- The Washington Times - Sunday, June 7, 2009

ANALYSIS/OPINION:

COMMENTARY:

Now that the financial stress tests in the United States are over, the capital parameters set and the fundraising well under way, many bankers are breathing sighs of relief. Alas, they should not, and neither should the regulators or investors.

Raising the required capital, though necessary, is not enough. Looked at in an objective manner, raising required capital is merely a temporary solution for financial engineering and will prove to be dilutive to the shareholder. It is a quick fix and accomplishes nothing to change the calculus of how the financial institutions are run. This should give everyone cause for concern.

There is a better way: Re-engineer the company for enhanced value. This method would allow most financial institutions to garner a continuous flow of incremental capital via enhanced earnings. Results of 10 percent to 15 percent per annum are quite reasonable expectations.

Re-engineering is not tactical cost-cutting, albeit reducing wasteful spending must be the responsibility of all the company’s employees. The solution is arrived at by looking at all aspects of a company’s balance sheet and income statement and asking two simple, yet fundamental questions:

c Is what we do in practice aligned with our strategic intent?

c Is how we operate the most effective as well as most efficient means of achieving our strategic intent?

In four decades of working in the financial services industry, I would be hard-pressed to recall an instance when both questions couldn’t be answered with the statement, “Perhaps, but there is room to improve.” Recent results over the past eight quarters indicate there is indeed room for improvement.

Re-engineering is not a one-time exercise. It is a structured, continuous process, which involves a way of thinking that must be ingrained into the culture of any company wishing to enjoy sustained success. It’s a rigorous, fact-based analysis flowing from the company’s strategic plan. It requires a detailed understanding of customer needs, competitive offerings and one’s own capabilities. It is a self-evaluation of the entire company.

When done correctly, re-engineering results in permanent changes to policies, structures, processes and procedures that will enable a company to compete better. To be executed successfully, re-engineering must start from the top, supported with actions and commensurate authorities.

Re-engineering is an end-to-end look at work flows, always asking the questions: “Do the customers value this attribute? Are they willing to pay for it? How much is this particular feature worth? How can I simplify what I do to speed the process, making it less costly and more reflective of the customers’ needs?”

A simple example helps explain the method:

If a process has 10 equal steps to complete, it’s difficult to eliminate 10 percent from each of these steps, which would result in an overall efficiency savings of 10 percent. It’s much more effective to ask a customer if he values steps three and seven in the process, or if they even are needed to produce the product. If these two steps aren’t necessary, eliminating them will make possible a 20 percent increase in the permanent effectiveness of the process before the remaining eight steps are even examined.

Re-engineering is hard work initially, but with time, it becomes business as usual to see how everyone in the company can improve the “how” to deliver to the customer the “what.” The payoff is enhanced capital levels without dilution or governmental help.

Carl Levinson is a retired senior executive of Citigroup, where he was employed for 36 years. He appears on network television and speaks at universities on the financial industry.

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