Sustainable growth through strategic cost management

As banks reach the point of diminishing returns with their ongoing cost reduction initiatives, a new approach promises to accelerate savings while enabling investment in growth, flexibility, and customer centricity.

“An emerging focus on a more balanced, sustainable approach to cost reduction will be critical to banks’ long-term growth and high performance”
-Matt Podrebarac, Accenture North American Banking Finance & Strategic Cost Management Lead

With soft markets, tighter credit and more burdensome regulations all bearing down on banks in recent years, it's not surprising that most banks have focused on implementing wide-ranging cost reductions. However, according to recent Accenture research, North American bank executives believe that such cost-cutting initiatives are falling short. In fact, in some cases costs remain as much as 40 percent too high, and some cost-cutting is hampering long-term growth and financial performance.

The time has come for banks to take a step back from across-the-board efforts to cut costs.  Instead, they must devise new strategies that balance their ongoing need for lower costs with the longer-term growth and performance goals of the business.

Ongoing cost pressures continue to challenge banks

Accenture recently surveyed 1,405 executives, including 500 at financial institutions, to understand how they have approached cost management in the past year and what their plans are for the coming 12 months.  North American banking executives indicated they have been pursuing significant cost reductions and that these efforts will continue at a pace exceeding most other industries in the coming year.  However, many executives also suggested their current approach to cost cutting might not be sustainable or have the desired long-term effect.

Looking to the future, at least 65 percent of bank executives said they will initiate further cost management actions, which is much higher than respondents from other industries.  However, the motivation for upcoming cost management actions appears to be shifting.  Seventy percent of banking executives said that future cost reductions will aim to enhance profitability rather than simply help them survive the economic downturn, possibly signaling renewed favor for long-term, strategic actions over short-term tactical maneuvers (Figure 1).  This is good news, indeed, as banking executives told us that the cost reductions already made in areas such as IT, customer service, and R&D actually have harmed more than helped their achievement of long-term business goals (Figure 2).

Tapping the present to fund the future

Accenture believes this emerging focus on a more balanced, sustainable approach to cost reduction will be critical to banks' long-term growth and high performance.  This approach, which we call strategic cost management, should incorporate three key components. 

First are the short-term, tactical cost cuts already ongoing at many banks, such as headcount reduction must be balanced with more strategic, longer-term initiatives.  In addition, focusing on areas such as procurement often can generate savings rapidly.  The savings generated by these actions should, in turn, be reinvested in ongoing strategic cost management and growth initiatives. 

Second, to help guide that reinvestment, banks should develop a proactive cost governance model that more closely links cost reductions to corporate strategy.  Such a model should include metrics that ensure cost management programs are aligned with larger business goals, and it should encourage a renewed organizational focus on efficiency, cost effectiveness, and continuous improvement. 

Finally, with resources freed up and a model in place to nurture sustainable cost reduction, banks should invest in operating model and business process changes that will sustain cost reductions and help support growth. For instance, cost savings can be reinvested in simpler, componentized product structures, which can be packaged into more tailored customer offerings while reducing cost and time to market. Banks also can invest their savings in operating model enhancements that boost responsiveness to changing customer demands, or that move the cost structure from fixed to variable through outsourcing and off-shoring.  Indeed, strategic cost management can help banks make a number of fundamental changes that can substantially reduce their costs while improving their customer responsiveness and financial performance.  Such changes include the following:

Creating a lean organizational structure to minimize management layers, clearly define roles and make extensive use of shared services.

Rationalize the bank's product portfolio so that it offers standardized components and reusable product features that can be grouped into tailored customer offerings that increase profitability.

Optimize the operating model architecture by moving progressively from a high fixed-cost base to a variable lower-cost base using off shoring and outsourcing.

Streamline and automate processes, encouraging a culture of end-to-end process ownership and continuous improvement.

Deploy a multi-channel mix of capabilities for an effective customer experience that delivers satisfying self-service options for simple sale and service transactions while focusing the right amount and quality of professional resources on interactions with the most profitable customers.

Modernize and simplify the technical architecture to implement capabilities that extract intelligence from data analytics to enhance customer targeting and service, capitalize on the mobile revolution and revamp the bank's capacity for managing risk.

Finding a new balance

The need for banks to aggressively manage their costs is here to stay.  The question is what can be done to ensure that cost-reduction initiatives continue to find traction while supporting profitable growth and customer responsiveness.  By carefully integrating and balancing long-term and short-term cost reduction programs, and by embedding the right governance to instill the cultural and organizational changes required to make them stick, banks can aggressively drive down costs while investing in the capabilities necessary to drive growth and high performance.

Learn more about the cost management survey results or listen to a podcast with Matt Podrebarac discussing how banks can use strategic cost management as a catalyst for growth.

Biography

Matt Podrebarac leads Accenture's North American Banking Finance and Strategic Cost Management practice. He has 25 years of experience in both management consulting and outsourcing. Matt advises senior executives of multinational and large organizations on cost management programs including finance organization strategy, streamlining financial and procurement processes, shared services strategy, outsourcing and enterprise performance management.