In the first part of this series, we talked about how financial services organizations, especially the larger industry incumbents, are continuing to make cost reduction a priority in the face of growing market pressures and challenges from new entrants. However, market leaders need to take a more sustainable approach to these methods, one that combines short-term tactical levers and long-term strategic initiatives. 

It is understandable that in the aftermath of the 2008 financial crisis, many in the industry have turned to rapid cost-cutting measures. Indeed for many, this has been essential for organization survival and to create space for the required investments in other areas.

There is a way to make these short-term solutions more tactical in order to create momentum for longer-term cost reduction goals.

The “Diet”

These are tactical interventions that typically target specific areas of organizations to remove cost quickly by using a few tried and trusted levers:

  • Reduce cost of compliance. Industry analysis shows that 23 percent of FS organizations are now spending more than five percent of their net income on compliance. It’s important that organizations better understand, control and streamline these investments.
  • Optimize sourcing processes and reduce external spend. Evaluate third-party relationships and implement tighter control on fixed and variable cost bases. Target variable costs, such as salaries and advertising first, then move to cutting fixed costs, such as property and utilities.
  • Redesign the organization. Streamline and resize the organizational structure through FTE savings, efficiencies of scale, and a simpler operating model and strategic agility.
  • Address the legacy organization, infrastructure and process. Identify quick wins within the existing technology architecture to help remove cost rapidly, before making more investments in legacy components. 

However, tactical cost reduction alone is a zero sum game and ultimately weakens a business. After an initial “Diet” it’s important to maintain a “Healthy Lifestyle”. 

The “Healthy Lifestyle”

Once a financial institution secures momentum and capital from shorter-term quick wins, it’s time to shift the focus to long-term initiatives that can transform the entire business to new way of operating by following these steps:

  • Create a zero-based organization. Evaluate every business unit, team and individual on the basis of value creation or value creation support. The operational budget must be justified on a line-by-line basis, not just by comparing changes in its make-up from the previous year. This philosophy and culture is about spending every dollar like it was your own and challenging costs in a healthy way – it has significant traction in other industries such as FMCG and is now being applied in financial services.
  • Relocate and optimize footprint. Move work offshore or to other low-cost locations as rapidly as possible while maintaining the stability of core services. This is especially relevant as work is digitized and physical location becomes less relevant, or as markets shift east.
  • Standardize shared-services model. Integrate front-to-middle and back-office activities across multiple processes and functions into meaningful end-to-end services with the customer experience at the center. Combine previously siloed capabilities (e.g. data, analytics, and digital) to create centralized service hubs that serve more than just one business unit or geography. Technologies such as ServiceNow are enabling this.
  • Leverage robotics and process automation.Deploying paperless, automated processes across all customer interactions has the potential to all but replace time-consuming and expensive manual activities and deliver the experience that customers expect. Other key benefits include reduction of processing costs, greater visibility and auditability of transactions, increased productivity with the potential to operate 24/7, and effective management of peaks in demand.
  • Develop industry utilities. Embrace industry-wide collaborative approaches that have given rise to selected utilities. As well as driving cost savings, industry utilities minimize the duplication of effort, share the cost of services across different areas of the business, reduce the amount of fixed costs associated with the utility services, and allow firms to shift existing permanent resources to areas of greater value
  • Consider a liquid workforce. Evaluate which skill sets are critical and must be developed within internal workforces, and which tasks can be delegated to an extended workforce of contractors, service organisations and networks. Create a fluid workforce organized around capabilities as opposed to rigid organizational hierarchies.

To learn more, register to download the report: Piling off the Pounds in Financial Services

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