We've heard it before. The market drops, quarterly profits sink, and a major bank announces it will take out a billion dollars in costs by restructuring the business and reducing staff.
The market loves these pronouncements. More dividends! Stock buy-backs! But it’s merely a status quo move; once there’s a rebound, staff levels inch up and the bank's cost basis rises again.
Typically, the financial services industry addresses market cycles with short-term, across-the-board cost cuts, often based on industry benchmarking. But with the growing burden of regulatory requirements, low industry innovation, and small efficient upstarts able to manage the same profit levels as mega-players, the industry's mindset must change.
In an increasingly commoditized market, differentiation boils down to customer pricing and the quality of the customer experience—and achieving that differentiation means reducing processing costs and improving productivity. For inspiration, financial services executives need look no further than manufacturing and how successful manufacturers handle their supply chains.
Knowing the "cost per unit" is in manufacturing's DNA. By understanding the cost of each element of the production process of, say, a $10 pair of sneakers, a manufacturer can tinker with supply chain components and use alternative delivery approaches to drive efficiency and productivity to reduce cost and increase profit.
Financial services executives should emulate this by looking at their processes as a series of supply chains—that is, by focusing on the microeconomics.
Consider a bank's loan origination activities. At the branch level, there is a cost for employees to help customers complete loan applications and send them to the middle office. At the mid-office there are costs for loan decisioning and on-boarding, or booking the loan. Total all of the process components and their costs, and the average cost to set up a loan may be $80. This "unit of work" will help you accurately assess options to reduce the cost to, say, $55 or $60. Options could range from cutting staff or combining similar units into a shared services center, to modifying work processes or adding automating technology.
Or consider post-trade processing in capital markets. If industry benchmarks say you're spending $70 million more than your competition, the traditional fix would be across-the-board staff cuts. But you still wouldn't know where excess spending is coming from to create sustainable improvements.
Delving into the process components of each step in post-trade processing might reveal that trade exceptions—such as dually listed securities—comprise an unusually high percentage of the work. What are your options? A tech upgrade? Process modification and redeployment of full-time employees? Distributed execution offshore? You can assess each option against the goal of reducing exceptions, which in turn will bring your costs in line.
Your first step is identifying the trends and causes that are driving escalated costs. With the big picture established, you'll then create unit-of-work metrics for each of your major processes and their components. Distinguish between pure knowledge steps—say, assessing risk—and output steps, such as validating customer information. Remember that knowledge and process steps are typically connected. For example, while making a decision on a loan is a knowledge step, deriving the information needed to make the decision is a process step that can be made more efficient.
At this point, you should see clear areas for change. But before you start tweaking processes, consider:
- What processes are the major drivers of cost and productivity?
- Is your operation's size appropriate for the transaction volume and service delivery processes?
- Are expensive specialized knowledge-based processes distinguishable from inexpensive output-based processes?
- Where have unit costs increased or productivity decreased in the existing processes?
- Where have resources been increased in the processes?
- Have labor and non-labor costs increased? Are workers less productive?