"Our competition worked twice as fast." (re-engineering a loan division)

Here's how one financial institution solved a productivity problem by re-engineering its loan division.

When we first realized that our competitors were advertising turnaround times of less than 30 days for loan applications, when ours were running 45 to 60 days, we knew we had to do something,"

says Larry Rinehart, president and CEO of Pomona First Federal Savings & Loan Association. "Pomona has served the southern California 'Inland Empire' for more than 100 years, and we've built up long-term relationships that stretch across generations. But we have to stay competitive to survive, especially in this fierce economic climate. And our long turnaround time was just one indication that we weren't making the grade.

"We knew inefficiencies had crept in over the years, and we were ready to take strong measures. But in the process of streamlining, we had to make sure we didn't damage customer service. And we wanted to make the transition as easy as possible for our employees, who are, after all, the ones who provide that service."

Analyzing the Situation

Pomona First Federal Savings & Loan Association was founded in 1892 to serve an agricultural community, primarily citrus growers. Since then, the community has evolved into a mix of agriculture, light industry and housing just east of Los Angeles. Pomona has grown along with the community to become one of the largest retail mortgage lenders in southern California, with $1.65 billion in assets, 21 branches, 470 employees and a loan portfolio of 17,500 mortgages.

"The growth actually contributed to a lot of our problems," says Kevin McCarthy, senior vice president. "As we expanded over the years, we added branches and office space on an ad hoc basis. As a result, the loan function was spread among five separate locations in three cities, which created enormous overlaps and redundancies. This meant delays in communication, duplication of effort and even mislaid documents. We knew there must be a better way to operate, and we had to find it."

The pressures on management were also increasing. First, the economy in southern California was generally regarded as one of the hardest-hit in the country, with no sign of improvement. On top of that, competition was growing, not just from other lenders in the state, but from huge national mortgage-lending institutions. And the respite provided by the surge of refinancing at lower interest rates was coming to an end.

The first step Pomona took was to form an internal management committee to review the existing organization and develop alternatives that would increase productivity and/or reduce staff and expenses. While the study identified areas of concern, the bank saw no clear way to rectify the problems. "Identifying the problem wasn't enough," comments McCarthy. "It is virtually impossible to make major revisions to the way you do things when you have created the processes in the first place."

At this point, Pomona turned to an outside marketing and management consultant for assistance. "We felt that bringing Wilcox & Associates in to analyze our operation would offer several benefits," says Rinehart. "The most important factor was that they had extensive experience helping financial institutions in transitions, like ours; they could help us steer our way through a complex process. In addition, their experience gave us access to national standards to use as benchmarks when reviewing our own performance. And finally, as outside advisors they could provide an objective view of our operation and, in many cases, make it easier to implement difficult changes."

Working closely with Pomona's management, Wilcox & Associates analyzed the loan process step by step, analyzing organization, staffing, workflow, productivity, technology and space requirements. It was clear that there were major inefficiencies in having the loan function in five different offices. But there were different levels of financial investment associated with different levels of operational change.

Wilcox & Associates presented Pomona's management with three alternatives, together with associated costs and benefits:

* Reorganizing workflow and responsibilities at each site;

* Reorganizing workflow and introducing new technologies at the locations;

* Relocating to a single site, reorganizing workflow and introducing new systems.

"After looking at our options, we agreed that the best choice for the long run was to go with the complete re-engineering package," says Rinehart. "It cost the most, and it promised the biggest upheaval, but we felt that it put Pomona in the best position to be competitive in the coming years. You could say it put us in fighting trim."

Once Pomona had made the decision, they retained Wilcox to manage the transition. "A change that enormous is almost impossible to manage from within," says Jan Lemons, senior vice president, director of Human Resources and Loan Service Administration. "You can't afford to take the time from your regular responsibilities. In addition to all the technical decisions, you have to increase communications, especially with employees, both to gain vital information about their jobs and to help them feel comfortable with such major alterations in their workplace. To the extent changes will affect customers, and the community at large, you also have to manage critical information reaching them."

Implementing Change

"Until an institution has been through a major transition, it just doesn't realize how complex the change is and the enormous number of decisions that are involved," says Bob Wilcox, president of Wilcox & Associates. "You have to describe it in a linear fashion, but it isn't. Everything is happening at once, and all the pieces are interlocked. What seems like the simplest action, such as finding a new location or even deciding on a standard office chair, depends on dozens of factors. The temptation to ignore some of them, through sheer exhaustion and pressures of time, is dangerous. The advantage of having an outside consultant is that they anticipate the problems and make sure nothing is overlooked."

