industrial is at ion for high performance in banking

Industrialization: The pathway to high performance banking

An Accenture global survey on industrialization in banking 2005-2006

Industrialization: The pathway to high performance banking

02Executive summary

04The big idea:Industrialization in banking

08Banks know they need todifferentiate on the outsideand simplify on the inside

10Banks are driving differen-tiation by tailoring orbundling products for customer segments

14There is no silver bullet—instead, banks are simpli-fying across multipledimensions

18Banks are investing in leadership and culturalskills to boost their execution capabilities

20Banks expect handsomedividends from industri-alization

23Where to from here?

24About this study

1

2

Banks are on the industrialization path

Accenture has worked with many banking clients globally to helpthem simplify internal operations to reduce cost and complexitywhilst creating greater capacity for differentiation in the market-place. We call this concept of reducing complexity whilst increasingdifferentiation “industrialized banking”.

Based on our experience in this area and our ongoing work in themarketplace, we have developed a firmly held view that the shifttowards industrialized banking is gaining momentum around theworld. Until now, there has been no hard data to support this view. To address this data gap, Accenture has undertaken a global bankingsurvey which examined the actual—and intended—take-up of indus-trialized banking. In this survey, we interviewed 107 senior executivesin banking institutions in North America, Europe and the Asia-Pacificregion and asked them about their journey towards industrialization.

The research findings strongly endorse our experience that an accelerating shift towards industrialization is under way.

Executive summary

3

The study confirms that banks:

Know that they need to differentiate on the outside and simplify on the inside—almost 90 percent are already investing in both.

Are looking to tailor or bundle products for selected customer segments to drive differentiation—over 84 percent are investing in better understanding their customers and in finding new ways to serve them and sell bundled products to them.

Are looking to simplify across multiple dimensions, right across theirorganizations—91 percent are currently simplifying their processes, 81percent are simplifying their IT systems, 74 percent are rationalizingtheir product offerings and 74 percent are centralizing their operations.

Are highly focused on the need to boost their execution capability—over 80 percent are working to develop their internal leadership andcreate a culture that is receptive to change.

Are tightly managing their execution capability—76 percent of indus-trialization programs are being managed by the CEO or just a small group of executives and 57 percent are being conducted on anenterprise-wide basis.

Expect a significant return to their bottom line from their move to industrialization—over 50 percent expect to generate at least a 10 percent revenue benefit through differentiation and a thirdexpect simplification to result in enterprise-wide cost reductions of more than 10 percent.

The results of the study are presented in detail in this report.

4

To explain the findings from our research, we first need to establishwhat we mean by industrialization in banking. In essence, industrial-ization means simplifying the bank’s operating model on the inside(to reduce costs) whilst creating the ability to differentiate on theoutside (to grow revenues).

When we talk about simplification on the inside, we are referring tothe “componentization” or “standardization” of products, processesand technology, and the use of these components to create modular-ized customer service platforms.

These modularized platforms can cut across business and productsilos. This not only reduces the cost base but also creates the flexibility required to customize products and services for different customer segments.

The inspiration behind the concept of industrialization in banking is drawn from a number of manufacturing industries in which standardized operating platforms are used during the manufacturingprocess to create consistency in product manufacturing pluseconomies of scale—whilst at the same time providing customerswith products that have been customized for specific segments.Examples of this approach can be found in many consumer-focusedsectors—including the automotive industry.

The big idea: Industrialization in banking

5

Industrialization also meansbecoming masters in the exe-cution of transformationalchange programs, as well asin the execution of day-to-day activities to support theorganization’s operationalstrategy. Again, inspirationcomes from other industries.

Mastery in the execution ofoperational strategy can befound, for example, in thefast food sector. McDonald’sis a case in point. McDonald’shas created and embedded awell-recognized corporateculture over a 50-year peri-od. Its culture has made itpossible for the organizationto prepare and serve meals ofconsistent quality to nearly50 million customers eachday in 30,000 local restau-rants across the 119 coun-tries in which it operates.This has become a centraltenet for its success.

This commitment to execu-tion mastery can be appliedin the banking sector.

