Achieving Operational Excellence

By Arjun Bahadur Kandel

Operational efficiency is about optimizing many processes and systems within a bank to maximize productivity and revenue, while also minimizing costs and reducing errors. It encompasses everything from channels to customers, to staffing, to technology adoption. This pursuit of efficiency plays a key role in creating a positive customer experience that keeps clients coming back, which in turn, has a huge effect on a bank’s revenue and profit margins. An efficiently run bank can process transactions quickly, reduce the likelihood of errors, and offer customers a hassle-free experience, from simple account inquiries to complex financial transactions. It also allows banks to allocate resources more effectively. They have the means to invest in new technologies, improve customer service, and meet the latest security standards.

Operational Excellence has emerged as a crucial element for the banking business. Achieving operational excellence goes beyond simply optimizing processes; it is about fostering a culture of efficiency, innovation, and risk management. Operational excellence is vital for banking institutions with significant exposure to financial markets and it helps them stay competitive, resilient, and customer-centric. Banks are investing in more tailored and more appealing products and services for their customers. Operational excellence behind the scenes makes an essential contribution to the quality of customer experience. It deals with how to eliminate dependence on all low-value, high-volume manual processes. This isn’t just about liberating staff to do real business. It’s also about reducing risks and the errors that go with it. In recent times all the banks have focused on improving operational efficiency in their branches because it’s directly tied to customer satisfaction, employee satisfaction, and overall revenue outcomes.

Major Factors Influencing Operational Excellence

1. Channel Optimization

Channel optimization refers to the techniques used to increase key performance indicators (KPIs) across all bank service channels. Banks’ main service channels are branches, extension counters, ATMs, Cards, call centers, KIOSK machines, digital banking, social media platforms, email, website, and relationship managers. etc. Its main aim is to assess the various ways customers interact with a bank to create a cost-effective combination that is adapted to each bank’s specific customer base. Banks and their branches have to optimize their service channels, reconfigure roles, duties, and staffing within the branches, and employ new metrics for analyzing branch performance and value.

2. Enhancing Customer Experience:

Customer satisfaction is the outcome of efficient branch operation. A seamless and efficient customer experience is a key differentiator for banking organizations, and operational excellence plays a pivotal role in achieving this goal. The way and mechanism of delivering banking services to customers have always played a crucial role in enhancing the banking business. Customer service is highly affected by various factors such as energetic and dynamic staff, quick response mechanism, product knowledge, positiveness, understanding of customer’s needs, proactiveness, time management skills, persuasion skills, unflappability, problem-solving skills, cleanliness, etc.  By streamlining internal processes and optimizing customer-facing operations, banks can deliver faster and more reliable services to their clients.

3. 3.   Increasing Efficiency and Cost-Effectiveness:

Operational excellence is synonymous with resource optimization and process efficiency. The goal of the bank is to improve the bank’s efficiency ratio by reducing the unit cost-to-value ratio of each activity or transaction. For banking organizations with extensive financial market exposure, this translates into reduced operational costs and improved profitability. By continuously identifying inefficiencies and implementing targeted improvements, these institutions can allocate resources more effectively, freeing up capital for further investment or risk mitigation.  Process improvement in this area involves continual performance monitoring and often comes about as a result of analyzing, mapping, benchmarking, and ultimately rethinking back-office processes.

4. Efficient Internal Control Mechanism

Internal control is a process effected by an entity’s  board of directors, management, and other personnel,  designed to provide reasonable assurance regarding  the achievement of objectives in the following  categories:

• Effectiveness and efficiency of operations
• Reliability of financial reporting and
• Compliance with applicable laws and regulations

The following instances represent the poor internal control of the bank branch:

• No proper mechanism for the cross-verification of cash
• Actual disbursements of funds without approval of the disbursement of funds
• Lack of control in transactions related to customer and proprietary accounts;
• Lack of control in ‘banking’ and ‘trading’ books;
• Informally providing information to customers about their positions while marketing to the same customers;
• Assessing the adequacy of loan documentation and monitoring the borrower after loan origination;
• Lack of timely reconciliation of pending accounts;
• Skipping Management review and approval;
• Lack of dual control system i.e. maker and checker;
• Lack of segregation of duties;
• Lack of timely internal audit;

Any other areas where significant conflicts of interest emerge  and are not mitigated by other factors

5. Ensuring Robust Risk Management

Banking organizations that operate in financial markets are exposed to an array of risks, such as market volatility, credit risk, liquidity risk, and regulatory compliance. By prioritizing operational excellence, these institutions can establish robust risk management frameworks to identify, assess, and mitigate potential threats effectively. A culture of continuous improvement ensures that risk management strategies remain up-to-date and relevant to the ever-changing financial landscape, safeguarding the institution and its stakeholders from adverse consequences.

