By Demos, Darryl; Dinkin, Les
American Banker , Vol. 167, No. 212
Productivity - the goods and services produced from each hour of work - is the magic elixir of economic progress, according to Federal Reserve Chairman Alan Greenspan. It is why we, without working longer hours, live better than our grandparents did.
Given productivity's importance to revenue and earnings growth, it surely must be of critical concern for financial services executives, right?
In fact, return on revenue per unit of labor or expense does not appear to be a critical agenda item in the boardroom. Revenue growth and expense management and reduction are, but revenue per full-time employee is generally not.
When we polled senior executives at major U.S. financial services firms, these simple productivity measurements were surprisingly not represented through specific metrics or delineated corporate goals. They consistently mentioned three reasons for this. We'll call them the three productivity myths.
Myth No. 1: Productivity is about widgets. It applies only to the manufacturing and retail industries, not services - and especially not financial services.
Myth No. 2: There is no practical way to measure productivity, especially in financial services.
Myth No. 3: Productivity just means "cost reduction." Revenue is not relevant.
On a macroeconomic level, productivity is defined by gross domestic product. It equals the value of goods and services divided by total labor hours. The GDP, and therefore productivity, measures how much value is produced for each unit of labor.
Value in financial services, from a metric point of view, can actually be seen as overall profit or revenue per full-time employee or equivalent. The most likely candidate for this metric would be operating profit divided by total FTEs. The key is to pick your measurements and track them over time for specific lines of business, customer segments, operating departments, and functions, as well as for the organization as a whole.
This approach supports the overall development of the enterprise and the deliberate strategic and tactical efforts to make it healthier. Productivity is best understood as a metric and a process that financial services firms implement to raise the value of employees' output.
However, extraordinary gains in this metric do not happen by accident - you must pick a solid strategy and optimize your people, processes, and technology to deliver the expected results.
We believe that senior executives should know the value their firm produces for each FTE, in both the front and back offices. We also believe productivity can and should be considered a critical metric in any industry, including financial services.
In effect, we are looking at the return (both revenue generation and reduced cost of work produced) for each dollar invested in the enterprise and in specific functions (for example, sales generation and processing). There are two kinds of productivity: expense-driven and value-driven.
Expense-driven productivity involves cutting costs and can deliver significant improvements in profitability.
Keep in mind, however, that though the cost of input declines, the value of output stays flat. There is improved profitability with no improvement in quality. Investing capital and restructuring jobs are examples of what we call "value-driven productivity."
Value-driven productivity increases the value of output and reduces the cost of input, which improves profitability and strengthens long-term competitive advantage. …