Hlavní práce68841_okpa00.pdf, 1.4 MB Stáhnout

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University of Economics, Prague

Bachelor’s Thesis

2019 Okpu Yo Agbor Takang

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University of Economics, Prague

Faculty of Business Administration Bachelors´s Field: Corporate Finance and Management

Title of the Bachelor´s Thesis:

The leanness level of Financial Institutions in the Czech Republic

Author: Okpu Yo Agbor Takang

Supervisor: Ing. Felipe Martínez, Ph.D.

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D e c l a r a t i o n o f A u t h e n t i c i t y

I hereby declare that the Bachelor´s Thesis presented herein is my own work, or fully and specifically acknowledged wherever adapted from

other sources. This work has not been published or submitted elsewhere for the requirement of a degree programme.

Prague, December 10, 2019 Signature: Okpu Yo

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Title of the Bachelor´s Thesis:

The leanness level of Financial Institutions in Czech Republic

Abstract:

This bachelor thesis focuses on the evaluation of the level of leanness of financial institutions in Czech Republic. This bachelor thesis follows the literature review of lean management with a focus on operations management of the financial sector. This research is carried out following the qualitative interview research strategy. The research questionnaire focuses on obtaining information on the performance of the operations of the financial institutions. The qualitative information obtained, reflects the efficiency of the operating systems and workplace environment of the financial institution. In addition, an analysis of the level of leanness of the operations of the financial institution. Furthermore, a consolidated evaluation of the financial information was conducted for the entire financial industry and a grading score to access the level of leanness of the financial institution in Czech Republic.

Key words:

Financial institution, lean administration, process, 5-S framework.

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They are often disregarded at face value but are the oldest institutions in the world. The aim of this bachelor thesis is an evaluation of the operations of the financial system. Through the evaluation of financial institution, the author will review the operations of various financial operations and their ability to adapt to the changes of the customer demand.

Financial systems have existed since the beginning of time and have changed their form to adapt to the different age in which they exist. The birth of governance of countries come hand in gloves with the existence of financial institutions governing in that territory. The Czech Republic became an independent country from their sister country Slovakia on the 1 January 1993. This is the date of operation of the debut of Czech National Bank Banka. The Czech National bank is the main supervisory body of the financial institutions and the sole financial regulator. The Czech Republic is a relatively growing country as compared to the existence and practice of banking institutions within the Czech territory. Over the years, the nation of Czech Republic has explored opportunities such as becoming a member state of the European Union in the year 2004 and this adherence has benefited the country and welcomed so, with many changes. The financial institutions contribute immensely to the growing population of the Czech Republic through their corporate social responsibilities (Schadler, April 2005).

As mentioned, the Czech National Bank is the sole supervisory body in the Czech Republic, and it is independent form any other body in the Czech territory. This supervisory body enforces strict measures and policies couple to the Czech legislation. The financial institutions who run their operations in the Czech Republic are obligated by legislation to adhere to these laws and legislation.

Things have come a long way from the old age mannerism associated to the banking sector over the years. The expectations and demand of their clienteles are fast changing in response to the different age groups and generation. In previous years, clients were contented to go to the bank branches and make transactions such as over the counter cash withdrawals and transfers. This simple request has metamorphosed to what the banks only dreamed of in past generation. Clients no longer want to go over the counter or to branches to have access to financial services as the older generation watch their dreams unfold before their very eyes.

Nowadays, clients want to receive financial services as the reach of their mobile phones, fast and reliable money transfers and at the convenience of their homes. We term this era, the digital age. The objective to meet customer demand is the main propellant behind the metamorphosis from old traditional way to the new digital age of the financial industry sector.

The digital age is characterised by heavy reliability of financial technology for the providing of financial services. In addition to the ever-changing customer requirements, the financial institutions need to adapt to new trends in the financial institutions and overcome challenges which plague their business activities.

Lean management, the literate review of this thesis, is a management philosophy that has evolved along the years. This management philosophy was primarily associated to the manufacturing industry. In 1993, Henry Ford created a flow production with interchangeable parts and standard work. Henry Ford work gained greater appreciation after its improved implementation by the team of Kiichiro Toyoda, Taiichi Ohno in Toyota. The successful

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implementation of the improved Flow production in Toyota and the applications of lean management can be seen in other business sectors and the results are outstanding. Some of the sectors include Administrative sectors, logistics and distribution, services, healthcare and governments.

The authors primary motivation to explore this topic is the interest in the stability of the financial services as a foreigner in the Czech Republic. Having to participate actively in a digitalised society and adapting to the use of financial services at close range and having first- hand experience on how fast and reliable the financial operations are. In addition, an active individual has an average of 4 financial operations a day. With the population growth in the Czech Republic, it is fair to say, the financial institution processes huge amounts of transactions daily. In this region of the world, the financial institutions take into consideration their customer satisfaction. A customer review be it positive or negative has a huge potential to impact the financial institution positively or adversely. For these reasons, the author was prompted to the desire to evaluate the implementation of lean tools and lean consciousness in the operations of financial institutions.

The aim of the Bachelor Thesis is to evaluate the degree of leanness of the operations of financial institution in their financial products and services. The author's contribution through this thesis includes a close examination of the objections obscuring the financial sector and the tools implemented by management to solve the enigma of the businesses while driving towards their set financial growth. This research is regarded as unbiased assessment of financial institutions as they strive to adopt an agile management style to improve their business objectives through an upgrade of their operational processes while operating with cost efficiency.

The structure of this bachelor thesis consists of three parts. These parts include a theoretical part, Methodology with the application of lean administration philosophy and results of analysis of the level of leanness of the financial institutions.

The first part of this bachelor thesis comprises of a brief introduction on the financial institutions in the Czech Republic. The author explains how the financial institution work and earn revenue, the risk management associated with operations in the banking sector, some of the challenges plaguing these business sector and trends associated to this industry. In addition to this, the author makes mention of the lean administration followed by the lean tools and their functionalities.

