Financial Services
ARE YOU DONE WITH COST AND
READY TO FOCUS ON GROWTH?
ACHIEVING SUSTAINABLE EFFICIENCY IN THE FINANCIAL SERVICES INDUSTRY
AUTHORS
Dylan Roberts, Partner
Alex Lyall, Partner
Amit Bhandari, Partner
John Boochever, Partner
Prashanth Gangu, Partner
The financial services industry is six years into the current crisis. Most of this period has
been characterized by aggressive cost management efforts, but the results have not been
structural or sustainable. Across the industry, massive capacity reduction took place as
a response to dropping volumes and margin pressures. Although many re-engineering
programs have been launched, the efficiency of the industry has not improved substantially.
Banks are now at a turning point: with cost programs winding down and signs of recovery
emerging, many believe they have done enough to optimize their cost structures and are
ready to shift their focus to growth. It’s a nice thought, but not a realistic one.
1. REVENUE GROWTH WILL BE SLOW
Retail and commercial banking revenue growth averaged less than 1% between 2010 and
2012, hampered by persistently low interest rates and the resulting compression of deposit
margins, continued anemic demand for credit, and the reduction of fee income caused
by new regulations. Wholesale revenues have also shown only modest growth. While
more optimistic analysts expect total industry revenue growth to approach 5% in the near
future, even this would not be enough to create attractive returns to equity investors.
2. EFFICIENCY HAS NOT IMPROVED ENOUGH, AND SIGNIFICANT COST
REDUCTIONS ARE STILL REQUIRED
Despite all the hard decisions on cost cutting over the last six years, fundamental
efficiency has not really improved. It costs as much or even more to create and service
every dollar of revenue as it did nearly a decade ago. Even if investors are willing to
accept lower than pre-crisis returns, additional cost reduction will be necessary. By
our rough estimate, for the industry to achieve an average return of 12% (compared to
roughly 15% pre-crisis), costs will need to be cut by about 10%.
More efficiency improvement will be needed to assure acceptable and attractive returns,
and to create strategic flexibility in a tough competitive environment. Yet, the next wave of
efficiency gains will be harder to find. The proverbial “quick wins” have been exhausted.
Six years of headcount reductions and re-engineering have resulted in an industry that is,
by many traditional measures, already lean.
Where will further savings come from? Additional, truly sustainable improvement in efficiency
will require structural changes. And it will require making a paradigm shift. Efficiency efforts
need to move from expense management to redesigning the way institutions are organized
and manage their core processes and performance. In this new paradigm, cost cutting is no
longer the direct goal but a natural by-product of sustainable change efforts. The following
sections of this report outline our thinking on how to approach this opportunity.
Copyright © 2013 Oliver Wyman2
REVENUE GROWTH WILL BE SLOW
Although there are signs of recovery from the crisis, revenue growth has remained flat over
the past several years. In retail and commercial banking, the industry averaged less than 1%
revenue growth between 2010 and 2012. This stagnant growth environment is attributed
to several factors. Firstly, the interest rate environment is hostile. In Q1 2013, net interest
margin fell to 3.27% – the lowest level since Q4 2006. The Federal Reserve indicates that
interest rates will continue to remain at record lows at least until 2015. Secondly, loan growth
coming out of the current recession has been unusually slow. Finally, regulations such as the
Durbin Amendment and the creation of the Consumer Financial Protection Bureau (CFPB),
have reduced industry income by ~$15 BN1 since 2007.
FFICIENCY HAS NOT IMPROVED ENOUGH, AND
E
SIGNIFICANT COST REDUCTIONS ARE STILL REQUIRED
For the industry as a whole, financial services productivity improvement has been minimal.
This is true over time compared to other industries and for the results of the most recent,
crisis driven cost improvement efforts. Costs are likely to rise as revenue grows with the cost
measures of the last years not having created the size of structural operating leverage that
will be required going forward.
Whereas the productivity of the financial services industry has stayed virtually flat for decades,
manufacturing in comparison has significantly improved. Many lessons can be taken from the
manufacturing environment on how to improve efficiency continuously and sustainably in
lower margin, lower growth environments. (Exhibit 1).
