In brief
- Operational efficiency is the ratio of resources used to the output produced. Improving operational efficiency means being smarter when using your resources by refining processes and workflows, investing in employee training, and implementing automation solutions
- Increasing operational efficiency lets you reduce operational costs and human error rates. You can enhance customer and employee experience and retention, increase profit margins and gain a competitive edge
- Typical operational efficiency challenges include subpar data quality and availability, high technical debt, weak straight-through processing (STP) rates, lack of standardization, low reconciliation matching rates, overly complex application stacks, poorly defined decision rights and lack of visibility into processes
- Key solutions for improving operational efficiency in the financial services industry include improving data management with an enterprise data management platform (EDMP) and optimizing STP and reconciliation matching rates with intelligent automation
Doing more with less. A dream for any executive, right? High efficiency is what separates market leaders from laggards.
Caution is needed though as efficiency has become a bit of a buzzword. That’s why COOs (chief operating officers) too often mistake improving operational efficiency with cost-cutting. Yet, simply reducing the available resources isn’t guaranteed to get you better numbers. In fact, it’s more likely to bring down productivity.
It might sound counterintuitive, but to significantly improve operational efficiency, you need to treat it as an investment in people, processes and technology. Here we will cover the best practices to do so.
What is operational efficiency?
Operational efficiency aims to maximize the use of resources needed to achieve the desired output. The fewer resources you need, the higher your operational efficiency. Resources are a broad term here, including time, equipment, workforce, operating costs and labor.
Improving operational efficiency, in turn, means optimizing resource utilization to increase or maintain the output with fewer resources. One way to achieve this is to streamline processes by introducing templates and procedures, automating repetitive tasks and upskilling your employees.
Operational efficiency differs from operational excellence (OpEx). Operational excellence is the management of business processes that fosters a specific culture of engagement within an organization.
Examples of operational efficiency
What does improving operational efficiency look like in real life? Here are some simple examples:
- An investment bank implementing automated trade reconciliation software to achieve the T+1 settlement cycle
- A capital markets firm developing a data standardization policy to reduce time spent on manually verifying entries
- A retail bank implementing straight-through processing for check payments
- An insurance company adopting an AI/ML tool to classify inbound emails and documents
- A financial institution implementing a robotic process automation (RPA) solution to streamline supply chain management
There’s no one-size-fits-all solution when it comes to operational efficiency strategies. That’s because different businesses suffer from different inefficiencies. And even when those are similar, their root causes still vary based on the specific existing processes, technology used and talent present.
What does achieving overall operational efficiency mean?
According to Asana’s 2023 Anatomy of Work report, 62% of an average employee’s workday is lost to repetitive, mundane tasks.
Improving operational efficiency means eliminating non-value-added tasks from employees’ workloads by getting rid of flaws in existing processes. Efficient operations mean your staff are laser-focused on value-added activities, while menial, repetitive tasks are automated.
How can you improve operational efficiency? You should opt for one or two routes:
- Eliminate unnecessary meetings or irrelevant reports
- Automate necessary but not-value-added tasks, like manual data entry and verification
Measuring operational efficiency: The devil is in the details
A common way to measure operational efficiency for a specific process is to track the operational efficiency ratio. This indicator compares all your resources used and results produced — inputs and outputs. For example, if five members of your content writing team publish 20 blog posts a month, the ratio is 1:4. That is, every team member produced four articles.
At the enterprise level, operational efficiency is measured by dividing your operating expenses (input) by the total revenue (output). Multiply it by 100% to get the operational efficiency rate:
![](https://www.luxoft.com/files/blog/2024/07/Dare-to-improve-your-operational-efficiency-Here-your-guide/Improving-ops-efficiency-graph1-1.jpg)
For example, if your operating expenses amount to $50,000 and your total revenue is $100,000, your operational efficiency rate is $50,000/$100,000 x 100% = 50%.
A declining operational efficiency ratio means the organization is becoming more efficient. The optimal efficiency ratio is 50% or below.
The operational efficiency rate isn’t the only metric you should track, of course. Operational efficiency strategies should establish key performance indicators (KPIs) for every objective set.