6. Operational Risk Mitigation

A probability or threat of damage, injury, liability, loss, or any other negative occurrence that is caused by external or internal vulnerabilities in the operational area of banking and that may be avoided through preemptive action. Simply it is a probability of loss because of operational issues. Major components of operational risk are people, processes, and systems.

Component of Operational Risk-People

Possibility of financial losses associated with negligence, wrongdoing with lack of knowledge, human error, damage, fraud, theft, work stoppages, appropriation of sensitive information, money laundering, inappropriate interpersonal relations, and an unfavorable working environment, and the Loss due to lack of clear specifications in the terms of staff contracts, losses associated with insufficient staffing or staff with inadequate skills, inadequate staff training, and/or weak hiring practices and duty segregation, etc.

Components of Operational Risk- Process

Financial losses are related to the inappropriate design of critical processes or to inadequate or non-existent policies and procedures, which may result in shortcomings in transactions and services or the suspension of these.

This may therefore be considered to include risks associated with

• failings in the models used
• inadequate assessment of contracts or the complexity of products
• errors in transactions, operations, and services
• inadequate remuneration, settlement, or payment
• insufficient resources for the volume of operations
• inadequate documentation of transactions, and failure to meet planned deadlines and budgets
• inadequate internal policies, process notes, and instructions

Components of Operational Risk System

This refers to the possibility of financial losses arising from the use of inadequate IT systems and related technologies, which may affect how the institution performs its operations and services by undermining the confidentiality, integrity, and availability of information. Complex or poorly designed systems and processes can give rise to operational losses, either because they are unfit for purpose, or because they malfunction. Increasing automation of systems and our reliance on IT has the potential to transform risks from minor manual processing errors to major systematic failures.

In the words of Warrant Buffet, “It takes 20 years to build a reputation and 20 minutes to ruin it”. Therefore, operational risk management is a prerequisite for achieving excellence in bank branch operations.

7. Adapting to Regulatory Demands:

BFIs are governed by stringent regulations, and non-compliance can result in severe penalties and reputational damage. Operational excellence ensures that banking organizations have well-defined and consistently implemented compliance procedures. This proactive approach enables these institutions to adapt swiftly to new regulatory requirements and to demonstrate their commitment to transparency and responsible financial practices. Various policies, circulars, directives, and notices issued by NRB have to be adopted by all BFIs to ensure that all the bank operations are complying. So all the bank employees are required to perform their bank operations as per regulatory requirements.

8. Fostering Innovation and Agility

In an ever-evolving financial landscape, innovation and agility are indispensable for sustainable growth. Operational excellence encourages a culture of innovation, empowering employees to seek creative solutions to complex challenges. The ability to adapt quickly to changing market conditions, emerging technologies, and customer preferences gives banking organizations a competitive edge, enabling them to capitalize on opportunities and navigate potential disruptions successfully.

9. Enhancing Employee Experience

Happy employee ensures happy customers. Friendly behaviour and relationships between the leader and the followers foster a sound working environment in an organization. When employees are in an environment that encourages employees to work hard, contribute more, to share ideas, thoughts, and doubts, they are more connected to both their own and the company’s goals and success. We strive to ensure safe and fair working conditions and practices and to create an environment that allows our employees to flourish.

10. Enhancing Internal Processes

The bank conducted a range of internal process improvements throughout the year which focused on centralization and automation, resulting in increased efficiency and productivity in our back-office operations. The internal process of the bank should be smooth and less hierarchical.

11. Boost Staff Productivity 

Operational efficiency can be achieved by increasing staff productivity. Automation tools can help improve staff productivity, enabling banks to handle more transactions and greater volumes of activity with the same number of personnel. However, productivity improvement is not dependent on technology alone. Some of the most significant opportunities involve using established performance management techniques, such as clearly defined expectations, improved motivation and rewards systems, and better training and supervision. Bank employees are tasked with achieving the Bank’s vision and embodying and representing our strong customer-focused. They execute the strategy which essentially involves delighting the customer and maintaining operational excellence. They are at the heart of our legacy of success and our future strategy.