Exhibit 1: FINANCIAL SERVICES HAS A LOT TO LEARN AND IMPROVE
PRODUCTIVITY REMAINS FLAT OVER TIME
US MULTI-FACTOR PRODUCTIVITY
INDEX, BASE YEAR = 1987
150
140
130
120
Productivity
Improvement Gap
110
100
Manufacturing
90
80
1987
1988
1989
1990
1991
1992
1993
1994
1995
1996
1997
1998
1999
2000
2001
2002
2003
2004
2005
2006
2007
2008
2009
2010
Financial Services
Source: US Bureau of Labor Statistics
1
Estimate based on Oliver Wyman analysis.
Copyright © 2013 Oliver Wyman3
Within financial services itself, efficiency levels have not improved significantly over the recent
years, despite the massive efforts. In fact, during the crisis, the average operating cost-toincome ratio has increased (Exhibit 2), substantiating the concern that much of the effort was
directed at rightsizing but not structural change with significant impact on operating leverage.
While not everyone is experiencing declining efficiency, industry returns are still below
hurdle rates. Current banking industry ROE is hovering around 7% and capital levels have
been driven up by regulatory responses to the crisis. While it is unrealistic for the industry to
replicate pre-crisis returns, expected ROE is 10-12%. If costs remain unchanged, achieving this
level of return will require industry revenues to grow by almost 10%. However, consensus
forecasts put revenue growth at about 5% in 2013. So achieving 12% returns will require,
at minimum, operating expense reduction of almost 10%.
With revenue growth expected to be lackluster and regulation continuing to put pressure
on capital levels, financial services executives who want to convince investors to continue to
fund their businesses have to look harder still at costs.
Exhibit 2: INCREASING COST-TO-INCOME RATIOS INDICATING A LACK OF STRUCTURAL
IMPROVEMENT IN EFFICIENCY LEVELS*
INDUSTRY AVERAGE
2001-2012
COST-TO-INCOME
75%
COST-TO-ASSETS
4.0%
70%
3.5%
65%
3.0%
60%
2.5%
Costs-toassets
55%
2.0%
Cost-toincome
ratio
2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012
*Industry is defined as US regulated depositories with assets greater than $1 BN; cost-to-income ratio is defined as non-interest
expense, less amortization of intangible assets, divided by net interest income on a fully taxable equivalent basis and non-interest
income; cost-to-assets ratio is defined as non-interest expense divided by total assets.
Source: Oliver Wyman analysis; SNL Financial
Copyright © 2013 Oliver Wyman4
THE NEXT WAVE OF SUSTAINABLE EFFICIENCY GAINS
WILL REQUIRE A PARADIGM SHIFT
Every large financial services firm has launched an expense management initiative in the last
six years. Common measures have included reductions in management layers and increased
management spans of control, elimination of excess capacity, Lean and Six Sigma process
re‑engineering, outsourcing of operations and non-customer facing functions or relocation
to low cost locations, consolidation of decentralized corporate functions, and pay cuts. These
measures have helped organizations respond to urgent cost reduction mandates during the
post-crisis period. But they haven’t solved the fundamental productivity issue of the industry.
Achieving the next level of efficiency and a continuous improvement capability will require
profound organizational and process restructuring, along with a reconfiguration of systems
and physical infrastructure. So far, most financial institutions have mainly deployed Wave 1
and Wave 2 expense management and cost transformation techniques. However, to realize
true sustainable efficiency, organizations need to make a paradigm shift by applying Wave 3
levers: that is, sustainable efficiency gains driven by true operational excellence (Exhibit 3).
