The document discusses the realities and myths that Indian banks will face as they scale up over the next decade to meet increasing size, complexity, and customer needs. It addresses four common barriers to scaling up - operating architectures, customer experience vs. productivity, using IT strategically, and building leadership talent. The document provides examples and analyses to show that balancing centralization and decentralization, eliminating waste from processes, treating information as a strategic asset, and developing leadership skills are important for banks to successfully scale up.
The document discusses the realities and myths that Indian banks will face as they scale up over the next decade to meet increasing size, complexity, and customer needs. It addresses four common barriers to scaling up - operating architectures, customer experience vs. productivity, using IT strategically, and building leadership talent. The document provides examples and analyses to show that balancing centralization and decentralization, eliminating waste from processes, treating information as a strategic asset, and developing leadership skills are important for banks to successfully scale up.
The document discusses the realities and myths that Indian banks will face as they scale up over the next decade to meet increasing size, complexity, and customer needs. It addresses four common barriers to scaling up - operating architectures, customer experience vs. productivity, using IT strategically, and building leadership talent. The document provides examples and analyses to show that balancing centralization and decentralization, eliminating waste from processes, treating information as a strategic asset, and developing leadership skills are important for banks to successfully scale up.
Transform to Outperform December 2010 CONFIDENTIAL AND PROPRIETARY Any use of this material without specific permission of McKinsey & Company is strictly prohibited Bancon plenary presentation document McKinsey & Company | 1 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 complexity Scale-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 McKinsey & Company | 2 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 1 Differentiate customer experience while improving productivity 2 Using IT as competitive weapon 3 Building required leadership & talent 4 McKinsey & Company | 3 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 McKinsey & Company | 4 Myth: Decentralised models are more efficient than the centralised ones DISGUISED CLIENT EXAMPLE 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 loan 1
>$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 <____> McKinsey & Company | 5 Reality: 5-7 major processes account for >70% of customer interactions and operations headcounts Major processes Typical performance focus Average banks Best in class Metric Account opening and deposits Application to issuance of welcome kit 5-7 days 1-2 hours Home loan processing Application to disbursement 12-15 days <3 days SME loan processing Application to disbursement 18-20 days 5-7 days Branch sales Quality of advice Product specialist Team- based Customer care Time elapsed for resolving problem Speed Predict- ability SOURCE: FIG O&T Practice 1 McKinsey & Company | 6 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 time Sources 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 McKinsey & Company | 7 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 reduction Capacity increase Country Channel Branch Branch Intermediary Field sales Branch Direct SOURCE: McKinsey analysis Percent 2 McKinsey & Company | 8 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 systems 1
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 | 9 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, its people and mindsets 3 McKinsey & Company | 10 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 McKinsey & Company | 11 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 Gap Baseline in 2010 Non-retiring pool Estimation for officers of the rank of AGM and above Index=100 SOURCE: McKinsey analysis 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 McKinsey & Company | 12 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 months Learning 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 Effectiveness measured after Reality: Adult learning research suggests learning is most effective when embedded in real life application SOURCE: Pesquisa IBM; Whitmore, Coaching 4 McKinsey & Company | 13 Myth: Higher compensation will guard against attrition 6,108 3,542 33 27 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 compensation Proportion of team leaders, ops managers grown internally Attrition 4 McKinsey & Company | 14 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 call 2 Only agent compensation is considered for calculation Average processing time Minutes Cost per transaction INR Productivity Calls/day Cost per call INR Months Example 2: Credit card customer service Example 1: Email customer service 4 McKinsey & Company | 15 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