The second part of this Bachelor Thesis is the methodology. In this part of the thesis, the author preludes the research methodology applied in carrying out the research. These includes the sources, the basis of the criteria selection and quality of data utilized to form the groundwork of results of the analysis.

The final part of these thesis will include lean administration tools directed towards the purpose of improving processes and operations. The author presents the evaluation of the financial institutions individually in the line with the thematic literature review. This evaluation is done using the lean administration framework and the main benefits of lean. For good measure, the author includes analysis of waste mitigation in each financial institution. The author also provides a consolidation of the different financial institution participating in this research as perceived in the practise of the financial institutions.

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1. The Financial Industry in the Czech Republic

For an understanding of the financial institution and processes behind their products and service, the author made a comprehensive study of the financial institutions in the Czech Republic. The author made mention of the description of the financial institution based on the relevance in the topic of the bachelor thesis.

1.1. Introduction to the Financial Industry of the Czech Republic

The Czech Republic has a financial system characterised as unchangeable, conservative and constant. The financial sector of this country consists of banks and credit cooperatives. By the end of the year 2019, the banking sector consist of 49 banks. 24 of which are Czech banks while the other 25 banks are foreign banks. (C.N.B, List of Monetary Financial Instituions in the Czech republic, 2019)

In the Czech Republic, the main financial and regulatory body is the Czech National Bank.

This bank began operation in January 1993 when the Czech Republic became an independent country from their former Czechoslovakia. This supervisory body is confirmed by the Czech legislation and has the authority to exercise influence and disciplinary sanctions without the interference of the Czech authorities. (Czech national Bank, "Financial market supervision", 2019)

The nature of the financial industry is characterised by high regulations and very competitive atmosphere and globalisation adds another dimension to the complexity. The benefits of globalisation are creating positive scenarios for banks by offering more expertise and new market opportunities. However, globalisation does not always have a positive impact.

These policies offer foreign banks a different platform and competitive advantage, making the banks of Czech Republic difficult to such competition respond efficiently. (Czech national Bank, "Financial market supervision", 2019)

Globalisation has turned the world into a global village thereby, making movement of capital and people very easy. For this reason, financial institutions compete with other bigger banks and creates opportunities to improve and compete. The Czech Republic became a member of the European Union in 2004 (C.N.B, Czech National Bank, 2004) and this agreement is beneficial for this country in terms of trade, movement of people and goods and services. For financial institutions in the Czech Republic, the idea of increasing their span of operations and new client segment has led to bigger opportunities. To increase their competitive portfolio and satisfy their new-found client demographic within and away from the Czech Republic, financial institutions have gone into agreements and partnership with bigger key players within the European Union. This has given rise to partnerships; subsidiaries as bigger banks purchase smaller banks. An example of a big bank in the Czech Republic becoming a subsidiary to a bigger bank with a much broader span of control extending to bigger territories is Ceska Sporitelna, which became a member of the Erste group in the year 2000 (Ceska Sporitelna, 2001). Likewise, other bigger banks in the Czech Republic are subsidiaries with bigger financial institutions in the European Union.

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Being a member state of the European Union comes with some stakes. Even though the Czech Republic is not part of the part of the European banking Union, the Czech National Bank has the objective to oversee the financial market in the Czech Republic in a manner conforming to international standards. This means, the Czech National Bank regards their collaboration with other supervisory bodies with utmost relevance. The Czech national bank is integrated in the European System of Central Bank ESCP. Some of the Czech National Bank collaborators in financial market supervisory bodies include the European Banking Authority EBA, the European Securities and Market Authorities ESMA, just to name a few. The main objective of this collaboration is to unify supervisory procedures and encourage conditions for cooperation within member states into a single European Licence Regime. In addition to this, the Czech National Bank has also engaged in bilateral and Multilateral agreements with the objective to exchange information with other National and European Authorities (Czech National Bank, 2019).

1.2. Banking operation

The disposition of banks has changed over time. The global financial system we know today originated from the Italian word "banca". Banca meaning benches is a reminiscence of the time when merchants use to loan money to farmers or for merchandise. While merchants deposited funds for the purpose to settle trade in the future, the brokers will use the deposits for their personal benefit for the moment. Today, the global financial system has become a complex and increasingly difficult to understand. For a comprehensive understanding of the level of leanness of financial institutions, it is paramount to understand how the financial institutions work (Moorad Choudhry, 2018).

From a general perspective, the financial institutions function by the principle of deposits and loans. A customer with surplus money, A, comes into the banks and makes a deposit into their account. The deposit received by the bank creates a liability of the bank to the depositor.

For this reason, a low interest rate is paid to the customer A for his deposits. Banks do not create money. In turn, banks collect small deposits, repackage these deposits as large size loans and borrow the loans to their other customers at a higher interest rate. The borrowers pay the returns on their loans which are in turn treated as deposits and eventually lend out repeatedly. Payments payed out are considered as assets in the balance sheet. This process is repeated thereby creating a multiplier effect. Financial institutions generate revenue by taking advantage of the interest gap on the assets and liabilities (Moorad Choudhry, 2018).

The structure of financial institution is influenced by the existence of regulatory constraints, financial institution funding and profit margin objectives (Moorad Choudhry, 2018)

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Figure 1 Basic diagram Banking System

Figure 1. Banking Operation System, Source: Author

This is not the only means through which banks make money. Financial institutions in the Czech Republic charge their clients over certain services they require. In other studies, Banks charge their customers monthly or annual fees for management of current accounts. A customer can also be charges for account monthly account statements which comprises of a summary of the client’s monetary movements during a set time period. Banks also charge a confirmation of Bank account balances which is a requirement by the foreign police department.

The products and services rendered in this financial institution are as a result of standardised process within their financial operating systems. There has been an evolution of the products and services offered by financial institution. Banking products have grown in complexity with the use of derivatives and swaps products just to name a few. This has led to the use of complex operating systems within the financial industry sector. (Hederson, 2018)

1.3. Regulations and Rules of the Financial Sector in the Czech Republic

The financial sector is a highly regulated business sector and the players in this sector are required to comply to changing regulations and it impacts their going concerns. The main supervisory body in the Czech Republic is the Czech National Bank. Czech National Bank is the sole financial supervisory body and is independent of the government with the following main objectives.

