Dare to Improve Your Operational Efficiency? Here's Your Guide

Doing more with less. Every executive would love to dream of that. What makes market leaders and market laggards different is high efficiency. One should take care since efficiency has become a buzzword. That's why COOs (chief operating officers) too often mistake improving operational efficiency with cost-cutting. However, the mere act of cutting down on the resources available is not sure to fetch you superior figures. Actually, it stands a higher chance of diminishing productivity. It might sound counterintuitive, but to significantly improve operational efficiency, you need to treat it as an investment in people, processes and technology. In this case we shall discuss the best practices to do so.

Operational efficiency aims to maximize the use of resources needed to achieve the desired output. The fewer resources you need, the higher your operational efficiency. The term resources here is very broad, that is, time, equipment, labor force, operating expense and labor. Improving operational efficiency, in turn, means optimizing resource utilization to increase or maintain the output with fewer resources. This can be done through:

• Streamlining by introducing templates and processes
• Automating processes and repetitive tasks
• Upskilling of your employees

Operational efficiency differs from operational excellence (OpEx). Operational excellence is the management of business processes that fosters a specific culture of engagement within an organization.

Examples of operational efficiency

What does improving operational efficiency look like in real life? The following are some of the basic examples:

• An investment bank which is using automated trade reconciliation software to reach the T+1 settlement cycle
• A capital markets firm developing a data standardization policy to reduce time spent on manually verifying entries
• A retail bank implementing straight-through processing for check payments
• A company that provides insurance in which an AI/ML tool is used to categorize incoming emails and documents
• A financial institution implementing a robotic process automation (RPA) solution to streamline supply chain management

There's no one-size-fits-all solution when it comes to operational efficiency strategies. The reason is that various businesses are afflicted by various inefficiencies. And even when these are alike, still their underlying causes depend on the particular processes that are in existence, the technology employed as well as talents existing.

A 2023 Anatomy of Work report conducted by Asana shows that 62 percent of the work day of an average employee is spent on repetitive and otherwise mundane work. When your operations are efficient then it implies that the personnel are laser-focused on value-added operations and menial, repetitive jobs are automated. How can you improve operational efficiency? You ought to choose either one or both courses:

• Do away with redundant meetings or useless reports
• Automate not-value-added but necessary tasks such as manual data entry and verification

A common way to measure operational efficiency for a specific process is to track the operational efficiency ratio. This indicator is a comparative measure of all your resources consumed and output generated- inputs and outputs.

Saying that, in case your content writing team has five members and they post 20 blog posts every month, the ratio is 1:4. In other words, each team member has come up with four articles. At the enterprise level, operational efficiency is measured by dividing your operating expenses (input) by the total revenue (output). Multiply it by 100% to get the operational efficiency rate. For example, if your operating expenses amount to $50,000 and your total revenue is $100,000, your operational efficiency rate is $50,000/$100,000 x 100% = 50%. A declining operational efficiency ratio means the organization is becoming more efficient. The optimal efficiency ratio is 50% or below.

Key Performance Indicators (KPIs)

The operational efficiency rate isn't the only metric you should track, of course. Operational efficiency strategies should establish key performance indicators (KPIs) for every objective set. Good KPIs:

• Are measured at the appropriate frequency (daily/weekly/monthly)
• Fit your industry and domain
• Discuss long run and short run objectives
• Have practical value
• Faithfully indicate the progress towards a goal

Enterprise-wide operational efficiency KPIs can include:

• Operating expenses
• Human capital expenses
• Fulfillment measures among customers
• Capital expenditures

On top of KPIs, you should also track performance metrics. These figures allow you to make comparisons of your efficiency with industry-related standards. They also provide a summary on a more detailed basis than KPIs. Performance metrics can include:

• Accounts payable turnover
• Average accounts receivable Days outstanding
• Inventory turnover

Achieving operational efficiency is a win-win for both customers and the organization itself. There are satisfied customers who have better services and quicker response. The organization, in its turn, would be able to boost profit margins and obtain a competitive advantage and minimize operating expenses.

