Introducing 24 Cost Cutting Practices
for The Banking Industry to Region
December | 2008
Introducing 24 Cost Cutting Practices for The Banking Industry to
As almost a matter of life and death, just to stay afloat, many financial
institutions around the world are biting off big chunks of cost items from their
income statements. For example, just recently, Lloyds TSB revealed its plans to
cut £1.5 billion of its costs by 2011, to make its after-merger organization
sustainable in one of the most challenging financial environments ever. No one
company is excluded from the crisis…look at any firm –Bank of America, Citibank,
Deutsche Bank – all are taking drastic measures to keep playing in this game of
survival of the fittest…
At the heart of a successful cost cutting initiative is the good old 80-20 Pareto
principle… 80% of cost cuttings can come from 20% of items you control… This
means that companies should start with a detailed analysis and understanding of
their cost items and opportunities for improvement, before launching draconian
cost cutting measures. Bank of America recently suffered from rumors about
soup, crackers, and hand soap no longer being supplied to employees. Whether
true or not, Bank of America has already received heat and bad publicity for
trying to apply cost cutting measures that ultimately would have minimal impact
on the bottom line.
Forte Consultancy Group has key guidelines it adheres to and will apply in the
region in engagements in the coming months in the region…these guidelines are
targeted at all main areas of the organization, which need to all work together in
applying cost cutting efforts to the company.
Decrease Cost of Decrease Cost of
Marketing and Sales and
Activities Service Activities
Marketing Sales & Service
Cost of IT,
Facilities Decrease Cost of Decrease Cost of
and Other Front-end and Products and
Support Back-end Services
Functions Operations Received
Support Operations Procurement
Across the Border
Across The Border
Again, the key success factor is focusing on the right areas and making decisions
based on actual facts and findings on cost items. Companies should not blindly
try to use all the guidelines, as there is no “one size fits all” solution. Instead,
they should selectively mix and match; some companies will need just one or
two of the following, whereas others would need the full package to stay
Across The Border
Some guidelines apply to all of the listed five business functions, which is why it
is common to see them in many cost-cutting projects.
Outsource If Cheaper
Outsourcing has been around for sometime as an effective way of decreasing
operational costs and complexities. An executive from Deutsche Bank even went
as far to saying that “if you don’t do it, you won’t survive”. Outsourcing of call
centers and IT operations is now taken for granted, and companies are looking
into more and more activities to outsource.
Optimize Staff and Their Utilization
Layoffs among financial institutions have recently drastically increased.
JPMorgan Chase is said to be cutting about 3,400 employees from Washington
Mutual headquarters, Bank of America expects to eliminate up to 35,000 in next
3 years. Staff optimization by allocating the right amount of resources based on
changing market demand and conditions is sometimes inevitable. However,
companies should also look into maximizing their utilization, by allocating cross-
functional responsibilities. For example, Queen City Federal Savings Bank in
Virginia states “Our staff wears a lot of hats, and that helps us keep our overhead
low… During slow times of the day, our tellers work on special projects and back-
Refine Service Levels
Service levels across an organization are key parameters in defining the resource
requirements. Shorter wait times in call centers mean higher numbers of
available agents. Shorter fulfillment cycles require more operational resources.
Since in regular times customer centricity is a key priority for most companies,
service level targets can tend to have been set aggressively and can thus be
lowered during times of crisis.. That said, tweaking service levels is a double
edged sword, companies need to look into its impact on their bottom-line and
refine their balance between customer centricity and cost efficiency.
Sales & Services
Migrate Customers to Low Cost Channels
Over the years, most banks treated customer channel migration as a priority,
seeking out means to decrease crowd at the branches as well as to reduce cost
of service. With the downturn, this has become even more critical…the cost to
serve a customer via the internet pales in comparison to branch service costs.
Numerous methods (i.e. loyalty program incentives, higher interest rates, etc.)
can be used to drive the migration of customers to lower cost channels.
Consider Channel Close Down and Relocations
Parallel to staff optimization, companies should be looking into closure of their
unprofitable channels, ATMs and branches, in order to decrease cost of sales and
services. With decreasing market demand and changing customer needs, certain
branches, ATMs and channels can become redundant with limited potential, or,
expensive to maintain. Relocation is also an alternative to a close down, which
can significantly decrease cost of rent and maintenance. Some banks are already
in action, such as Lloyds TSB, which has recently started planning closure of up to
Aim for Sales Excellence
Time spent on unqualified leads and long sales closure cycles are significant
inefficiencies in the utilization of sales staff, a very costly aspect of conducting
business. Companies should focus on excellence in their sales activities,
optimizing their lead generation activities, reducing spend on lead lists with
limited potential, as well as processes in their sales cycles, to get the job done in
minimum amount of time possible with minimal resources.
