Forbes.com

Go Bigger and Bolder with Cost Transformation

Four practical guidelines can help banks balance the short- and long-term concerns in order to achieve a successful transformation.

By Peter Stumbles

First published on dezembro 28, 2016
min read


This article originally appeared on Forbes.com. Throughout the banking industry, stalled cost-control initiatives persist like a low-grade flu. Eight years since the financial crisis, banks barely meet return-on-equity (ROE) levels that surpass their cost of equity. Of the various levers to increase ROE, such as revenue growth and greater leverage, productivity has become more important given macroeconomic and regulatory constraints. How important? Globally, the top 20 banks by market capitalization need to shave off almost $50 billion, or 9% from their 2015 cost base, in order to deliver an ROE that is at least 1% above their waterline cost of equity, Bain & Company estimates. Banks thus face a big management challenge. While many have focused on streamlining and automating existing processes, few have removed some of the processes. Meanwhile, they have layered on complexity with new digital channels and additional compliance activities. Banks commonly encounter several problems as they pursue the next wave of cost savings: Failure to tackle the politics of issues that must span functions. Boundaries remain rigid among product, distribution, operations and IT groups, and the voice of the customer is faint. For processes such as obtaining a mortgage, there are too many handoffs from one function to another. Reluctance to deal with complexity. Too often, bankers focus only on how people work rather than on what work they do. Yet one of the biggest sources of cost is complexity. In the product portfolio, for example, maintaining too many legacy products and processes raises cost in the back office and confusion in the front office. An overly incremental, conservative culture that prevents real progress. Most banks resist major change and tend to structure incentives so as to limit perceived risk. The accretion of small changes, however, adds complexity in its own way. For example, the compliance staff is motivated to add more checks and balances, not remove redundant ones. Betting on digital to do it all. The business case supporting digital investments often assumes substantial savings from lower variable costs per transaction on a shared, fixed technology cost base. In practice, digital investments have often added costs, without the migration of routine transactions from the branch and contact center in sufficient volumes to offset those costs. In our work advising and analyzing banks, we have discerned four practical guidelines that can help senior leaders balance the short- and long-term concerns in order to achieve a successful transformation. Dismantle the silos. As part of a cost transformation program, most banks will have to realign their operating model so that silos get dismantled and entrenched positions get shaken up. Every organizational structure creates boundaries among departments, geographic units or lines of business, and people must collaborate across them. Realignment thus involves how people interact across these seams. A decision taken by the product group will have implications for the distribution and IT groups. Where two parts of the business don’t align, complexity abounds—and costs and customers suffer. Remove and change the nature of the work. Banks should stop some work and reexamine all remaining work to see how it could be done better. Managers should redesign processes and customer episodes to be simple and digital. That means far simpler digital interfaces for customers and staff, and simplified product suites that everyone can understand more easily. Zero-based redesign is an effective approach that resets the cost structure to align with the strategy. Zero-based redesign examines all expenses, not just incremental expenditures in obvious areas. It forces managers to justify every expense item that should be kept—which activities should be performed at what levels and frequency, and which could be better performed through streamlining, standardization, outsourcing, offshoring or automation. Apply digital technologies selectively. Targeted investments in digital can unlock the next level of productivity—and also materially improve the experience for customers. The key is to mesh the digital transition with the principle discussed above on changing the nature of the work. Otherwise, digitizing a cost-ridden, complex process will yield a cost-ridden, complex digital process. Sustain the changes to keep costs from creeping back. At a minimum, install senior-level controls, such as elevating all new spending requests to the CFO. A permanent solution, though, involves building a culture obsessed with simplicity. To change behavior accordingly, banks must introduce a mix of incentives and reinforcements that will overcome the ingrained culture of death by a thousand small vetoes. And each cost packet should be assigned to an individual who will be accountable for meeting budgets. Finally, what keeps a company on track is the behavior of executives. Employees who can see the senior team resist adding bad costs and complexity will have a greater motivation to do the right thing. With the entire organization focused on keeping out complexity and bad costs, banks raise the odds of accelerating toward their target ROE. Peter Stumbles is a partner in Bain & Company’s Financial Services practice.

