Optimizing cost reduction
Despite transformation efforts over the past eight years, investment banks have realized modest improvements in their cost-income ratios. Accenture research reveals the largest investment banks collectively may need to further reduce costs by up to US$20 billion to improve the average return on equity. We found:
All firms have increased their compliance activities.
Cost reduction has taken place largely within the four walls of banks.
Improved virtualization and cheaper computing power help to reduce IT costs.
Firms have focused on reducing “unit costs.” Once identified, cost-savings should be converted to long-term investments in new products, services and financial technology initiatives.
Seeking sustainable cost structures
Five “hot topics” in cost reduction:
Broker use is increasing as a result of remediated broker policy and controls, and a shift in the role of inter-dealer brokers in the over-the-counter (OTC) market.
Market data use is increasingly driven by proactive enforcement of usage agreements by data vendors.
Sales and trading workforces are being resized to accommodate ongoing electronification across asset classes and changing market conditions.
Control workforces, particularly compliance and risk departments, are growing as a result of new rules regarding conduct and supervision.
Technology is being simplified, driven by increased consumption of change, IT infrastructure and third-party application services.
In addition, zero-based budgeting and spending has the potential to play a pivotal role in helping banks make effective, value-adding investments to continually refuel for growth.
Three steps to profitability
Banks can optimize return on investment by:
Taking an outside-in view to create cost visibility and insight: Compare how much it would cost to house a specific function outside the bank with how much it costs to maintain it internally.
Building an end-to-end governance model that drives accountability to the rightful owners: A governance model, along with related financial controls and performance incentives, plays a key role in ultimately shifting mind-sets to enable long-term change for the bank.
Using cost savings to fuel growth: Banks must design transformation programs based on sustainable operating models that promote efficiency and cost savings.