The Checklist Manifesto: How to Get Things Right is a best seller written by Atul Gawande, a surgeon. It provides one of the most straightforward and practical approaches for managing difficult situations, the often ignored and unappreciated checklist.

 

The Need for a Checklist
In the book’s opening chapter he writes of the tremendous knowledge we possess in the twenty-first century (in areas well beyond medicine) and the difficulty involved in managing that information: “We have accumulated stupendous know-how… Nonetheless, that know-how is often unmanageable. Avoidable failures are common and persistent… across many fields — from medicine and finance, business to government. And the reason is increasingly evident: the volume and complexity of what we know has exceeded our individual ability to deliver its benefits correctly, safely, or reliably.” Within financial services, banks operate today with increased complexity related to analysis, products offered, compliance requirements, and investor involvement, among other areas.

 

His solution is the checklist, which he readily admits will appear “almost ridiculous in its simplicity” to some of those who have developed “more advanced skills and technologies.”

 

Checklists Work in Many Industries
Gawande writes concerning surgery that the response to complexity has been to have doctors move from being specialists to super specialists. But even with this super specialization upwards of 150,000 surgery-related deaths occur each year, half of which are avoidable. His point is that by itself specialization cannot overcome medical complexity and the need to take the specific steps required to avoid problems such as infections.

 

He cites a December 2006 article in the New England Journal of Medicine describing a project in Michigan to reduce central line infection rates at hospital ICUs. Once a checklist was introduced and implemented, the rate of infections decreased by 66% and at some hospitals to zero.

 

The value of the checklist goes well beyond the hospital. His book also discusses the use of checklists by pilots, in particular the role that following checklists played in the safe water landing of US Air flight 1549 by Sully Sullenberger. Related to finance, one investor notes that Warren Buffett uses a mental checklist process when evaluating potential investments.

 

Checklists and Banking
While the book does not focus on banking, in our work we see multiple cases in which a well-crafted checklist could increase productivity, quality, and productivity:

 

• We see credit memos that do not follow a unified format and often lack critical information. In some cases, these memos are returned for further work (lowering productivity) while in others they may be accepted as is (lowering quality).

 

• Our reviews of the credit files of failed banks underscore that little consistency exists from one file to another even within the same bank. Required financial statements are either missing or out-of-date, appraisals are old, and overview memos are missing.

 

• Our experience with banks trying to manually create Certificates for the submission of loans to the FDIC is that they face significant rework and lost productivity partly because they are not following an internal checklist or a checklist that emphasizes data integrity.

 

• Exceptions in pricing, fee collections, and balance requirements continue to occur across many banks

 

Of course, in many cases some sort of checklist may exist at a bank but is either not followed or is amended on an ad hoc basis, destroying the value of the discipline that following checklists provide. Most credit files are supposed to follow a checklist of some sort yet exceptions are often picked up during audits because senior management tolerates banker inaction or ineptitude. Checklists require senior management commitment for their use to have impact.

 

Frequently, workers push back against checklists, thinking that their activities are “unique” or too sophisticated to allow for the use of a checklist. Frankly, rather than uniqueness, laziness or arrogance are overweighting what is usually best for their employer and their clients. To this day, some bankers, in particular commercial lenders, portray their responsibilities as more art than a craft that can be described in a largely sequential manner. Lenders like those resist checklists… and required controls on their actions.

 

To some degree checklists are nothing new in banking. They are used implicitly or explicitly in many consumer and commercial loan areas. Investment groups may also apply them to determine the suitability of certain instruments for their clients. However, today’s uncertainty and continued economic volatility point to the need for a checklist manifesto rather than just a checklist suggestion.

 

Concluding Thought
Implementing more extensive use of checklists should not be an opportunity for bank bureaucrats to further burden line or staff personnel with more time consuming activities. An effective checklist continues to be used over time in part because it selectively focuses on those key elements of a process rather than taking a “kitchen sink” approach. While the value of checklists is clear, senior management has to ensure that their development and implementation demonstrates an understanding of the key finite factors driving an area’s performance.