I’ve worked with banks for over 25 years, and their cost-cutting cycle is becoming depressingly familiar. The external environment deteriorates, profit plans are missed, shareholders get nervous, and a decree comes from the c-suite to cut costs. In response, obvious fat is trimmed, management is thinned through a spans-and-layers exercise, external contracts are renegotiated and sofa cushions are lifted to find some loose change. Everyone breathes a sigh of relief and victory is declared when the cost-income ratio (CIR) drops by a few percentage points. But soon complexity grows back, business leaders lose focus, bad habits reassert themselves and efficiency entropy sets in. Before you know it, the CEO and CFO are once again issuing cost decrees and the cycle begins again.

Einstein famously said that insanity was repeating the same actions and expecting different results. In banking’s new normal of long and low interest rates, compressed fee income, increased capital and mounting compliance costs, the approach to efficiency needs a fundamental rethink. Periodically attacking costs with a toolbox full of blunt instruments needs to evolve to an approach where there is a far tighter integration between business strategy and efficiency, and where those efficiency gains appear continuously and bottom-up from a more agile and digital business model. In a world where digital challenger banks have CIRs in the high 20s and the best traditional banks are in the mid-30s, cost transformation rather than incremental improvement is required—but it remains rare in the industry.

Read the report.
Read the report.

A recent Accenture survey shows that only 30 percent of banks prioritize the reinvestment of cost savings to drive strategic priorities and less than one-quarter of banks have a clear process to funnel cost savings into enterprise-level growth initiatives.[1] Rather than align around a strategic objective and then have improved efficiency be an integral part of the journey, the old and the new worlds are often separate economic systems. This means the impact of efficiency gains is diluted and fragmented rather than being used to drive forward-looking business model transformation. One explanation for this disconnect is that only 18 percent of executives have complete confidence in their bank’s investment and growth priorities; unsurprisingly, they may resist having savings in their areas be used to fund business initiatives they are skeptical about. So, one priority is far tighter linkage of efficiency programs with the broader enterprise strategy agenda.

A second priority is to embed continuous improvement in the bank’s DNA rather than relying on periodic cost programs. A key Fintech lesson is that agile operating models allow continuous improvement at pace and the delivery of banking services at far lower cost. However, our research shows that only 42 percent of executives strongly agree that digital strategies are enablers of advanced operating models, indicating that ‘old world’ thinking still dominates in many banks. This translates to only 28 percent of banks saying they have flexible operating models that consistently adapt to deliver improved efficiency[2].

If banks are to break out of the insanity cycle of blunt instrument cost reduction they need to do two things well: First, they need to tightly integrate efficiency and growth to create a virtuous circle of self-funding value creation. Second, they need to build an operating model and digital DNA that generates those efficiency gains as part of business as usual, not as the result of a periodic top-down process. Failure to do so will leave banks eking out marginal CIR gains while the industry transforms around them in a way that undermines their long-term future.

I invite you to read our full report: Converting Cost to Growth: Why Strategic Cost Reduction Matters in Banking.

[1] Accenture Increasing Agility to Fuel Growth and Competitiveness 2016

[2] Accenture Increasing Agility to Fuel Growth and Competitiveness 2016

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