Under article 98 of the Czech constitution, the main objective of the Czech National Bank is to maintain price stability in the Czech Republic. Some of the tools used to maintain price stability involves creating an environment of low-inflation and adequately create conditions to promote the growth of the economic development in a sustainable manner. In addition to the

Liabilities

▪ Deposits

▪ Investment

▪ Current and Savings accounts

Assets

▪ Loans

▪ Mortgages

▪ Business Finances Financial

Institutions / Banks

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main objective, Czech National Bank sets monetary policies, oversees the circulation of money, the banking payment system and bank settlements. In addition, the Czech National Bank is responsible for financial stability (Czech National Bank, 1993)

In order to achieve these objectives, the CNB has the power to enforce its power and authority on and institution without contacting any other Czech authority. In 2004, the Czech Republic became a member state of the European Union, but the Czech National bank did not join the European central bank. However, the Czech National Bank is a member of the European System of Financial Supervisory Banks. The CNB aims to adhere and act in accordance with international standards of the European Central bank and the European Banking Authority, in their role of supervising the financial markets and the participants. (Czech National Bank, 2019) In direction of maintaining financial stability, the CNB uses two instruments to supervise financial activities. These instruments are part of the G-20 submit of 2009 with the purpose to strengthen financial systems. These are;

"The Capital Requirements directive (CRD IV) and the Capital requirement Regulations"

The CRD IV or Directive 2013/36 the indispensable legislation requirement to comply to in the Czech Republic if a financial institution wishes to pursue business activities in the credit sector are prudential requirements needed to carry out business in the credit and investment institutions (Czech National Bank, 2019). Requirements of the CRF IV include bank governance regulations and internal controls. Financial institutions are required under the Banking Act No. 163/2014 to deal with management prerequisites some of which include management principles and processes, organisational structures with set hierarchy and responsibilities. In addition, this act requires members of elected corporate bodies to have qualities such as trustworthiness, professional expertise and experience. (Czech National Bank, 1993)

The regulations of the Czech National Bank are not solely limited to professionals in the Czech Republic. Outsourcing of financial activities need to be notified to the Czech National Bank under the conditions set by the decree No 163/2014 (Czech national Bank, 2014).

Furthermore, there are rules governing the banks relationship with their customers and other stakeholders. Some of these rules include business rules in general, financial institutions are compelled to handle client’s complaints and the implementation of internal mechanisms to address such when they arise. Financial institutions operating in the Czech Territory are obliged to adhere to these laws as a matter of going concern and should expect the interference of the Czech National Bank consider it necessary to intervene (Peter, 2019).

1.4. Risk management.

At the end of October 2014, the European Central bank, European Banking Authority concluded their assessment of the financial institutions in Europe. The aim of this assessment was to increase transparency through the implementation of better information quality in the balance sheet and increase stakeholder trustworthiness in the banking sector. A stress test was administered in this assessment and the Czech Republic confirmed the stability and resilience of their banking sector. This reconfirmed a healthy domestic banking sector (I.M.F., 2013).

Financial institutions in the Czech Republic are exposed to the same multidimensional risk as every financial institution. Some major risk characterising the financial sector includes credit

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risk, Interest risk, and liquidity risk. Revenue earned by financial institutions is mainly earned from loans in the form of mortgages, credit cards defaults. Due to the nature of the business models, banks cannot fully safeguard their businesses from the Loss incurred. However, banks have the potential to balance their risk portfolio through diversification. (Moorad Choudhry, 2018)

Credit Risk is a form of risk associated with banks operating within the capital market. In the Czech Republic, financial institutions have different market segments and so, experience this form of risk with different impact. However, the pressure to build a resilient and robust balance sheet can further influence their market risks. Market risk differs from banks to banks.

Some banks choose to operate at commercial banks, these constitute current accounts and short- term loans. This represents lower risk. The market risk differs significantly in the investment banking which gives out long-term loans at a higher market risk (Klomp J. & Haan J. d., 2012) Interest risk is the risk associated with the change in interest rate on assets and liabilities.

The changes in interest affect the value of assets and liabilities. In the financial institutions, financial instruments are valued at the current interest rate. Therefore, the valuation of instruments in the balance sheet are constantly fluctuating, resulting in possible loss of value of the assets and liabilities. Interest rate is also influencing liabilities depending on how redeemable the loans are, hence presenting risk for the financial institutions. (Moorad Choudhry, 2018)

Liquidity risk is an important form of risk to which this business model is highly susceptible.

Liquidity risk is the risk associated with the bank not being able to repay their financial obligations towards their customers from a treasury perspective. After the financial depression in 2008, the financial sector has tried to rebuild the confidence of their customers. In the Czech Republic as well as other nations, the financial and regulatory bodies have imposed strict policies to rebuild their reputation. In order to improve bank trustworthiness, there is a compulsory insurance by the Financial Market Guarantee system which applies to all deposit clients in banks in a Deposit Guarantee scheme. This insurance guarantees the client to 90% of their deposits, up to a maximum of 100, 000 EUR. The regulatory and supervisory body puts regulations for the benefit of the clients and often perceived by the banks as detrimental to their business. (Klomp J. & Haan J. d., 2012)

Financial institutions in the Czech Republic are obliged to adhere to bank governance regulations in the Bank Act 162/2014 which requires banks to have an effective risk control system and an internal control system consisting of internal audits and compliance. This act also includes a need for experience board of members and detailed rules to ensure relevant experience and expertise of members of the supervisory body. These rules follow the European Bank Authority and other supervisory bodies in the Eurozone (Klomp J. & Haan J. d., 2012).