Good KPIs:
- Are measured at the right frequency (daily/weekly/monthly)
- Fit your industry and domain
- Cover both long-term and short-term goals
- Have practical value
- Accurately reflect the progress toward an objective
Enterprise-wide operational efficiency KPIs can include:
- Operating expenses
- Human capital expenses
- Customer satisfaction scores
- Capital expenditures
On top of KPIs, you should also track performance metrics. These numbers let you compare your efficiency against sector-specific benchmarks. They also offer an overview on a more granular level than KPIs.
All KPIs are metrics, but not all metrics are KPIs. KPIs give you an idea of your progress toward a specific goal. Performance metrics, in turn, reflect the general efficiency of business processes and teams across the organization.
Performance metrics can include:
- Accounts payable turnover
- Accounts receivable turnover
- Inventory turnover
Six benefits of operational efficiency
Achieving operational efficiency is a win-win for both customers and the organization itself. Customers enjoy better services and faster response times. The organization, in turn, can increase profit margins and gain a competitive edge while reducing operating costs.
Optimized operating costs
Efficient business operations require fewer resources to achieve the same or better results. As a result, operating costs can be reduced without compromising on output quantity and quality.
For example, automatically triaging customer calls and support tickets reduces the time spent on each query. As a result, you can reduce the size of your customer service department without sacrificing response times.
Reduced human error
Manual processes are prone to human error. Having to fix those mistakes only slows down your employees and negatively impacts customer satisfaction.
Automation and process standardization allow you to prevent mistakes, saving your employees’ time and improving customer experience. And, of course, fewer mistakes mean lower operating costs, too.
Improved customer satisfaction
Faster response times, higher one-touch issue resolution rates and faster onboarding all contribute to higher customer satisfaction scores. In fact, easy onboarding is the number one reason why consumers choose non-traditional financial services providers.
Financial services customers already expect certain operations to be available online, according to Salesforce. For example, over 70% of banking customers want to apply for debit or credit cards digitally. In turn, 69% of insurance customers want to renew coverage online.
Those processes can be near-instantaneous with automated data verification and application validation.
Increased profit margins
Lower operating costs plus increased revenue driven by higher customer satisfaction equals higher profit margins.
For example, clients adopting the self-service borrower portal through Luxoft’s EarlyResolution™ product can achieve a 25-30% saving in call-management cycles and a 30-50% uptick in efficiency, thus minimizing customer wait times and eliminating the need for temporary staff during volume spikes.
Improved employee satisfaction and retention
Repetitive tasks and inefficient processes are the bane of employees’ routines. Removing them goes hand in hand with ensuring employee happiness. A higher employee net promoter score (eNPS), in turn, correlates with higher retention rates, productivity and engagement.
Furthermore, high employee retention gives you an upper hand in times of higher competition for talent in certain domains, such as tech.
Competitive edge
All the other benefits of implementing a sound operational efficiency strategy — increased speed, profit margins, and customer and employee satisfaction – translate into a competitive advantage.
Let’s put it more bluntly. Achieving and maintaining operational efficiency is key to successfully addressing rising competitive threats posed by Big Tech, megabanks, big fintech and challenger banks.
What might stand in the way of achieving operational efficiency?
Financial services organizations traditionally struggle with eight operational efficiency challenges, from data availability and quality and STP rates, to high technical debt. Let’s take a closer look.
Subpar data availability and quality
Data silos are the largest barrier to innovation, according to a WBR Insights survey of financial leaders. (It has overtaken the lack of buy-in and budget constraints.)
Fragmented access to data can be an inefficiency in and of itself, too. The same survey revealed that in 85% of organizations, IT staff spend between a quarter and half of their time helping other employees access the data and insights they need.
Breaking data silos, however, on its own is not enough. Data must be readily available when needed — and remain reliable, too.
Ensuring data quality — its completeness, validity, accuracy, consistency, and fitness for purpose — may require the following challenges to be addressed:
- Data entry errors
- System integration errors
- Incomplete entries
- Data capture failures
- Data discrepancies
- Duplicate entries
- Out-of-date or irrelevant entries
- Lack of data standardization
- Lack of context for enterprise or cross-functional data
High technical debt
If data is the key to operational efficiency, then an up-to-date, modern, unified digital ecosystem is the keychain to hold it all together.
Transitioning to such an ecosystem can be a challenge in itself. On average, universal banks’ applications are 14 years old, as opposed to just three years old for digital banks.
