Financial institutions continue to face tremendous pressures to reduce costs. Since the credit crisis began, banks have reduced headcount, re–engineered processes and introduced LEAN and Six Sigma methodologies in an effort to lower costs and maintain or grow revenue.
Most banks have exhausted the low-hanging fruit cost-reduction efforts available to them. Few options remain that would bring about additional cost savings without significantly impacting customer service, which could negatively affect banks’ bottom line.
On the flip side, many financial institutions made significant investments in long-term large-scale IT transformation projects to optimize processes and lower costs. However, in today’s slow economy, many banks do not have available funds to invest in transformation initiatives even if they might lead to lower costs in the long term.
As a result, numerous banks find themselves stuck between these two dichotomies. They’ve reduced costs as much as they can without negatively affecting their business as well as implemented multi-year transformation programs that will eventually yield savings but yet they still need to find ways to improve the bottom line now.
This has led banks to look for cost-reduction solutions somewhere in the middle — aggressive transformation projects that provide sophisticated short-term cost-cutting measures without a large upfront expense. The philosophy behind this “leverage transformation” model is to identify quick wins that are pseudo-strategic in nature, optimize costs and lead to a desired end state. The projects take the financial institution in a direction that it wants to go but provide short return cycles that offer immediate cost savings.
To jump-start these transformation projects, banks are partnering with service providers to leverage their balance sheet to fund projects now while deferring costs in the short term. In this new model, the bank asks the service provider to, in effect, loan it the money upfront to invest in the project. In return, the financial institution signs a long-term service contract with the provider that allows it to recover those costs over several years. This new model allows banks to significantly reduce their project budget in the short term while reaping the benefits of a transformation project in the long term.
Another emerging cost-cutting trend focuses on short-term transformation initiatives with a direct but aggressive execution cycle. Banks are implementing targeted short-term projects that provide quick wins to reap immediate benefits. The quick wins allow the banks to use the immediate cost savings to implement additional short-term projects, thereby becoming almost self-funding.
Financial institutions are also evaluating business units and product lines at the micro level to determine which are helping or hurting the bottom line. Eliminating products or services that cost more than they bring in allows banks to refocus their efforts on profitable core competencies and products that can contribute to their revenue stream.
All three creative measures can help banks reduce costs in the short term, at a time when they need the savings the most, while still maintaining a competitive edge and reaping the benefits from transformation initiatives in the long term.