Moving beyond traditional cost reduction programs in Financial Services

Publish date:

Is it time for Financial Services organizations to re-invent their cost strategies? Already experiencing strong pressures on their cost-to-income ratio and return on equity, banks and insurers are now facing another significant challenge – the impact of COVID-19.

Life before COVID-19 

The Financial Services sector had been experiencing profitability issues before the coronavirus outbreak. To start with, banks had been hit by diminishing revenues as a result of a low interest rate environment, strong competition from new market entrants and international players, and diverse national monetary policies that affected their access to liquidity. 

Adding to this pressure were continuously increasing costs arising from regulatory compliance and high levels of technology spending. This included the need to fund more remote working, as well as a growing volume of risks due to defaults, insurance claims, client bankruptcy, etc.  It’s clear that the industry was encountering stormy weather. Which became a perfect storm at the outbreak of COVID-19. 

Responding to the cost pressures  

Many banks and insurers have responded to the existing and COVID-related cost pressures with traditional cost reduction programs yielding short-term savings. Foremost amongst these are plans to cut thousands of jobs globally and the freezing of transformation projects. But this approach (what spending do I have? what do I need? what can I cut?) typically fights the symptoms, not the cause.  

In this traditional scenario, it is not unusual to see as-is cost analysis requiring significant up-front effort, highly complex cost mapping with uncertain benefits, and a lack of focus on the bigger picture as individual initiatives with short-term cost reduction potential prevail. Budget reallocation rather than cost reduction often results from poor benefits tracking, while complex operational set-up and significant fixed cost bases limit the impact of cost reduction initiatives. 

If this sounds familiar, then you’ll already know that cost optimization in this landscape is not sustainable. Failed change management often drives down employee engagement and reduces the impact of initiatives. Now, with the added impetus created by COVID-19, Financial Services organizations must embark on a cost transformation journey across the value chain to build a structurally efficient and profitable operating model.  

Life after COVID-19 

So, where do you start? Many levers (innovation, digital, partnerships, change management…) may be used to create a more disruptive operating model that is cost efficient, evolutionary, and resilient, with an improved user/customer experience. But before that, eight key questions must be answered to steer the cost transformation journey: 

  1. Where are the potential cost optimization areas in the business? 
  2. How much is attainable and what kind of savings can be achieved? 
  3. What are the levers for delivering both short-term impact and sustainable results? 
  4. What are the priorities and levels of investment needed? 
  5. When will the results start accruing for shareholders, the business, and customers? 
  6. How can savings be maximized? 
  7. What (who) talent is needed to run the company efficiently and profitably in the future? 
  8. How should the rest of the workforce be managed? 

In all of this, traditional growth and sustainability objectives must now switch to achieving business resilience. Here, short-term cost transformation must be balanced with risk management, as well as the growth and sustainability ambitions of yesterday.  

In pursuit of resilience 

Resilience demands a shift of focus from one-off project costs to recurring run costs. And from revisiting immediate cost reductions to keeping costs low permanently. The impact on employees cannot be underestimated and, as part of this shift, banks and insurers need to develop an innovation culture to keep employees engaged, remain attractive as a place to work, and achieve long-lasting gains. 

At Capgemini Invent, we support our clients as they transition the workforce to new, more resilient ways of doing business, supported by digital tools. For example, we can help to define re-skilling strategies that might include job analysis, workforce planning and transition, training, and new team alignment.  This is offered as part of a broader Cost Efficiency Framework, for which we use the following four levers designed to reduce cost, innovate operations and future proof our clients’ businesses: 

Digital Workforce

  • Analysis of workforce location mix and operational requirements, including resilience and contingency capability 
  • Define the optimum future workforce model that balances physical, collaborative requirements against roles and time that can be digitized, whilst improving resilience and contingency  
  • Typical Savings: The elimination or significant reduction in physical location costs can result in up to 75% savings 

Intelligent Process Optimization and Organization Streamlining

  • Analysis of end-to-end business processes from the customer to back office and support functions 
  • Improve operational processes, embrace digital/artificial intelligence (AI) opportunities and support organizational design to maximize revenues, cut costs and decrease risks 
  • Typical Savings:  Up to 50% are common when incorporating digital/AI opportunities 

Legacy IT Transformation

  • Apply our proprietary eAPM solution to the rationalization of legacy systems and infrastructures 
  • Plan to utilize new technology, transition to cloud, and maximize strategic partnerships where possible  
  • Typical Savings: Up to 40%  

New delivery models through partnership

  • Analyze the non-core activities and assets suitable for outsourcing
  • Options range from right shoring and managed services through to non-core divestment, asset buyback and captive buyback solutions: including perform–transform arrangements that will change fixed costs to a more responsive, variable cost base
  • Typical Savings: Up to 60% depending on solution adopted

Transforming for future success 

These levers help our banking and insurance clients to both overcome the current cost pressures and, more importantlytransform to thrive in the marketplace of the future. For a leading bank, we used our Cost Efficiency Framework to review, validate and categorize efficiency potential in its IT capability. Along with automated reporting, we designed and implemented the approaches needed to ensure the bank’s cost cutting measures were successful. The result? Up to 18% decrease in IT operational expenditure. 

Transformation projects like this demand a new, more agile approach than the now outdated define, plan, execute three-step methodology.

At Capgemini Invent, we have developed a modern, dynamic and fluid approach to accelerating change and getting the results our clients expect.

In adopting this agile, end-to-end approach to cost resilience initiatives, we also mobilize our innovation capabilities and experts, using our asset factory to rapidly test new digital assets. Cost pressures will not go away. Rather, they will ebb and wane according to ever-changing circumstances, such as the current coronavirus pandemic. Adopting an agile approach to managing these pressures will ensure future cost resilience.

Find out more about Strategic Cost Resilience with Capgemini Invent here.
Or contact Antoine Genin.

Related Posts

Capgemini Invent

Financial services firms need to act now on climate change risk to ensure a sustainable future

Gaurav Bedekar
Date icon September 25, 2020

It is time for financial services firms to actively incorporate climate risk into their...

automotive

Automotive product launches in the digital era

Ashish Sharma
Date icon September 21, 2020

The COVID pandemic has caused organizations globally to re-examine their marketing...

Capgemini Invent

Driving interest in the pandemic’s impact on the automotive industry

Daniel Davenport
Date icon September 18, 2020

Research report spikes media attention on how consumers feel about owning cars today