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
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
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
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
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
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