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Lean Transformation Case Study

A Lean Banking Case Study in Mortgage Operations Transformation

Article by : The Lab Consulting

If you’re seeking to achieve lean management and operations transformation in banking, some of the biggest process improvement opportunities can be hiding in plain sight. That’s what happened in this real-world case study.

The bank in question enjoys a powerful presence in the southern U.S. The areas of concern were their mortgage servicing operations and default management. While this bank services more than 2 million mortgages across 48 states, they sought to employ lean principles to rapidly improve mortgage operational efficiency and manage growth, especially in the southeast—their largest market.

Enter The Lab. We were called in by a senior management team at the bank, spearheaded by their Director of Mortgage Servicing Operations, as well as their CEO of Mortgages and Bank COO. The assignment they handed us was sizable. It spanned 3,000 employees. It sought simultaneous process improvement, organization redesign, and productivity gains to achieve an aggressive cost-cutting target via lean mortgage transformation. Among the areas in the spotlight were:

  • Mortgage servicing operations, including post-closing/MERS, loan administration, cashiering, and reporting to both investors and credit bureaus.
  • Mortgage default management, including collections, loss mitigation, pre-foreclosure and foreclosure procedures, and bankruptcy and REO.

In just six weeks, The Lab used its lean banking improvement templates to identify more than 300 activity-level mortgage transformation improvements—none of which required new technology! This analysis phase of our work revealed five key insights for areas where lean principles were to be implemented:

  1. 1. Lean banking implementation requires connected mortgage operations processes

In its efforts to respond to market and regulatory requirements, this bank had developed an ad-hoc, highly-manual, uncoordinated response to risk issues and backlogs. The resulting disconnect and redundancies were painful. Working with the bank, we identified more than 1,400 costly, activity-level sub-routines: hand-offs, revalidations, corrections, and reviews. And guess what? Many of these either overlapped other areas, or were simply unnecessary. After lean transformation and process standardization, 70 percent of this effort was eliminated or preempted.

  1. 2. Lean principles in banking: Prudent measurement can clarify results

In hindsight, what this bank took for granted seems incredible: each month, senior management would spend an entire day reviewing more than 6,000 metrics. Talk about information overload. And most of these were presented in mind-numbing, complex, arcanely-labeled spreadsheets.

Not only did this glut of data waste their time; it also obscured key trends. And despite the massive number of mortgage operations metrics, many key metrics of productivity were either buried in the minutiae, used inconsistently, or not at all. Thus the team was unable to see which areas were actually efficient.

  1. 3. Quality management: A prerequisite for lean banking transformation and mortgage operational efficiency

Most teams were unaware of the costly error rates that permeated their operations. But they should have been. That’s because these sometimes reached an appalling 40 percent. What’s worse, most of these errors were only uncovered after they were reviewed by downstream groups, outside of mortgage operations. And talk about redundancy: Compliance and accuracy were monitored by not one, but five different compliance and risk groups—in addition to investor and internal-department reviews, as well as those pesky downstream groups.

If you’re looking to create a lean banking enterprise, this wasn’t the way to do it. Hopefully, seeing where this bank made its missteps can help you with your own efforts in streamlining mortgage operations.

  1. 4. Lean banking management requires accurate capacity planning

This bank had created productivity measurements tools to plan capacity for each area within the organization. That’s the good news. The bad news is that almost none of the areas used them. Maybe that wasn’t as bad as it seems, because the process models were outdated, relying on incorrect assumptions.

We helped the client install accurate banking capacity planning models based on The Lab’s Activity Cube. In some areas, the new models revealed individual employee productivity variance of 7x. It was a sobering revelation for management. And The Lab helped make certain that it was reduced to less than 1x within two months.

  1. 5. Lean banking transformation demands effective management routines

In order to truly achieve lean banking principles in banking, management must be focused and efficient. Unfortunately, that’s not what The Lab discovered here. Instead of actually running the business, managers spent more than half of their time preparing for meetings, sitting in meetings, or “fighting fires.” In other words, their “management routines” were routinely unproductive and needed process streamlining.

