Bank reengineering was a major business fad during much of the 1990s. As originally described by Michael Hammer and James Champy in their 1993 book Reengineering the Corporation, it involved a sophisticated rethinking of the key aspects of one’s business and required a significant long-term commitment to change by senior management. However, as promoted by consultants selling their reengineering services, it often degenerated into a quick, mostly cost reduction-oriented exercise. (Note: I worked on three of the bank reengineering projects mentioned below, concentrating on commercial banking issues.)

For those who are unclear about just what reengineering means, I will quote from Business Buzzwords, a now woefully out-of-date book I co-wrote ten years ago. Reengineering involves “fundamentally redesigning core processes to make them more efficient and sensitive to customer needs…the best reengineering projects take a unified approach to improving a company’s operating efficiency at the same time they strive to enhance revenues.” Please click on this link to read a more complete description of reengineering from Business Buzzwords. When we wrote our book, reengineering was often lumped in with other initiatives such as change management, corporate transformation, decluttering, reinvention, and rightsizing, among others.

Recently, reengineering consultants have gone back to the roots of the program and have reengineered their own approach to better match the needs of today’s management and the economic environment in which banks are currently operating. More banks are evaluating programs of this type, but they do so from positions of relative strength (both in economic and management quality) versus the past. Therefore, the banks that venture down this path can better take advantage of the deep value that reengineering can offer rather than focusing on some of its limited aspects.

1990’s: Reengineering in Crisis

The first bank reengineering engagements focused primarily on banks that were under intense pressure to put up higher numbers quickly. Some were operating in crisis mode, pushed by investors or the analyst community to take fast and radical action to improve their performance.  Hence, senior management wanted to do something dramatic to improve their bottom lines and give a pop to their stock prices. So, banks like Star Bank in Cincinnati (that had received an unsolicited takeover offer from Fifth Third), CoreStates, First Security of Utah, Michigan National, and many others signed on for programs that were well-received by the Street. In fact, announcing reengineering programs often had an immediate positive impact on the stock price. Whether because of an improved stock price or for other reasons, many of these banks were subsequently acquired after they completed the reengineering exercise.

One criticism I heard regularly from the internal client teams working on these projects was that this process drained sales energy from the bank and caused too many employees to become internally-focused. Another major issue related to implementation. By the end of the six-month project, internal teams developed hundreds of recommended changes related to cost reduction and revenue improvement. Those recommendations then had to be approved by a senior Steering Committee. Once ideas were OK’d, the consultants left, and it was up to the bank to implement. Historically, the consultants did not provide any detailed implement-planning path to the banks.

The net result was that some recommendations fell through the cracks. Cost takeouts were easier to achieve than revenue enhancements that required repricing or other strategic actions that necessitated approaching the customer. The cost focus also limited any positive cultural impact on the bank, as a true reengineering initiative should. Further, and perhaps most important, the same top management was in place post- reengineering as before. Yet, they were the management that, in the first place, had led the bank to the crisis mode that necessitated the reengineering. Not a good sign for the future.

Reengineering Revisited

Today, most banks we see evaluating reengineering opportunities do so after years of strong performance. Growth has been steady and portfolios are clean. However, bankers recognize significant roadblocks are ahead that may keep them from achieving their future expected growth. They want to take proactive steps to anticipate the changing environment rather than have change dictated to them. Appropriately, management now seems at least as focused on revenue growth as on expense reduction. And, reengineering should result in higher revenues as companies focus on products and segments that are most attractive.

Programs of this type can result in a significant bottom line impact. As the bank evaluates its current approaches and rethinks and redesigns them, operating expense reductions of 10 to 20 percent or more are not uncommon. The revenue impact can mirror cost takeouts, putting the institution on a new level of performance. The bank’s competitive position can improve dramatically and, if desired, this positions the bank more favorably if it wishes to merge, acquire, or be acquired.

We think one of the major pluses of reengineering-like programs is that they are bank-and banker-led. While consultants may design and guide the process, the bank forms working teams that have the responsibility for determining possible cost and revenue opportunities and for making recommendations. The success of this initiative very much rests in the hands of the bank’s staff. However, one specific area in which the consultants can offer leadership involves implementation. Consultants, at least the better ones, understand the importance of implementation and their role in fostering it. The programs being offered today should end with the consultant providing detailed implementation plans to the client. While the consultants may leave after recommendations are accepted by the Steering Committee, the plans they co-design with the team members will serve as a critical roadmap for achieving desired results.

Concluding Thoughts

Reengineering works best when the bank embarking on it is building off a position of relative strength. In our view, the quality of the analysis is more thoughtful, the decisions made are better reasoned, and the implementation planning can be more detailed. For many banks that are currently performing well, but sensing that the best of times may be over, now may be the right time to consider an initiative that, to use the phrase of a firm that has a specialty in this area, results in “rapid profit improvement” while leading to longer term strategic and cultural changes.