Banks should scrap pilot programs—and do this instead

This article originally appeared in American Banker.

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.

Read the full article at American Banker.

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