Banks constantly battle to streamline their back-office "factories," with good cause—these facilities can be responsible for up to half of their operating costs, excluding interest. Yet whether the factories process mortgages, securities, or other products, banks tend to use the same approach across the board: process reengineering and general cost cutting are the usual favorites, but outsourcing is gaining ground. Most banks also treat the IT operations that support back-office processes as a single, separate function requiring a separate cost-cutting program. But world-class banks take a different approach. During 2001 and early 2002, we studied the relative efficiency of the back-office operations of 13 European banks as well as how 20 banks in Europe and North America handled such operations. Our two samples included various types of banks, with a wide revenue range. We found that the world-class banks manage their back-office and IT operations as a portfolio of individual factories, each demanding a unique solution depending on its characteristics. Using these findings, we developed a guide to help banks choose the right sourcing solutions.

Our first study, on the relative efficiency of the back-office operations of different banks, showed that unit-processing costs for the same product can vary...