A Systems Approach to Bank Management: A Solution Blueprint

How can a systems approach be leveraged by banks to develop a solution that would aid integrated bank management? A combination of influential ideas, the current context and available technology appear to enable this approach now more than ever before.

Banks are multi-dimensional service organisations. They work across customer segments, geographies, regulatory environments, technologies, vendors, and staff. Enduring successful management requires careful planning and execution while taking into account material change across dimensions and impact of change in one dimension on the other dimension(s).

Most banks could explore a model to manage themselves more as a ‘system’ rather than a sum of parts. Today, various aspects of the banks are loosely connected by means of financial goals or budgets and capital allocation. This article explores the systems approach, along three dimensions, with a view to provide bank management with a practical tool.

1. What are the contributing and agenda-setting ideas that suggest this approach (explicitly or implicitly)?
2. What is the proof that banks need for such an approach?
3. What technology options exist and what could be the elements of solution design?

Ideas Related to a Systems Approach

Mr. Geneen’s monkey

An American CEO once quipped ‘When I am finished, a monkey would be able to run it’, referring to his company and the structures he had put in place. Infamously, this quote is often used in management literature to highlight short-term thinking and extent of radical change that no structure can typically manage. When viewed with a positive lens, the idea/vision behind this statement can be ‘agenda-setting’.

Restless Inc.

Richard Pascale, a management guru, attributed the success of Honda in the US to its state of restlessness, rapid re-adjustments collectively termed by him as ‘organisational agility’. Agility and its measurement is a key topic on the agenda of most banks. The same state of restlessness was articulated by Andrew Grove as ‘paranoia’ in his famous book.³

Blind and paralysed

The remedies to factors that cause decline at most organisations are in the control of management.⁴ In effect, this means that either an organisational ‘blind spot’ or a ‘response paralysis’, or both, typically hinder execution of preventive action. Vertically aggregated structures don’t alleviate the situation either. Solutions are needed to ensure vision and responsiveness.

The learning organisation

Peter Senge’s work on the learning organisation in his book ‘The Fifth Discipline’ advocates viewing the organisation as a whole and not merely a sum of its parts. He emphasised that systems can be understood by contemplating the whole and not by any individual part of the pattern. He also emphasised the ‘co-relation’ between sub-systems in organisations that work as a set of interconnected sub-systems - hence decisions made in one part of the business have implications for the other parts.

Strategy, structure and systems to purpose, process and people

Most organisations today have been built on the strategy, structure and systems (SSS) (command and control) philosophy. Collaborative change programmes typically fail or have limited success because they are just IT systems and processes that are implemented on a structure that inherently does not support such an approach. With more and more collaboration, organisations have already started to evolve into the purpose, process and people (PPP) model whether specifically acknowledged or not.

Living systems theory

James Miller observed living organisms and defined the living systems theory by suggesting eight levels of hierarchy and 20 typical sub-systems that comprise any living system. ‘Self-organisation’ in the wake of change is an important quality of living organisms that he highlighted. When applied to a banking organisation’s context, the pursuit of ‘self-organisation’ can throw up interesting views.

Across these six ideas that have been voiced over couple of decades, it is evident that a holistic approach holds the key for integrated management of organisations. Banks are no exception to this.

Could a Systems Approach Have Prevented the Sub-prime Crisis?

Would a systems approach have prevented the sub-prime crisis? It would have at least raised sufficient warnings. An extraordinary growth in any part of a living organism is a clear cause for concern and would draw attention. Extra growth in a living organism would be tantamount to serious issues like tumor or cancer, for example. Whereas, in a traditional bank management context, growth in one sub-system (LOB) is encouraged and rewarded may be, such as in the case of sub-prime mortgages, detrimental to the bank either in the short- or long-term.

In the Banking Context - ‘Banks as Living Beings’

Manufacturing, due to its tangible value proposition, has the benefit of naturally adopting systems thinking at least in its output, e.g. cars, if not in the organisational structure. In the services industry, such as banking, organisational structure and service delivery are inseparable, and hence adoption of systems thinking is inherently more complex. A single view of the customer, attempted by most banks, is the initial step in the manifestation of systems thinking, albeit at the customer end. Other examples include a 360? appraisal from a performance management/HR perspective.

For any vision or an idea to become a reality, a couple of accomplices are needed - ‘tools’ and ‘context’. The challenging ‘context’ that banks find themselves in and the collaborative ‘tools’ that are available in the market today have made the concept of a systems approach to bank management possible.

Should Banks Adopt a Systems Approach?

Banks can attempt to answer the following set of questions to undertake a self-evaluation. If the answers to the questions are either ‘no’ or ‘not sure’, then the context may be just right for adoption of systems approach.