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1.5. Existing challenges in the financial industry

The financial institutions are among the oldest businesses ever in operations. They have been plagued with the use of archaic processes and procedure which can be limiting in this new era of digitalisation. Based on financial expert information, there is a new wave of technological advancement which offers the financial institutions they key to revolutionize their operating activities. To revolutionize these industries, there is a need to address the existing limitations and challenges which characterize their industry sector.

Cybercrime: There has been an increased number of cybercrimes which has plagued the financial industry and the banking sector in the Czech Republic. Over the years, the number of cybercrimes perpetuated as continuously increased in the form of loan frauds, unauthorised access to bank clients’ accounts, credit and debit cards. Banks are under durex to provide security to their clientele to ensure they retained their customer base as well as protecting their assets and brand awareness. Data breaches are very costly to financial institutions and the use of technology can be used to mitigate such loses (Nejad, 2016).

Regulatory compliance in the Financial Institution: In a world full of changes, it is essential to acclimatize to the new conditions. Rules and guidelines made by the governing country and supervisory body do meet the purpose of change and advancement. Consequently, there are ever changing rules in the financial sector and an urgent need to be adhered these new changing rules. Some of these changes can alter or interfere with current processes and even be cost consuming. Regardless of the changes, adhering to the regulatory compliance of the country in which a business is operating is paramount to the business existence and survival (Nejad, 2016).

Use of Artificial Intelligence in Financial Institutions: There is a wave of appreciation directed towards the benefits of the application of AI technology. However, these benefits can only be fully appreciated if the technology is utilized efficiently and to their full potential. With great power comes great responsibility. There are a few questions related to these technologies which have not come to light. Is it possible to fully utilize AI technologies without experiencing the adverse effects associated to the usage of the technology? Will the financial sector be equipped to mitigate and control the adverse effect without losing their operational efficiency (Nejad, 2016).

Disruptions from FinTech: Financial institutions like other businesses have key activities in their niche market. In the Czech Republic, the financial market is very competitive and maintaining a market share is important. Regardless of how competitive the financial market is, the emergence of FinTech companies has disrupted the market dynamics. The effects of emerging FinTech has led to a more robust fight for customers in sectors such as the consumer banking and the commercial banking with a focus on small and medium size banking (Nejad, 2016).

Employee retention: Retaining a competent employee in this era is difficult. The Gen Z and the millennials have different expectations from the labour market. Their expectations are not limited to a good remuneration package above industry average, employee insurance and good working conditions. Some expectations which differ from the previous generations include work-life balance, company culture in line with believes, 5 weeks paid holidays and other incentives. Gen Z workforce also require flexible workers which can see as problematic

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to their current managers. Values and diversity are key qualities that make up the strength of Gen Z. Never the less, the survey indicates that 44 of the Gen Z will prefer to be unemployed rather than occupy a labour role which does not bring them career satisfaction.

With the incorporation of information technology in the day-to-day activities of the business unit, it is difficult to attract a competent employee in these roles (Tucker J. & J. Scott, 2019).

Customer experience: It is difficult to evaluate customer services and there are new technologies that spring out every day to collect such relevant data. Banking customers no longer want to go over the counter to for cash withdrawals. The expect their banking experience to be at their conveniences on their mobiles and for their money transactions to be done at the fastest speed available. The banking sector was fashioned in the old ways and changes to meet customers’ expectations is challenging the status quo. The required changes are viewed as costly and embracing new way can meet resistance (Tucker J. & J. Scott, 2019).

Based on the above expert information, we may have identified some of the challenges that could be addressed. The main challenges are the incorporation of technology in the business processes without impeding on the operational efficiencies and customer experience. Also, the disruption of current financial market dynamics by the emerging FinTech companies and their influence of the survival of existing financial institutions. With the help of expert information, we can identify important current financial market limitations and potentially make solution proposals to target these limitations.

1.6. Trends in the financial institution.

The financial institutions are operating in the age of digitalised technology. There is a need to strip off their old-fashion way of operating and embrace the fast-growing trends and explore the opportunities created by the advancement in technology presented by this new age. Previous studies support the changes which will occur in the financial institutions worldwide and the future of financial services. Recent reports on the topic of trends in the financial institutions are documented below.

An imbedded Information technology operating model: With increased opportunities and challenges in the financial sector, traditional financial institutions. The rationale behind the centralised IT is to monitor and control the resource pool and maintain resource efficiency. The trend of embedded information technology in the operating model is to include IT professionals in the business unit provides a route for new competitive advancement and still fit in the project budget lines. Benefits of decentralised IT may include increase flexibility and potential to meet customer requirement faster (Crook M.D.& Brian R, 2016).

Focus on digitalisation transformation: The customer segment requires financial service providers for faster, more reliable services at the snap of their finger. Digital transformation can be seen with the growth in popularity of the mobile banking, chances are the digital presence will become more revolutionized. The possibilities of mobile banking are endless. Banks can track their client’s history while providing them with more personalized services and display.

In addition, more complex services can be provided such as Biometric identification and even online bank to bank transfers. (Verduyn M., 2019)

Emerging Fintech companies’: New opportunities become more evident with the breakthrough of Fintech industries. A rise in partnership being born between banks and fintech

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does not only offer new intangible assets and a new stream of customer based. Competition gradually transforms into idea pools and potential investments. Customers are in a constant search of companies who meet their convenience and which companies will provide them such services at the best rate. Emerging FinTech has the possibility with the combining their applications can easily acquire these new niche market (Verduyn M., 2019).

Regulatory Technology: There are significant changes in regulations in the financial sector, some for the greater good while others can be viewed as disruptive. However, these regulatory changes may be perceived, regulatory tech are growing in importance. This technology enables banks and financial institutions and ecosystem to adapts to regulatory changes. Regulatory Technology brings the benefit of compliances to existing norms without interrupting important banking Key Performance indicators such as customer experience and operational efficiency (Crook M.D.& Brian R, 2016)

Augmented Reality and Virtual reality: The financial institution is regarded as very complex for customers and other stakeholders of the banking institutions. Financial institutions make use of Augmented reality to help their clients better understand complex financial data and products with more visual characteristics. This offers the customers a more convenient approach of understanding than use data. The possibility of Augmented reality creates an educational awareness and an opportunity to introduce complex financial service in a simple way (Verduyn M., 2019).

