Cost Cutting Practices For the Financial Services Industry

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…

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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 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.

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 competitive…

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-office operations.”

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.

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 700 branches.

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 profitable customers.

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.

Eliminate Waste
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.

Simplify, Economize
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 referrals”.

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 measures.

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.”

To receive information about our recommendations, and learn more about related Forte Consultancy  service offerings, please contact us at


2 thoughts on “Cost Cutting Practices For the Financial Services Industry

    • Dear Greg,

      Forte Consultancy Group has offices in Turkey (Headquarters) and UAE with consultants available across EMEA region.

      Berkin Ozmen
      Forte Consultancy Group

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