Exhibit 3: OPERATIONAL EXCELLENCE MEASURES FOR NEXT LEVEL
SUSTAINABLE EFFICIENCY
Tactical
Wave 1
“EXPENSE MANAGEMENT”
Expense control
Organizational delayering
Capacity right-sizing
Procurement, e.g. vendor
consolidation, rates reduction
Structural and sustainable
Wave 2
“COST TRANSFORMATION”
Select activity outsourcing, e.g.
application development, testing,
HR and finance operations
Functions centralization, e.g.
across geographies, products
Lean Six Sigma
Distribution channel optimization
IT infrastructure virtualization
Wave 3
“OPERATIONAL EXCELLENCE”
True front-to-back
re-engineering
Value-driven productivity
management
Organization structured to
unlock inefficiencies
Radical workforce model
change
IT operated as utility model
Cost shared and flexibilized
through industry utilities
Top down levers,
across-the-board cuts
Optimization within
organizational silos
New cost curve via
silo-busting/horizontal levers
1. True front-to-back re-engineering: Re-engineering comes in many flavors, from
redesigning processes, optimizing operations to consolidating common functions. While
siloed re-engineering initiatives for specific processes within a function have proven
benefits, next level efficiency requires a front-to-back approach, which often starts with reengineering the business. Traditional re-engineering often leaves fundamental efficiency
drivers untouched. Rather than optimizing an existing process using techniques such as
Lean Six Sigma to eliminate redundancies and minimize wait time, front-to-back reengineering fundamentally alters the way customers are served or services are delivered.
Copyright © 2013 Oliver Wyman5
For example, in wholesale banking the cash equities business has been under severe
pressure requiring a reduction in costs by 10-15%. This magnitude of cost structure
change requires fundamental front-to-back rethinking, including delayering client
interfaces (i.e. consolidating sales forces across research and trading) and innovating
around research distribution and charging models to create downstream effects on
operational and IT infrastructure. Similarly in consumer finance, customer selection and
customer risk rating determines volume and automation of back-office work, at the
same profit levels.
Exhibit 4: FRONT-TO-BACK RE-ENGINEERING TO UNLOCK VALUE BEYOND LEAN SIX SIGMA
VALUE
• Development of hassle maps
Extending Second Wave
Lean Six Sigma technique
PROCESS
RE-INVENTION
Fundamentally
change the way needs
are being served
DEMAND MANAGEMENT
Altering of the demand constellation to reduce
volume or fundamentally change the process
architecture of the organization
• Fundamental review of how customers are being
served
– e.g. shift work to customers
– e.g. eliminate possibility for rework
– e.g. risk-based decision approaches
• Realigning activities from front office downstream
to middle and back office
• Customer selection and variable service levels
• Mapping of activities across value chain
TRADITIONAL LEAN SIX SIGMA
Focus on elimination of non-value added activities
within a given single-process configuration and
demand constellation
• Classification into value added and non-value added
steps
• Automation, elimination, consolidation of non value
added steps
• Metrics that expose the true drivers of productivity
and economic success
Activity-based, end-to-end productivity metrics
Third Wave technique
• Foundation for continuous improvement
Second Wave technique
2. Value-driven productivity management: As many financial institutions have used
Lean Six Sigma and automation to increase workforce productivity, extracting even
higher productivity will require new approaches. Experience shows that despite leaner
processes, significant performance skews remain across the workforce. Yet, in most
operations and IT environments, pay and bonuses reflect these skews very little, and
show very limited correlation to the real drivers of value. This is also true for many sales
forces where performance-based pay has been common. A 15-25% productivity potential
remains which can be unlocked through value-driven performance management. It
starts with clear performance metrics linked directly to incentives. For many functions of
the bank, this is a significant culture and paradigm change, but one that creates big
returns with very little investment. For example, a leading retail bank increased the
number of applications adjudicated per hour by 16% at lower error rates through this
approach. Another retail bank saw their sales force productivity jump over 20%.
Copyright © 2013 Oliver Wyman6
CASE STUDY #1: RETAIL BANK
Front-to-back reengineering of the branch to back office value chain
Situation: Deteriorating economics of branch operations.
Low single branch sales performance. Need to
further reduce channel expense as part of overall cost
structure change.
Approach: Implementation of segmented, valuedriven sales and service model. Migration of activities
from branch to middle/back office. Active migration
of customers to alternative, electronic channels.
Hybrid “sales and service” role implementation
to optimize branch staff utilization. Service leveldriven capacity planning. Reengineering of sales and
service processes. New value-driven sales and service
productivity management.
Results: $180 million in increased revenue. 28% branch
cost reduction. Improved service scores where it matters.
ROE doubled over 18 month period.
