Announcer: Hello, I’m  and I’ll be your host for this edition of The Point Podcast Series  The Point is a regular publication featuring news and perspectives from Accenture’s financial services industry specialists. Welcome to today’s topic on cost reduction.  Managing Director for Global Banking, offers his perspective on how financial services companies can best approach cost optimization in a downturn. Listen closely as Noel outlines the four key factors that can position companies for future growth and profitability.

n the first half of this decade, financial institutions operated in an environment of low interest rates, rising home prices and an overall expanding global economy—all of which created opportunities to generate substantial growth and helped most financial services companies improve their cost-to-income ratios.

Today, weak to negative economic growth and the continuing fallout from the credit crisis have put a damper on the financial industry, to put it mildly. North American and Western European financial institutions, in particular, are under the most severe liquidity pressures. And overall, few companies have escaped the major consequence of the current economic downturn: the far higher cost of capital and the significant increase in funding costs.

Companies have made efforts to stem the tide of the current economic downturn by raising capital and making dividend cuts. But these have not been entirely successful. Increasingly, financial services institutions are turning to internal cost savings, including headcount reductions. However, it is important to note that traditional cost reduction strategies that worked in previous slowdowns, such as in the early 2000s, are being compromised today by uncertainty as to when the bottom of this downturn will be reached.

Companies seeking high performance must find the right balance between painful but necessary short-term cuts—such as headcount reductions—and longer-term strategic imperatives such as process improvements and the outsourcing of non-core functions. And if done correctly, companies can lower overall costs by up to 20 percent without compromising their organizational strength and capabilities which help them gain an overall competitive advantage once the market turns.

Timing is always an issue. The key here is for financial institutions to evaluate their business model now against scenarios ranging from best to worst, and to act before the full impact of the credit crunch plays itself out.

The long-term winners will be those that begin stabilizing and building for the future by adopting flexible operating models to accommodate threats and opportunities as they emerge.

Sometimes cost-cutting opportunities seem counterintuitive. For example, rolling out new products while the competition is retrenching might sound like a sensible business strategy. But in a weak economy, investing in new products can add unwanted complexities without generating sufficient additional profits.

For some financial services companies, it may make more sense to shrink product portfolios and channel the savings into more strategic, longer-term programs such as credit risk management.

Investors want action and layoffs are often followed by an up tick in stock price based on the anticipation of immediate bottom-line savings. However, financial institutions that have emerged most successfully from past downturns were not necessarily those making the deepest cost cuts. Instead, many winners focused on optimizing their cost base.

By funding these longer-term initiatives, the company can enjoy a far greater uplift in across-the-board benefits and its competitive advantage in the years that follow.

For example, to maintain competitiveness over the long term, financial institutions need to move progressively from a substantially fixed-cost base to a more variable cost base tomorrow. This provides the organization with the flexibility to “dial up” or “dial down” its cost and capacity levels in line with market conditions and changing goals. Indeed, many financial institutions are already embracing and implementing strategic industrialization through a selective mix of alliances and outsourcing.

Given the uncertainty and instability created by the downturn, not to mention the increasing pace of change in today’s global marketplace, financial companies may find it hard to embrace, much less execute a strategic cost-transformation program and do so at speed. But achieving high performance and competitive differentiation does not come without bold strategic thinking or without the leadership and effort necessary to make that thinking become reality.

Based on our extensive work with a wide range of leading financial services companies, we’ve seen four recurring challenges organizations must address to be successful.

The first challenge lies with traditional organizational silos, which tend to look out for themselves during economically difficult times, but must be broken down to unlock the company’s full potential.

Second, many companies tend to retain memories of failed initiatives past, creating a kind of "Been there, done that” attitude among senior managers that makes it difficult to get a new effort off the ground.

A third challenge is present even in the best of times: is balancing business as usual with new initiatives without disrupting daily operations.

Finally, securing the resources to fund the major structural improvements necessary to achieve a sustainable, long-term payback can be a struggle when immediate cash conservation is at the top of everyone’s agenda.

There are four key factors to contribute to the success of any program you undertake.

First, you have to make sure senior management fully supports the initiative, and that the objectives and methodology behind it are both clear and measurable.

Next, stay grounded in facts, establishing the most accurate cost baseline possible using high-quality data.

Then you have to make it a priority to communicate the costs and benefits of the plan as they arise, keeping everyone informed and aware.

Finally, make sure your cost-reduction programs are aligned with your existing investment portfolio and supported by a clearly established authority and structure.

In view, winners will be simplified organizations, with varied sourcing models, increased automation and customer service targeted to retention, acquisition and profitability. As they become more efficient, these companies can increase their market share, which can, in turn, lead to improved shareholder returns.