• How is balance ensured between activities that support short-term performance and medium- to long-term health?
• How are projects that are designed to deliver cost savings or higher customer satisfaction initiated and tracked?
• Is there an atmosphere of challenging the norm, as against resting on laurels?
• Is there a common knowledge of how to track and respond to various classes of competitors’ actions?
• Is the opportunity cost of inaction to a market trend captured?
• Is the innovation pipeline built, managed and transitioned in a structured manner?
• Is the collective knowledge of the people in the organisation leveraged?
• Is ‘re-invention of wheel’ uncommon?
• Are employees operating as the ‘eyes and ears’ of the bank?
• Are consistent channels defined and available, for a bottom-up flow of information from frontlines to relevant top levels in the bank?
• Are employees aware of multi-dimensional metrics used by the bank to measure its short- and long-term performance and the relative score?
• Is the interplay between such metrics measured and used for decision-making?
• Is there a structured approach to leveraging best practices across global offices?
• Does the management only use short-term performance for rewarding employees?
• Are employees empowered, self-directed and bound by common goals?
• Is there an integrated model to address the above?

Most banks would have attempted elements of some of the above with varying degrees of intensity and automation. Lower automation leads to individual discretion and gives rise to non-standard practices and presumed compliance. An integrated approach with an execution focus will be needed to deliver beyond the incremental results.

The Solution: What It Is

The following are high-level descriptive statements of the solution that banks can build to assist in managing the bank as a system/whole. The solution is:

• An IT-enabled application.
• A trigger and track for various change/transformation programmes.
• Internal and external monitoring and related flow of primary information and activity flows in the organisation encompassing think, build and operate dimensions.
• A real-time index/pulse reflecting score of organisational activities across short- (run the bank)⁸ and long-term (change the bank) against clearly defined metrics including co-relation.
• A tool to maintain balance between short-term and long-term activities.
• A bank’s ‘central nervous system’ to which every employee contributes. Contribution can be an information, observation, status, or opinion as per the nature of the parameter.
• A systematic documented basis for running the bank as a whole.
• An integrated tool, or ‘glue’, for managing the ecosystem of a bank encompassing customers, employees, partners and regulators.

The Solution: What It Is Not

• It is not ‘theory’.
• It is not limited to a typical management information system (MIS) with post-mortem focus.
• It is not a silver bullet in itself.

Tools

Two primary technologies that have been acknowledged as having far-reaching consequences can be leveraged in this pursuit of ‘systems approach to agile bank management’.

1. Web 2.0 and other collaborative technologies can be used to tie up the heads and hearts of people across the ecosystem comprising of bank staff, partners, and vendors. Web 2.0 technologies can be the basis of change programmes and also be the basis of this IT application.
2. Workflow, modelling, statistical, business rules and visualisation tools can aid in managing the complexity inside and presenting user friendly and intuitive access to this application. Complex event processing (CEP) tools will be required for banks opting for greater granularity.

Low Level Solution Elements

The following functionalities will be essential pieces, at a minimum, in designing an application that can truly support a bank’s management on a holistic basis:

Identify the core ‘level 0’ parameters

Level 0 parameter(s) is the highest level of grouping that encompasses all types of events, actions and value adding activities that banks indulge in. We identified 10 ‘level 0’ parameters on an illustrative basis - sales, servicing, people, income, financial performance, cost management, project health, risk, public opinion and customer satisfaction. While some of them are performance/short-term oriented, others are health/long-term oriented. Some of the parameters reflect a dual orientation. Accordingly, the parameters should be marked as such in the application.

Identify and tag sub-parameters

A level 0 parameter, when broken down to smaller parts, would form sub-parameters. Sub-parameters when taken together should deliver level 0 in its entirety. Based on the complexity and willingness of top management, multiple levels of sub-parameters can be incrementally added. All the parameters when combined should essentially resemble a bank’s ‘nervous system’. For those level 0 parameters that demonstrate a dual orientation (performance and health), the sub-parameters can be tagged as performance or health as the case may be. Low level detailing for a few of the level 0 parameters is provided below on an indicative basis:

Level 0 - People

• Level 1 - Internal parameters and external parameters.
• Level 2 - Internal parameters - training sought and complete, irritable policies identified and scrapped, job rotations, multi-role time sheets, ideas/information/job marketplace activity etc.
• Level 2 - External parameters - external employer ratings, etc.

Level 0 - Project health

• Level 1 - Pipeline, new technology, monitoring.
• Level 2 - Pipeline - product/service innovation registered, process innovations, business model innovations, etc.
• Level 2 - New technology - number of new technologies tracked, number of prototypes, number of market releases, etc.
• Level 2 - Monitoring - project mix (RTB/CTB, etc), overruns, shelved, progress monitoring, etc.