Exhibit 1:Inspiration for industrialization in banking comes from other industries including the automotive industry

Concept ‘D1’ A8

New ‘W8’

Beetle, Golf, Bora

A6A4

FeliciaFabia

PoloLupo

CordobaArosa

Brand & model

SkodaVolkswagen SEAT Audi

OctaviaToledoLeon

Source: Accenture, Helsinki University of Technology

Platform

Platform B/C

Simplified platforms

Platform A0

Platform A

Market segment

Medium/High

Small Class

Medium

Upper Class Platform D

New ‘W8’Passat

A2

TT, A3

Differentiated brands

6

Adapting industrialization to banking

Accenture has worked with manybanks around the globe to adaptthe concept of industrializationto the banking industry—withconsiderable success.

Industrialization applies particu-larly well in banking. Using theconcept of industrialization, wehave helped our banking clientsreduce the number of distinctprocesses and systems by con-solidating common capabilities,reducing product complexity andincreasing differentiation in themarketplace. In fact, we areworking with many banks wheresimplification is being done in away that also enables differenti-ation and drives organic growth

to achieve high performance.Accenture has seen firsthandhow industrialization can gen-erate significant operationaland financial benefits in itswork with many of the world’sleading banks.

An example of how industrial-ization can work efficiently inbanking can be found in lendingproducts and credit cards.Traditionally, banks have han-dled credit risk assessment on a product-by-product basis. Butthe process of assessing risk isnot product-dependent—it ismuch the same for a mortgage,a personal loan or a credit card.By creating a single credit riskassessment platform within a bank, the risk assessmentprocess could be significantly

streamlined. A customer’s credithistory can also be held in asingle database. This can elimi-nate the need for a customer’scredit history to be reviewedeach time he or she is beingoffered a new product. It alsoenables the bank to make targeted offerings to specificcustomer groups who have similar credit attributes.

Three elements to industrial-ization in banking

The three elements of industri-alization in banking are summa-rized in Exhibit 2.

Exhibit 2:Industrialization in banking comprises three core elements

What does “industrialized banking” mean?

... a clear view of what makes them unique—whetherit be product, sales, service, brand or business model

... an ability to deliver consistently positive experiencefor customers in each market segment

... prioritize execution as a core capability:

– managing the investments and risks of change programs– creating a culture to drive operational strategy

... simplicity in everything they do:

– standardized or componentized products, processes and systems

– identifying where they need scale and how to get it

Differentiation “on the outside”

Simplification “on the inside”

Execution mastery

Source: Accenture

7

Simplifying on the insidewhilst differentiating on the outside

The shift to industrialization inbanking is happening in manyways. For example, banks areconsolidating their retail andwholesale payments systemsonto single platforms to supportboth their retail and wholesalebanking operations. Similarly,banks in Europe with multi-country operations are re-platforming their operations to support common processingacross their entire group ratherthan running their systems on a country-by-country basis.Exhibit 3 shows how one bankwe have worked with is adopt-ing the differentiation and simplification elements of

industrialization. This bank has identified various productcharacteristics and developedproduct templates and productofferings using these character-istics. All this is done on astandardized basis “on theinside” of the organization.Once these product offeringshave been established, differen-tiated offerings can be made“on the outside” to differentcustomer segments by choosingvarious product combinationsand utilizing the preferred distribution channels for each customer segment.

Momentum towards industrialization

In this global banking survey,we examined how well thethree elements of industrializa-tion in banking are currentlyunderstood by the world’s leading banks and how muchoperational momentum hasbuilt up behind the shift to full industrialization in thebanking industry.

Exhibit 3:How one bank has successfully adopted the industrialization model

Differentiation“Marketing shop” creates offers by choosing products and distribution channels for each segment

Simplification“Assembly shop” that creates and processes basic product and channel characteristics

Source: Accenture, Client case study

Reusable product characteristics

Common product configuration

Personalized product and channel offerings for each segment

Common channels

Product characteristics

Products Differentiated offersChannels

Product 1 Product 2

Product 3 Product 4

Segment 1

Segment 2

Segment 3

Channel 3

Channel 1 Channel 2

Channel 4

8

The banks we surveyed rated all three elements of industrializedbanking—differentiation, simplification and execution—as criticallyimportant. This view is in stark contrast to much of the past decade,during which time the banks have flip-flopped between cost take-out initiatives and growth initiatives—but not both together.

