A Strategic Approach to Cost Reduction in Banking

After several years of easy operating conditions, banks are singularly ill-prepared for the crisis currently facing the financial services industry. To survive and ultimately prosper, banks must see cost-cutting as part of a broader efficiency effort and another step along the path to high performance.

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After several years of operating in an extraordinarily benign environment of low interest rates, rising house prices, expanding loan volumes and robust economies, banks now face profound challenges. Energy prices are high, many economies are sluggish—and the fallout from the U.S. subprime crisis is shaking financial markets and economies around the world.

Accenture’s experience in financial markets—backed by its ongoing High Performance Business research program—shows that traditional crisis responses such as indiscriminate cost-cutting are unlikely to work now. Operational risk is unprecedentedly high, and the scope of the crisis remains unclear. Perhaps most serious of all, the recent cycle of easy credit and growth masked serious underlying problems that now need to be rectified.

To achieve high performance, banks need to strike the right balance between short-term, tactical cost reduction and longer-term, strategic cost initiatives. In other words, short-term measures such as headcount reduction must form part of a longer-term program that includes streamlining processes and outsourcing noncore functions like learning, HR and finance and accounting.

Clearly, specific strategies will depend on banks’ operating models and priorities, but long-term winners will most likely be those that build for the future by adopting flexible operating models that allow them to respond to threats and opportunities as they arise.

Accenture has identified the following principles that banks could adopt in order to help ensure that they weather the current storm while positioning themselves for future growth:

• Avoid arbitrary cuts. Banks that emerged most successfully from previous downturns were those that optimized their cost bases—not those who made the deepest cuts. Each bank will therefore have to understand its cost anatomy as costs are not spread evenly across operations.
  
  
• Transform cost reduction. Banks should reinvest savings from tactical measures, such as headcount reduction, into strategic initiatives that provide longer-term benefits.
  
  
• Industrialize operations. Banks will have to industrialize their operations to combine low costs with the flexibility needed to respond to unforeseen market changes (be they positive or negative).

Accenture’s wide client experience and High Performance Business research indicate that successful banks will be those that successfully simplify their organizational models. But high performance is not single-change effort, rather it requires ongoing vigilance and the creation of a culture of cost management.

Contact us to find out how Accenture can help your bank weather the crisis by improving performance.