In the current economic climate, banks have to cut spending and find efficiencies wherever possible. However, many investment banks have substantial – and increasing — cost allocations that make it nearly impossible to lower costs and provide a constant challenge. Organizations are now discovering that cost transparency and a solid understanding of their allocation are prerequisites to getting a handle on cost containment.
Today, we are seeing an interesting dynamic develop among investment banks. They’re increasingly looking to move to a variable cost structure. Largely driven by the critical need to contain costs and protect against future cost increases, some organizations are using managed services to eliminate high fixed costs and move to a cost-per-outcome model for certain assets classes.
Financial firms can follow three steps to move to a true variable cost structure.
- Establish complete transparency into cost, including all shared costs. Financial institutions must not only look at individual business costs but also at the attributions and allocations that go into each business. For example, if a bank simply allocates 40 percent of its costs without any further breakdown, those become fixed costs that the organization has very little hope of cutting. In general, a high allocation only means that there is little transparency into where the costs truly lie. Therefore, optimizing one part of the business would only shift these costs to other parts of the business therefore not truly reducing costs. Driving cost transparency enables banks to understand costing at a more granular level, even if they have shared centers. This way, each business can understand — by transaction — what its true costs are, providing true insight into where cuts can and cannot be made.
- Evolve the business into a more variable cost structure. Once organizations have established transparency into costs, the next logical step is to empower the business to take action to drive both direct and indirect costs into more of a variable structure. For instance, if an organization sees the internal costs of servicing a request are too steep, it has the ability to make choices that it otherwise could not make. The firm can make the decision to move transactions from its internal centers to an external center, a measure that would make costs variable and improve efficiencies. It could also combine multiple internal centers into a shared center to further improve efficiencies, or look at a third party for all services if it chooses to externally benchmark for efficiency. These choices are made possible only when the organization has a solid understanding of costs.
- Leverage cloud infrastructure and other managed services. To further variablize costs, financial firms can move their infrastructures, applications and operations to a cloud model — an aspect of this was previously discussed as a “lurking variable.” Moving to a cloud model gives the business far better control of cost management and enables it to more successfully align its costs with revenues. Organizations that evolve their infrastructures and operations into BPaaS will not only make their costs truly variable but also can realize another great benefit – increasing transparency.
Taking these three steps will position banks well from fluctuations in business conditions – and protect them from being challenged by future cost increases.