The managers were also poorly-armed to perform productive management routines. They lacked concise and useful reports. No data existed to manage individual employee performance and productivity. This made it impossible to quantify and identify best practices. Not surprisingly, they conducted no staff-management events to identify training issues or increase productivity.

A lean and happy ending after mortgage process improvement implementation

After our initial Analysis and Design Phase, The Lab led an organization-wide lean banking transformation effort encompassing business process improvement, implementation of lean work standards, and management reporting improvement. The end results were stunning:

  • Service levels reached top quartile, competitive levels.
  • Error rates dropped by half.
  • Operating cost plunged more than 20 percent.
  • Annual operating savings reached $25 million.

By the way, the entire engagement self-funded in just five months. And by month 12, payback on the investment in The Lab reached a factor of 7.5x.

If you’re looking to apply lean methodology in banking or mortgage operations, look no further than The Lab. We’ve helped scores of banks with lean operations and lean implementation plans, all without any new technology. Learn more about our unique self-funding engagement model, and irresistible money-back guarantee, right here.

A leading consumer-packaged-goods (CPG) player was struggling to respond to challenging market dynamics, particularly in the value-based segments and at the price points where it was strongest. The near- and medium-term forecasts looked even worse, with likely contractions in sales volume and potentially even in revenues. A comprehensive transformation effort was needed.

To fund the journey, the company looked at several cost-reduction initiatives, including logistics. Previously, the company had worked with a large number of logistics providers, causing it to miss out on scale efficiencies.

To improve, it bundled all transportation spending, across the entire network (both inbound to production facilities and out-bound to its various distribution channels), and opened it to bidding through a request-for-proposal process. As a result, the company was able to save 10 percent on logistics in the first 12 months—a very fast gain for what is essentially a commodity service.

Similarly, the company addressed its marketing-agency spending. A benchmark analysis revealed that the company had been paying rates well above the market average and getting fewer hours per full-time equivalent each year than the market standard. By getting both rates and hours in line, the company managed to save more than 10 percent on its agency spending—and those savings were immediately reinvested to enable the launch of what became a highly successful brand.

Next, the company pivoted to growth mode in order to win in the medium term. The measure with the biggest impact was pricing. The company operates in a category that is highly segmented across product lines and highly localized. Products that sell well in one region often do poorly in a neighboring state. Accordingly, it sought to de-average its pricing approach across locations, brands, and pack sizes, driving a 2 percent increase in EBIT.

Similarly, it analyzed trade promotion effectiveness by gathering and compiling data on the roughly 150,000 promotions that the company had run across channels, locations, brands, and pack sizes. The result was a 2 terabyte database tracking the historical performance of all promotions.

Using that information, the company could make smarter decisions about which promotions should be scrapped, which should be tweaked, and which should merit a greater push. The result was another 2 percent increase in EBIT. Critically, this was a clear capability that the company built up internally, with the objective of continually strengthening its trade-promotion performance over time, and that has continued to pay annual dividends.

Finally, the company launched a significant initiative in targeted distribution. Before the transformation, the company’s distributors made decisions regarding product stocking in independent retail locations that were largely intuitive. To improve its distribution, the company leveraged big data to analyze historical sales performance for segments, brands, and individual SKUs within a roughly ten-mile radius of that retail location. On the basis of that analysis, the company was able to identify the five SKUs likely to sell best that were currently not in a particular store. The company put this tool on a mobile platform and is in the process of rolling it out to the distributor base. (Currently, approximately 60 percent of distributors, representing about 80 percent of sales volume, are rolling it out.) Without any changes to the product lineup, that measure has driven a 4 percent jump in gross sales.

Throughout the process, management had a strong change-management effort in place. For example, senior leaders communicated the goals of the transformation to employees through town hall meetings. Cognizant of how stressful transformations can be for employees—particularly during the early efforts to fund the journey, which often emphasize cost reductions—the company aggressively talked about how those savings were being reinvested into the business to drive growth (for example, investments into the most effective trade promotions and the brands that showed the greatest sales-growth potential).

In the aggregate, the transformation led to a much stronger EBIT performance, with increases of nearly $100 million in fiscal 2013 and far more anticipated in 2014 and 2015. The company’s premium products now make up a much bigger part of the portfolio. And the company is better positioned to compete in its market.

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