The Operational and Management Dilemma for Russian Bankers

By Miroslav Boublik

Over its 4000 year history, banking has undergone a set of major transformations. From an early Assyrian merchant lending out money to his neighbor, recording the debt and collecting it himself, to today’s multinational behemoths covering every financing need from an individual’s credit card to a major government’s complex derivative, the inside of banking – its operating model – has changed beyond recognition.

As have many other industries they touch, banks have specialized core tasks, computerized key functions and subsequently centralized their internal operations. Unlike regulation, which seems to be cyclical and not always constructive, or product innovation, which can lead to unforeseen consequences, changes in bank operating models have led to results which can be viewed as largely positive.

The Operational and Management DilemmaLet us look at the operating model along three dimensions – the organization of operations, the approach to business, and the management model.

Organization of Operations
Starting with the first area, the simpler of the three, accepted operating standards and common practices emerged which are rarely viewed as controversial.  Although I have met some executives who tried to dispute the benefit of moving towards centralized operations, real experience has proven them unequivocally wrong.
The path to centralization consists of three distinct evolutionary stages – the “autonomous branch” model, the “branch back office” model, and the “centralized operations” model.

Autonomous Branch Model
Banks have historically started with a fully decentralized model in which each branch operated almost like a small, completely separate bank, with its own customer staff, accounting, and general ledger. Customers were tied to a specific branch and could not access their accounts at other branches.  Branch staff performed both customer-facing and, what we would consider today, back office tasks. Work was mostly organized by customer files, with the head office accounting function being the only “back office”. Customers may have considered the service personal, because it was – one person was taking care of them and that person knew them well. In terms of controls, banks relied on the trustworthiness and professionalism of their staff and on the occasional random inspection.  While such a model worked initially, it did not scale beyond a small operation; and today, in a world of centralized competition, this model cannot be sustained due to high cost and, potentially, high risk of internal fraud.

Branch Back Office Model
As the number of customers served by a single branch grew, the banking industry was taking a cue from manufacturing.  Specialization began to emerge with customer-facing activities allocated to one group of employees, while sales support and back office tasks were assigned to another group. By specializing, each group could be picked to closely match the job requirements: extrovert communicators thrived when selling to customers, while meticulous introverts were better suited for back office rigor.

In this model, with conscious effort from the head office, controls have improved as back office staff could counterbalance the sales staff’s enthusiasm for a particular customer or deal. Nonetheless, having back office report to a branch manager who needs to be driven by sales targets can also lead to weakened controls, and locating back office staff in branches is unnecessarily costly.



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