Going back to basics to unlock sustained efficiency and productivity gains in financial services
Quick wins alone can’t solve long-term problems. For instance, as anyone who has tried to get healthier can attest, cutting calories can be a good first step, but making comprehensive changes in diet and exercise is most critical to achieving lasting results.
The financial-services industry provides another example. Like other industries, it has experienced increased instability over the past decade. To address long-standing cost challenges, many financial-services companies have responded with traditional quick-win interventions, such as freezing budgets, streamlining organizational structures, offshoring or outsourcing certain functions, and consolidating real estate.
In addition, financial-services firms have invested in AI and other technologies to digitize and automate key processes. However, in some instances, they fall short of investing in the underlying ecosystem changes required for large-scale impact. As a result, gains made through these efforts are often short lived. And now these companies are confronting new issues that affect productivity, including changing workplace norms, declining employee engagement, and weakened corporate cultures.
Our experience in the field suggests that the best way for financial-services companies to address such challenges is to get on a holistic “fitness” plan—that is, to take a systemic, people-focused approach to realizing and sustaining productivity gains and efficiencies. Indeed, recent McKinsey research has indicated that banks can achieve lasting productivity gains by taking an integrated approach to simplifying their portfolios and operating models.
In this article, we’ll take a deeper look at how financial-services institutions can prioritize organization- and talent-centric approaches to improve their efficiency and productivity. This approach will mean pursuing a full rewiring of the organization, including talent, mindsets, and behaviors. It also will require commitment from leaders across the company—from strategy to business to finance to HR—to work together to identify and solve long-standing problems and to achieve and sustain long-term health.
Short-lived gains
Banks and insurers have been wrestling with a variety of disruptions in recent years. Varying by subsector, these include the rise of private-equity-backed platforms and independent distributors in life insurance; digital- and analytics-enabled disruptions in payments, wealth management, and property and casualty insurance; and regulatory overhauls in banking. The past five years have been especially disruptive to employees in financial services, with the global COVID-19 pandemic, the shift to hybrid work, the “Great Attrition” followed by the “Great Resignation,” and the rapid rise of gen AI. As a result, most companies across the industry now face tough questions about their operating models, the economics of their legacy businesses, and how to create more value.
In aggregate, neither banks nor insurers have seen significant net productivity gains over the past 20 years. Also, in recent years, their cost-to-income and expense ratios have remained flat or worsened, despite many institutions continuing to invest in technology and taking actions to cut costs (Exhibit 1).
For many financial-services companies, efficiency and productivity gains realized through traditional interventions often fade away after an initial surge. Previous McKinsey research on 1,200 public companies over a ten-year period found that of the organizations that announced cost-reduction initiatives, only one in four was able to sustain savings for more than four years. While the reasons for this result vary across institutions, they often include the following:
- Failed playbooks. Organizations too often apply cookie-cutter approaches to rightsizing their structure—such as conducting span-and-layer exercises to set the optimal number of employees per manager and the ideal management hierarchy without fundamentally reevaluating business and operating models.
- Loss of steam. Many companies fail to sustain focus and effort when managing change, realizing value, evaluating the skill sets required as business needs evolve, rethinking how talent should be organized and enabled, and embedding the change into existing workforce planning and management systems.
- Insufficient focus on root causes. Organizations often don’t address fundamental issues that cause inefficiencies, including demand management—that is, what work is done and how it’s done—as well as structural decisions, mindsets, and behaviors.
- Underinvestment in talent. One of the most important ways to sustain efficiency efforts and unlock new levels of productivity is to ensure that the workforce is set up for success, with changes fully embedded into the organizational culture and processes. In some instances, organizations overlook that step. In others, the efforts end up labeled as “HR exercises” and lack proper integration and attention from business, finance, and other functions.
New challenges to productivity
Over the past five years, emerging challenges have exacerbated existing efficiency and productivity issues for financial-services companies and introduced new ones. For instance, high levels of employee attrition between 2021 and 2022—when the voluntary quit rate was 25 percent higher than prepandemic rates—coupled with the shift to a largely fully remote corporate work environment weakened many corporate cultures. Some companies overhired to counter this attrition, which created bloated structures often seen in, but not limited to, non-revenue-generating roles. In many cases, companies were making hiring decisions in silos instead of engaging in strategic workforce planning grounded in value creation.