Level 0 - Sales

• Level 1 - Number of new customers, number of new accounts live after ‘x’ months, number of products per customer, percentage of movement between groups, etc.

Weightage

Weights can be assigned to level 0 and sub-parameters to assist in according to relative importance as per change in the operating environment. It will be a good practice to assign financial/dollar value to an event to prevent important events from becoming obscure under the weight of multitude of weighted parameters. Changes in weightage accorded to various parameters should be documented within the application, supported by clear business logic and auditable. This will ensure a transparent and consistent index that reflects the true picture of the bank’s performance.

Target monitoring

Multiple events/activities are mapped to parameters. Such events need to have the following key attributes - ‘n’ level of steps in fulfillment, key dates, lead and lag impact, and frequency of review. Based on the parameter type and the nature of response of the bank, such attributes would aid in managing, measuring and maneuvering activities.

Scoring

Scoring scale may be defined for all events on a standard scale. Fulfillment steps/levels would need to be reverse fit to the standard scale. All events will be scored as per frequency of review. Since all the parameters are classified as performance or health, scores can be arrived at for each of the groups on real-time basis that can be dubbed as ‘performance index’ and ‘health index’.

Define co-relation

Co-relation between parameters (cause and effect relationship) at level 0 could be defined based on a judgmental approach and refined as per empirical evidence gathered over time. Along with co-relation, the order of execution should be defined to avoid circular reference. Co-relation at a level lower than ‘0’ will provide greater granularity and should be attempted as per bank’s appetite.

Replicate parameters at unit levels

To start with, the parameters may be replicated at an LOB level and/or a geography level to replicate the bank’s as-is structure. As per nuances of performance, opportunities for re-organisation may evolve from time to time.

Factor in external benchmarks

Where available, external benchmarks can be factored in for relative measurement. More than one benchmark may be tagged with weightage based on reputation of the source. However, care needs to be exercised in comparing even apparently comparable numbers. For example, while cost-to-income ratios are typically comparable, adjustment for ‘business mix’ needs to be factored in. For some parameters an external benchmark may not be available and hence provision for an internal substitute/target needs to be made.

Workflow

The set-up, acceptance and monitoring processes of all events should be supported by an electronic workflow with in-built TAT’s and escalation paths. A good principle to apply would be ‘a flow for everything and everything in its flow’.

Communication

Integration with various online communication models, such as e-mail or web portals, can assist in helping employees play their designated parts. Advanced communication tools, such as video-conferencing, wikis and virtual world can provide high interactive platforms to support global teams.

Performance updates

Updates to events and parameters may be manually updated by designated people or auto-updated based on interfaces with underlying application(s).

What-if analysis and scenario simulation

‘Simulation’ functionality will assist in identifying, investing and tracking those events/activities that deliver the desired ‘index’ score/value. With ‘drill-down’ type of functionalities management representatives can understand the nuances from level 0 to sub ‘0’ levels. On the basis of simulation, management can drive budgetary and investment decisions that would maintain a balance between the performance⁹ score (short-term) and health score (long-term).

Others

Other typical functionalities of an IT application, such as audit logs, access rights, output to .xls, .pdf, search, etc, may be replicated.

In essence, bank management could adopt a parameter model and, by leveraging IT tools, build and maintain a system that supports strategic direction and execution while balancing short- and long-term requirements by involving people across their ecosystems. Top management commitment, inclusive technologies and workflow based approach are keys to success of this practical approach. The evolution and perfection of this model would not be a big bang but a multi-generation programme with iterations dictated by the collective will of the employees and direction of enlightened top management.

Conclusion

Billions of dollars are spent on application systems to assist transaction and data processing. It is about time that some investment is made in application(s) that could aid in running the bank as a whole. Systems approach and related thinking have been available in theory for a long time and were definitely ahead of their times. The ‘tools’ and ‘context’ are ripe today for adoption by banks. Given the external and internal environments, management teams in banks would welcome the prospect of having an ‘auto-pilot support’, to whatever extent, to navigate through these challenging times and improve readiness for the good times to come.

Article by Venugopal (Venu) is an assistant consultant with the banking industry practice. He has over eight years of banking and banking systems experience. Prior to joining TCS, Venu worked in the cash and payments domain with ABN AMRO Bank in their Indian operations. His current responsibilities include solution/offering development, pre-sales and contributions towards project efforts in the commercial banking space. His other areas of interest include applied strategy, economics, Islamic finance and structured finance.