Dave Woody of Wilcox & Associates, project manager for the transition program, concurs. "The mistake many financial institutions make is to rush through a transition just to get to the end, ignoring what they think are peripheral matters, like keeping employees fully informed or analyzing how forms are used. In the end, it all matters. Pomona really understood how important it was to assess every option, to pay attention to what seemed like small and unimportant details."

"Actually, the major change for us was a philosophical one," says Rinehart. "Instead of thinking of the loan division as a service center, we started to think of it as a profit center. Every decision was made with this in mind. And that meant everything from the expenses of new technology to how a decision might affect our employees' performance. It's a rigorous approach, but the kind of thinking that you need to survive."

Reorganizing the Loan Process

Once the decision was made to house the entire loan operation in one place, the transition team began to re-engineer the work process. The entire procedure for handling loan applications was broken down into small, discrete steps. The flow of work was then streamlined to reduce delay in moving from one step to the next. Each decision in the process was analyzed to determine its degree of risk; decisions that involved minor risks were then delegated to lower levels, freeing management to focus attention on decisions with larger implications.

"For example, we began giving staff the power to make lower-risk decisions, such as waiving fees for late charges, without having to get approval from their supervisor," says Lemons. "This increased efficiency in two ways: it reduced the time needed to process the loan and it reduced total staff hours required to process each application. What's more, this new empowerment increased job satisfaction at all levels."

Setting Standards

With the new profit-oriented approach, Pomona began to analyze work standards for various positions. "We knew roughly how long it took to do something, or, alternatively, how much work an employee could handle, but we had no idea how much time it should take or how much they ought to be doing," comments Lemons. "Using national mortgage banking standards as well as internal benchmarks, we developed new standards for the division."

"Productivity has increased dramatically," says Lemons. "As an example, the average processing of 'demands' by a loan service clerk has shot up from nine per day to 20 per day. The new work process, the new technology, intense training and higher expectations all play a part; the point is, now we know how much work we should be turning out."

Converting to New Technologies

A major part of the transition program was integrating new technologies in the work process. Five separate but integrated systems were installed:

* Single-terminal workstations provide each employee with access to all loan files; this reduces the time necessary to retrieve information and make sure information is up-to-date.

* Pipeline accounting allows instant retrieval of loan information as applications pass through the approval process, improving the speed of response to customers' inquiries.

* Functional reporting systems state, on a daily basis, how individual performance compares to established work standards and allows quick identification of bottlenecks.

* Pomona also converted to laser-printed loan documents, reducing the need for extensive inventory and permitting easy and rapid updates.

* And finally, a new telephone system provides quick access to each employee.

"A significant part of our $4 million budget was allocated to the new systems," says McCarthy. "We expect a financial payback in about five years. This is possible because better customer service means fewer aborted loan applications, there are measurable increases in productivity, staffing requirements are decreased and we have been able to reduce expenses for things like telephones and printing."

Selecting a Location

"The key to [our] reorganization was having everyone under the same roof," continues McCarthy. "But where that roof was, and what we put under it, involved a number of factors."

Using the site criteria developed in the planning study, Pomona reviewed a number of alternate sites and finally selected a 35,000-square-foot industrial building in Rancho Cucamonga. The new office is in a fast-growing suburb, centrally located to the headquarters and to branch offices. Before making the decision, the bank did a study of employee location by ZIP code to make sure they would not be adversely affected by increased commuting times. The building itself, located beside a busy highway, gives the bank added visibility.

Inside, the space was designed to provide the highest efficiency in workflow and productivity. Size, configuration and locations of workstations were determined by the space standards and by the new single-terminal workstations.

Keeping Channels Open

From the beginning, Pomona placed a priority on keeping employees fully informed about the changes. "Communication with employees and customers is key to the success of every major transition," says Wilcox. "It's important to focus not just on the changes you are making but also on the effects they will have on the people involved in your business. Put yourself in their shoes and think how you would feel; then make sure you inaugurate a program--memos, letters, meetings, questionnaires, progress reports, hot lines--to keep lines of communication open."

"In order to analyze our operations, we needed information from the employees on how they do their work," says Lemons. "It was also an opportunity for them to make suggestions about things that could be improved, from the work process to the forms they used."

"We made sure that everyone knew about our plans, including those that might worry employees, such as having to work in new ways and use new technologies, and the fact that we were reducing staff. By keeping your staff informed, you avoid creating disruptive rumors that could impede performance or cause them to consider leaving." Keeping and motivating staff was a key concern. By making each employee a part of the transition process and providing extensive training and encouragement in learning new systems and new work processes, Pomona was able to retain its key employees.

