With financial services companies still feeling the effects of the global financial crisis, many have focused on finding ways to create leaner, more efficient organisations.
While no cure-all recipe exists, our experience with some of the leading players has pointed to the importance of tackling the challenge of complexity.
Most managers recognise complexity hurts their businesses and tends to increase costs. When Bain & Company recently surveyed executives at 960 companies globally, nearly 70 per cent told us that complexity was driving up costs and hindering growth.
For financial companies - including corporate and retail banks, insurers and credit card issuers - complexity is an especially pernicious problem because it is so hard to identify. Goods manufacturers see tangible evidence of complexity all around them, but at service companies, complexity is all but invisible and can grow without restraint.
Often a new "product" can be introduced simply by piggybacking on existing services and adding a few new seats and scripts to call centres. It is the very ease with which new service products can proliferate that makes the resulting build-up in complexity so damaging.
To weed out complexity, managers should focus first on two key objectives: rooting out complexity in the product and service portfolio by better understanding customer needs; and streamlining the organisation by finding the right mix of "spans" and "layers".
Careful customer segmentation can help to avoid complexity cost traps in two ways: optimising the product and service portfolio; and reducing complexity in distribution. The segmentation process requires companies to identify their core customers' needs and develop a focused value proposition to serve them.
In the Middle East, banks have typically adopted a conventional approach to defining customer clusters, focusing exclusively on metrics such as current deposits and loans.
A better alternative is to focus on customers, taking into account criteria such as age, income, marital status and behavioural patterns. This allows banks to develop a deeper understanding of their customer base and how to serve it best.
By improving its understanding of customer needs, a Middle East bank found its core customers did not value personal interaction with a relationship manager when using some of its basic services. After introducing online transfers and deposits, the bank was able to reduce complexity in its distribution network, increase branch productivity, and reduce the average time and cost to serve a customer at branches.
While aligning the offering with customer needs is essential to reducing complexity, streamlining the organisation is a second key criterion for success. As they increase service offerings, companies often create new, specialised departments or functions.
The result is an increase in the specialisation of managers and reduction of their "span", or reach, as well as an increase in the "layers" of communication between top management and front-line employees. As organisational complexity accumulates, costs pile up and ideas and decisions - the life force of a strong company - stop flowing smoothly up, down and across an organisation.
Our analysis of more than 125 global companies revealed that, on average, a manager has a span of six to seven direct reports and the organisation has eight to nine layers between the top leadership and the front-line employees. Best-in-class companies in Bain's database have average spans of between 10 and 15 direct reports and no more than seven layers.
In our experience, bringing spans and layers back under control requires four steps:
Establish the baseline: this may be difficult as best practices change by industry and the organisation evolves as people are hired, fired or transferred. It is nevertheless important to arrive at a common baseline as a first step, as it reveals the extent of the company's problem, as well as the potential rewards for fixing it.
Set stretch targets: benchmarking against best-in-class companies helps the company get to the right goal. In our experience, it is best first to understand the mix of employees and job types - skills-based versus task-based - set targets by function or business area and work from the top down.
Make it happen: agreement on the right level of spans and layers does not always translate to action. Managers protect people or move employees to other areas of the business. At this stage, it is thus important to link the targets for spans and layers to key performance metrics and make them a part of senior management reviews.
Keep out the fat:companies need to invest in management processes and systems that prevent the organisation from sliding back to its old size. Some smart preventive tactics include setting up a human resources dashboard that allows the organisation to track the right metrics, and holding managers accountable for spans in their departments.
Combating complexity requires this two-pronged approach of weeding it out in products and in organisational structures.
As the market environment for financial services companies continues to be a tough one, focusing on complexity is a winning way to build a leaner, more profitable and fit-for-purpose organisation.
Emmanuel Yoo and Giovanni Pio work in the financial services practice of Bain & Company Middle East