Banking on performance in the financial services sector

In the fourth of our series looking at how different sectors of the economy are trying to improve their productivity, we examine the financial services industry to see how banks and insurance companies are faring.

The Treasury claims that the financial services industry "makes a disproportionately high contribution to UK productivity growth compared with other sectors", with hourly labour productivity in the sector estimated to have grown by 3.6% a year between 1997 and 2001¹. By contrast, growth in the UK economy as a whole was only 2%.

It also says evidence of higher-than-average wages in the industry is an indication that labour productivity in the financial sector is better than in other industries. Data from the autumn 2004 Labour Force Survey show that in almost every part of the UK average wages in financial services are higher than the average across all industries, with the gap between the whole-economy mean wage and the average in financial intermediation around 39% - £525 per week compared with £378 (See box ). "This large gap suggests that output per worker is substantially higher in financial services than the whole economy average," says the Treasury.

Despite its better than average performance, the financial services sector, like many other parts of the UK economy, is failing to bridge the productivity gap between itself and competitors in other countries. Analysis by the Advanced Institute of Management Research (AIM) found that in 2001 the financial intermediation sector, which includes banks and building societies, was one of three industries responsible for over half of the business sector productivity gap between the UK and the US². According to AIM, the financial intermediation sector accounted for 18% of the total productivity gap between the UK and the US, with the position worsening since 1990.

Much of the UK's financial sector is protected from the negative impacts of international competition because the City of London remains the premier location in Europe for financial services. But it still needs to improve its performance or higher-level jobs in the industry will follow the routine data processing and back-office services that are already being outsourced to cheaper locations.

Tackling the productivity gap is not only important for the financial sector itself, but, given its size and importance, productivity improvement in the sector is vital to the UK's overall economic health. Financial services employ more than one million people in the UK, account for more than 5% of the country's gross value added (GVA) - that is, gross domestic product (GDP) minus taxes on products plus subsidies on products - and generate a trade surplus equivalent to 1.6% of GDP.

Offshoring jobs

One sure-fire way of boosting productivity, at least in the short term, is to cut employment levels. Some UK financial service companies have exported back-office functions and customer support services to India and other lower-cost countries. Estimates suggest that around 200,000 financial service jobs will have been outsourced in this way by 2008, with up to 350,000 posts being relocated by 2015.

Lower infrastructure and wage costs in India mean that for every 1,000 jobs offshored, companies enjoy cost savings of around £10 million a year (see A passage to India: offshoring in financial services ). And because the typical working day is an hour longer in India than in the UK, finance sector employers immediately benefit from an automatic productivity gain when jobs are transferred.

Despite the disappearance of financial jobs to low-wage destinations, the overall finance workforce in the UK continues to grow. In Scotland alone, which is second only to the City of London as a base for UK financial services companies, the number of jobs in the sector has increased by 23% (20,000) over the past five years, according to the Financial Times. Indeed, many overseas financial services, such as the Bank of New York, see the UK as an ideal location for their operations, while the overall number of job losses from firms' offshoring strategies is relatively low. Barclays, for example, reported in 2004 that while 523 roles moved offshore that year, 69% of affected staff were redeployed, producing a net loss of just 162 employees.

Some firms, including the Nationwide Building Society and Northern Rock, are publicly committed to retaining a UK-based workforce, irrespective of the potential cost savings and one-off productivity improvements generated by offshoring, which means they may be under even greater pressure to improve productivity.

High-performance workplaces?

According to the most recent High Performance Workforce Study from professional services firm Accenture, executives in the financial services industry believe that the performance of their workforces could be substantially improved³. Financial service respondents placed improving productivity top of a list of 13 HR initiatives vital to future success. "Human performance remains the biggest untapped source of improvement for financial service companies, regardless of industry," says Accenture.

Executives in financial services report that much of the industry does not resemble the high-performance workplace model outlined in previous articles in this series - with effective leadership, employee development and continuous learning, meaningful staff involvement and stimulating workforce innovation. Just 11% of those responding to the Accenture research believe that the overall skill level of their workforce is "industry leading", while many say that their organisation is not faring well in building the key organisational capabilities, including developing leaders and the ability to quickly adapt to change, that deliver competitive advantage.