This article originally appeared on Forbes.com.

Throughout the banking industry, stalled cost-control initiatives persist like a low-grade flu. Eight years since the financial crisis, banks barely meet return-on-equity (ROE) levels that surpass their cost of equity. Of the various levers to increase ROE, such as revenue growth and greater leverage, productivity has become more important given macroeconomic and regulatory constraints.

How important? Globally, the top 20 banks by market capitalization need to shave off almost $50 billion, or 9% from their 2015 cost base, in order to deliver an ROE that is at least 1% above their waterline cost of equity, Bain & Company estimates.

Banks thus face a big management challenge. While many have focused on streamlining and automating existing processes, few have removed some of the processes. Meanwhile, they have layered on complexity with new digital channels and additional compliance activities. Banks commonly encounter several problems as they pursue the next wave of cost savings:

Failure to tackle the politics of issues that must span functions. Boundaries remain rigid among product, distribution, operations and IT groups, and the voice of the customer is faint. For processes such as obtaining a mortgage, there are too many handoffs from one function to another.

Reluctance to deal with complexity. Too often, bankers focus only on how people work rather than on what work they do. Yet one of the biggest sources of cost is complexity. In the product portfolio, for example, maintaining too many legacy products and processes raises cost in the back office and confusion in the front office.

An overly incremental, conservative culture that prevents real progress. Most banks resist major change and tend to structure incentives so as to limit perceived risk. The accretion of small changes, however, adds complexity in its own way. For example, the compliance staff is motivated to add more checks and balances, not remove redundant ones.

Betting on digital to do it all. The business case supporting digital investments often assumes substantial savings from lower variable costs per transaction on a shared, fixed technology cost base. In practice, digital investments have often added costs, without the migration of routine transactions from the branch and contact center in sufficient volumes to offset those costs.

In our work advising and analyzing banks, we have discerned four practical guidelines that can help senior leaders balance the short- and long-term concerns in order to achieve a successful transformation.

Dismantle the silos. As part of a cost transformation program, most banks will have to realign their operating model so that silos get dismantled and entrenched positions get shaken up. Every organizational structure creates boundaries among departments, geographic units or lines of business, and people must collaborate across them. Realignment thus involves how people interact across these seams. A decision taken by the product group will have implications for the distribution and IT groups. Where two parts of the business don’t align, complexity abounds—and costs and customers suffer.

Remove and change the nature of the work. Banks should stop some work and reexamine all remaining work to see how it could be done better. Managers should redesign processes and customer episodes to be simple and digital. That means far simpler digital interfaces for customers and staff, and simplified product suites that everyone can understand more easily.

Zero-based redesign is an effective approach that resets the cost structure to align with the strategy. Zero-based redesign examines all expenses, not just incremental expenditures in obvious areas. It forces managers to justify every expense item that should be kept—which activities should be performed at what levels and frequency, and which could be better performed through streamlining, standardization, outsourcing, offshoring or automation.

Apply digital technologies selectively. Targeted investments in digital can unlock the next level of productivity—and also materially improve the experience for customers. The key is to mesh the digital transition with the principle discussed above on changing the nature of the work. Otherwise, digitizing a cost-ridden, complex process will yield a cost-ridden, complex digital process.

Sustain the changes to keep costs from creeping back. At a minimum, install senior-level controls, such as elevating all new spending requests to the CFO. A permanent solution, though, involves building a culture obsessed with simplicity. To change behavior accordingly, banks must introduce a mix of incentives and reinforcements that will overcome the ingrained culture of death by a thousand small vetoes. And each cost packet should be assigned to an individual who will be accountable for meeting budgets.

Finally, what keeps a company on track is the behavior of executives. Employees who can see the senior team resist adding bad costs and complexity will have a greater motivation to do the right thing. With the entire organization focused on keeping out complexity and bad costs, banks raise the odds of accelerating toward their target ROE.

Peter Stumbles is a partner in Bain & Company’s Financial Services practice.