Optimized operating costs

There are less resources needed to produce the same or even better results in efficient business operations. Consequently, there will be the ability to reduce operating costs without the need to compromise on quantity and quality of output. As an illustration, automatic customer call and support ticket triage saves time in answering queries per call. Consequently, you are able to shrink your customer service department without compromising on the response times.

Reduced human error

Human error is likely to occur in manual processes. The necessity to correct those errors just causes the slowing of your employees as well as deteriorates customer satisfaction. Automation and process standardization allow you to prevent mistakes, saving your employees' time and improving customer experience. And, needless to say, there will be fewer mistakes, which also means less operating costs, as well.

Better customer satisfaction

Increased response time, an improved one-touch issue resolution rate and rapid onboarding are elements that lead to increased customer satisfaction scores. Actually, the most popular reason of consumers to resort to non-traditional financial services providers is easy onboarding. Salesforce reveals that the online availability of certain financial services operations is already expected by financial services customers. As an illustration, more than 70 per cent of banking clients desire to apply online to get debit or credit cards. By extension, 69 percent of the insured customers desire to renew the cover online. Those processes may be almost immediate with automated data verification and application validation.

Increased profit margins

Reduced operating expenses and increased revenue due to the customer satisfaction is equivalent to higher profit margins. Indicatively, a client utilizing the self-service borrower portal can save 25-30% of the number of call-management cycles and 30-50% increase in efficiencies hence reducing the waiting of customers and the necessity to hire temporary employees in times of spikes.

Better staff satisfaction and retention

Monotonous activities, useless procedures are the plague of the routine of the employees. The process of eliminating them is accompanied by making employees happy. The increased employee net promoter score (eNPS), in its turn, is related to the increased rates of retention, productivity and engagement. Moreover, high retention rates of employees provide you with a competitive advantage once the competition is stiffer in specified areas, including technology.

Competitive edge

All the other benefits of implementing a sound operational efficiency strategy — increased speed, profit margins, and customer and employee satisfaction – translate into a competitive advantage. Let's put it more bluntly. Achieving and maintaining operational efficiency is key to successfully addressing rising competitive threats posed by Big Tech, megabanks, big fintech and challenger banks.

Financial services organizations traditionally struggle with eight operational efficiency challenges, from data availability and quality and STP rates, to high technical debt. Let's take a closer look.

Poor quality and availability of data

The greatest hindrance to innovation, based on a survey of financial leaders by WBR Insights, is data silos. (It has surpassed the absence of buy-in and financial limitations) Disjointed access to data may become an inefficiency by itself, as well. The same survey found that in 85 percent of organizations, IT workers use a quarter to half of their time assisting the rest of the job seekers to find the information and knowledge that they are required. The following challenges may need to be met to ensure the data quality:

• Data entry errors
• System integration errors
• Incomplete entries
• Data capture failures
• Data discrepancies
• Duplicate entries
• Outdated or obsolete records
• Lack of data standardization
• Absence of context of enterprise or cross-functional data

High technical debt

If data is the key to operational efficiency, then an up-to-date, modern, unified digital ecosystem is the keychain to hold it all together. Even changing to such an ecosystem may not be an easy task. The applications of universal banks are 14 years, on average, compared to three years of digital banks. A mosaic of applications which barely communicate with each other or do not share any data at all is the source of inefficiencies particularly when there exist redundant systems.

Weak straight-through processing rates

Low STP rates is one of the persistent issues of banks. A centralized data management platform is one of the common causes. Other reasons involve archaic systems which could pose severe constraints on the STP solutions that can be adopted. The low-than-preferable STP rates might also be a result of customer tastes. Indicatively, a third of the B2B transactions in the U.S. and Canada are conducted through checks.