Surprisingly, in outlining where future spend would occur, the banksgave almost equal weight to the need to invest in differentiation,simplification and execution.

Interestingly, the banks indicated that their investment in differenti-ation, simplification and execution has already started.

Banks know they need to differentiate on the outside and simplify on the inside

Almost 90 percent are already investing in both differentiation and simplification initiatives.

90%

9

20

40

60

8090

70

50

30

10

Execution Differentiation Simplification

% Extremely/very important

88%

74%65%

Exhibit 5:Investment spend will be distributed evenly across each industrialization element—this confirms the importance of all three elements

Please estimate the breakdown of the investment planned by your organization in the next three yearsbetween differentiation, simplification and execution.

38%

29%

33%

Execution

Differentiation

Simplification

NoYes

Improving executionDifferentiation Simplification

8%13%

92%87%94%

6%

Source: Accenture research

Exhibit 6:The banks are already investing in the industrialization process

Is your organization taking initiatives directly focused on increasing differentiation, simplification and improving execution?

Exhibit 4:The world’s leading banks say that they need to focus on both simplification and growth initiatives, whilst maintaining high standards in execution

Thinking about the areas of differentiation, simplification and execution, what impact will each area haveon the performance of your bank over the next three years?

10

As we expected, the leading banks are investing in differentiationinitiatives that will improve the effectiveness of their sales force,increase their understanding of their customers and allow them to tailor or bundle products that are attractive for their different customer segments.

The high priority accorded to sales force effectiveness, improvedunderstanding of customers and product bundling was not unexpect-ed. These are all critical elements in the shift to the new bankingindustrialization model, in which banks are aggregating and bundlingstandardized products, services and channels to create a customizedexperience for different customer segments.

Banks are driving differentiation by tailoringor bundling products for customer segments

Over 84 percent are investing in betterunderstanding their customers and in finding new ways to serve them and sell bundled products to them.

84%

Exhibit 7:Banks are investing in differentiation initiatives that will improve the effectiveness of their sales force, enhance their understanding of their customers and deliver products that are bundled and tailored for specific segments

Among the following specific initiatives directly focused on improving differentiation, which ones are you undertaking in your bank?

11

Improving sales force effectiveness 95%

Improving customer segmentationand customer insight capabilities

90%

Product development / R&D 85%

Product bundling / tailoringto segment needs

84%

Pricing for customer value 76%

Strengthening campaign, event,alert management

76%

Extending internet bankingand mobile banking

70%

Redefining target customer experience 69%

Focusing branch on sales, movingtransactions to direct channels

68%

Enhancing contact centers 67%

Redefining / clarifyingbrand positioning

66%

Revising geographic coverage 64%

Redesigning branches 63%

Percentage undertaking initiatives


12

Service 96%

89%Sales

67%Products and offerings

% Extremely/very important


Service, sales and tailoringproducts and offerings drivedifferentiation

Our respondent banks indicateda continuing strategic focus onthree drivers of differentiation:

• Service• Sales• Products and offerings

This finding highlights theimportance of creating aunique customer experience,improving the effectiveness ofthe sales force and deliveringtailored products and servicesfor customers.

Results of organic growthsurvey confirmed

Interestingly, this aligns with a separate global survey onorganic growth in retail bankingwhich Accenture undertook in 2005, in which we asked 118senior marketing and distribu-tion executives in major retailbanks in the US, Europe andAsia-Pacific about their view ofthe near future in the industry.The consensus in that study was that banks need to providecustomer-focused, flexible andeasy-to-understand products,and make them available on amodular basis to satisfy specificcircumstances and life stages.Respondents said that thisapproach would improve theirability to sell their products andservices. Most of the marketingand distribution executivesinterviewed in the survey alsofelt that product bundlingpromises success.

Exhibit 8:Service, sales and the tailoring of products and services for customer segments will remain importantelements of success over the foreseeable future

Focusing on differentiation, what impact will the following initiatives have on the performance of yourbank over the next five years?