![](https://www.luxoft.com/files/blog/2024/07/Dare-to-improve-your-operational-efficiency-Here-your-guide/Improving-ops-efficiency-GRAPH2.jpg)
A patchwork of applications that barely exchange data or don’t share it at all is a source of inefficiencies, especially if there are duplicate systems. Banks operating in multiple markets can also greatly benefit from reusing functionality across locations.
Weak straight-through processing rates
Weak STP rates are a chronic challenge among banks. One common cause is the lack of a centralized data management platform. Other causes include old systems that may impose serious limitations on the STP solutions you can implement.
Customer preferences may also contribute to lower-than-preferred STP rates. For example, around a third of B2B (Business to Business) transactions in the U.S. and Canada are still done with checks. While the shift to digital payments is ongoing, improving STP rates still requires accommodating more old-fashioned transaction types — with the help of optical character recognition (OCR) and large language models (LLMs), for example.
Lack of process standardization
Efficient operations consist of standardized, well-documented processes. Otherwise, each employee, left to their own devices, would devise a slightly different way to accomplish the same task. The inevitable outcome? Variable productivity and inconsistent quality of work.
First, each employee must figure out how to tackle the task at hand — a time-consuming activity in and of itself. Then, individual approaches to activities lead to the emergence of over- and under-processors, both of which lead to waste:
- Over-processors are employees who put too much time and effort into their work, which can slow down teams
- Under-processors are employees who cut corners whenever possible
Low reconciliation matching rates
The reconciliation match rate reflects the accuracy of the reconciliation process. Low rates aren’t only an indicator of operational inefficiencies — they’re also an obstacle to achieving the T+1 settlement cycle.
Low matching rates may be the result of:
- Fragmented systems used to handle transactions in different lines of business or locations
- Manual match validation and research
- Manual cross-system corrections
- Lack of data standardization, which leads to a high rate of discrepancies
- Lack of scalability across lines of business
Overly complex application stacks
According to Asana’s 2023 Anatomy of Work report, an average knowledge worker uses 8.8 apps to complete their work tasks. Reducing the complexity of the application stack could save them an estimated 4.9 hours per week.
What’s more, the abundance of apps can worsen the quality of work. The report also highlights that 25% of workers using 16+ apps miss messages and actions. The figure is lower for workers using one to five apps (8%) and six to 15 apps (15%).
Legacy technology can also burden the app stack in banking and capital markets. Outdated systems usually require additional tools just to meet modern business needs, and integrating bespoke legacy systems into a single ecosystem can prove to be a significant challenge.
Poorly defined decision rights
Without clear decision rights, teams may be left hanging waiting for approval or clear direction from leadership. Furthermore, conflicting instructions can easily lead to misunderstandings and bottlenecks, bringing down operational efficiency even further.
While your organization-wide approach to project management should rely on stakeholder buy-in, someone has to have the final say. This means you must clearly define final decision-makers at all levels of operations.
Lack of visibility over current processes
If you fail to implement metrics and establish benchmarks, how will you know when you manage to increase operational efficiency?
Understanding current operations, as they are, is key to targeted, effective process improvement. Collecting and analyzing data on current operations will allow you to:
- Identify areas of improvement
- Prioritize initiatives to increase operational efficiency
- Assess risks more quickly and accurately
- Track progress in achieving operational efficiency objectives
Ten ways to improve operational efficiency
Where do you start with your operational efficiency strategy? Here’s how to improve operations management in ten ways.
Get to the frontlines
To improve operational efficiency, you need a hands-on understanding of processes and workflows that comes from actually doing the job.
Yes, the data on the enterprise level — and the bird’s eye view of operations stemming from it — is essential. But it can’t rival getting feedback from frontline workers. It allows you to gain insight into inefficiencies and their root causes at a granular level.
Business owners and managers can also benefit from an “undercover boss” experience, where executives work beside ground-level staff. Doing the job yourself will allow you to see what works and what doesn’t.
First-hand experience and feedback from frontline workers are the antidote to failed process improvement initiatives driven by false assumptions.
Maintain process documentation
To improve operational efficiency, you need to make your processes reviewable. And for that, they have to first be documented.