12. Efficiency of Operation In charge

In most of the bank branches Assistant Branch Manager is appointed as an Operation in charge. He/she is a key person in ensuring overall Compliance with efficient Service Delivery by motivating the Team. The branch operations in charge have been entrusted by the bank to ensure that all the laid down processes, procedures, directives, regulations, SOP, guidelines, and policies are adhered to while executing transaction banking and yet make the customers feel at home by providing quality service as per Bank’s mission/vision statement and commitments.

13. Effective Leadership

The entire operation of bank branches depends on effective leadership. The branch manager is also a leader, coordinator, supervisor, and mentor who needs to drive their team to achieve set goals and targets and oversee and manage inherent risk associated with the day-to-day operation of the branch. Therefore, the commitment, ownership, vision, and dedication of branch managers are key to achieving operational excellence.

14. Better Decision-Making.

       Implementing an operational excellence program can help improve how a bank makes decisions. To streamline workflows and eliminate inefficiencies, operational excellence requires good decision-making skills.

16. Increased Resilience and Ability to Adapt to Change. Operational excellence is about finding what isn’t working well and making the changes needed. It requires a keen growth mindset and a sense of agility to be able to stay resilient.
17. A Thriving Company Culture.

 Banks can attract more customers with a positive work culture. Creating a positive work culture is not easy, but the payoff is worth it. To create a positive work culture every bank branch should adopt strategies such as communicating openly, rewarding excellence and teamwork, and supporting a healthy work-life balance.  Banks strive for high-quality performance; they also strive to eliminate the pain points that employees feel in their day to day. At the end of the day, it leads to increased employee engagement, collaboration, and a thriving company culture.

17. Growth Mindset

To achieve operational excellence, the mindset of people needs to shift. People who have a growth mindset believe that even if they struggle with certain skills, their abilities aren’t set in stone. They think that with work their skills can change over time. Contrary, people with fixed mindsets think their skills won’t improve no matter how hard they try. So, all bank employees should have a growth mindset with the goal of making improvements. We have to examine our processes and identify areas that are broken. Make sure we’re looking at the root cause of what’s causing roadblocks, pain points, or challenges.

18. Fostering Communication

Operational excellence isn’t a one-and-done type of pursuit. It takes constant care, intention, and improvement. For this, all lines of communication should be kept open for the workforce and even for customers. Two ways of communication i.e.top down and bottom-up approach of communication should be implemented.  It helps to establish a culture of feedback in a bank.

19. Measure Result

Various KPIs can be implemented to measure the efficiency of bank operations. We can count and rank every type of transaction and service in a bank to accurately evaluate performance, profit, customer service, and more. It can be hard to choose which measures to focus on. Major KPIs can be revenue, expenses, operating profit, ROA, ROE, average time to settle issues, customer feedback, number of accounts opened, sales volume, profit per employee, quality, culture, etc.

20. Commitment to Continuous Improvement

Once we’ve implemented the changes in bank operation, keep a pulse on how those changes helped improve our business. We might find new things to improve in this process, which means continuous improvement should always be top of mind. The backbone of success has always been our commitment to operational excellence. This commitment is more important in today’s world of heightened competition and flux.

Conclusion:

Operational excellence focuses on a consistent way of working. It has a balanced focus across customers, data-driven decision-making, continuous improvement, effective collaboration, and the use of technology to automate and improve efficiency. Operational excellence is made up of the entire organization, working in harmony to meet its purpose. It is creating a set of behaviors, mindsets, and a working culture that is specifically tied to the values of that organization. By enhancing efficiency, risk management, and innovation, banks can thrive in an increasingly competitive and unpredictable financial landscape. Today, the banking market is more saturated with an array of similar banking products and services, what sets an organization apart is its speed, accuracy, and quality of delivery.  Therefore, operational excellence is considered as a tool that helps banks meet the ever-evolving expectations of customers and employees, while also helping the institution grow.

(Mr Kandel is a Chief Manager of Nepal Bank Limited. This article was originally published in “Special Edition of 87^th Anniversary of Nepal Bank Limited in November 2023)