FRONT-TO-BACK REENGINEERING UNLOCKS SUSTAINABLE EFFICIENCES
NEW BRANCH MODEL
OLD BRANCH MODEL
 Pre-sales support
 High value customer service
 Management
Branch space
available
 Low value
customer service
 Post-sales support
 Administration
 Segmented sales
3. Organization structured to unlock inefficiencies: More and more financial institutions
are realizing that their organizational structures in themselves are inhibitors of greater
efficiency. Either role design is too rigid and preventing optimal capacity utilization,
structures are too matrixed and complex driving exorbitant coordination time,
duplication of activities remains despite implementation of shared services, or front-toback thinking cannot be institutionalized as processes cross too many organizational
units. For example, a global universal bank realized that separate centralized technology
and operations units led to suboptimal process automation as operations favored
offshoring to lower cost, rather than sustainable automation. An investment bank
realized that the organizational separation of Operations, Finance and Risk continued
to retain data issues and caused multiplication of reconciliation and reporting. Another
global universal bank identified the separation of Risk, Ops Risk and Compliance as a
root cause for controls proliferation and redundancy. Yet another bank identified KYC/
AML and client onboarding as an opportunity to establish a utility across businesses. And
a retail bank realized that the channel driven organization model was preventing benefits
from multi-channel customer engagement to be fully captured. In all of these cases, a
fundamental rethink of organization design allowed additional value to be unlocked.
Copyright © 2013 Oliver Wyman7
CASE STUDY #2: RETAIL BANK
Step function improvement in productivity through value-driven productivity management
Situation: Many rounds of lean Six Sigma process
reengineering. Implementation of automated workflow
capability to improve utilization and minimize transfer
times. Need to further improve workforce productivity
and flexibility. High performance skews across
operations staff.
Approach: Implementation of a value-driven
productivity management approach across all
operations units. Diagnostic of current performance
management environment revealed many metrics
and little link of performance to pay. Value metrics
developed, tailored to different operations
environments and the relative importance of quality
and cost. Full alignment with roles and levels.
Results: 15-25% productivity improvement depending
on type of operations unit. Liberated capacity
taken as cost reduction. Much higher uniformity in
performance levels. Significantly improved flow of
continuous improvement ideas from operations staff.
PRODUCTIVITY IMPROVEMENT FROM VALUE-DRIVEN PRODUCTIVITY MANAGEMENT
BEFORE
Incentives were less equitable with the same level of reward
among low and high performers
AFTER
Incentives were redistributed among high performers, re-aligning
behaviors to achieve a higher level of productivity
ANNUAL INCENTIVE ($)
AVERAGE CREDITS PER HOUR
10,000
8,000
16% productivity
improvement
Different reward for same
level of productivity
6,000
4,000
2,000
Same reward across wide
range of productivity
0%
0
200
400
600
800
1,000
Pre
Post
AVERAGE CREDITS PER DAY
Challenges
• Complex scorecard with too many metrics
• Mix of output and input metrics, with subjectivity
• Limited performance rating dispersion
• Complex link between performance and pay
• Institution performance elements not controllable
A additional benefits
• Improved quality
• Errors down overall; best producers making fewer errors
• Better team management
• Active management of productivity skews and capacity
• Enabler of continuous improvement
Copyright © 2013 Oliver Wyman8
4. Radical workforce model change: Offshoring and outsourcing has been pursued
for some time, and in some instances, is being built back as efficiencies have not
materialized, or increasing labor costs are diminishing the benefits of offshoring. The
next level of labor efficiency will require a much more deliberate exploration of flexible
workforce models, creating capacity utilization benefits and the ability to dial down the
main cost block of any bank when volumes drop, or up when business spikes. These new
workforce models come in a number of shapes including fundamental role redesign
towards hybrid roles, remote workplaces, matching locations with concentrations
of specialized labor pools across the globe, increasing part-time opportunities, and
blending own and outsourced workforces. This needs to be enabled by changes in
infrastructure and management approaches including flexible “hubbing” workspaces,
automated workflow capabilities, virtual collaboration tools, mobility tools, part-time
capacity planning tools and leaders who can direct remote staff effectively. High tech
companies have pioneered these workforce models achieving 80% and above remote
workplaces, seamless integration of work across the globe, while creating and delivering
complex products and services. Experience shows that another 15-20% of sustainable
efficiency improvement is available through workforce model paradigm shift.
