The Introduction to Operational Efficiency blog introduced the Efficiency Ratio and its importance to financial institutions (FIs). However, there are several other tools that an organization can use to help improve their overall operational efficiency.
Here are the most commonly used tools:
Benchmarking is using a set of standardized data to compare one FI against another in order to understand whether or not the institution is staying competitive. The data gathered should be specific, and requires a strong definition and agreement among all participants to prevent, or minimize bias. Benchmarks can be for a specific area of the organization, such as branch operations, or built across the broader organization. In a well-designed benchmark, data is often tracked for a specific and measurable time frame. Benchmarking is most effective when it can be repeated across a period of time, and it’s useful in helping an organization establish better tracking across processes.
Some might refer to Performance Management as “managing by the numbers.” While all organizations do Performance Management in terms of annual reviews of their staff, very few organizations take it to a level where all aspects of the operations are managed and reviewed. In some organizations, this process is manifested in quality control programs measuring a form of quality statistic, such as number of errors per account, or call abandon rate in the call center. However, there are hundreds of measurements an organization can use including financial, production, and quality metrics. When evaluating Performance Management, organizations should be wary of combining too many statistics, this often leads to data overload. Best practice is to maintain one or two key metrics for productivity, cost, quality, and sales within a function.
Lean was a tool originally developed by Toyota for managing production lines in its automobile factories. About 10 – 15 years ago, service organizations began to adopt the principles of Lean, and apply them to their own organizations. Lean is focused on the numbers and metrics of the operation, but includes a customer component.
Lean, in a service environment, always places the voice of the customer at the forefront. Lean helps organizations build a stable operating platform, so they continually have predictable and repeatable outputs. An organization then builds a strong standard operating process (SOP) environment. Managers regularly observe their staff to measure and manage to the SOP environment, and spend about 50 percent of their time managing the production floor, rather than in their offices or meetings.
Next, lean introduces the concept of transparency. Organizations do this through the use of whiteboards that highlight issues, production, current statistics, or other important information. The whiteboards also form the basis for daily huddles by team members to discuss the anticipated activities of the day and plan accordingly.
Invented by Motorola Corporation in the 1990s, Six Sigma is another carryover to the services industry from manufacturing. Motorola was already a big proponent of Total Quality Management, and adopted a very strong quality management program, but felt that they needed to do more. Six Sigma is a methodology that measures how many defects per million instances of something. To reach Six Sigma, the acceptable error rate is 3.4 defects per million.
Six sigma utilizes a concept referred to as DMAIC (Design, Manage, Analyze, Implement, and Control) as the method to achieve its goals. In order to do this, processes and projects have to be managed by specially trained individuals. Like Lean, Six Sigma has proven to be a valuable tool for organizations willing to invest in training, and perform the detailed analysis it requires.
It primarily differs from the other tools because it looks for creating perfection in everything an organization does. Therefore the voice of the customer is not talked about with regards to Six Sigma, perfect processes lead to delighted customers.
This is simply a review of the various operational components of the organization by an industry expert, or consultant. They often bring a sense of what other companies do in similar situations, and may use one or more of the above tools to do a diagnostic and analysis. This is a great solution for an organization looking to jump start its operational efficiency process.
Overall, there are many ways an institution can evaluate their operational efficiency. It is important to remember that every organization is different, and what works for one may not work for another.