Road to revolution
29 Jun 09
Banks looking to ensure their long-term success need to embrace not only cost cutting, but also a more radical change in culture
by Trevor Hatton and Scott Rutherford
The credit crunch followed by the economic downturn represents a defining moment for Britain’s banking industry. Actions being taken now will not only determine banks’ ability to survive, but will also shape their future success.
The winners will be simplified organisations with high degrees of automation and customer service. They will enjoy greater efficiency and expanded market share and thereby deliver increased shareholder value. The under- performing banks will see their market share quickly eroded and have no option but to be absorbed by larger players.
Even for the winners, the road ahead will not be a smooth one. Achieving high performance as a low-cost, agile bank will require vigilance and a cultural revolution that must be ongoing. It will be necessary to break down silos between units and to deal with attitudes such as “it’s been tried before and didn’t work”.
Today’s reality means that banks have entered uncharted territory after the extraordinarily benign environment of the past few years, which allowed them to grow revenue substantially, not least through increased lending to individuals and businesses. Most banks in Britain seized on these opportunities.
It is now clear that the cycle of easy credit and growth in lending masked underlying problems in bank structures and operations. Many UK banks built up highly disparate and complex operating models. This resulted in high cost bases often with “pockets” of cost scattered throughout the organisation. Structures became inflexible and contained embedded duplication and diseconomies of scale.
Given the challenges of the current credit environment and the combination of losses on assets, slowing economy, rising inflation and the risk of increased defaults, the imperative to solve these problems and reduce costs is urgent.
The new reality – and its uncertainties – means cost reduction must be approached in a more coherent and strategic way than ever before. Banks that slash and burn may well survive the slowdown but could be critically weakened when the upturn comes and the focus shifts back to growth. Knee-jerk approaches based on sharing the pain across the organisation are no longer enough and risk cutting the bank’s muscle as well as its fat.
Instead, they need to take a structured approach to identify their cost-cutting opportunities and resulting returns across their operations. They should then adopt a strategic approach to exploit these in a planned and co-ordinated way while reinvesting savings in further sustainable cost reductions.
Currently, UK banks have a relatively strong short-term earnings momentum but the outlook remains highly uncertain. This gives them a small window of opportunity to tackle the size and flexibility of their cost base.
Our firm, Accenture, believes that banks that take this strategic approach could target up to a 20 per cent reduction in their cost bases. Only this will enable a bank to weather the credit crunch while improving its future potential for growth and high performance efficiency in the years to come.
The first step is to take a strategic view of cost across the organisation. Short-term winners will be those who start taking action now. Long-term winners will be those who also stabilise and build for the future by adopting flexible operating models to accommodate threats and opportunities as they emerge.
To do this, they must confront and unravel the complexity in their business and at the same time establish a clear and competitive edge among their target customers. They will need to execute all this without disrupting “business as usual”. But with so many challenges on all fronts, senior banking executives must be wondering not just how to do it, but also where to start?
Through our ongoing work with leaders in the banking industry, Accenture has developed a methodology that enables a bank to reduce costs and build greater flexibility by industrialising its operations. The key is to approach the challenge as a game of two halves: analysis and execution.
Ultimately, in re-engineering a bank, the ability to identify cost reduction opportunities is less important than executing those opportunities well.
The analysis phase consists of three steps: the first is a diagnostic that validates and identifies areas of opportunity and maps them to the current operating model.
Next is the solution stage where the high-level cost/benefits outcome for each initiative is quantified. This means that a prioritised list of cost reduction options can be created, complete with business cases.
The third stage of the analysis is the creation of a road map where the approach and outcome for each initiative is finalised and sequenced for implementation. The execution phase can now proceed at speed.
In many cases, the scale of change required combined with the pressures many organisations are under, and the scrutiny of investors, media and regulators make for a challenging execution environment. These special challenges require banks to prepare for and deliver their change programmes to the highest standard, which encompasses five key pre-requisites for success:
• Absolute executive buy-in to clear financial objectives and operating model
• An incontestable fact base and cost baseline
• Ongoing transparency and reporting of cost and benefits hardwired to financial plans
• Clear alignment with existing investment portfolio
• Robust programme structure and design authority.
Looking back, experience shows that the banks that emerged most successfully from past recessions were not necessarily those that made the deepest cuts in their cost base. Instead, they focused on optimising their cost base and investing strategically to ensure they would be better positioned for growth as they entered the upswing of the cycle.
What kinds of cost-saving solutions could easily be adopted by banks? Here are just a couple of examples of document management and profit recovery:
Banks generate millions of internal and external documents each year, frequently spending hundreds of millions of pounds on customer communications. In many cases, this supply chain is complex and relatively inefficient with multiple separate internal and external suppliers.
This complexity and inefficiency is driven by fragmented spend across business units and a lack of deep insight into the workings of the supply chain.
Working with an outsourced document management provider, banks could streamline the end-to-end supply chain by standardising processes, offering integrated solutions across all business units and consolidating suppliers.
Accenture’s experience of working with organisations to reduce costs in this area helped the Royal Mail to transform their document supply chain and create a new business that is set to change the document management industry.
The iRed Partnership, Royal Mail’s document management subsidiary, is already working with one UK bank to achieve cost savings of £30 million.
We have also found that despite significant systems investment, many large organisations overpay suppliers and incorrectly compute allowances in the procurement process. Profit recovery audits uncover an estimated $5 billion-plus savings each year in the US.
Banks, with significant amounts of external spend, are prime candidates to benefit from profit recovery. Accenture Profit Recovery and Analytics works with clients to analyse their procurement and payment data to help prevent, detect and recover lost profits or mistaken payments that can result from human error or system integration issues.
In recent work across many industries, including financial services, clients have enjoyed recovery rates of up to 0.27 per cent of their third party spend – potentially several millions of pounds to the UK’s largest financial institutions. Also, our business analytics could identify savings of up to 20 per cent within the procure-to-pay process.
The agenda for success will require a high degree of collaboration across the industry and Scotland, as a world-class financial hub, is well placed to do this. It is home to a large experienced financial services workforce providing significant opportunities to in-source work to Scotland from the rest of the UK and beyond. That, coupled with its capacity for innovation, positions Scotland’s financial industry to help shape the future of banking globally.
TREVOR HATTON is managing director and SCOTT RUTHERFORD is finance & performance management lead, with Accenture Scotland.