5. IT operated as utility model: Despite much focus on reducing the cost of IT, either
through offshoring and outsourcing, virtualization, better demand-supply integration
and software development automation, legacy IT systems and overly complex application
architectures remain inhibitors to the next level of sustainable efficiency. And they often
require immense and lengthy lead time and high risk investments to be changed. This
is predominantly prevalent in universal banks where often an application architecture
with a high degree of duplication, many complex integrations, and proliferation of
underlying technologies continues to exist. In retail banks, legacy core banking and
lending systems make feature enhancements long and costly endeavors and often drives
ineffective workflow and automation solutions, further compounding the problem. A
universal bank has taken a radical approach, starting with the mapping of applications
against a functional decomposition of the bank, systematically identifying duplication
of applications and data issues, developing target state architectures, concentrating on
few platforms and through that, radically decommissioning applications, reducing cost
and gaining substantially in flexibility. The opportunity is a sustained 20%+ reduction in
technology expense, allowing available IT investment to be deployed more effectively.
6. Cost shared and flexibilized through industry utilities: Standardizing and
centralizing processes and functions into a common or shared service structure
has been widely pursued by organizations. Most of the opportunities for sharing
within financial institutions have been pursued through the cost efforts over
the last six years. However, many back-office activities remain that provide little
competitive differentiation and increasingly require very substantive process
and technology investment to remain state of the art and reduce cost. Those
are candidates for sharing across the industry, both reducing unit costs through
higher scale on increasingly automated platforms and sharing the inherent
substantive technology investments. This is particularly true for many posttrade activities in wholesale banking where most broker dealers perform almost
Copyright © 2013 Oliver Wyman9
CASE STUDY #3: COMMERCIAL INSURER
Radical cycle time reduction through front-to-back reengineering
Situation: High touch and complex service model with
a lengthy processing time from quote to policy issuance.
More than 10 systems supported the service processes,
with associated duplication of data entry and validation,
and integration issues.
Approach: Working with brokers on case quality and
quality of data into the underwriting process. Front
end risk rating for faster elimination of unlikely deals.
Modular process approach to drive to maximum
commonality across insurance products. Lean Six Sigma
elimination of non-value added processing steps.
Reconfiguration of underwriting and processing model
to separate common from exception across products.
Results: Obtained significant reduction in cycle times.
Impact: Profitable growth on smaller accounts due to low
touch underwriting model.
CYCLE TIME IMPROVEMENT THROUGH FRONT-TO-BACK REENGINEERING
UNDERWRITING
PROCESS
CURRENT
STATE
TARGET
STATE
RISK SELECTION AND
ASSESSMENT
ACCOUNT STRUCTURE
AND COVERAGE
RATING, PRICING AND
NEGOTIATION
• Undifferentiated focus
and scattered efforts
across all producers
that are fragmented
regionally and globally
• Extremely complex
process for analyzing
data
– Redundancies in
rekeying certain data
– Unnecessary data
are collected and
modeled
• Many coverage
offerings customized to
create unique options
for each client
• Many iterations/
re-ratings required to
reach convergence
• Dedicated efforts on
selected few high-value
producers, e.g. top 10
brokers, brokers in
priority regions for
future growth
• Simplified evaluation
– Only critical input
data are collected
and validated, i.e.
data fields, years
of history
– Optimized rating
tools and models
• Standardized coverage
bundles with limited
menu of individually
priced options
MARKETING
• Time-consuming to
customize for each
individual client
• Lengthy and
cumbersome process
• Quicker and more
automated pricing
• Fewer number of
pricing and rating plan
iterations
ISSUANCE
• Multiple hand-off
points across functions
to review policy and
prepare documents
• Re-entry of same data
at sub-steps of
issuance process
• “Push-button” assembly
for issuance and reports
that uses previously
entered data
• Simplified, digital and
straight-through
issuance process
Copyright © 2013 Oliver Wyman10
exactly the same activities, using similar processes and infrastructure. Many
of these activities have been leaned and much needed further cost reduction
can only be achieved by combining volume on the same platform. Estimates
show that depending on volume, up to 80% of the cost can be mutualized.