The rise in hybrid work has also been a challenge for financial-services organizations. Employers are managing bifurcated workforces with employees who hold sometimes-challenging expectations about working norms and values, which can make employee motivation difficult. While most employees who have transitioned to remote work say that it’s now easier to balance their work and personal lives, many of the executives we have interviewed wonder if their organizations will be able to weather new challenges. Organizations that struggle the most in this environment often have weak or relatively informal management systems. They lack a strategy that translates into specific goals for every layer of the organization, as well as standard tools and management practices that provide transparency and drive performance.
Finally, employee engagement is low. Previous McKinsey research showed that in the wake of the COVID-19 pandemic, more than half of employees reported being relatively unproductive at work. Some companies are beginning to recognize this challenge through their own people and financial data. For example, a financial institution analyzed how its tech employees spent their time. The company discovered that, on average, the employees logged in for only 4.5 hours during an eight-hour shift, with a mere 2.2 hours spent on actual coding. In another example, an insurance carrier experienced an 80 percent drop in the volume of outbound sales calls on Fridays after implementing a remote-work-Friday policy. These anecdotes suggest that companies urgently need to find ways to reengage their employees effectively.
A fresh path to sustaining efficiency and productivity
As efficiency and productivity challenges have become more daunting, financial-services companies face a moment of truth. The traditional interventions and technology investments previously discussed remain important. However, they should be blended into a more holistic approach to rewiring the organization and positioning the workforce for success over the long term. This involves two key efforts: fundamentally rethinking the organizational model and investing in talent and talent enablement (Exhibit 2).
Rethinking the organizational model and structure
Too often, even when faced with daunting productivity and cost reduction challenges, companies stop short of fundamentally rethinking their organizational model and structure. They make changes and reductions in silos, which risks cutting into the “muscle” of the organization and leaving it weaker rather than leaner. There’s a huge opportunity to unlock efficiency and productivity by questioning what work people do and how they do it. Leaders should consider opportunities in the following four areas:
- Rightsizing the structure of support functions. Organizations can enhance efficiency and productivity by evaluating the true end-to-end costs of shared services (such as product development and back-office teams) and assessing those costs against the business, product, or client segment that they support. Sometimes, the real view of these costs can be obstructed because of the fragmented or shared ownership of these functions. That was the case for a global financial-services firm. Its shared-services functions supported multiple lines of business, which risked camouflaging the end-to-end costs of each line of business because the support expenses were spread across the organization. By gaining more visibility into these costs, senior leaders at the company were able to identify and address areas where resources were greatly inflated (such as a product organization three times the size of the distribution organization) and misplaced.
- Carrying centralization to its last mile. While centralization can yield considerable benefits, it often leads to the creation of “shadow functions” that duplicate efforts or continue providing customized services for certain lines of business, undermining the objectives of a centralized structure. Institutions can overcome this challenge by reviewing organizational design and planning clear change management. A financial-services organization has centralized its middle-office capabilities—representing 35 percent of its total enterprise resources—and created a common structure across businesses and geographies. However, two years into this transformation, the businesses and regions continue to carry shadow resources that are, for some capabilities, 1.3 times the size of the centralized resources. The firm didn’t go through the rigorous process of standardizing roles and capabilities, defining a common taxonomy of services needed for the businesses and geographies, and reengineering processes to meet those needs in an efficient, cost-effective manner.
- Implementing zero-based redesign of organizational units. Traditional transformations often target incremental improvements (that is, partially eliminating, outsourcing, reducing, or simplifying certain activities). “Zero basing” takes a clean-sheeting (or building from scratch) approach to evaluating what’s being done and how. It means asking what bare-bones organizational design is needed to maintain a company’s current momentum and then asking how that design can be optimized to meet the organization’s strategic priorities. After several rounds of efficiency efforts and attempts to gain visibility into what employees did, a global bank did a cleansheet evaluation of one of its support functions. The bank’s leaders shifted from trying to identify the efficiency opportunity for this function to asking, “If we were to build it from scratch, what capabilities would we want to have?” As a result of this effort, the bank discovered that more than 50 percent of resources were misplaced and identified missing capabilities within the remaining resources. This created substantial opportunities to increase efficiency, most of which wouldn’t have been discoverable under the original approach.