Rationalize the Portfolio
A high variety and frequent launches of new products and promotions can be a
competitive advantage when trying to build a pioneering brand image in regular
times. This however has led to many companies holding a portfolio of products
and services that is bloated – too many, too few clients, little profits. Not all the
products and promotions sell and their maintenance costs can make them
unprofitable. An economic downturn is an idealtime for rationalizing marketing
portfolios and eliminating the unprofitable offerings, ultimately to save money
and resources. The scope can range from sub-product terminations to complete
category abandonment, as in the cases of UBS, JPMorgan Chase & Co. and
Deutsche Bank, all of which shut down their credit proprietary trading desks.
Aim before You Fire
Although traditional mass marketing and advertising activities can be effective
ways for increasing overall awareness and interest, they are not the most cost
effective means for marketing. Tailored marketing activities targeted at only the
relevant audience can substantially decrease the cost of communications while
boosting response rates. Companies should move more towards targeted
activities in promoting their products and services, cutting down their marketing
budgets while keeping and even improving their effectiveness.
Cherry Pick your Targets
From a pure profitability point of view, not all customers are equal, and, they
should not be treated equally. Retention of high value and high potential
customers are far more critical than individual mass customers, especially in
times of economic downturn. Companies should focus their limited marketing
budgets on getting, retaining and growing these customers as much as they can.
At the other end of spectrum is the below zero customers, who have negative
impact on the company bottom-line. Companies should also consider ways for
selectively “firing” these customers, unless they have the potential to grow into
Use the Right Channel
Another way of decreasing marketing costs is through the utilization of lower
cost channels in outbound activities. Companies can move towards using
channels such as e-mail and SMS instead of eliminating their marketing
communications all together. This guideline also applies even in the case of mass
marketing, where companies should look for ways to optimize their media mix,
investing in mass media (e.g. newspapers, TV, billboards) that offers the best
return on investment.
Most operations not engineered with maximum cost efficiency in mind create
some amount of waste of resources and utilities. Eliminating such waste can
decrease considerable operating costs, which is why this is one of the most
frequently followed guidelines. As an example, Citigroup recently posted a cost-
cutting memo, advising that “staff should print black and white and on double
sided paper”. Similar memos are going out all around the world, with reminders
to not print documents for reading, to turn off lights when leaving the office, etc.
Process re-engineering, for elimination of inconsequential steps, or using less
expensive resources for their execution, is at the heart of noteworthy cost
cutting projects. As initial process designs are not always performed with cost
efficiency as the highest priority, and since practice moves away from original
process designs over time, there always exists ways to decrease the cost of
operations through economizing process designs. This could simply mean one
less approval step in a given process, or the introduction of a complete new way
of doing things.
Although most companies abandon their investments in technology altogether
during harsh times, automation can mean lower cost of human resources, less
paper use and faster operations, all resulting in substantial cost savings.
Companies which can find ways to make better use of their existing IT systems or
make minimal investments with substantial impact can create considerable cost
savings through such efforts. Credit Suisse presents a simple yet effective
example, encouraging employees to make use of their audio and video
conferencing facilities instead of traveling for meetings.
Replication of activities across branches usually creates utilization inefficiencies
in operations. Consolidating certain functions via the utilization of a centralized
approach can result in significant savings. One bank that took this to heart was
Commerzbank, when they centralized numerous activities and functions in 2002.
For companies operating multi-nationally, it can become an even bigger cost-
cutting initiative, “centralizing beyond borders.” Citibank serves as another
example, with their mantra around operation “Think Global – Deliver
Local”…many of their product lines from 100+ countries are operated from e-
Serve service centers in India.
Minimize Cost of Cash
Cash is, ultimately, the inventory of financial institutes, and as in all industries,
effective management of cost of inventory results in decreased costs. By
optimizing levels of cash in ATM machines and across branches as well as
automating transactions as much as possible, banks can decrease cash handling
maintenance costs as well as their opportunity costs. North Fork Bancorp, for
example, managed to reduce its excess cash reserves from 30% to 15% through
effective management of its cash across its branches and ATMs.
Focus on Cost of Risk and Funds
Last, but not least, of operational guidelines is minimizing cost of credit risks, (i.e.
decreasing default) as well as the cost of funds. Most banks with mature treasury
and credit units already excel in these terms, however, turbulence in market
conditions bring in new factors, such as different profiles of customers
defaulting, which requires moving beyond day-to-day practices.
