Traditional cost-cutting measures aren't enough to solve current profitability crisis in Financial Services industry

13 February, 2019

In a new report titled: The productivity agenda – moving beyond cost reduction in financial servicesPwC sets out the important challenges and opportunities facing the financial services industry and the ways in which senior executives should respond if they want to move beyond simple cost cutting and improve profitability in the long term.

With banks struggling to improve their return on capital, many institutions are being forced to restructure and cut costs. Even in the asset management industry, where return on expenditure is higher than the financial services industry as a whole, there is downward pressure on margins and profitability. Cost cutting will only deliver so much. If financial institutions are to improve profitability in the long term, they need to fundamentally improve the productivity of the enterprise.

Steve Billinghurst, Advisory Leader for PwC Isle of Man, stated:

“The cost cutting agenda adopted by many institutions since the financial crisis has, in essence, made the industry more local or national, shrunk global footprints, divested businesses, and shed clients. We have seen first-hand the effect of this on the Island. However, this process has run its course. If profitability is to get anywhere near the highs of fifteen years ago, what’s needed now is a fundamental focus on building a sustainable productive business model that can compete with both incumbent institutions and importantly digital-only competitors.”

Based on a detailed survey of the global financial services industry, PwC has identified six areas where financial institutions can focus their productivity efforts to boost long term sustainable profitability:

1: Better understanding the workforce

Our experience indicates that by simply tracking hours by task, organisations can improve productivity by 15% to 20%, and the implementation of service catalogues and multi-tier sourcing can bring another 20% improvement. Of the organisations that didn’t track work by hours and tasks, 62% believed such tracking would yield productivity benefits.

2: Rethinking change functions

Forty per cent of financial institutions are spending 20% of their entire budget on so-called ‘change-the-institution’ efforts. However, only 15% said they were satisfied with their ability to execute change.

3: Embracing the platform economy

Only 21% of financial institutions employ crowdsourcing tools today. Platforms can run challenges that tap the collective brainpower and resources of a crowd, driven by a sense of competition to develop the best response. Finding innovative solutions to talent acquisition is key to a tight labour market such as the Island experiences. We predict that gig employees will perform 15% to 20% of the work of a typical institution within five years. This translates into significant cost savings across the board, along with the potential to improve the level of talent and innovation delivered from the employee base.

4: Improving workforce digital IQ

As people live and work longer, and unemployment rates remain low, digital training and retraining of existing workforces is particularly crucial. Despite its importance, research shows that current efforts are not achieving the desired results. Of the financial-services leaders polled in PwC’s 2018 CEO Survey, 75% reported they were concerned about shortages of digital skills within the industry. This is a statistic echoed by many Isle of Man business leaders.

5: Bringing an agile mindset to the mainstream

To keep up with digital-only competitors and rapidly deliver a seamless and instant customer experience, 77% of financial institutions are becoming more agile within their organisations.

6: Mastering digital labour         

Over 50% of CEOs believe artificial intelligence (AI) will have a bigger impact than the internet. Getting the balance right between tasks performed by AI and tasks performed by people will be key to future success for financial institutions.

“It’s clear what financial institutions need to do to build future profitability and to remain competitive. However, doing it and making the necessary changes will be a huge challenge. Very soon we will start to see which CEOs have taken the productivity agenda seriously”, added Steve Billinghurst. “With our deep local industry experience, PwC is ideally placed to support financial services business with this challenge.”

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Steve Billinghurst

Director, PwC Isle of Man

Tel: +44 (0) 1624 689711

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