Bank­ing on cost man­age­ment

Changes in cul­ture needed to de­liver re­sults

The Herald Business - - Professional Brief -

The most suc­cess­ful cost-cut­ting ex­er­cises in Bri­tish bank­ing tend to be achieved by com­pa­nies which take a strate­gic approach to the is­sue. Mod­ern bank­ing is in­creas­ingly ob­sessed with driv­ing down costs and this be­comes even more crit­i­cal when the busi­ness cy­cle is turn­ing and prof­its risk be­ing eroded by bad debts.

In re­cent years, lead­ing full ser­vice banks have re­lent­lessly driven down their costs as a pro­por­tion of in­come to around 40%, while the na­tion’s most ef­fi­cient bank, the mono­line mort­gage and sav­ings provider North­ern Rock, has got just be­low 30%. How­ever, a more strate­gic approach seeks not only to re­duce costs but to do so in the con­text of im­prov­ing pro­cesses, mak­ing com­pa­nies more ef­fec­tive and leav­ing them more f it for pur­pose.

Man­age­ment needs a strong strateg ic vi­sion, the courage to take tough de­ci­sions and the sin­gle-mind­ed­ness to em­bed cost re­duc­tion in the cor­po­rate fab­ric, in­cen­tivis­ing man­agers and em­ploy­ees to con­stantly seek the most eff icient way of op­er­at­ing.

Tech­nol­ogy and glob­al­i­sa­tion present fresh op­por­tu­ni­ties for banks to be­come more ef­fi­cient.

Legacy sys­tems can be mi­grated on to straight-through pro­cess­ing plat­forms, while myr­iad op­er­a­tions such as sep­a­rate pay­roll and ac­count­ing sys­tems for dif­fer­ent coun­tries and de­part­ments can be re­or­gan­ised to ben­e­fit from shared ser­vices.

How­ever, a ma­jor ob­sta­cle is the fact that the best cat­a­lyst to re­duce costs is of­ten a com­pelling event such as a ma­jor merger. With­out such a cat­a­lyst, it is more dif­fi­cult to at­tack in­ef­fi­cient prac­tices and pro­ce­dures within or­gan­i­sa­tions.

Tac­ti­cal cost re­duc­tions are of­ten short-term in na­ture and with­out care­ful man­age­ment costs creep back up again. Cost re­duc­tion be­comes a cycli­cal af­fair with ex­penses ris­ing again be­tween purges.

The ques­tion is what dis­tin­guishes the banks with the low­est cost-in­come ra­tios from their higher-cost peers. Why can’t banks with cost-in­come ra­tios well above 40%, or even 50%, bring their ra­tios in line with the lead­ers?

But hav­ing al­ready ra­tio­nalised branches and call cen­tres, stream­lined pro­cesses and won tech­no­log­i­cal im­prove­ments, can Bri­tain’s banks find new ways of im­prov­ing their ef­fi­ciency? Or do they risk drift­ing in an eco­nomic en­vi­ron­ment where it is also likely to be­come more dif­fi­cult to grow the top line?

One de­vel­op­ment may be that, with the lower-cost banks find­ing it harder to re­duce costs fur­ther, the out­liers will be­gin to catch up. Lloyds TSB has been us­ing the Six Sigma pro­duc­tiv­ity and per­for­mance met­rics pop­u­larised by Gen­eral Elec­tric.

And an­a­lysts will be closely ex­am­in­ing the per­for­mance of Abbey un­der its new Span­ish own­ers. Banco San­tander Cen­tral His­pano is one of the most ef­fi­cient banks in Spain and has achieved good cost sav­ings from an op­er­a­tional and tech­no­log­i­cal plat­form that it is now in­tro­duc­ing to its Bri­tish pur­chase.

Ul­ti­mately, how­ever, with man­age­ment changes, ini­tia­tives come and go and the cycli­cal na­ture of bank­ing means that short­term, cost-fo­cused pro­grammes tend to stag­nate af­ter achiev­ing their ini­tial goals.

Banks with a strate­gic vi­sion to be the low­est-cost provider take a longer-term approach, build­ing an ethos and cul­ture in which ev­ery­body in the or­gan­i­sa­tion takes re­spon­si­bil­ity for ef­fi­cient and ef­fec­tive use of re­sources.

It is the dif­fer­ence be­tween good and bad cost re­duc­tion and it may de­ter­mine who are the win­ners and losers out on the high streets.”

Con­tentsup­plied­byRichardFlinn,apart­ner in­con­sultin­gatDeloitte.

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