PwC - Release cash and reduce costs without losing strategic agility

When economies are booming and finances are good, financial institutions tend to praise their employees and refer to them as assets. In bad times, employees are seen as a cost to company and often fall victim to retrenchment as the same financial institutions remove dead weight to cut costs.

A recent Banking and Capital Markets report by PricewaterhouseCoopers (PwC) examines innovative ways of cutting costs without harming your business.

Tom Winterboer, SA Financial Services Lead Partner, PricewaterhouseCoopers says, “Now, more than ever, financial institutions need to get the basics right in terms of cash, cost, controls and culture. We believe there are more options to consider that many institutions and people might not be aware of.”

Most financial institutions will have exploited the most obvious opportunities to reduce costs, making the identification of the remaining cost cutting prospects a difficult process. The first and most popular step is to get the right people on board in your business from the word go. Now is the perfect time to be sourcing these individuals and re-evaluating the staffing mix in your business.

Exceptional candidates, who would otherwise only be available at a higher premium, are now joining the employment market in search of good opportunities. Institutions around the world have faced a fierce war for talent in recent years – and they now have an opportunity to selectively bring top quality staff on board.

Sustainable cash release and cost reduction efforts should be multidimensional, considering all aspects of the business and their impact on both the balance sheet and profit and loss. If costs are reduced without a clear understanding of the implications for strategy and effects on customers, the damage caused can outweigh the costs saved.

Right now, it is critical to understand not just the financial risks, but also the operational risks and the relationship from trading through to processing. This view helps identify areas of inefficiency and potential cost reduction that have been previously hidden or ignored as a result of business unit silos. Winterboer mentions, “Business owners or heads of organisations should be demanding to see operational assessments of end-to-end processes and systems, with actions and mitigation plans attached to the risks and opportunities.”

Leaders need to walk a tight rope when making hard decisions. These decisions can affect many employees and should be focussed on maintaining an employee’s commitment to deliver results. Success in these difficult times may be defined totally different than it was a year ago.  Clarifying what success really means, setting the priorities and refocusing the organisation on shorter time scales are critical.

7 Practical tips to getting your cost-saving initiative right

Cost management – A key issue today and tomorrow

The global market is experiencing a severe liquidity crunch and the explosion of a global asset bubble well beyond sub-prime. The root of the crises lies not only in asset values, but also in the amount of capital available in the financial system today versus the size and liquidity of the balance sheets of financial institutions. In an environment where deleveraging is the order of the day, businesses need to fundamentally rethink their strategies, operating models and cost structures.

A pre-securitisation baseline may be appropriate

If one assumes that the securitisation markets have contracted permanently then the appropriate way to consider the business may be in pre-securitisation baseline, adjusted for key acquisitions. One needs to adopt the proper mindset to consider when formulating businesses strategy and budgeting may be a pre 2004 or 2005 operating model and cost structure.

Understand the genuine cost and profitability of each business unit

This is essential information in assessing the overall impact of any decision made. This means understanding the linkage between up and downstream costs and risks rather than just focussing on activities that are specific to each business unit.

Don’t confuse cost postponement with cost reduction

Many organisations simply stop investing in new projects and new people during difficult times. This often comes with a hidden price, for example the future development of the institution, staff morale, customer loyalty and long-term profitability. The resulting costs could outweigh what was saved.

Focus on both direct cost and indirect cost reduction

Areas such as front office costs, the costs of risk management failures and funding costs will have to be considered in new ways to achieve a cost baseline acceptable in today’s markets. Operational costs will also have to be re-examined.

Understand the risks and strengthen risk management

Leaders need to ensure that they understand that while the front office might take the money, it is the middle and back office who help ensure that these returns are tangible through appropriate risk management processes and controls.

Ongoing review and monitoring to ensure effectiveness and avoid control slippage

Of course, it would be ideal to have a robust financial management framework to keep track of everything. In many cases, this is not possible. Simpler dashboard tools with the right key performance indicators are sufficient to monitor the effectiveness of your actions. It is crucial to have an end-to-end program that has the support of all the top managers.

In conclusion Winterboer says, “Before making any decision, it will be vital to assess your situation from various angles. Involve the right people, foster open debates, generate options and explore the risks and rewards of all the alternative options.”