13

Flexibility 70%

47%Cost

47%Integration

23%Simplification

14%Technology

Timing problems 13%

% of executives citing area as priority

Source: “Redefining Core Banking” Accenture and SAP Core Banking Survey 2005

The need for flexibility in corebanking systems

Another survey, conducted in2005 by Accenture and SAP,investigated the views of 147executives from 70 banksworldwide about issues relatedto core banking systems. In thatresearch, the respondents’ number one issue with corebanking systems was flexibility[see Exhibit 9 above]. As thisshowed, the banks simply donot have the flexibility theyneed to better serve their customers, improve speed tomarket or develop tailoredofferings to customers acrossmultiple segments—and they are seeking to address this.

Exhibit 9:Banks, globally, are seeking to address the inflexibility of their core banking systems so that they can respond quickly to customer requirements across multiple customer segments

What current problems are you facing with your core banking systems?

14

The road to high performance is an extremely challenging journey for a bank, requiring major changes across the whole of the enter-prise. The world’s leading banks agree with this viewpoint. They havetold us that simplification can’t just happen in one or two isolatedareas. Rather, to be effective, simplification must occur across manyfronts concurrently.

A further finding from our survey of the leading banks is that theshift to outsourcing is gaining momentum as a way of simplifying the business. Just a few short years ago, outsourcing was low onbank agendas. However, our research shows clearly that outsourcinghas now been accepted by banks as a valid and, in many cases, necessary approach for delivering change across multiple dimensions.

There is no silver bullet—instead, banks are simplifying across multiple dimensions

15

Over 74 percent are undertaking significantsimplification initiatives across the whole of their organization.

74%

Exhibit 10:Simplification must occur across the board

Among the following specific initiatives directly focused on simplification, which ones are you undertaking?

Process 91%

81%IT

74%Product

74%Centralization

62%Channel integration


17

The majority (76 percent) of industrializationprograms being undertaken by the world’s leading banks are being managed either by the CEO or by only a small group of executivesfrom the corporate office.

76%

18

Globally, operational risk management is currently the top-rankingexecution initiative—a fact which is hardly surprising given the glut ofexternally mandated changes such as Basel II, Sarbanes Oxley and soon. However, banks are also placing significant emphasis on gettingthe culture and leadership issues right to ensure that the transforma-tion to an industrialized organization can be executed smoothly. Over80 percent are working to develop their internal leadership and createa culture that is receptive to change.

In terms of execution of the bank industrialization programs, more is happening on a bank-wide level than we expected. 57 percent ofindustrialization programs are being conducted on an enterprise-widebasis. This highlights the importance of this topic for CEOs.

The majority (76 percent) of industrialization programs beingundertaken by the world’s leading banks are being managed eitherby the CEO or by only a small group of executives from the corpo-rate office. This confirms the widespread desire to tightly manageexecution capabilities.

Banks are investing in leadership and culturalskills to boost their execution capabilities

19

Exhibit 11:Together with risk management initiatives, banks are investing in their people to ensure they can successfully execute their change programs

Among the following specific initiatives directly focused on execution, which ones are you undertaking?

Operational risk management 91%

86%Culture that is receptive to change

82%Internal leadership development

78%“Can do” proactive culture

65%Major program management approach

Exhibit 12:Industrialization is a bank-wide initiative

What is the scope of your simplification model?

Exhibit 13:Execution is being tightly managed by the head office—by the CEO or just a small group of executives

What is the preferred governing method of your organization to drive the initiatives focused on simplification?

26%

17%

57%Business unit/line of business level

Enterprise-wide

Cross enterprise/shared services functions

44%

24%32%

A small group of executives from the C suite

CEO led and driven approach

A decentralized model led by business unit directors


20

Differentiation on the outside

A componentized or modular-ized approach is a key part ofindustrialization. This approachis expected to generate solidrevenue growth by enablinggreater flexibility to innovate,delivering the right products to each customer segment—faster—and improving the overall customer experiencethrough a focus on customerservice. Over 50 percent of thebanks expect revenue benefitsof at least 10 percent throughthese differentiation initiatives.Cross-selling rates can beexpected to rise. Customeracquisition rates will rise. Andchurn rates can be expected to fall. These differentiationbenefits to revenue lines werealso confirmed by the organicgrowth survey Accenture under-took in 2005.