These Wave 3 Operational Excellence measures in many ways require financial institutions
to think very differently about the way they manage processes, structure organizations,
create collaboration across organizational siloes, and configure their infrastructures. Leading
financial institutions have embarked on Wave 3 Operational Excellence programs that
rearchitect their organizations for next level, sustainable efficiency gains, and the strategic
flexibility they provide. And they are actively working on implementing the management
mindshift that is required to execute and continuously improve.
A MINDSHIFT IN MANAGING COST IS REQUIRED
Financial institutions are now realizing that the old mindset of annual budget cycles
that build on last year’s budgets and a cost management approach that treats cost as a
periodic initiative will no longer be sufficient. Cost and efficiency leaders are moving to
zero-base approaches, fundamentally questioning expenses continuously and creating a
comprehensive set of management mechanisms to make cost management a natural and
continuous part of day-to-day management. Much of this is modeled after manufacturing
industries where low margin and low growth environments have honed these management
approaches over time.
EXHIBIT 5: ZERO-BASE APPROACH CREATES A STRUCTURE AND LANGUAGE TO
TACKLE COST CONTINUOUSLY
ZERO-BASE DEMAND AND ACTIVITY ANALYSIS
What is necessary to meet
customer needs and
regulatory requirements?
“Survival
minimum”
“Strategic
minimum”
What is critical to
implement our
strategic initiatives?
Discretionary
• Unnecessary internal
demand
• Non-value added
activities
PRINCIPLES OF ZERO-BASE APPROACH
• Start with bare-bones or blank slate,
e.g. $0 base budget, no-frills product skeleton,
base process straw man
• Avoid starting with existing baseline and then
work backwards to reduce complexity,
e.g. avoid starting with existing product and
“de-featuring” it
• Layer on survival minimum or strategic minimum
• Challenge every product feature, expense item
or process step layered on top of the base
EXAMPLE APPLICATIONS OF ZERO-BASE APPROACH
• Budgeting
• Redesigning process/product
• Rationalizing product or initiatives portfolio
• Transforming an operating model
Copyright © 2013 Oliver Wyman11
Radically higher levels of efficiency can be achieved only by addressing the most fundamental
drivers of cost and complexity – basic choices about products, services, and geographies.
Managing a business portfolio actively is difficult, time-consuming, and requires executive
leadership to make painful decisions. So sometimes it just doesn’t happen with as much rigor
as it should. Even when organizations try to reduce complexity, they often fail to realize all the
efficiency gains possible because they are too wedded to the status quo. To overcome this
problem, a zero-base approach has proven successful and sustainable.
The most important aspect of a zero-base-approach however is not that it questions
expenses at every budget cycle from the ground up, but that it creates a language of
operational excellence that builds questioning expense and avoiding waste into the
day-to-day activities of every employee. This is where it becomes powerful as a tool to
sustain efficiency.
Beyond zero-base approaches, effective and sustainable continuous cost management
requires a number of organizational mechanisms including leadership competences
and behaviors, aligned incentive systems, metrics and scorecards, the right
governance mechanisms, dedicated efficiency management roles, and tools and
support for continuous efficiency improvement. In concert with the implementation
of specific Wave 3 Operational Excellence measures, financial institutions need to
review their management approaches and mechanisms and ensure that an efficiency
management and culture is continuously driven throughout the organization.