Lack of process standardization

Standardized processes are well documented systems of operations. Otherwise, when you left each employee to his/her own devices, they would come up with a slightly different approach to do the same task. The inevitable outcome? Unequal productivity and poor work quality. Different approaches to activities result in the appearance of over- and under-processors:

• Over-processors are those workers who spend excessive time and effort in their work and this might slow down the teams
• Under-processors are those workers who do everything possible to cut corners

Low reconciliation matching rates

The rate of reconciliation match indicates the accuracy of the reconciliation process. There is not just an indicator of operational inefficiencies, low rates are also a barrier to the T+1 settlement cycle. The cause might be low matching rates as a result of:

• Different lines of business or different locations used fragmented systems to process transactions
• Hand match check-up and research
• Cross-system corrections are made manually
• Lack of data standardization, which leads to a high rate of discrepancies
• Absence of line of business scalability

Overly complicated application stacks

Asana (2023) Anatomy of Work report states that an average knowledge worker uses 8.8 apps to get their work done. They would save up to 4.9 hours per week by making the application stack less complex. More so, the multiplicity of apps may deteriorate the quality of work. Another point revealed in the report is that 25 percent of employees who use 16 or more apps lose messages and actions.

Improperly spelled out decision rights

Teams should never be left hanging without making decisions unless leadership has made it clear and has given them direction measures. Furthermore, conflicting instructions can easily lead to misunderstandings and bottlenecks, bringing down operational efficiency even further.

Inability to see what is going on with current processes

If you fail to implement metrics and establish benchmarks, how will you know when you manage to increase operational efficiency? Understanding current operations, as they are, is key to targeted, effective process improvement. The gathering and interpretation of data about the existing operations will enable you to:

• Determine areas of improvements
• Prioritize initiatives to increase operational efficiency
• Evaluate risks more expeditiously and precisely
• Track progress in achieving operational efficiency objectives

Where do you start with your operational efficiency strategy? Here's how to improve operations management in ten ways.

Get to the frontlines

To improve operational efficiency, you need a hands-on understanding of processes and workflows that comes from actually doing the job. Yes, the information on enterprise level, and the bird eye view of operations based on this information is necessary. However, it cannot compete with obtaining feedback of front-line workers.

Maintain process documentation

To improve operational efficiency, you need to make your processes reviewable. And to that, they must be first of all written down. The undocumented processes are also not standardized and there is a variation in methods of conducting these processes and quality of output. Besides, without documentation, knowledge transfer must be a one-on-one process, which slows and prevents the transfer in certain instances.

Optimize resource utilization

Improving operational efficiency is, at its heart, all about using your resources wisely. Easier said than done, isn't it? A complete picture of: to maximize resource allocation in this case, you need to know:

• Human resources in your bank and their competencies
• Their availability at present and in future
• How expensive they are to your organization

Dismantle interdepartmental boundaries

Organizational silos are likely to exist along departmental boundaries in large businesses. But those can harm operational efficiency as they give rise to data silos and lack of transparency and communication. In order to facilitate cross-departmental cooperation, develop:

• Clear and regular intra-team communication supported by appropriate tools to support it
• Understanding of the role and how every job helps the organization meet its corporate goals
• Incentive to work as a team towards attaining firm objectives
• Openness to changes in business, business decisions and other information

Address bottlenecks

The bottlenecks may occur at any of the level, including supply chain management, or even customer service. By catching them early, it is possible to avoid paying a high price in the slowdown of operations or its complete standstill. Other bottlenecks are brought about by:

• Communication flaws
• Process management issues
• Software systems problems
• Supply chain management issues
• Undocumented knowledge
• Company culture and employee morale

Track the right metrics

Unselected metrics and KPIs may result in either of the two following situations: One, you may think that your operations are running smoothly, but in fact, it is not the case. Two, you think that your operations are not efficient when metrics is not a suitable indicator of resource productivity.