Simplification on the inside

The world’s leading banksexpect that simplification onthe inside will produce both a reduction in the enterprisecost base and an increase in revenues.

A third of the banks surveyedexpect simplification to result inenterprise-wide cost reductionsof more than 10 percent (withmuch greater reductions expect-ed in some specific areas).

Of the banks surveyed, morethan a quarter expect to achieveincremental revenue benefits of more than 10 percent. Theserevenue benefits will be gener-ated through the flexibility thatsimplified operating platformswill bring.

More than 50 percent of the banks participating in ourresearch expect to generate significant revenue benefits through differentiation initiatives. And a third expect simplification to result in enterprise-wide cost reductions.

Banks expect handsome dividends from industrialization

21

Exhibit 14:Differentiation—Banking executives are confident that better differentiation will pay handsome returns

How much impact do you expect your differentiation initiatives will have on revenue growth?

Exhibit 15:Simplification—Reductions are expected on the total cost base of the banks—given that these cost reductions are expected across the entire enterprise, these cost savings will be significant

How much impact do you expect your simplification initiatives will have on cost savings?

Exhibit 16:Simplification—The world’s leading banks expect that simplification will also generate significant revenue growth

How much impact do you expect your simplification initiatives will have on revenue growth?

0-5% 9%

40%5-10%

23%10-15%

11%>20%

17%15-20% 51%

0-5% 22%

46%5-10%

14%10-15%

7%>20%

11%15-20% 32%

0-5% 34%

40%5-10%

16%10-15%

6%>20%

4%15-20% 26%


51 percent expect to achieve incremental revenue growth of more than 10 percent from differentiation initiatives.

51%

23

This study has confirmed our experience about the shift to industrialized banking. The messages from the study are clear:

• Banks understand the benefits of industrialization; and• They are already on the industrialization path.

To help banks industrialize, Accenture has created the HighPerformance Bank, a framework comprising a number of Accenturedeveloped reusable assets and tools that support industrialization programs for our clients. The Accenture High Performance Bank framework can help any bank—regardless of its situation—take the steps necessary to reduce operational complexity and drive organicgrowth to achieve high performance.

We bring an unrivaled breadth of practical experience in this area.

We invite you to contact us to learn more.

Where to from here?

24

Covering four continents and13 countries

This Accenture Banking HighPerformance Business researchprogram involved interviews with107 senior executives in bankinginstitutions in North America(Canada, US), Europe (France,Germany, Italy, Netherlands,Spain, Switzerland, UK andIreland) and Asia-Pacific(Australia, China, Japan). Theinterviews, held between Juneand October 2005, focused on therespondents’ priorities regardingindustrialized banking. The 107interviews with leading bankerswere conducted by phone, eitherin English or in local languagewhen requested by interviewees.

The chosen sample of banks wasextracted from the global top1000. Interviewees were select-ed on the basis of their role asdecision makers and influencerswith regard to corporate strate-gy and/or development. Typicalresponsibilities of the inter-viewees include strategy direc-tor, corporate developmentdirector, line of business direc-tor, CFO and CMO.

The fieldwork was managed by TNS, an independent surveyresearch company, except in Japan, where the localAccenture leadership conductedinterviews directly.

TotalFranceGermanyItalyNetherlandsSpainSwitzerlandUK and Ireland

TotalCanadaUS

TotalAustraliaChinaJapan

Europe

North America

APAC

Total

Number of respondents

641111152

1375

294

25

14536

107

About this study

About Accenture:

Accenture is a global managementconsulting, technology services andoutsourcing company. Committed to delivering innovation, Accenturecollaborates with its clients to helpthem become high-performancebusinesses and governments. Withdeep industry and business processexpertise, broad global resourcesand a proven track record,Accenture can mobilize the rightpeople, skills and technologies tohelp clients improve their perform-ance. With more than 129,000 people in 48 countries, the companygenerated net revenues of US$15.55billion for the fiscal year ended Aug. 31, 2005. Its home page iswww.accenture.com.

industrial is at ion for high performance in banking

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