Yet many financial service organisations in the UK are pursuing strategies in line with the high-performance workplace model, establishing talent management programmes to improve leadership among managers and continuously reskilling their workforce so they are equipped with skills needed to thrive in the future.

Most also recognise the need for effective internal communication and staff involvement in decision-making and innovation. The Nationwide , through its Genome project, has even developed a sophisticated business model to show that committed employees lead to more committed customers and improved business performance (see box).

Skilled workforce

A survey for the HR standard Investors in People (IiP) found widespread belief among senior managers in the UK that effective development and nurturing of human capital will help to raise productivity⁴.

One-third of respondents from the financial services sector placed investment in employee development top of their list of measures that would do most to improve performance (the next best was investment in research and development, cited by 22%). Although research by the Financial Services Skills Council (FSSC) shows that more than half (58%) the banking and insurance workforce is qualified to at least National Vocational Qualification level 3, the industry is suffering significant skill shortages, especially among professional, managerial and administrative occupations.

To plug the yawning skills gaps, both individual employers and the industry as a whole is investing heavily in training. Teresa Sayers, chief executive of the FSSC, says the amount of money being spent by the industry on training each year is huge. "Our very conservative estimate is that financial services spends around £300 million each year on developing staff."

As a regulated industry, much of the training is to ensure staff understand and comply with regulatory requirements. But Sayers says that, as well as developing technical competence, financial services companies are also keen to improve "soft" skills, such as customer service, teamworking and communication.

Across the industry, the FSSC, whose main objective is to raise productivity by ensuring that the financial services sector has the range and level of skills it needs, reports the most common areas of skill deficiency are technical and practical skills, followed by communication skills and customer handling skills.

Individually many financial services firms are investing heavily in employee development. According to Sayers, the sector, as a whole, is much more likely than other parts of the economy to regularly deliver and review training and staff performance.

Training and development is taken seriously at Nationwide. "There are lots of career opportunities and the in-house training is very comprehensive," says head of personnel operation Carol Hurst. The Genome research found that the happier staff feel about their capabilities, the better the customer outcome.

The building society, which is one of only 16 UK organisations in 2004 to be recognised as a Champion of Investors in People, claims to spend more per person on training than any of its competitors. Last year, Nationwide launched its Development Curve, which enables staff to access the 315 learning materials it provides. Almost 14,000 employees have now created around 31,000 personal development plans as a result, leading to more than 37,000 training days on course-based learning programmes during 2004-05.

Overall, the more than 16,000 employees at world's largest building society receive an average of 2.74 in-house training days per year on top of the day-to-day coaching, individual development time and specialist external training that also takes place.

Elsewhere, Barclays says its UK workforce received a cumulative 208,000 days of learning and development in 2004, which equates to 2.38 days per employee. The company also opened 14 new Barclays University learning zones last year, increasing the opportunities for employees to engage in face-to-face learning. Similarly, Lloyds TSB reports that it invested £42 million in training across the group in 2004. It established a corporate university in 1999 (the University for Lloyds TSB), which provided more than 67,000 training days last year.

Leaders of the pack

Leadership is a key factor in distinguishing between high- and low-performing organisations. So, in addition to training and development opportunities for all staff, the major financial services firms are increasingly seeking to enhance their leadership capability.

For example, following feedback from its 2004 employee opinion survey, which identified the quality of leadership within the company as one of two key areas for improvement, Barclays is focusing on building sufficient leadership across the company by putting effective succession plans in place. It has established an emerging talent team to develop staff with potential for senior management positions, with many identified as having high potential attending a strategic business course run in conjunction with London Business School.

The Royal Bank of Scotland (RBS), which owns NatWest, established an executive training programme in 2003 in collaboration with Harvard Business School for Executive Leadership Development. By the end of 2004, more than 700 of the company's executives and senior managers had attended courses. RBS has also developed personal leadership courses for managers to complement the Harvard programmes. Nationwide's commitment to developing effective leaders and managers has received recognition from the IiP Leadership and Management model, which is designed to provide guidance and clarify an organisation's current and future management needs.

