‘work smarter’ environment.

Management
The impact of Lean Manufacturing is not restricted to the ‘workers’. Management also has to change.
For a variety of reasons most managers only concentrate on their small area. They very seldom
have a process wide perspective let alone an organization wide perspective. They manage what is in
front of them. For Lean Manufacturing to be successful, this silo mentality has to change. Managers
have to manage and cooperate across the few hand-offs that might have to remain in the process for
control, time or geographical reasons.
In addition, the continuous improvement ethic that one wants to instill in the workforce requires a
different management approach to a ‘meet the target’ approach. Managers are also going to have to
‘think out of the box’ to be able to accept some of the recommendations for improvement that are
going to come from their staff.

Organizational Design
The elimination of hand-offs changes organization boundaries. The elimination of errors at source
often forces change in different organization units to where the impact is felt. This provides
challenges for cooperation across traditional organizational boundaries. Managers need to be open
to input from colleagues – they need an agenda set by the CEO that clarifies the requirement for a
‘team first, me second’ stance, so that the business can be organized in the most efficient way
possible for the end result.

Multi-Skilling
As we discussed, Multi-skilling is a big part of Lean Manufacturing to ensure that capacity is not
wasted by job specialization – having people on hand that can’t do the work available. This approach
raises a few key questions:
• Are the existing workforce is capable of multi-skilling or not?
• If not – how will this be dealt with in the most supportive way possible?
• If yes – what combination of training, mentoring and coaching will be required to bring about
the change in skill levels?
 • What management and HR approaches need to be changed/developed to support successful
multi-skilling?
• How will the multi-skilling concept be ‘sold’ to the workforce?

In summary, unless the people side of Lean Manufacturing receives as much emphasis as the
process side – any apparent capacity gains will not be realized even medium-term.

Increasing capacity without increasing headcount is all about eliminating work. Lean Manufacturing
provides a rich source of methods that can be adapted profitably by financial service businesses. But
these new ways of working require management and staff to change commensurately. JSK
Solutions have extensive experience in what it takes to successfully design and implement Lean
Manufacturing in a wide range of financial service businesses and functions to deliver step-change
results in a rapid timeframe.