Undocumented processes are also non-standardized, leading to inconsistencies in approaches and output quality. Plus, a lack of documentation means knowledge transfer has to be done one-to-one, slowing it down or making it impossible in some cases.
So, the lesson here? Don’t underestimate the written word and document your procedures! Ensure the documentation contains algorithms on what to do in both run-of-the-mill and unusual scenarios. Include contingency plans for when things go wrong, or when employees encounter an exceptional situation.
Once the documentation is ready, collect feedback on improving processes from the people doing the job.
Documentation will also allow you to measure process efficiency, zero in on inefficiencies and devise improvements to improve resource allocation and productivity.
Optimize resource utilization
Improving operational efficiency is, at its heart, all about using your resources wisely. Easier said than done, isn’t it?
Still, several options exist, depending on the challenge and resources. For example, ensuring your talent performs at full capacity means two things. First, avoiding underperformance. Second, no less important — not overloading your workforce with the tasks coming from your project management approach.
Always look for a match between the employee’s knowledge, experience, and tasks; they shouldn’t be overqualified. At the same time, people shouldn’t have too much on their plates. Otherwise, they’ll be on the road to performance issues, burnout and, perhaps, resignation.
To optimize resource allocation in this case, ensure you have a full overview of:
- People at your disposal and their skill sets
- Their current and future availability
- How much they cost your organization
Break down organizational silos
In large businesses, organizational silos tend to appear across departmental lines. But those can harm operational efficiency as they give rise to data silos and lack of transparency and communication.
To enable cross-department collaboration, foster:
- Open and frequent communication across teams, backed by the right tools to facilitate it
- Organization-wide alignment with corporate goals and understanding of how each role contributes to achieving them
- Motivation to collaborate on achieving company-wide goals
- Transparency regarding changes, business decisions and other information (with a thoughtful approach to avoid causing distrust, blame-shifting and resistance)
Address bottlenecks
Bottlenecks can emerge at any level, from supply chain management to customer service. Catching them early on means avoiding a costly operational slowdown or complete standstill.
Bottlenecks can take many forms. Yet, they all boil down to a single point of failure that may prevent the whole team from running smoothly. For example, imagine a scenario where only one specialist knows how to perform a certain task, so you can’t easily replace them if they end up on sick leave. Comprehensive process documentation removes this bottleneck.
Besides undocumented knowledge, bottlenecks can also be caused by flaws in communication, process management, software systems or supply chain management. Even corporate culture and staff morale can lead to a bottleneck.
A short-term solution that increases capacity can help deal with a bottleneck. For example, you can contract out certain tasks when your current capacity isn’t enough. However, preventing bottlenecks requires mitigating their root causes and improving in-house capabilities.
Track the right metrics
Poorly chosen metrics and KPIs can lead to one of two scenarios: One, you believe your operations are efficient when, in reality, they’re not — and suddenly a bottleneck reveals itself in the ugliest way possible. Two, you believe your operations are inefficient. In this case metrics aren’t an adequate reflection of resource productivity.
So, choose your metrics wisely. Otherwise, you risk fixing what’s not broken — and missing out on the real troublemakers. Keep in mind that employee productivity is notoriously difficult to translate into quantifiable data — just look at the developer productivity metrics debate.
Upgrade and unify your software systems
Just as your operations should run like a well-oiled machine, so should your software. In other words, your applications need to be a harmonious digital ecosystem, not a wild zoo where different species fight each other. This will enable a seamless flow of data and prevent double work, such as copying and pasting data from one system into another.
While reviewing your application stack, ask these questions:
- Are there any solutions that lack functionality to power operational efficiency?
- Are there any legacy systems that require modernization before they can be integrated into a digital ecosystem?
- What do users have to say about each system? What inefficiencies do they face?
- Are there any systems that serve similar or identical purposes? Can they be replaced with a single solution?
Leverage intelligent automation
To achieve operational efficiency, you’ll need automation, whether robotic process automation (RPA) or AI solutions. RPA tools operate on basic algorithm trees, whereas AI-powered intelligent automation solutions can take on more complex tasks like data extraction or analytics.
To enable automation beyond standard “if-then-else” scenarios, you’ll first have to ensure a seamless flow of data between systems. This data will then be used to train AI models, provide real-time insights and execute tasks based on real-time information.
