Season 2  |  Ep. 13: What is a Hidden Factory
Podcast

Season 2 | Ep. 13: What is a Hidden Factory

March 19, 2024

"An estimated $3.1 trillion dollars per year are spent on poor data quality or the hidden data factory" - HBR Study

In a recent episode of the Risk Intel Podcast, industry veteran Shawn Ryan joined host, Ed Vincent to share invaluable insights into the hidden risks lurking within banking operations. With over 30 years of experience in financial institutions, Shawn shed light on a concept called "Hidden Factories" and exposes their implications for banks. Click below to listen to full conversation or read the summary to learn about the key takeaways from this enlightening discussion.

What is a Hidden Factory?

According to a recent Harvard Business Review (HBR) study, a hidden factory refers to any set of activities or processes within an organization that operates outside of established protocols or prescribed procedures. These activities may not be readily apparent or documented, hence the term "hidden." While not necessarily malicious in nature, hidden factories often arise due to systemic inefficiencies, gaps in technology, or reliance on outdated methods. The concept of hidden factories encompasses a wide range of activities, from manual processes to deviations from standard procedures, all of which can contribute to inefficiency, errors, and increased risk within the organization.

According to Dr. Armand Feigenbaum, author of "Total Quality Control", hidden factories can account for 20-40% of an organization's total capacity. The HBR studys cost of hidden factories, estimating $3.1 trillion dollars per year are spent on poor data quality or the ‘hidden data factory’, which they define as the “lengthy and expensive process of manually checking over poor data and making corrections to that data.”

Addressing hidden factories requires a concerted effort to identify and rectify underlying issues within the organization. This may involve implementing better technology solutions, streamlining processes, and fostering a culture of transparency and accountability. By uncovering hidden inefficiencies and aligning processes with strategic objectives, organizations can improve their overall performance, mitigate risks, and foster a more resilient and adaptive organizational culture. Ultimately, recognizing and addressing hidden factories is essential for ensuring organizational success and competitiveness in today's dynamic business environment.

What Does a Hidden Factory Look Like Inside a Bank?

Drawing from Shawn Ryan's experience and insights, a hidden factory within a bank manifests itself in various ways. Shawn's extensive background in financial institutions provides valuable context for understanding what a hidden factory might look like within a bank:

"Activities conducted outside of established procedures may go unnoticed, potentially exposing the bank to financial losses or regulatory scrutiny."
  1. Unplanned Inefficiencies: Hidden factories in banks often involve unplanned activities or workarounds that occur outside of prescribed procedures. These inefficiencies can include manual processes, reliance on outdated technology, or ad hoc methods to address operational challenges.
  2. Technology Gaps: Banks may encounter hidden factories due to gaps in technology infrastructure or reliance on outdated systems. For example, using legacy software or manual data entry processes can create bottlenecks and increase the risk of errors or data breaches.
  3. Cultural and Strategic Misalignment: Hidden factories can undermine the bank's culture and strategic objectives by promoting behaviors that are inconsistent with organizational values or goals. For example, employees may prioritize speed over accuracy or engage in shortcuts to meet performance targets, compromising long-term sustainability and reputation.
  4. Deviation from Top-of-House Expectations: Hidden factories represent a deviation from top-of-house expectations, reflecting a disconnect between stated organizational norms and actual practices. This misalignment can erode trust and confidence among stakeholders and hinder the bank's ability to achieve its strategic objectives.

Addressing these hidden inefficiencies requires a comprehensive approach focused on improving processes, enhancing technology infrastructure, and fostering a culture of transparency and accountability within the bank.

What are the Risks Associated With Hidden Factories Inside Banks?

Hidden factories within a bank pose various risks that can undermine operational efficiency, increase regulatory compliance issues, and jeopardize financial stability. Some examples include...

  • Operational Inefficiencies: Hidden factories often involve manual processes, workarounds, or outdated technology, leading to inefficiencies in operations. These inefficiencies can result in delays, errors, and increased operational costs, ultimately impacting the bank's ability to deliver services effectively and meet customer expectations.
  • Compliance Violations: Activities conducted outside of established procedures within hidden factories can increase the risk of regulatory compliance violations. Failure to adhere to regulatory requirements, such as anti-money laundering (AML) regulations or data privacy laws, can result in fines, legal sanctions, and reputational damage for the bank.
  • Financial Losses: Errors or inefficiencies resulting from hidden factories can lead to financial losses for the bank. For example, incorrect data entry or processing errors may result in misallocated funds, erroneous transactions, or reconciliation discrepancies, impacting the bank's financial position and profitability.
  • Reputational Damage: Hidden factories can erode customer trust and confidence in the bank's ability to safeguard their interests and deliver quality services. Instances of operational errors, compliance violations, or data breaches can tarnish the bank's reputation, leading to customer attrition, negative publicity, and loss of market share.
  • Cultural and Organizational Risks: Hidden factories may foster a culture of secrecy, inefficiency, and non-compliance within the bank. Employees may resort to shortcuts or workarounds to meet performance targets, compromising ethical standards and organizational values. This cultural erosion can hinder collaboration, innovation, and employee morale within the bank.

Overall, hidden factories pose significant risks to banks, including operational inefficiencies, compliance violations, financial losses, reputational damage, cultural erosion, and strategic misalignment. Identifying and addressing hidden inefficiencies is essential for banks to mitigate these risks, enhance operational resilience, and safeguard their long-term viability in the financial marketplace.

Stay tuned for future episodes on this topic as we go into detail around:

  • What does a hidden factory look like inside a bank?
  • How to uncover hidden factories
  • Risks associated with Hidden Factories at a bank
  • How to identify and mitigate hidden issues
  • Examples of how banks are leveraging technology to solve for inefficiencies caused by hidden factories

Contact us today to learn how our solutions can help your bank mitigate hidden factory risks and optimize operational performance.

References:

https://hbr.org/1985/09/the-hidden-factory

https://www.ease.io/blog/what-is-the-hidden-factory-costing-your-organization/

https://mitsloan.mit.edu/ideas-made-to-matter/how-to-find-and-fix-hidden-factories

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