Downsizing as Little as Possible

The focus of the transition program was to improve efficiency; however, a byproduct of this was that the bank would be reducing staff. "We're pleased that we were able to accomplish this without layoffs," says Rinehart. "The new program called for a reduction of 30 people in the loan division; we were able to accomplish this by a two-tiered system. Eligible employees throughout the bank were offered a one-time-only early retirement plan, and several people in the loan division elected to accept this. A second offer of a voluntary severance package--made only to those in the loan division--was accepted by enough employees to achieve our goal."

Training for a New World

Pomona also paid close attention to the employees who stayed with the bank and worked to overcome the concerns they had about having to handle the same work load with fewer people. "'Hard' training sessions were held prior to the move to familiarize employees with the new technologies," says Woody. "'Soft' training sessions were also held for those with less technological involvement, such as loan counselors or people in the field. After the move, hands-on training with the new systems was supplemented with assistance from key supervisory people in each functional area."

"Looking back, we wonder how we ever got along before," says Rinehart. "Work is smoother and more comfortable for the employees. They love the new space and have found that the new systems make their work easier and more rewarding. They can retrieve information, answer questions and move the applications along faster than before. A lot of the frustrations, and certainly most of the inefficiencies, have disappeared.

"The changeover was worth every penny we spent. Our turnaround times are well within the limits we set as an objective, and that's just a very visible accomplishment. The new systems have greatly improved our ability to serve customers better, at lower costs, on almost every level. Which puts us in a very good position for the future," Rinehart continues.

"I do have some advice for others considering making changes in the way they work. First, don't wait. Second, get outside help. Third, select appropriate technologies (not necessarily the newest and flashiest) that are flexible enough to adapt to change. And, most important of all, give it your total commitment."

SHOPPER'S GUIDE

This company appears under the heading Strategic Consulting in Bank Marketing magazine's Annual Buyer's Guide.

Behavioral Analysis, Inc.(*) Tarrytown, N.Y. Kate Permut (914) 332-5300

Boston Consulting Group(*) Chicago, Ill. Alenka Grealish (312) 993-3321

These companies appear under the heading of Strategic Planning in Bank Marketing magazine's Annual Buyer's Guide.

Associated Advertising Agency, Inc.(*) Wichita, Kan. Kerry Gray (316) 683-4691

BlouinBachman(*) Rollinsford, N.H. Deb Miller and John Dubois (800) 394-1632

DeSola Group, Inc.(*) New York, N.Y. Pamela Roach (212) 832-4770

440 Financial Worcester, Mass. John Florence (800) 342-0440

Financial Selling Systems, Inc.(*) Brentwood, Tenn. M. Marshall Weems (800) 332-0937

Financial Shares Corporation(*) Chicago, Ill. George M. Morvis (312) 943-8116

Furash & Company(*) Washington, D.C. Edward E. Furash (202) 331-8400

FUSION Marketing Group(*) Memphis, Tenn. Donald C. Mann (901) 526-0088

Geosegment Systems Corporation Cambridge, Mass. Thomas Popik (617) 494-0020

John Ryan Company(*) Minneapolis, Minn. Pamela Stein Meyers (800) 255-7926

Ketchum Advertising(*) San Francisco, Calif. Terry DiCarlo (415) 984-6163

MHW Advertising & Public Relations Cleveland, Ohio Mr. Kim Colebrook (216) 646-9400

The McClure Group(*) Valley Forge, Pa. Jim Ba-rcus (610) 933-0933

Optima Group, Inc.(*) Milford, Conn. Kenneth Hoffman (203) 874-3664

Response Marketing Group, USA(*) Richmond, Va. Jonathan Lyle (804) 740-6501

Retail Planning Associates, L.P.(*) Columbus, Ohio John Bradford (614) 461-1820

Stap & Company, Inc.(*) Kalamazoo, Mich. John Stap (616) 344-1412

Strategic Solutions(*) Golden, Colo. Diane Sauter (303) 278-4814

Synetics, Inc.(*) Cambridge, Mass. Jeffrey Govendo (617, 868-6530)

Washburn Direct Marketing(*) Charlotte, N.C. Karen Cusic (704) 334-5371

The Whittle Group Chicago, Ill. Jack Whittle (312) 693-8110

* Industry Service Member of the Bank Marketing Association

Edward Lynch is senior vice president Wilcox & Associates, Inc., in San Francisco, Calif. He can be reached at (415) 773-5373.