Artificial Intelligence to meet customer needs: There is a need to utilize the existing financial constraints adequately and artificial intelligence addresses these needs. The application of AI technology can be seen through the implementation of chat box and robust customer services all day long which increase customer satisfaction. The application of Artificial intelligence and robotics in financial operations has greatly deferred the use of manual intensive activities in a highly efficient and reliable manner. while providing the employees time to perform other role responsibilities effectively. These technologies enable financial institutions to benefit from operational efficiency and cost optimisation (Crook M.D.& Brian R, 2016).

Cyber security: Existing in the era of digitalisation makes financial institutions vulnerable to cyber-attacks. Existing regulatory norms such as GDPR General Data protection regulation and Know your customer can be problematic as sensible information can be hacked by people with bad intentions. In the Czech Republic, there is an increase number of cybercrimes almost four times in the Czech Republic leaving banks to think of ways to protect their clients, their assets and brand reputation. Financial institutions are required to be proactive and implement many security measures such as the use of biometry.

In summary, the information presented above indicates that the financial sector in the Czech Republic is a stable and complex. The financial industry is a heavily regulated industry and plays a vital role in the economy. The activities and processes of the financial institutions are complex, and the financial institutions are always seeking for ways to improve their efficiency. Based on the information described, the approach from Lean management specificity from Lean office has something to say here. The next chapter introduces the Lean management philosophy and their applicability in the financial sector.

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2. Lean Administration

The focus of authors of this bachelor thesis a to measure how lean the financial institutions in the Czech Republic are and how lean administration tool are applied to their operational processes within the financial services. The precious chapter provides an overview of the banking sector and the complexities of individual banks within the system. In this chapter, we study the fundamentals of lean management principles and their tools to further our knowledge and understanding to better enrich the quality of explanations to base our analysis.

2.1. Background

The origins of Lean Administration, sometime called Lean Office, arise from the management philosophy in reference to Lean manufacturing. This has industry with the lights of heavy weight manufacturers such as Toyota. Lean management could be dated back in the beginning of the manufacturing era but has grown substantially regarding their application, producing effective results in other industry segments and their benefits shining through all the segments in which this philosophy has been successfully applied. For the purpose of this study, lean management will be referred to as lean administration. Hence the title of this chapter. ("The Toyota Way model", 2014)

Lean administration is a well-renowned stable for operational efficiency as its benefits span from front office to back office in different measures in the financial institutions and other service industries (Hobbs D. & Burton T., 2012). Companies and businesses function in today’s era, carry out their business activities in an era of continuous scrutiny, high level of competition and increase customer requirements. The application of lean administration cuts across these business requirements by improving operational efficiency of the processes one step at a time.

This in turn enables the business in the form of time saving and cutting cost for business units activities, driving to increase productivity (Liker J. K., 2006).

Financial institutions and their financial leaders are always in search of new ways to drive profitability, outsmart their competitors and increase their Return on Equity. The immediate response of the financial leaders is to reduce cost to increase profitability, produce better quality products and fast delivery of services (Hederson, 2018). The aim of this business model is to have a more robust business portfolio to build competitive advantage and increase their return on equity. While these answers come straight out the book, their implementations are not that easy.

What is lean management? A question that spikes the interest of all who hear this term and philosophy. The lean management philosophy is a series of scientific techniques, researched over the year which when effectively applied reduces the events of inefficient activities within a process flow. This results to greater efficiency of activities and processes. Lean management applications in processes translate into the improvement of waiting time, better time management and reduced delays. Lean management in operating services identify non-valuable activities and their subsequent elimination in the business processes. Lean operating systems are beneficial to all types of process-based activities. The elimination of inefficient processes is evident in operating activities including production, design and efficiently leads to improving customer satisfaction (Hobbs D. & Burton T. , 2012).

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This definition is obtained from the book of Hobbs and Burton, 2011 and addressed the authors bachelor thesis area of focus while enhancing the authors knowledge on this philosophy.

Lean management can be traced to the era of Henry Ford. He began a concept known as flow production as he was conceptualising the idea of a motorised car. However, Lean management gained more recognition as the Toyota Production System and has become a stable in manufacturing ever since. However, Lean management is no limited to just automotive manufacturing. The application spans across different business sectors including healthcare, government businesses, administration and so much more. Most importantly, Lean management is not a one face organisational style, it embraces the organisation in which it is applied and builds a new identity based on the type of organisation and their operations (Hobbs D. & Burton T., 2012).

2.2. Process improvement for the Lean Implementation

For the implementation of lean management to be effective, the employees and current users of the business processes need to receive all the lean principle and tools and be willing to actively improve their daily processes and help them achieve their daily responsibilities. The list of lean tools is vast, (Alvarado R. Pumisach A. & Barraya, 2012) and it is essential to find the appropriate tools which suit the function and employees at best.

Lean management is often accompanied with the use of Japanese words since the birth home of Lean management was in Japan. For process improvement, we will use the word Kaizen.

There are many components to a business activity and Kaizen is a process of continuous improvement over a certain period.

Figure 2: Kaizen Continuous Improvement

Figure 2: Kaizen Continuous Improvement. Source: Author

In recent studies, the benefits of Kaizen are encouraged by the participation of managers in the creation of a working environment which encourages they employees to improve their skills.

In addition, other studies support the motion that workers participation in continuous improvement is essential. (Alvarado R. Pumisach A. & Barraya, 2012)

Other studies review the varying effects of centralisation and decentralisation in influencing the process of continuous improvement, amongst others. The Kaizen framework is an effective tool of continuous improvement and can is applicability is practiced irrespective of the sizes of the company (Sarkar, 2005).

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2.3. Implementation of the Kaizen 5-S framework

Financial institutions have different processes and diverse performance metrics. All financial institutions strive to achieve competitive advantage while improving business performance. The application of 5-S lean tools and practices in the financial sector have improved services performance in the form of

• Creation of an organised and efficient workplace.