To foster leadership skills through participation in external projects, the Aviva Leadership Academy has partnered Enable, an organisation that pairs companies with charities, to work on specific projects that are designed to improve the teamworking and leadership skills of staff taking part. Further down the corporate hierarchy, Norwich Union, which is part of Aviva, has introduced behavioural leadership courses for team managers. At Yorkshire Building Society, managers and team leaders participate in an intensive 10-day, five-module leadership development programme.

Communication and involvement

The high-performance report from Accenture referred to earlier found that three-quarters of executives in financial services believe their employees understand the company's strategic objectives. Good communication is the key to establishing such clarity.

Nationwide operates monthly executive forums at which staff hear what is discussed at board meetings and have the opportunity to ask questions. Similarly, RBS includes senior management briefings as well as employee conferences and focus groups in its approach to internal communications.

Lloyds TSB says that employee dialogue is mostly through formal one-to-one meetings between staff and line managers, including regular performance reviews that enable them to speak about their concerns and expectations. It also holds employee forums and conducts focus groups to test staff opinion on a range of issues, such as company strategy and product development.

In April, Prudential established its UK Employee Forum, which, the company says, gives staff the opportunity to become involved in the decision-making process. Employee representatives at the life assurance and pensions provider take staff views and concerns to employee forums attended by senior managers. Likewise, Royal London Group , the UK's second largest mutual insurer, has introduced a system of staff forums.

Several large financial services firms, such as Aviva, Barclays and Legal & General, have agreed formal partnership agreements with the main finance union Amicus. The Legal & General partnership deal was first signed in 1997, and is now described by the firm as forming an important part of its culture and the way it operates. The company won the Amicus employer of the year award in 2004 and consultation with the union takes place formally through monthly Partnership Consultation Meetings involving Legal & General's senior HR directors and internal and external union officials. The meetings cover key business initiatives and trading information. To improve consultation at all levels middle managers are attending Partnership Workshops that emphasise the importance of consulting fully with staff when implementing change.

Encouraging employee involvement in product and service innovation is a vital component of the high-performance workplace model. RBS is one financial services company seeking to become more innovative by getting staff to submit ideas for improvements. It has adopted the principle that staff are the best people to understand the problems they confront in their jobs and to generate ideas to solve them.

The company's trademarked Work Out scheme, which was introduced in 2003, provides staff with the skills and tools to identify problems, and propose and implement solutions. "It enables employees at all levels across the group to initiate improvement and enhance business performance," says the company. RBS claims that by the end of 2004 around 20% of its workforce had participated in Work Out, and that more than 40,000 employees participating in the firm's annual staff opinion poll said they had seen an improvement in customer service and efficiency as a result of the scheme.

Elsewhere, Morley Fund Management, which is also an Aviva subsidiary, has established an employee suggestion scheme entitled Morley ideas, while the Nationwide runs a similar scheme, called Brainwaves. At Yorkshire Building Society redesign workshops involve operational staff challenging current methods to identify more efficient ways of delivering customer service.

Growing importance

Global competition in financial services is increasing significantly. The Treasury warns: "As a global industry, the sector is particularly exposed to the effects and implications emerging from global economic developments." Improving productivity is key to maintaining its current pre-eminence in core markets, such as world foreign exchange business and cross-border bank lending.

Although much of the UK industry is competitive, its overall performance lags behind its major competitors - the FSSC says the US productivity lead over the UK in the banking and insurance sector is 59%. By adopting aspects of the high-performance workplace model, financial services firms will be better placed to eat into that gap.

¹ The UK financial services sector: Rising to the challenges and opportunities of globalization (PDF format, 1.06MB) , HM Treasury, March 2005.

² NIESR database 2002, www.niesr.ac.uk/research/nisec.htm .

³ The High-Performance Workforce Study 2004 (PDF format, 964K) , Accenture.

⁴ Britain's productivity challenge: the view from the boardroom, Future Foundation, November 2004, www.futurefoundation.net/publications.php?disp=113.