Banking on cost management
Changes in culture needed to deliver results
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.”