• The 5 S helps the employees to feel included, have a sense of affiliation towards the company team collaboration and improves company culture.

• Reduced time in performing business activities and allowing the development of creativity.

• Reduce consolidated cost by effectively eliminating waste.

• Improving customer satisfaction by improving efficiency and service quality.

The 5-S framework is a lean tool suitable for the workplace which excels in the service industry. It consists of 5 S Seiri (Sort), Seiton (Set in Order), Sieso (Shine), Seiketsu (Standardise) and Shitsuke (Sustain). The 5S framework draws inspiration from the Japanese words. Recently, another S has been added in the form of Safety making it the sixth S (Wilson, 2013)

Figure 3: The 5-S Kaizen framework

Figure 3: The Kaizen Framework, Source: (Wilson, 2013)

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The 5-S framework is explained in detail below. This 5-S framework comprises of the following phases

(Sort): Organisation is a business is a fundamental requirement to expansion, growth and improvement. The financial sector makes use of the information technology as they are walking in line with the vast changing business environment. Consequently, sorting materials and other tools effective for running business activity is a key driver of a good quality and reliable service.

Sorting can be done in the form of past, current and future projects or in ascending order or by priority.

Set in order: This tool is utilized in the service industry as they are always moving to improve customer value. The underlying aim is to organise activities in a standardised form. There should be a clear distinction such as desk items, data bases, operating procedures and system names as a driver of consistency. Set in order requires elements with the same characteristics to be grouped and used effectively.

Shine: Providing a clean environment with the necessary tools to perform the task in clean and neat conditions. This will help the workers have a fresh mind and focus on other task and increase their performance. The workspace conditions no matter the field of the practice needs to be supervised to maintain the conditions by companies which practice the 5 S.

Standardise: this is the first supervisory phase of the 5-S framework. Building a routine and have defined objectives to attain throughout the day. This tool encourages individuals to be proactive and stop procrastination. When a process is effective and performed in huge volumes, it is more beneficial to standardise this effective process. Standardisation encourages a stable environment and promotes creativity.

Sustain: Sustaining a good practise is a key ingredient for going concern. After the process have been standardised, it is essential to maintain the functioning system and monitoring for continuous improvement. Sustainability is key concept for the future development of the business (Wilson, 2013).

The Kaizen tools are effective when implemented as a package. Singling one tool out will not build a cost advantage or reduce waste. In the financial service sector, the delivery of a system occurs when a client walks in the branch and request for a service. This request triggers the stimulation of the value assemble. It is important for the workplace environment to be Therefore the 5-S framework is suitable for this thesis. (Sarkar, 2005)

There are other models used in the lean management philosophy such as the DMAIC model of six Sigma. However, the focus of this study is a qualitative study on the financial services and quantifying a service is not accurate. For this reason, tis model is not suitable and is only highlighted as an effective tool for lean administration in the financial industry (Hobbs D. &

Burton T., 2012).

2.4. The eight forms of Waste

As stated above, one of the benefits of lean administration is to improve the efficiency of operating systems. This is done by identifying the different types of waste involved in the processes and eliminating the non-valuable activities. The different types of waste fall in the same category in any given industry, but the take different form in the financial sector. For the

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purpose of this study, the author uses the TIMWOODS acronym for the different forms of waste. The findings mentioned below on the different forms of waste are extracted from the study of study of Lean Sigma guide to doing less (George, 2010).

• Transport: Transportation is the process of moving information or goods from one place to another. Transportation is more visible in the manufacturing industry than in the service industry. Transportation becomes more visible as companies increase in size and departmentalise activities. Therefore, a simple information search can take longer periods of time when the search request is sent to the wrong person in charge and department if not redirected promptly. The application of lean administration encourages management to redesign their process to streamline flow thereby eliminating waste.

• Inventory: Inventory is a form of waste generally associated to product and in the manufacturing industry, it is often considered as work in progress while in the service industry, it can be considered inexistent. This is not the case as inventory in the service industry translate are partial products stuck in the service transaction processes for some reason. Inventory is created in the financial institutions when a process flow is interrupted, and the process does not run smoothly in the first try.

• Movement: Movement is the motion of people from one place to another in the operation line. This form of waste can be seen by measuring the amount of time lost by employees when walking to perform an operation, lifting or overtyping.

Unnecessary motion such as lifting of heavy objects and spending too much time on the computer can affect the employees’ health situation. Consequently, long-term motion affects employee’s performance when neglected.

• Waiting times: Waiting is constant event in everyday activities. In the pull system, the service begins when the customer makes the order. In the financial industry, the mortgage process takes a period of a week while the value activity is a few clicks and take a shorter time. The waiting time is considered a waste of resources especially in this era where clients are very time sensitive.

• Overproduction: Overproduction is a form of waste when the demand is higher than the demand. In the financial services, overproduction can hardly be detected in the same light as in the manufacturing industry. Processes in the financial industry which do not meet economies of scale such as accounting and auditing are very costly, and so should be monitored effectively.

• Over processing: How much extra effort is required to build product or service and it is not utilised? Over processing is when a product delivers more than what the customer is willing to pay for. In addition, over processing is not the cost of the final product but an aggregate of the cost of all the individual processes involved in delivering a process. Therefore, to avoid over processing, financial institutions need to evaluate and stream line their processes to the aggregate cost of every individual step involve in creating a service.

• Defects: A defect is a service which does not meet the customer requirement and ultimately needs to be repaired, reprocessed or refund. In the financial industry, defects occur when the customer does not receive the correct requirements as per

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their request. This results in the services being reperformed and potentially impact customer satisfaction.

• Skills: The eight form of waste is the unutilised natural or otherwise acquired special talent of their employees (George, 2010).

