SOLUTION

PROFILE

Framing The Business Problem. CaliFinance¹, a retail bank staffed 13 branches with loan underwriters. The work performed by the underwriters across the various locations is homogenous – they process two types of loan applications – (i) applicants with W-2 wages and (ii) self-employed applicants. The bank enforced a standardized credit-policy, provided underwriters with the same training & job-aids as well as access to the same information systems. Despite the homogeneity, a wide variation in (efficiency) performance was detected in the underwriting functional-area among the branches. Management commissioned a consulting engagement to answer the following questions:

• What is the relative (performance) efficiency of each location? Which branch location(s) are exemplar at minimizing their inputs/resources consumed (e.g.. # of staff) while optimizing the two output indicators of performance (i.e.. - total # of “W2” loans underwritten and total # of “self-employed” loans underwritten)?
• For each underperforming location, which are the areas of highest potential improvement?
• If a third output indicator of performance (namely - the loan portfolio balance² generated at each location), is incorporated into the model how does the overall relative efficiency ranking change?

NOTES

The Solution Profile has been adapted and simplified to represent ThinkPartner consulting service capabilities. Quantification used in this profile is illustrative.

¹   CaliFinance is a pseudonym for the customer.

²   This output measure indicates the dollar amount of loans being added to the overall bank loan      portfolio, as contributed by each branch-location. The more the loan balance originated, the larger the      portfolio and the higher the interest income earned by the bank.

Summary of Engagement Results. The engagement results identified that Carlsbad and Santa Barbara locations operated at the highest relative efficiency. The recommendation quantified the overall improvement target-opportunity to be: 40% higher loan balances and 30% higher productivity for W2 applications while reducing staff by 20%. CaliFinance was guided to uncover a small number of unique best-practices being executed in these locations which accounted for their higher Efficiency scores. The practices were profiled, packaged and exported to the underperforming locations. Annual financial benefits were the result of: 15-20% less underwriters plus incremental net interest income ($16K for each $1MM of incremental loan balance).

In addition, the relative efficiency analysis framework was selected to serve as the foundation for the execution of a new Variable Compensation strategy/program which awarded periodic "bonus" payments to loan underwriters based on their comparative Efficiency Score for each performance period.

Selected Excerpts from Engagement Outputs. Based on propreitary fact-base construction and data analysis, an  "Efficiency Frontier” was created to show the relative performance for the underwriting function across the 13 bank branches (constituting the reference set). Clearly,Carlsbad emerged as the only branch location on the “Frontier” (relatively 100% efficient). The remaining branches exhibited a range of relative inefficiency as depicted below.

Top-level analysis indicated that in the aggregate, the highest efficiency gaps (i.e... scope for improvement) exist in the production output of W2 applications (to the tune of 49%). The next largest area of opportunity was staff reduction (potential scope to decrease by 41%). These were calculated relative to Carlsbad ("100% efficient" among the reference set).

Delving deeper into branch-level analysis, the performance of individual locations relative to Carlsbad were investigated for the top areas of improvements. The depiction below shows the quantified (target) level of potential improvement for each input/output measured in the study.

The model was expanded to accommodate the third output parameter – “loan portfolio balance” for each location. Upon recalculation, the relative overall efficiency analysis yielded slightly different results:

Santa Barbara (previously 86.7% efficient) also scored at 100% efficient (at par with Carlsbad) - implying that Santa Barbara was originating higher loan balances per loan. Similarly the relative efficiency score of other locations were revised accordingly.

Upon repeating the top-level improvement potential analysis for the expanded model, it indicated that the area with the scope for most improvement was  - “loan portfolio balance” – upto 41% (see below) implying that efficiency scores at branch locations stand most to gain from improvement efforts directed at increasing loan portfolio balances.

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