Modernize and integrate your software systems

Your operations must be as smooth as a well-oiled machine and so should your software. That is, your apps should be a symbiotic digital ecosystem, rather than a digital zoo where each different species competes against the other. As you are reviewing your application stack, ask yourself the following questions:

• Are there any solutions that lack functionality to power operational efficiency?
• Does it have any legacy systems that need to be updated before they can be incorporated into a digital ecosystem?
• How do the users speak about any system? What inefficiencies do they experience?
• Are there any systems that fulfill similar or the same purposes? Is it possible to replace them with one solution?

Leverage intelligent automation

To achieve operational efficiency, you'll need automation, whether robotic process automation (RPA) or AI solutions. RPA tools operate on basic algorithm trees, whereas AI-powered intelligent automation solutions can take on more complex tasks like data extraction or analytics. Indicatively, within the supply chain management, AI can be used to automate the processing of orders, tracking of shipments and management of inventory throughout the entire supply chain.

Provide necessary training

Even if you adopt cutting-edge AI automation solutions, they are still only tools. The effectiveness of such tools is dependent on the ways in which they are utilized by people. Therefore, when you address the issue of your inefficiencies in operations with the new technology, be sure that the users are aware of the best uses of the tools available to them.

Ensure continuous improvement

To maintain operational efficiency, operational efficiency strategies can't stay set in stone. You should regularly review and iterate on them to enable continuous improvement. Such reviews must be set on the basis of a stakeholder review as well as gathered metrics. They are a chance to:

• Assess the impact of operational efficiency initiatives already in place
• Change them or revert them in case they fail to deliver the desired goals
• Remain in touch with customer demands in terms of service quality and speed
• Keep up with competitors
• Take advantage of innovative technology to improve operational efficiency
• Find new areas of efficiency gaps

In financial services, improving operational efficiency often goes hand-in-hand with standardizing data, optimizing STP rates and improving reconciliation.

Data standardization

Data standardization requires centralizing all data in a single enterprise data management platform (EDMP), be it a bespoke or off-the-shelf one. However, data standardization doesn't equal simply rolling out an EDMP. It should also involve:

• Establishing a clear and comprehensive data governance policy
• Ensuring data interoperability with consistent data formats across the organization
• Using data profiling tools to correct mistakes, find missing data and automatically authenticate entries
• Implementing data quality controls and implementing frequent data maintenance
• Assuring the data security and the adherence to privacy and industry-related regulations
• Adopting a standardized method to the treatment of null values

Straight-through processing optimization

To begin with increasing the rates of STP, one should detect the cases in which the users continue to use the manual labor to send the confirmations and payments. Automation tools can then be phased in to allow STP. An STP solution can help you:

• Automatically send PDF confirmation to customers
• Reduce human error rates
• Coordinate your human resource to do more of the value added work
• Increase the pace of processing transactions, which enhances customer experience

Regarding the routes of optimization at hand, automation can assume:

• Comparison of information given with country rules and regulations
• Detecting inconsistencies in data provided and warning the transactions to be reviewed
• Making customers have requirements of currency-level of payment information
• Allowing systemic preemptive transaction verification

Reconciliation improvement

Higher reconciliation matching rates improve payment process efficiency and reduce the ops team's workload. In order to enhance those rates, you will be in need of a complex tool that will be able to accommodate front office and back office (FOBO), Nostro, bridge, position, sundry and other types of reconciliation. The inefficiencies of reconciliation are usually due to the manual nature of comparing records since one or more of the sources holds unstructured data which is not computer friendly. But, the process of making all data machine-readable is just the initial move towards the automation of reconciliation. You also need to:

• Normalize data between various sources
• Introduce data validation to determine that it is accurate and reliable
• Combine data sources to a single system in order to draw data on-demand
• Select matching and exception-handling rules

That covers everything, and just to briefly summarize our extensive guide: operational efficiency is the ratio of resources used to the output produced. Its enhancement consists in streamlining processes, investing in training and automating it. The advantages are lower costs, decreased errors and increased customer and employee experience and the weaknesses are low data quality, technical debt and lack of standardization. The solutions? Enterprise data management platforms and intelligent automation to optimize your processes.