Transforming your business

Cost reduction is and will be a key issue in the financial sector for the foreseeable future. In an environment marked by de-leveraging and capital scarcity, it is necessary to fundamentally rethink business strategies, operating models and cost structures. Focusing only on operational costs however will not be enough. Financial institutions need to implement comprehensive programmes to reduce cost that are consistent with a sustainable long-term vision for their business.

Cost reduction – preparing the ground

• Set ambitious goals. Typical cost reductions range from 20% to 30% of the cost base as a result of productivity improvements, reductions in cycle time, lead time, working capital, etc.
• Understand the true profitability of each business. More than ever before, it is crucial understand exactly where your institution makes money to decide which platform to build a sustainable business on. Gain insight into how different activities, products and geographies inter-relate, and how curtailing certain activities will affect your broader business.
• Cost postponement is not the same as cost management. Freezing or cutting investment in projects, key people and support teams until the economy recovers endangers customer loyalty and future profitability. Careful analysis of the measures you take and the long-term impact they will have on your business platform is a must.
• Extend your focus beyond on operating costs. Areas like front office, risk management and funding also have to be reassessed to achieve a cost baseline that is viable in today’s markets.
• Going back to a “pre-securitisation” baseline may be best. The right mindset for business strategy and budgeting may be a pre-2005operating model and cost structure.

Cost reduction – some important considerations

• Use a coherent, enterprise-wide approach. A decentralised, ad hoc approach can result in suboptimal implementation, missed targets and worse. Avoid these pitfalls by setting up a comprehensive programme with a clear executive mandate, defined targets, management organisation and strong commitments from the business and support units.
• Coherent cost reduction is a differentiating factor. Traditional cost reduction approaches are not enough to ensure the long-term viability of many institutions; the markets will discriminate between those that rationalise their costs sustainably and those that don’t. Getting it right may well make the difference between survival, takeover or worse.
• Consistent investment is required. Even in times of financial turmoil, resources are needed to build a sustainable business platform. The key is to fund medium to long-term savings by realising tactical, short-term savings – and striking the right balance between the two.

Cost reduction, cost management and transformation measures

• Challenge and (re)define cost drivers and activity levels
• Challenge existing budgets and put in place strong budget ownership, discipline and accountability
• Challenge non-critical, contingency or unsupported balances to save on discretionary spending
• Set out core cost management guidelines and monitor variance by means of gap analysis and exception reporting
• Create an executive dashboard to monitor results. Putting in place KPIs and efficient reporting helps management gauge the overall effectiveness of their programme and to adjust their decision making and tone appropriately
• Use functional benchmarking analysis to drive savings based on headcount reduction
• Use forensic contract analysis to stop contract leakage and drive savings from invoice control. Forensic contract reviews can uncover cost reduction opportunities of 5-10% for selected contracts
• Re-examine tax and VAT structuring for cost savings opportunities
• Set in motion organisational, capability and behavioural change programmes
• Identify and eliminate waste, and measure improvements in performance and management processes

How PwC can help with cost reduction

We have a strong track record of success in putting in place cost reduction programmes and cost control processes. Well structured programmes set the stage for more transformational activities, and can even help finance them. It is not uncommon to realise 5–20 euro of cost savings for every euro spent in fees. PwC can help you in the following ways:

• Overall programme assessment and support. We leverage the know-how of our global Financial Services team to assess your programme from start to finish and support your programme management and execution
• Specific experience in the front office. We offer business financial analysis, divestiture and acquisition assistance
• In-depth experience in middle and back office operations. We have a reputation for helping clients balance the need to reduce costs while continuing to trade efficiently
• Risk and compliance cost reduction. We have the capabilities and experience required to advise on and execute cost reduction efforts in sensitive areas involving regulators, boards and other stakeholders
• Aligning initiatives and project expenditure with strategy. We use a highly structured methodology combined with an independent, big picture view
• Designing and operating efficient core functions. We bring together knowledge and experience in finance, accounting and tax with the necessary process and technology expertise to deliver an end-to-end solution
• Independent, global view of the best sourcing options. We can assess the best options for you without bias towards a proprietary solution
• Broad range of competencies. Our wide variety of skills and experience allows us to address cost issues throughout your value chain.