With the challenges financial institutions face these days, it’s no wonder many banking executives are focusing intently on cutting costs and “right-sizing” their operations. But a relentless focus on cost-cutting alone is not a formula for long-term success.
What’s needed is a balanced approach—one that enables an institution to improve operating efficiency and upgrade its capabilities to serve customers and respond to market trends.
The following are six strategic areas where many of today’s industry leaders are focusing their efforts.
Business realignment: The basic premise is to exit business lines that have high costs and low margins and expand those lines that are inherently more cost-effective and profitable. Efficient institutions take a robust approach to strategic planning, assessing the minimum commitment of resources needed to compete in a particular line of business and identifying opportunities to differentiate themselves from competitors.
Channel optimization: The goal is to create a cost-effective combination of channels that is adapted to each bank’s target customer base. This strategy is encouraging some fairly aggressive selling and buying of branches as banks adjust their geographic presence. Many institutions also are significantly reconfiguring duties and responsibilities in the branches and employing new metrics for analyzing branch performance and value.
Again, there is no one-size-fits-all approach. Some banks assertively promote electronic account openings, remote deposit and accounts that are designed to be virtually paperless. Other banks—often those with large commercial customers or wealth management services—pursue a fundamentally different approach, focusing on increasing revenues through personal service with a relationship manager and support team assigned to each qualifying account.
Process costs: The opportunity to improve process costs often is underappreciated in financial institutions, in part because it involves taking a manufacturing view of business processes. The goal is to reduce the unit cost-to-value ratio of each activity or transaction—such as the cost of opening an account or creating a loan document package. Improvement involves workflow analysis, process mapping, benchmarking, continuous performance monitoring, and ultimately rethinking back-office processes.
Staff productivity: Improving staff productivity reduces costs by enabling banks to handle more transactions and greater volumes of activity with the same number of personnel. While workflow technology certainly can improve productivity, improvement is not dependent on technology alone. Some of the most significant opportunities come from established performance management techniques, such as clearly defined expectations and scorecards, improved motivation and rewards systems and better training and supervision.
Other useful tools include making performance metrics visible in support of “line-of-sight” incentives—bonuses based on individual or team performance, not just institutional results. Many institutions also find success in redefining job roles, offering more flexible work arrangements and outsourcing specialized activities.
Technology and automation: Technology can have an enterprise-wide impact on processes. The overarching goal is twofold: 1) reduce the time that’s spent finding information and 2) use automated business rules to move work through the institution more quickly and efficiently.
Using imaged documents from the beginning of the process can minimize delay and allow parallel processing of documents so that several steps can be completed simultaneously. In many instances, using signature pads and online processes can eliminate paper altogether.
Vendor relationships: Improved vendor management does not mean simply pressuring vendors to lower their prices. Rather, it is focused on deriving the greatest possible value from a vendor relationship. Important tools include using service-level agreements and vendor scorecards to monitor performance issues.
Other basic cost-cutting techniques include consolidating vendors and benchmarking costs against comparable services in the market. Bear in mind that vendor relationships can affect regulators’ view of the institution’s risk profile.
Instilling a Culture That Values Efficiency
Looking beyond the six specific cost-saving strategies discussed here, it’s important to recognize that long-term cost effective operations are impossible to achieve without a corporate culture that supports and values it. This requires a visible commitment from top management to balance value and cost, reduce unnecessary expenditures, and implement metrics and accountability that encourage individual attention to cost reduction and efficiency.