- Performing granular clean-sheeting of the business portfolio. Companies that periodically take a methodical, detailed look at their products, value chains, and client segments may be able to find cost-saving opportunities. While this portfolio strategy isn’t a new concept, doing it at the right level of granularity is where issues arise. Most organizations lack readily available product, value chain, and client segment taxonomies with a granular view of revenues, end-to-end costs, and supporting platforms.
Systematically investing in talent
The final and most critical piece of the puzzle in creating sustained efficiency and productivity gains in financial-services companies is to reinvest in people, mindsets, and behaviors. Without a change in how people behave and manage their everyday roles at all levels of an organization, efficiency and productivity improvements usually fall away. To unlock employees’ potential and maximize the return on talent, senior leaders should focus on the following areas:
- Integrated workforce planning. To achieve sustained improvements in efficiency and productivity, organizations need to put in place a rigorous workforce-planning cadence that convenes leaders in business strategy, finance, operations, real estate and location, and talent and organization design (HR). Currently, few organizations are highly confident in workforce plans that go beyond a one-year outlook, are directly linked to value creation priorities, and provide sufficient detail about the roles and skills required. Even fewer organizations can readily combine the traditional disciplines of strategic workforce planning, organization design, location and real estate strategy, and budgeting. This is why most don’t know whether they’re maximizing ROIs—especially their investments in people.
- Holistic redesign of the employee experience. Our research and experience confirm that a distinctive employee experience is a core driver of engagement at most financial-services companies. Better employee experiences can also mean that people are eight times more likely to stay at a company and four times more committed to the organization. While employee experience is often viewed as an evergreen topic, companies have the opportunity to look beyond the minimum required standard for keeping their people happy to understand how to differentiate their employee experiences to deliver a real, measurable competitive advantage.
- Redesign of the management systems and performance dialogue. It’s important for leaders in the financial-services industry to take a systematic approach to talent and organizational improvement, just as they do with business processes. They should start by defining clear objectives and goals and then systematically measure performance and analyze data to identify areas for improvement. High levels of performance rigor and frequent dialogue are critical for unlocking and sustaining productivity, even more so in hybrid settings. Every company engages in performance dialogues and meetings (such as weekly or quarterly leadership gatherings), but what differentiates the best is the quality of that dialogue, supported by standardized data dashboards and a clear accountability model.
- Top-team effectiveness and speed in decision-making. In financial services and many other industries, we find that the most successful organizations have closely aligned top teams and make decisions faster than their peers. These companies experience average growth rates 2.5 times faster than those of their peers, achieve successful innovation 2.2 times more frequently, and are twice as profitable. Top teams can speed up implementation by clearly segmenting decisions—for instance, identifying which ones need careful debate versus quick action—as well as effectively communicating and demonstrating decision processes at every layer of the organization.
- Capability building to strengthen implementation. The combination of diminished individual productivity exacerbated by the pandemic, remote and hybrid work models, and significant talent turnover over the past four years has prompted many organizations to reevaluate their talent strategies at all levels, including management. For example, one of the challenges that we most frequently observe is the same leaders being tapped over and over to take on important strategic priorities. This results in managers taking extra work on top of their regular duties and spending a disproportionate share of time handling administrative tasks instead of coaching and building capabilities of their frontline employees. It also creates highly skewed productivity curves toward a very small group of high performers. Many CEOs say that they wish they could boost their number of go-to leaders from 20 to 200. Previous McKinsey research estimated that a decade ago, CEOs and top teams typically focused on four or five critical issues at any one point in time; now, that number has doubled. Rising to this challenge requires organizations to take a methodical “leadership factory” approach to identify individuals with high leadership potential and take them through structured experiences to build their skills and aptitudes.
Imagine that, like many people, you have been struggling with your weight and health for years. Two weeks before attending a wedding, you realize that your favorite outfit is too tight. So you go on a crash diet to help you feel more comfortable about how you’ll look for the big event. This may be a quick win, but it alone won’t address your core need: better long-term health. Without a consistent, sustained effort to improve your diet, exercise, sleep, emotional well-being, and other important health factors, you’ll keep relying on short-term solutions.
Similarly, banks and insurers must recognize that they can’t depend only on their typical primary practices for improving efficiency and productivity if they want to achieve lasting gains. Quick wins from streamlining organizational structures and deploying gen AI and other technologies are important but not sufficient. To unlock and sustain efficiency and productivity gains, leaders in financial services need to combine traditional interventions with a deep rethinking of organizational structure and an investment in talent and talent enablers, mindsets, and behaviors.
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