2.5. Improving financial services, the Lean way

Financial industry operates in a form of transaction business with their products characterised as intangible and consisting of data and information. Financial services are processed under specific procedures which are peculiar depending on a participant in the financial sector (Brenig-Jones, 2015).The application of lean management can improve financial industry in the following ways,

Speed and Quality: These two qualities attributes are crucial for a business but are often considered mutually exclusive. Investing and improving the pace of a service is detrimental to the quality of the service and vice versa. However, in a lean administrative organisation, creating and maintaining customer value is essential. Streamlining and eliminating non-value steps used in processing reduces opportunity cost, hence improve speed of delivery. In addition to this, a consistent quality is preferable to no service at all. Lean tools application tackles these qualities by increasing the speed of operation and better response ability to respond to changing customer demands with agility (Brenig-Jones, 2015).

Checking variety and reducing complexity: The variety of a services varies based on the volume of the transactions and services offered. The demands of customers change over time but recently, customers demand personalized services. Offering personalized services increase complexity of operations in the form of increased support and maintenance, overtaxed back- office processing procedures, new customer-service centric systems and new trainings for the current staff. This translates to slower and defective services. It is primordial to sort services which require specific training and train specific staff. Other areas of complex terrain could be standardised and treated as special items. The result to reduce complexity by building capacity in the staffs to handle complexity effortlessly (Brenig-Jones, 2015).

Frontline power: One of the main benefits of the 5 S lean tools is exploration of speed as well as quality, while focusing on building the frontline power. To fully benefit from this addition, there is a make the decision making closer to the clients. This is referred to a front liner power.

In the financial sector, front office staffs are empowered by the knowledge of diverse business segmentation of products. Segmentation will offer the front staff an opportunity to engage the client independently of management oversight and builds a personalized customer experience.

The properly trained frontline power in the financial institution offers clients the opportunity to take their own decisions independently instead of being overcrowded with information and succumbing to the banker’s advice at the client’s detriment. This setup allow room for personalised customer satisfaction which is a driver of revenue.

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2.6. Lean Management Qualitative tools

There are numerous lean tools effective in analysing the data observed from processes, show how waste can be minimized while painting a visual picture of the internal performance. Lean tools are little everyday improvements easy to apply and benefit from.

Process Flowchart: The process flow chart is a quality management tool used in showing the interactive relationship between different parts of a team or a department in an organisation.

The aim of the flow chart is to document business processes in a specific ascending order. There exist different types of flowcharts. However, these charts require each step to be designated in a specific form termed flowchart symbols. The flow of information and connectivity is denoted by arrows and lines respectively. An elaborate flowchart showcases who is responsible for the completion of specific functions and communicate the expectations to all flowchart participants (Ross, 2014).

Below are a set of designated flowchart symbols and their relevant significance.

Table 1: Flowchart shapes and significance

The Oval The customer

The rectangle The process

The diamond The decision

The parallelogram The input

The arrow The flow of information

Source: Author

The process flow chart in the business sector provides an understanding of processes and employees activities. The Quality and Process Improvements identifies different types of process flows from a business perspective. These types include logic flow, product process, system flow chart and process flow. The business process model is the major type of flowchart we will explore in this thesis and this model focuses on the steps involved in the business processes (Ross, 2014). The author uses this form of quality control to show the expected streamlined process at the end of the 5 S framework implementation.

Cause and Effect diagram: Also known as the Oshawa diagram, the cause and effect diagram offer the possibility to visually identify influences and connections which are directly linked to a particular outcome. The influences can be described with the help of the 6 M. The six M are Measurement, Manpower, Material, Methods, Machine and Mother Earth (Environment). This graph is presented in the form of a fish from where it derives its name. from this category, the author identifies possible causes and how they are connected to the outcome. The fishbone

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diagram provides the use the cause of the performance inefficiency of the process. This approach is regarded as simple and plain to see and therefore it is not often utilized. (Rumane, 2013)

Figure 4: Cause and Effect diagram Marble Fixing Work Rejection

Figure 4: Cause and Effect Diagram Marble Fixing Work Rejection, Source: (Rumane, 2013)

An example of a cause and effect diagram in the construction projects shown above, the author uses this information to enrich the knowledge on the processes and identifying the causes leading to the effect on the performance of operations of the financial institution.

First Time Yield: The first-time yield is a performance measure which calculates the actual number of times a process run from start to finish free from any defects. The only criteria required for this quality control is at the end of the set process in observation. The first-time yield is calculated by dividing the amount of finished product output in relation to the resources imputed. It is easily accounted for in the manufacturing sector. None the less, first-time Yield is suitable for financial services.

The author uses this quality control tool as part of the qualitative tools to assess the performance and efficiency of operations in the financial services. This quality control tool is easy to understand and easy to interpret. This makes it easy to explore and critical factor as it

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provides analysis of margin of error that arises during the process. Therefore, monitoring this metric, provides insights to the author on how the ratio of processing output to input is influenced with different levels of expertise, improved quality and skills progress over time

First time yield can be calculated as and can be expressed a s a percentage.

Pareto Charts 80-20 Rule: The pareto chart is a chart used to illustrate the pareto principle thereby providing a fast and accurate possibility of identifying influences with a great impact on performance amongst other insignificant influences. Vilfredo Pareto discovered that

"top 20% of the total input is accountable for 80 % of the output generated, while 80% of the input accounts for 20 % of the output generated"

Pareto shows percentage of contribution of significant influences parallel to absolute number with 2 vertical axes. The peculiarity of this graph is that the values are arranged in descending order with the most significant influence earning the first spot while the rest diminish in influence and order. The pareto showcases the cumulative percentage of contribution and absolute amount of the influences. (Kruger, 2015)

Described below is an example of the use of the Pareto charts in the financial sector in types of customers. The author uses the pareto chart to identify which elements contribute to the top 20 % of the inputs which accounts for the 80 % of the output generated and vice versa in the financial institution which are evaluated. This evaluation helps the author to identify which customers are in the 20% group which accounts for 80% of their profits and the customer group of 80% which account for only 20 % of the profit margin. The Pareto analysis is a tool open to interpretation and easy to understand

