It's a familiar story in the financial services industry. The market is down, profits are down, and a major bank announces it will take out a billion dollars in costs by restructuring the business and reducing staff by a few thousand people. The stock market responds positively to such announcements, but the truth is that such cuts simply return a bank to its status quo. As the market or the economy rebounds, staff levels inch back up and the bank's cost basis returns to previous levels.
For years, much of the financial services industry has responded to market cycles with short-term across-the-board cost cuts. But there are forces at play that make a change in the industry's mindset an imperative:
- First, there is the growing burden of meeting regulatory requirements. One financial services leader complains his bank used to have 30 on-site auditors but is now required to have 180.The result? A major new permanent expense without revenue to offset it.
- Second, innovation in financial services is running low. No one is producing new ways to do mortgages, credit cards, or savings products. So new revenue streams for financial products are drying up.
- Third, scale is no longer a major factor in competition. An upstart enterprise in mortgage loans can produce the same level of profit as a much larger competitor based on how well it manages efficiencies.
- Finally, and most importantly, the financial services industry is increasingly commoditized. Pricing and the quality of the customer experience are the only differentiators that matter.
In such a changed environment, the financial services industry must abandon its reliance on short-term 'fixes' and create permanent efficiencies by reducing processing costs and increasing productivity. For inspiration, banking executives should look at manufacturing and how successful manufacturers handle their supply chains.
In manufacturing, knowing the "cost per unit" is part of the industry's DNA. By understanding the cost of each element of the production process, including FTEs, a manufacturer can tinker with the components of his supply chain and use alternative delivery approaches to drive efficiency and productivity.
Read more about what financial services executives can learn from manufacturing in the Wipro Consulting paper, 'Not Just Another Round of Cost-Cutting.'?