PA IN THE MEDIA

The financial sector has once again been put on a diet - but the ambition should be for a more permanent lifestyle change

By:

Palle Antonsen, PA financial services expert
| Finanswatch

22 April 2020

The financial sector is under a massive cost pressure due to negative interest rates, low margins, increased regulatory requirements and now a COVID-19 crisis on top. In their efforts to meet these challenges, more and more financial companies are stepping up work to establish a cost culture where efficiency is built into the company's DNA. But remarkably few succeed in this ambition. What really characterises the companies that succeed - and those that do not? What can businesses do to succeed?

Efficiency has become the highest priority among companies in the financial sector again, just as in the years following the financial crisis. Back then, the primary reason was significantly increased impairments on bad loans after the housing bubble burst. Today, the ambition is the same, but the reason is different, namely low interest margins and significantly increased compliance costs. In addition to this a potential new financial crisis in the wake of the COVID-19 pandemic.

Most financial companies have therefore launched plans for comprehensive savings that they intend to realise through a broad range of efficiency initiatives - and in this context, more and more companies are setting an ambition to establish a cost culture. This is understandable, because experience clearly shows that the companies that have succeeded in creating a cost culture are far stronger in terms of cost-effectiveness compared to those that have not succeeded. Moreover, experience shows that while it is actually relatively easy to get a sense of whether a company has a high cost maturity - and while most top executives have a good understanding of what it entails, there are remarkably few who have been able to build and maintain an actual cost culture.

But what is the key to creating the cost culture they want? There is no clear recipe - but some very clear characteristics can be identified in the companies that have not succeeded and those that have.

Characteristics of companies that do not succeed

Many short-term cost initiatives, such as restrictions on travel, education, social events, external support, etc.
Poor management of budgets and costs - without overall overview and total management. Often, local budgets emerge 'out of the blue' under the radar of the overall budget process. Furthermore, budgeting and follow-up are not rooted in potential assessments and business cases.
Launching stretch targets for cost savings without simultaneously allocating funds to finance real and long-term efficiency initiatives that help improve processes, systems, behavior and eventually culture.
Poor coordination and governance across significant value streams and high levels of sub-optimisation due to local objectives and agendas
A thick layer of insulation between senior management and middle management that absorbs senior management's savings goals and prevents them from being translated into constructive initiatives and real effects
Low level of ownership of middle management savings goals - and non-existent ownership among employees, creating resistance.
Many uncoordinated business cases that are not tied to a budget and for the most part are never realized

Characteristics of companies that do succeed

Both short- and long-term cost targets and initiatives
Central and tightly controlled budget and target follow-up
Focus on competence development for managers within cost optimisation and operational management
A persistent management approach that manages to create and maintain a cost culture
Systematic approach to continuous improvement at all levels
Broad ownership of cost targets at all levels
Well-developed skills and methods in realising profits

The ambition for financial services companies must therefore be to create a plan to build a cost culture - based on both short- and long-term initiatives. Companies need to focus on a long transformation journey that must be broadly rooted in the organisation and include all aspects of the company's operating model.

In everyday language, this is a radical lifestyle change rather than a short-term diet.

Palle Antonsen is a financial services expert at PA Consulting