For example, in supply chain management, AI tools can automate order processing, shipment tracking and inventory management across the whole supply chain.
Provide necessary training
Even if you adopt cutting-edge AI automation solutions, they are still only tools. The efficiency of these tools depends on how people use them.
So, if you tackle your operational inefficiencies with new technology, ensure its users know how to make the most out of the tools at their disposal. Training is also necessary to bring your employees up to speed on process improvements, changes in workflows and company-wide efficiency goals.
Finally, equipping your workers with certain skills can boost productivity, thus making training a solution to certain inefficiencies.
Ensure continuous improvement
To maintain operational efficiency, operational efficiency strategies can’t stay set in stone. You should regularly review and iterate on them to enable continuous improvement.
These reviews should be based both on stakeholder feedback and collected metrics. They represent an opportunity to:
- Assess the impact of operational efficiency initiatives already in place
- Adapt them or roll them back if they don’t achieve the set objectives
- Keep up with customer expectations vis-à-vis service quality and speed
- Keep up with competitors
- Take advantage of innovative technology to improve operational efficiency
- Identify new gaps in efficiency
Solutions for financial services organizations
In financial services, improving operational efficiency often goes hand-in-hand with standardizing data, optimizing STP rates and improving reconciliation.
Data standardization
Data standardization requires centralizing all data in a single enterprise data management platform (EDMP), be it a bespoke or off-the-shelf one. This solution will then ensure the data quality, align it with the standard and distribute it downstream to other systems like a supply chain management solution.
However, data standardization doesn’t equal simply rolling out an EDMP. It should also involve:
- Establishing a clear and comprehensive data governance policy
- Ensuring data interoperability with consistent data formats across the organization (e.g., standardized country names, scales for numerical data, date formatting)
- Leveraging data profiling tools to rectify errors, detect missing data and automatically validate entries
- Introducing data quality controls and ensuring regular data maintenance
- Ensuring data security and compliance with privacy and industry-specific regulations
- Implementing a uniform approach to null value handling
As for the eternal buy vs. build debate, vendor solutions have undeniable benefits. The vendor is responsible for maintaining and upgrading them, ensuring their functionality remains cutting-edge. A vendor solution is also compliant out-of-the-box and comes with comprehensive documentation.
Straight-through processing optimization
Improving STP rates starts with identifying the cases where users still rely on manual work to send confirmations and payments. Then, you can phase in automation tools to enable STP. Keep in mind that automation needs a step-by-step approach.
An STP solution can help you:
- Automate sending PDF confirmations to customers
- Reduce human error rates
- Direct your human resources to more value-added tasks
- Speed up transaction processing, improving customer experience as a result
As for the optimization routes available, automation can take on:
- Comparing provided information against country-specific rules and regulations
- Identifying discrepancies in provided data and flagging transactions for review
- Providing detailed currency-level payment information requirements to customers
- Enabling systemic preemptive transaction validation
Reconciliation improvement
Higher reconciliation matching rates improve payment process efficiency and reduce the ops team’s workload. To improve those rates, you’ll need a comprehensive tool that can handle front office and back office (FOBO), Nostro, bridge, position, sundry and other reconciliation types.
Reconciliation inefficiencies often stem from manually comparing records because one or multiple sources contain unstructured data which is not machine friendly. If that’s your case, you need a solution to extract and structure this data. For example, an OCR tool can extract data from scanned documents, while an LLM can structure it and compare it against other records.
However, making all data machine-readable is only the first step in automating reconciliation. You also need to:
- Standardize data from multiple sources
- Implement data validation to establish its accuracy and reliability
- Integrate data sources into a single system to pull data in real time
- Define matching and exception-handling rules
That covers everything, and just to briefly summarize our extensive guide: operational efficiency is the ratio of resources used to the output produced. Improving it involves refining processes, investing in training and implementing automation. Benefits include reduced costs, fewer errors and enhanced customer and employee experience and the challenges include poor data quality, technical debt and lack of standardization. The solutions? Enterprise data management platforms and intelligent automation to optimize your processes.
Ready to tackle operational efficiency goals?
Luxoft can help you leverage technology and multiply its impact on people and processes to improve operational efficiency. Contact us to discuss how our automation solutions can give your operations an efficiency boost.