Figure 5: Basic Formula for first time yield

Source: Author

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Figure 6: 80/20 Rule Type of Customers

Figure 6: 80/20 Rule Type of Customers. Source (Kruger, 2015)

In summary, the principles of lean administration have been explored in detail throughout out this chapter. The author communicated the different forms of process improvement through the implementation of lean administration. In addition, this chapter consist the application of lean approach 5-S framework and had a detailed explanation of the different forms of waste that arise in financial administration. This offers a detailed understanding of the workplace environment and the efficiency of the operations in the financial institutions. The -S framework of lean administration offers a concise understanding of the basis of evaluation, making this framework suitable for this bachelor thesis. Moreover, the author made mention of the lean quality control tools which enrich the contribution of the author in the financial sector as one of the tools to maintain a consistent evaluation process of the financial institution. The next chapter constitutes of the methodology of the thesis. The methodology offers a comprehensive understanding of the strategy and guidelines with which the author will convey the results of the Leanness evaluation of the financial information. This chapter provides more insight on the thematic literature relevant for this research study and their contribution to develop the conclusion of this bachelor thesis.

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3. Methodology

This chapter is in line with the journal article of Lean home services in the Czech Republic and follows the same approach. This is an introduction into the strategy the author utilized when conducting the preliminary research necessary to base the conclusion of this thesis (Martinez F., 2018). The author expatiates on the rational and limitations experienced during this work.

This chapter offers to the reader how analysis was conducted and the rationale behind the approaches selected following the research framework of Lean in home services. In addition, a layout of the framework of the results of the leanness evaluation of the operations in the financial institution.

3.1. Research Strategy

The research strategy implemented in this bachelor thesis is a qualitative interview. The qualitative interview was conducted in the form of case studies research approach. Each qualitative interview was conducted to obtain an in debt understanding of each financial institution in which the qualitative interview was conducted. The detail understanding consists of the processes in the financial institution, the people working in the office and the working environment of each financial institution.

The author conducted interview with experts in the banking sector and aims to access the level of leanness in their institution of function following the case study research approach. Due to the General Data Protection Regulation and the confidentiality mandatory by employees of the financial industry, the qualitative interview was tailored sole for the academic purpose of this bachelor thesis. The author was granted audience by experts of the financial institutions during the qualitative interview within their workplace environment. The author used a mixed approach between a theoretical outline and a practical part to build the research questionnaire. The primary interviews were conducted following the basis of a qualitative criteria relevant to the bachelor thesis in evaluating the level of leanness. The qualitative research strategy is not limited to the primary interview. The qualitative research was extended through the process of observation as a participant-observer in the workplace environment in the financial institution.

In the aftermath of data collection, the author searched for patterns and similarities were extrapolated from the qualitative data collected. The results extrapolated are used to form the basis of the evaluation of the level of leanness of the operations of the financial institutions individually and later, a consolidated evaluation of the leanness level of the financial sector of the Czech Republic.

The research strategy of this bachelor thesis is to obtain qualitative data on the processes of the financial institutions. The research questionnaire focusses on the operations of the financial information and does not include any reference on the financial information of the financial institutions. The qualitative data was gathered from individual meetings with a set of

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experts in their domain actively working in the financial sector. The results from the qualitative survey is summarised in 3 categories.

Table 2: Grading of Level of Leanness of Financial Institution

Grade Score range Leanness Level

Grade A 5.00 – 4.01 Perfectly Super Lean

Grade B 4.00 – 3.01 Averagely Lean

Grade C 3.00 – 2.01 Poor Lean

Table 3: Grading of Level of Leanness of Financial Institution

Source: Author

Even though the research strategy is a qualitative interview, the author utilises quantitative information obtained from other sources to support the basis of the qualitative tools. In addition to the benefit mentioned above, the quality of the information collected supports the need to develop better processes to achieve efficient operations.

The basis for the grading criteria is based on the score obtained from the from te qualitative interview scorecard. There were three standards forming the total grading score. The main parameters for the questions of the qualitative interview were

• Value creation

• Continuous Improvement

• Reduce Waste TIMWOODS.

The research questionnaire was prepared following the main parameters of lean administration. These parameters include the Value, continuous improvement and the different forms of waste. The research questions revolve around expert-evaluation on the performance of the operations within the financial institution. The questions included in the research interview are mentioned below.

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Table 4: Research Questionnaire

Main Parameter Questions

Value

Do you know who your customer is and are they defined by the marketing department

Value Are there defined internal customer segmentations in the business.

Value

To what extent do individual customer requirements fit in your standardized services? Please provide an estimate in percentage.

Value Do you offer your customers anything beyond their requirements?

Value

Are you able to anticipate customer’s needs (Present (Martinez F., 2018) or future) before the customer?

continuous

improvement Do you have guidelines and policies documented that can be improved?

continuous

improvement Do you remember any process improvement in the last 3-6 months?

continuous improvement

How involved are the employees in the process improvements? Provide an estimate

Transport

How do you transport document from one station(department) to another?

Inventory

How often do you archive documents after completing a service (Physically and electronically)?

Inventory

How is the storage of documents done? Is the storage a necessity and do you have a registry?

Inventory

Which % of the stored documents are related to the customer // facilitates the customer satisfaction.

Movements How often are the archived documents moved to storage facility?

Movements How many physical documents are physically required by legislation?

Movements What percentage of physical documents are moved in the bank?

Waiting times

How often do employees complain about information delay and/or material delay?

Waiting times

How often are employees not able to do their job due to information delay from other parts of the system

Overproduction What percentage of services developed are not sold?

Overproduction How many documents on your desk are treated on the same day?

Overproduction

What percentage of services provided are not fully utilised by your customer

Over processing

FTY - What percentage of services documents flow through the processes on first time basis?

Hlavní práce68841_okpa00.pdf, 1.4 MB Stáhnout

University of Economics, Prague

Bachelor’s Thesis

2019 Okpu Yo Agbor Takang

University of Economics, Prague

The leanness level of Financial Institutions in the Czech Republic

Contents