Renegotiate, Renegotiate and Renegotiate
As much as it is critical for financial institutions to keep their high value
customers during the downturn, it is also critical for their suppliers and service
providers to keep these companies. Renegotiating prices is an effective tactic in
this environment, where substantial savings can be gained from better bargains.
As an example, Independence Community Bank renegotiated all of its contracts
in 2002. These renegotiations can even include cancellation of contracts with
some of the redundant providers, as Golden West Financial Corp. did by
eliminating one of its three ratings agencies.
If You Don’t Need It, Don’t Keep It
Economic downturn is clearly not the best time to invest in nice-to-haves and
corporate luxuries. Unless completely necessary for performing or supporting
business functions, companies should reconsider keeping their ongoing
expenditures in fringe activities. Bank of America is canceling educational
seminars and conferences and Credit Suisse is posting memos stating that it will
no longer pay for “any market data received that is not truly essential for the
performance of a specific responsibility.”
If it’s Not Broken, Don’t Fix It
In case of facilities, technology or anything that ‘works’, companies should hinder
from renewals and upgrades, as long as it does not significantly affect
operations. This may mean changes in certain organizational policies and
configuration of management practices, as most established organizations
already have periodical renewal and upgrade policies. An example in this area is
Bank of America, which is now restricting all new orders for computers, unless
they are out of order.
Reconsider Your Cheaper Choices
During every procurement decision, there exists various alternatives which are
evaluated based on numerous dimensions, only one of which is the cost.
Although cost is commonly a key criterion, this does not mean that companies’
current suppliers / vendors are cost leaders. The economic downturn is a time
when priorities change, requiring a re-evaluation of selections and the pressing
for cheaper, potentially less satisfying but still functional alternatives. This
applies to almost all areas, such as HR, where, Citibank now asks its employees
to recruit using “low and no-fee sources such as job boards and employee
Centralize All Procurement
‘Economies of scale’ is an effective means for decreasing cost of supplies, across
all industries. Financial institutes should also capitalize on this idea, centralizing
all procurement decisions and deals, be it the computers or printer paper used
across branches. For multi-national institutes, global procurement centers can
take these savings one step further, leveraging the best deals across nations for
products and services needs.
Decrease Cost of Facilities
Rent or maintenance costs of company buildings may not be considered quite
essential during regular times, when compared to the benefit of having a more
satisfactory work environment or prestigious business address. However, when
compared to several alternative cost cutting measures and the impact of not
cutting enough costs, relocating may become a more preferable option at least
for some of the business functions.
Decrease Cost of Human Resources
Keeping employees motivated during an economic downturn is a tricky business,
yet keeping them motivated while decreasing HR costs is trickier. Many financial
institutions will inevitably need to adjust their compensation policies during this
downturn, decreasing or even terminating certain monetary benefits. However,
there is more to cost reductions in human resources than simply stopping all
salary raises and not giving out any year-end bonuses. Companies can find ways
to decrease costs by focusing on non-monetary benefits or free services which
are not vital and would not necessarily create as much dissatisfaction on the
employees. For example, RBS put a strict £10 budget for each employee for its
Christmas party, and many others canceled theirs this year. Many companies
take actions to put more restrictions on personal use of corporate services, such
as postal services and communications. Although most of these actions have
negative impact on employee morale, harsh times inevitably call for such
Decrease Cost of Information Technology
Information technology is one of the massive items in financial institutions’ cost
ledgers, creating substantial CAPEX and OPEX each year. Revisiting IT
expenditures and looking for alternatives in hardware with lower maintenance
costs, software with lower-license fees and services without nice-to-have
features can contribute substantially to cost cutting initiatives. This is why more
and more companies are looking into opportunities for moving to platforms such
as Linux and freeware solutions.
Companies need to ultimately find the right mix of these guidelines to apply
based on their specific situation, which can be done based on a detailed analysis
of their cost items and opportunities for improvement. Pragmatic and quick
actions are necessary before conditions get more challenging. Financial
institutions should leverage both their internal resources – such as employee
suggestion programs to get them involved and provide benefits in return – and
external resources – which can provide temporary support and know-how
decreasing time and permanent resource needs – to ultimately make the
changes needed to reduce costs.
Trends suggest the economic downturn still has a ways to go, requiring all
companies in it to take action. Those who do manage to steer through it
successfully can actually benefit from it to a great extent. As Jean de la Bruyere
once said, “Out of difficulties grow miracles.”
About Forte Consultancy Group
Forte Consultancy Group delivers fact-based solutions, balancing short and long term
impact as well as benefits for stakeholders. Forte Consultancy Group provides a variety
of service offerings for numerous sectors, approached in three general phases -
intelligence, design, and implementation.
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