Effectively managing complexity in financial services — and increasing profit
The financial industry is plagued by complexity, especially banks. As a customer-focused, service industry, offering largely intangible products, proliferation is easy to do and justify. The customer wants it! Customers are segmented into more discreet target groups, and customization multiplies. The end result has often been growth, but not necessarily profit.
Banks have not always been good at managing the tradeoffs between customization and complexity. Too often, complexity has saddled banks with excessive operating cost and hindered their ability to react to market changes and customer needs. However, not all complexity is created equal. There is good complexity and bad complexity — and finding the right balance is vital.
Good versus bad complexity
Good complexity is necessary. It adds value for the bank and the customer and, by doing so, is at once desirable and sustainable. Bad complexity is inefficiency that drains value from the bank, and therefore must be identified, targeted and eliminated. Good complexity drives the bank to customize its products and services in a way that will help increase revenues, profits and customer loyalty. Bad complexity pushes the customer away and sends the bank into chaos and confusion.
Banks need to understand that complexity, both good and bad, is a strategic issue that requires a business solution. Rather than taking the straight-line approach of eliminating a few slow-moving products or services, the best companies think about how to achieve and maintain profitable growth by adding complexity only where it increases profits. These leaders keep their focus on providing customers with an appropriate variety of products, while ruthlessly and constantly driving unnecessary complexity out of the business.
The costs of customization and complexity
For financial institutions it is difficult to track the costs of customized products and is seldom done, especially at a sufficiently granular level. Costs start with the time, materials, and promotions of the bank’s product managers, marketing staff, and sales departments. Then the costs continue to add up as the customized product filters through the value chain.
The after-sale functions span implementation, technology changes, operations, and customer service for the new, customized product. The front-line sales people require new product training and support guides, procedures, etc. Perhaps more call center people are needed to handle customer questions and complaints. And the costs continue to multiply with, for example, integration with other products, technology solutions, and HR support.
So while a bank might be reluctant to curtail product offers and service levels for fear of losing customers, it must understand the full impact and costs of customization all along the value chain. That detailed understanding can be the start to effectively managing the balance of customization and complexity.
Five-step complexity management process
To reduce "bad" complexity while still retaining customization capability, A.T. Kearney recommends a five-step process:
- conduct a company-wide complexity review
- simplify offerings
- streamline back-office operations
- price for complexity
- build the case for change
These steps will allow financial services to begin to get their arms around complexity and drive key improvement levers and initiatives to deliver flexibility and responsiveness.
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