EXHIBIT 6: CONTINUOUS AND SUSTAINABLE COST AND EFFICIENCY MANAGEMENT CAPABILITY
• Ongoing leadership reviews
• Establish a Head of Cost Management role
• Give that role operational responsibilities
• Potential roles in the businesses as well
Dedicated
Management
Roles
• Productivity toolkits
• Change management toolkits
• Dedicated implementation support teams
• Bank-specific definitions of cost
and operational excellence
• Metrics driven management approach
• Enabling leaders to guide/teach their teams
Enterprise
Toolkit &
Support
Roles
Governance
Sustainable
Cost/Productivity
focused
culture and
capability
Leadership
Compentencies
& Behaviors
• Management of portfolio of initiatives
through committee
• Collective responsibility
• Costs excellence a constant in leadership
language
Metrics/
Scorecard
Performance
Management
Alignment
• Establish a set of metrics that create
transparency of operating model
performance and health
• Create a management cadence around
those metrics
• Giving teeth to metrics and behaviors
through linkage into the performance
management methodologies
Copyright © 2013 Oliver Wyman12
CASE STUDY #4: GLOBAL UNIVERSAL BANK
Finance efficiency improvement through structuring to unlock organizational inefficiencies
Situation: A number of process reengineering initiatives
completed. Single general ledger in place. Finance
Ops in operation. Finance function efficiency high, but
perceived need to further reduce expense. Recognition
that additional efficiency will likely require thinking
differently about org and operating model.
Approach: Combination of zero-base approach and
review of org design and operating model. Activity
based cost categorization into “Survival minimum”,
“Strategic minimum” and “Discretionary”. Review of
“financial” activities across the entire organization, in
particular Operations, Finance and Risk. Identification
of efficiency opportunities through elimination of
discretionary activities and organizational consolidation
around reconciliation, reporting, product control and
finance processing.
Results: 18% cost reduction of an already highly efficient
Finance function by benchmark comparison.
BREAKING SILOS CREATES 18% COST REDUCTION AND HIGH QUALITY OUTPUT
STREAMLINED AND HIGHER QUALITY
Product control
• Reconciliation
• P&L daily
production
• Trade execution
• Reporting
• Core/base
decomposition
Risk
• Cash recon
• RWA
• Position to
sub-ledger recon
• ECAP
• Month end closing
• Reporting
Advisory
Financial
control
• Performance
management
• Decision
management
• Forecasting
• Sub-ledger to G/L entries
• Reconciliations
• Transfer pricing
• Platform financial &
management reporting
• Tax/audit requirements
Systems
• Reporting
• Link with individual
business platforms
Operations • Cash reconciliations
• Risk systems
• Consolidation
• Internal and
external reporting
• AP
Challenges
Product control of varying competence in multiple locations
Redundant reconciliations given systems and data fragmentation
Inefficient reporting due to inability to leverage reporting tool and data
fragmentation
Data integrity issues as a result of manual system updates
BUSINESS Trade
• Pre-trade
• Trade execution
CIB Ops
•
execution
• Settlement and
clearing
Risk
• VAR
• RWA
• Economic capital
FINANCE
• Strategy development &
Advisory &
support
performance
management • Costing & profitability
analysis
• Initiative monitoring
• Forecasting
• Analysis mgmt
reporting
• Decision support
• Score cards and
metrics
• Performance mgmt
Product
control
• P&L daily production
• Month end close
• Core base decomposition • Valuations
Financial
control
• Disbursements Income
• General accounting
• Tax requirements
• G/L integrity
Reporting
Utility
• Internal reporting
• External reporting
• Statutory and
regulatory reporting
Systems
• Link with individual
business platforms
Operations
• Cash reconciliations
• Position to sub-ledger
• Risk systems • One source of the
truth
• G/L
Consolidation • Accounting rules
• Month end Balance sheet
• Sub ledger to GL
Centralization of report creation
• Settlement and
clearing
Move activities to Operations
CIB Ops
• Pre-trade
Tailored
advisory
Businesses
Geographies
Trade
Reconciliations
eliminated by
improved systems
REDUNDANCIES AND INEFFICIENCY
Key operating model changes
Pool resources by expertise into cross platform Product Control and
Financial Control units
Purify role of Financial Control by industrializing transactional activities
and shifting them to Operations
Create a reporting utility to provide cross-business support using
automated and standardized processes
Consolidate data across multiple sources and link related systems to
provide greater data integrity and eliminate unnecessary activities,
e.g. manual reconciliation
Redistribution of activities
Copyright © 2013 Oliver Wyman13
WHAT TO DO NEXT
There are a number of indicators that show if a continued focus on cost and
efficiency through Wave 3 Operational Efficiency measures is required. They center
on the fundamental question if the prevailing cost structure can or will provide
the strategic flexibility to use margins and investment funds for competitive
advantage, or if the cost structure is on par at best and still characterized by a
high portion of fixed cost. Typical indicators for a call to action include:
•• Still high cost-to-income ratio
•• High portion of IT expense going into run-the-bank
•• Financial forecasts show ROE below 10%
•• Noise that actions of other units in the bank prevent higher efficiency
•• Front office blaming the back office and vice versa
•• IT change is slow and costly
•• Operating leverage is below 5%
•• Cost isn’t a continuous management discussion
If any of these indicators are present in your institution, more structural and paradigm
shifting cost structure change is likely required to sustain attractiveness to investors and
create strategic flexibility for sustained competitiveness.
