Banks must be ready for competition

By Axel Leeb

JAKARTA (JP): It is nearly two years since the economic crisis hit the region, and most countries in Southeast Asia are showing strong signs of recovery. With stock markets up again almost everywhere, there is the feeling that the worst is behind us.

In the hard-hit financial services sector, legislation and regulations are being put in place to stabilize banks. In Malaysia, for example, we read almost daily about Danaharta and Danamodal acquiring nonperforming loans and injecting funds into ailing financial service firms. But action from the banks themselves is more variable. A few have acted boldly, initiating mergers and restructuring their operations, but many are simply waiting, expecting a natural return to precrisis performance once the aftershocks are over.

We believe a much more strategic approach is needed, and it is needed now. Some banks in the region have realized that it will be a long time, if ever, before the good old times return.

In Mexico, for example, banking returns on equity before the currency crisis were 34 percent -- six years later they are around 6 percent. The story is similar in Sweden, where it took five years for returns to recover to precrisis levels.

In our region, some banks have already set their strategic objectives, begun massive restructuring programs and are attempting to build sustainable positions in what they have recognized will be an even tougher competitive environment. These banks are likely to be the winners when the dust settles.

Will these winners all look the same? Is there a single "bank of the future"? We believe not -- opportunities will exist for many different types of banks, each with its own strategy, business model and set of rules. But despite these differences in what banks do, some common elements in how they do it will distinguish the winners from the losers. These elements are focus, relationship management, experience branding and reconfiguration. In addition, high-performing banks will have designed and implemented restructuring programs that encompass almost every aspect of strategy and operations.

For most banks, achieving focus will entail giving up businesses in which they are unable to provide superior value. Banks will have to differentiate their offerings, and that means concentrating on those businesses where they have or can create competitive advantage by offering superior value to their customers.

Successful banks also will be distinguished by their excellent relationship management. They will know their customers intimately and have a deep understanding of their life cycle needs. Comprehensive database management, coupled with ongoing analysis, will enable them to be proactive in meeting their customers' changing requirements.

For most banks, brand management is reduced to advertising, but in a new, highly competitive environment, they will have to learn how to manage and orchestrate all their internal processes, from innovation to product delivery, to ensure they provide their customers with a unique and valued brand experience.

Reconfiguration of staff functions will be an important element of performance. At most Asian banks, 20 percent of staff interact with customers, while 50 percent to 60 percent are in production and 20 percent to 30 percent perform overhead functions. The banks with a future will reverse this ratio by upgrading their production processes to reduce risk and increase efficiency, quality and speed. This should not require a one-time massive cost reduction project -- high performing banks will continually manage down their costs, every day and at every level of the organization.

More fundamental restructuring programs will also be required. BCG's global experience suggests it will be useful to "separate the good bank from the bad bank" -- in other words, to separate day-to-day operations from the crisis management activities necessary to resolve problem loans, and assign different groups of managers to each.

This kind of action may be necessary even in those countries where banks can sell parts of their loan portfolios to a government entity like Malaysia's Danaharta. The risky loans remaining in the portfolio need special attention, and quickly. Because the managers who extended these loans originally may be the least able to settle quickly and move on to the next case, the "bad bank" executives should be organizationally independent from regular account managers, with clear negotiating authority and a green light to hire experienced workout specialists.

Managers in the "good bank" will face a different and, in many respects, more complex challenge. Inadequate credit approval processes will have to be transformed. Rigorous financial analysis will underpin lending decisions in the future, and the managers of the "good bank" will have to develop this capability and invest in the sophisticated information systems to support it, even as they continue to manage costs down.

The next step will be to align the organization by defining the business units needed to serve targeted customer groups. Successful banks will scope out the required organizational units and management structures for mass market service, relationship management, credit risk management and supporting functions.

And decisions will have to be made on how central support functions will be divided between the business units and the corporate center, as well as the number of staff required in each. Processes will have to be reengineered to align with the new arrangements, process owners must be assigned, and aggressive quantitative performance targets set for each of them. Remuneration should be based, in part, on achieving those targets.

Many banks turned inwards during the crisis, with energy, management attention and human resource skills focused on nonperforming loans. While these must remain a high priority for many banks in Malaysia and in the region, successful banks will begin a parallel "rediscover the customer" initiative, systematically identifying and targeting additional revenue sources.

The existing customer base is likely to be a fruitful starting point -- cross-selling new products to the highest-value 20 percent of customers -- but new customers should also be targeted. Retail banks serving the upper-middle segments of the consumer market and commercial banks catering to small and medium sized companies are likely to be the most successful at boosting their revenues.

Most banks will have to institute aggressive cost-cutting programs. Our experience suggests that banks often have to shed 15 percent to 25 percent of their workforce to regain competitiveness after a crisis of the kind suffered by the region. While several banks have announced restructuring projects, none has much experience with cost cutting of this magnitude. Relations with unions and governments should be managed proactively, and creative ways of easing the effects of redundancy should be developed.

Finally, branch networks should also be restructured. Overlapping branches resulting from mergers or acquisitions should be closed immediately. New, low-cost formats should be designed and implemented. The objective should be to serve the mass market through standardized, mostly electronic channels, while providing high-value customers with personalized service in specialized branches. Overall, the number of customer contact points is likely to increase while the cost of the branch network should decrease.

BCG has seen successful bank restructuring programs in many economies around the world. The task is not easy, involving as it does the coordination of many different improvement initiatives, but those banks that take firm action now will reap their rewards in one or two years' time. The banks that choose not to act, or to take action in only a few selected areas, are unlikely to retain their autonomy in the harsh competitive environment that will follow the easing of the economic crisis.

The writer is vice president of The Boston Consulting Group and president director of The Boston Consulting Group Singapore