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Realities and Myths of

Scaling Up For Growth


Transform to Outperform
December 2010
CONFIDENTIAL AND PROPRIETARY
Any use of this material without specific permission of McKinsey & Company is strictly prohibited
Bancon plenary presentation document
McKinsey & Company | 1
The next decade will see massive scale-up of Indian banks
in terms of size and complexity
SOURCE: McKinsey analysis
ESTIMATES
Scale-up in terms of size

Increasing diversity of product/market
segments (e.g., youth/retirement;
urban/rural; emerging/large corporates)
Scale-up in terms of complexity
Scale-up in terms of complexity

5x
5.5x
4.1x
More sophisticated customer needs and
interactions (e.g., integration with
corporate ERPs, supply chain financing)
Increasingly expansive network of JVs,
partners and alliances (e.g., payment
specialists)
Increasing competitive intensity (e.g.,
NBFC specialists, IT, Telco, Retailers)
Increasing pace of regulatory change
and globalization
Assets
Profits
Market Cap
6000 30,000
2010 2020
60 320
690 2,800
000 cr
Performing banks will be 2-3X their
current size in assets in next 3-4
years
Banks will enhance structures, talent
and processes to cope with
complexity
McKinsey & Company | 2
However banks will need to see through the myths and
realities associated with four barriers to scale-up
Balancing
operating
architectures for
scale and
responsiveness
1
Differentiate
customer
experience while
improving
productivity
2
Using IT as
competitive
weapon
3 Building
required
leadership &
talent
4
McKinsey & Company | 3
Reality: Balance between need for scale and need for local
responsiveness will vary by product/market
CASE EXAMPLE
1
Key drivers
Maturity of processing
infrastructure
Inherent riskiness of
product/market
Last mile constraints
Availability of talent
1
2
3
4
Urban Retail
Loan
origination
Typical operating architecture for major Indian banks by
product/market
SME loan
processing
Urban CASA
opening
Rural
banking
Highly centralized with typically 2-3
processing sites across nation in
some cases
Regionally centralized with 30-50 retail
loan processing sites for home loans;
servicing may be even more centralized
Education and auto loans may be
processed in the branches
City-level centralized with 60-80 SME
processing centres targeting 40 major
cities which account for most of the
opportunity
Primarily done through branches
In some select, high opportunity districts,
may use district-level hubs
Centralized
Decentralized
McKinsey & Company | 4
Myth: Decentralised models are more
efficient than the centralised ones
DISGUISED CLIENT
EXAMPLE
Mortgage Bank A
Centralized
Mortgage Bank B
Decentralized
Operating
model
Single processing center
nationwide
~20 processing centers,
located at each wholesale
branch
Scale
~20,000 loans p.a.,
processed at a single
location
~20,000 loans p.a.
processed across the
network
Underwriting
turn-time
>3 days 1-2 days
Unit cost per
loan
1

>$1,200 <$900
1
Drivers of performance
Superior coordination
from front to back
office
Standardised
processes across all
processing units
Optimised network
architecture across
front- middle- back
office
1
2
3
1 <____>
McKinsey & Company | 5
Reality: 5-7 major processes account for >70% of
customer interactions and operations headcounts
Major processes
Typical performance focus
Average banks Best in class Metric
Account opening
and deposits
Application to
issuance of
welcome kit
5-7 days 1-2 hours
Home loan
processing
Application to
disbursement
12-15
days
<3 days
SME loan
processing
Application to
disbursement
18-20
days
5-7 days
Branch sales
Quality of
advice
Product
specialist
Team-
based
Customer care
Time elapsed
for resolving
problem
Speed
Predict-
ability
SOURCE: FIG O&T Practice
1
McKinsey & Company | 6
Myth: Inherent trade-off between customer experience
and productivity
Median across 3 banks
Best in class
5-7
15-18
-69%
3-5
1-2
+167%
<3
10-12
-73%
Credit
appraisal
productivity
Impact of eliminating waste in home loan processing
(composite across 3 big Indian banks)
Applications
lost due to
delays
Turn around
time Sources of waste
Days
Files per day per FTE
Percent
2
Multiple and error-
prone hand-offs
Complex procedures
and documentation
Mis-aligned capacity
and demand
One-size-fits all
process
McKinsey & Company | 7
Reality: Lean methods have unlocked capacity
and increased speed in developed and emerging markets
30
30
35
35
40
65
70
70
80
40
80
30
30
35
50
50
60
60
Australia
UK
UAE
Peru
Chile
US
Malaysia
Singapore
US
Branch
Branch
Branch
Cycle time reduction Capacity increase Country Channel
Branch
Branch
Intermediary
Field sales
Branch
Direct
SOURCE: McKinsey analysis
Percent
2
McKinsey & Company | 8
Reality: Information, not just technology will be the
strategic weapon of future
SOURCE: 2010 Transforming Banking through IT Survey of Indian banks
7
73
Decrease
20
Keep
same
Increase
Future IT spend
Planned future IT spend
% of CIOs who selected the option
Future priority investment areas for IT
% of of CEOs that ranked a given choice
in Top 3
Alternate retail
channels
Core Banking
System
Support function
systems
(e.g., F&A, HR)
CEO response
10
11
29
43
54
Specialised
product systems
1