***
Structural or Wave 3 techniques can produce tremendous long-term efficiency gains, but
they are not for the faint hearted. Operating model transformations require substantial
investment in new infrastructure and processes, retraining and recruitment. But, they
are essential to addressing the structural changes in the financial services industry even
at a time when revenues are starting to improve, for long term investor attractiveness
and to create the right level of strategic flexibility in a capital constrained environment.
Copyright © 2013 Oliver Wyman14
CASE STUDY #5: CAPITAL MARKETS INDUSTRY
Sharing and flexibilizing cost through industry utilities
Situation: Industry-wide need to reduce cost by 20-30%.
Many activities in the trade lifecycle/value chain do
not provide competitive differentiation. Every individual
player has substantive technology and process
investments. Processes tend to be efficiency optimized.
More scale is needed to reduce cost.
Mutualization of technology and process investments.
Increase scale leading to lower unit cost. Build effective
governance mechanisms to ensure benefits can
be attained.
Results: Unit cost reduction of up to 50-80% for many
post trade activities via cost mutualization with an
average two year ROI on capital expenditure, and a
similar reduction of annual technology investments.
Approach: Partner with competitors to build industry
utilities in non-competitive back office activities.
COST SYNERGIES FROM MUTUALIZATION
EXAMPLE: BACK OFFICE UTILITY
TARGET AREAS FOR BACK OFFICE COST MUTUALIZATION
COST
+++
Client
network
mgmt
Notification of
order execution
network mgmt
Structure
origination
Market
network
mgmt
++
Order
management
Positions &
valuations/
balances
Execution
management
Other trading
system network
Fully
dressed &
validated
trade
Mutualization
cost synergies
+
Pre-trade
analytics
Market
exchange
network/
Broker
network
SHARED SERVICES
Current
cost basis
Controller
services
Reporting
services
Position
management
Funding &
collateral
services
External
services
Trade
processing
Custody
services
Receipt &
delivery
network
Validation &
enrichment
General
ledger
VOLUME
Risk
services
Risk
information
Total cost without mutualization
Confirm/
affirm
network
Lifecycle
event
network
Individual broker-dealer cost base
with mutualization
Individual broker-dealer unit cost
with mutualization
Allocation
network
mgmt
CLIENT SERVICES
EXCEPTION MANAGEMENT
VALUATIONS
REFERENCE AND MARKET DATA
Target areas for cost mutualization
Copyright © 2013 Oliver Wyman
15
“
Wherever you are in the
cost journey, our message
is the same: it isn’t over
yet. A paradigm shift is
still required for a truly
different and sustainable
cost structure.”
Copyright © 2013 Oliver Wyman
16
Oliver Wyman is a global leader in management consulting that combines deep industry knowledge with specialized expertise in
strategy, operations, risk management, and organization transformation.
For more information please contact the marketing department by email at [email protected] or by phone at
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ABOUT THE AUTHORS
Dylan Roberts is a Partner in the Americas Finance & Risk and Strategic IT & Operations Practices
Alex Lyall is a Partner in the Americas Corporate and Institutional Banking and Strategic IT & Operations Practices
Amit Bhandari is a Partner in the Americas Retail & Business Banking and Strategic IT & Operations Practices
John Boochever is a Partner in the Americas Strategic IT & Operations Practice
Prashanth Gangu is a Partner in the Americas Insurance Practice
www.oliverwyman.com
Copyright © 2013 Oliver Wyman
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