Banks Should Scrap Pilot Programs — and Do This Instead

For years, banks have relied on lean techniques to improve branch networks and processes like mortgage and credit-card applications. Their overarching goals have been to reduce cost and raise productivity. Yet two-thirds of lean programs either don't deliver the desired level of cost reduction or can't sustain the savings, according to a Bain & Co. assessment of 17 financial institutions.

One reason, we would argue, is banks' heavy reliance on testing a new process through small pilot projects. Banks would gain a much better understanding of how new programs and initiatives will work on a broad scale by embracing hothouse testing. A hothouse test environment focuses on average processes, average customers and average locations—and it uses a sufficiently large sample with enough variation among these variables to represent the entire network.

In practice, it's difficult to draw useful lessons from a small pilot. Banks typically stack the deck for success. They pick one or two branch or back-office locations with the best and most motivated managers, the easiest problems to address and the most receptive customers, and they ensure adequate staffing for the project.

As a consequence, small pilots often fail to subsequently roll out at large scale. They can rarely withstand a more complex process, average managers or less receptive customers. When the main unit of cost consists of labor, improvements to a process at one branch have a tiny effect and become difficult to expand to a meaningful size.

To illustrate the problem, consider how one regional bank in the U.S. launched a number of "branch of the future" pilots with new technology and incentives for customers to migrate to digital channels. The program piloted at two branches — one at a university campus and another in an affluent neighbourhood. Given that most of the bank's customer base consists of lower-income households in rural areas, the pilot strategy had little relevance for the wider network.

With hothouse testing, by contrast, two dozen bank branches in neighborhoods with different demographics would provide a more realistic testing ground than just a handful of branches that look alike. A bank will learn, for example, that lower-performing units need additional training in order for a new program to succeed, or that some locations won't work at all.

In addition, the larger hothouse scale yields benefits even before scaling a program across the entire bank. For instance, a change in the service and staffing model across a hothouse of 20 branches could generate a 10% savings that's equal to two full-time-equivalent employees, freeing up time for the staff to pursue higher-value activities.

Staffing the hothouse program with scalability in mind from the start raises the odds of long-term success. If the business case permits 80 dedicated employees for a full-scale rollout across 1,000 branches, design a hothouse of 50 branches with only four dedicated employees.

Hothouses also give banks the chance to try out process changes in a relatively contained manner. That helps risk and compliance officers become more comfortable with upcoming changes. And thorough testing gives business-unit leaders the confidence that changes can be rolled out across the enterprise.

Hothouses work best when they achieve the following objectives:

• Identify the must-win battles. Banks should focus on programs that reduce costs and improve the customer experience. Evaluate initiatives based on how much staff capacity for high-value activities they free up, ease of implementation and the effect on customers.
• Push boundaries and tolerate failure. Try activities that might initially cause discomfort, like changing service scripts or service levels. Even if they fail, the organization can learn and build experience that helps take future improvements to the next level.
• Let the front line lead. A sense of ownership among frontline staff is essential to unleashing their creativity. They should be backed by sponsors at all levels of the organization, who can help to free up needed resources and clear roadblocks.
• Reach for transformational, not incremental, change. A willingness to challenge sacred cows, such as taking a clean-sheet approach to compliance, is the only way to deliver a really big  improvement in capacity.
• Travel light. Going light on resources at the start sets realistic expectations for subsequent rollout across the wider network.

The hothouse approach helped one retail bank simplify its branch processes. The bank determined that roughly half of the activity at its branches could be classified as non-revenue-generating noise or, at best, discretionary. About one-third of activities related to cash transactions. Further analysis showed the procedures that could help get cash transactions and other low-value activities out of the branch. In a hothouse of 23 branches, the bank redirected cash and check deposits and withdrawals to smart ATMs, modified teller scripts to coach customers on using digital channels and adjusted counter service levels.
The test worked well, and the bank was able to roll out the changes throughout its network. Addressing cash transactions and other branch processes resulted in a number of tangible benefits for the bank overall: a 10% reduction in branch staff capacity, which freed up time for higher-value activities like selling and serving customers; a threefold increase in ATM usage for deposits; accelerated migration of customers to digital channels; a reduction in customer complaints by nearly one-quarter; and a rise in employee engagement.

Hothouse tests that center on improving the customer experience and shifting employee behavior will not only raise productivity but also earn customer loyalty. And when the front line gets truly engaged, lean will stick.

Peter Stumbles and Richard Fleming are partners with the financial services practice of Bain & Co.