1 Examples include cash management, trade finance, treasury systems and others
MIS/CIM/Risk
management
Increasing IT investments ... with particular focus on MIS/CIS/Risk
1. Create an on-
demand
information
architecture
2. Establish
information
governance
3. Build informa-
tion analytics
capability
will make
information a
strategic weapon
3
McKinsey & Company | 9
SOURCE: 2010 Transforming Banking through IT Survey of Indian banks; McKinsey analysis
Challenges faced in using IT effectively
% of CIOs who ranked
given choice in Top 3
% of CEOs who ranked
given choice in Top 3
21
29
43
43
50
86
Organisation structure of IT is not aligned
to support business units effectively
Difficult to justify economic benefit of IT
Revamping legacy systems
Gaining access to technical talent
Limited understanding in the business
managers on how to use and manage IT
Business processes and practices do not
change enough to fully realise the benefits
of IT and automation
33
33
27
40
87
60
Reality: The main barrier to scaling with IT is not
technology, its people and mindsets
3
McKinsey & Company | 10
Reality: Architectural simplification is key to scalable IT
platforms
SOURCE: Corporate and Press releases
Single technology platform
PARTENON

2 Regional IT development
centres: Madrid and Chile

Four regional operating centres
Madrid
Milton Keynes (UK)
Queretaro (Mexico)
Sao Paulo (Brazil)

Significant cost savings: 25%
reduction in transaction costs

Rapid product delivery
3
McKinsey & Company | 11
Reality: Massive leadership gap especially in public
sectors
Addl.
required
in 2015
300-350
Others
(faster
promotions,
direct hiring)
100
280-300
10
70-80
Gap Baseline
in 2010
Non-retiring
pool
Estimation for officers of the rank of AGM and above
Index=100
SOURCE: McKinsey analysis
CASE EXAMPLE
The bank needs to
aggressively
accelerate capability
building of its senior
executives to enable
them to lead a bigger,
more complex
organisation
4
McKinsey & Company | 12
It is crucial to embed
new leadership skills
by applying them in
the fields, otherwise it
is just theory that will
soon be forgotten
3 weeks 3 months
Learning
through Formats
70% 10% Explanation
(listening)
Presentation/speech
Manual/flyers
Video
Discussion
72% 32% Example
(seeing)
See someone doing
85% 65% Experience
(doing)
Role play
Practical application day-
to-day
100% 100% Experience
(teaching)
Leading others to do
Coaching own team
Teaching other leaders
Effectiveness
measured after
Reality: Adult learning research suggests learning is
most effective when embedded in real life application
SOURCE: Pesquisa IBM; Whitmore, Coaching
4
McKinsey & Company | 13
Myth: Higher compensation will guard against attrition
6,108
3,542
33
27
20
35
61
88
24
15
SOURCE: P360 benchmarking
Above average players
Below average players
Percent
US$/annum
Percent Percent
Percent
Cross-skilling ratio Team leader attrition
Agent compensation
Proportion of team leaders, ops
managers grown internally
Attrition
4
McKinsey & Company | 14
61
12-18 42
< 12
18-24
>24 72
56 104
133
98
114
Higher employee tenure does not ensure higher
productivity
Variation in employee productivity
652
341
48%
6.5
9.2
29%
1 Average time taken to service a request / answer a call
2 Only agent compensation is considered for calculation
Average
processing time
Minutes
Cost per
transaction
INR
Productivity
Calls/day
Cost per call
INR Months
Example 2: Credit card customer
service
Example 1: Email customer
service
4
McKinsey & Company | 15
Question
If you are 7 or below on the 10-point self-test, it is time
1. Hand-offs across functions in all major processes are few and error-free
2. Network of processing sites has the right balance between centralization
and de-centralization
3 Limited variance in productivity and TAT across processing sites
4. Ability to meet customer expectations at key moments of truth is
monitored and at acceptable levels
5. Productivity of key resources (e.g., credit officers, RM) in major processes is
competitive
6. Internal leadership benchstrength to manage larger and more complex
businesses is sufficient
7. Your ability to recruit high quality talent and retaining it is high
8. Your training programs are working effectively in delivering the skills and
mindsets you need
9. Your IT platform can scale effectively in supporting new products,
channels and expected business volumes
10. Your ability to manage information for effective decision making is high