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Research Report for the Banking Industry

Achieving Sustainable Growth through Strategic Cost Management

Insights from the Accenture Cost Management Survey

About the research

Accenture recently surveyed 1,405 executives at large companies in the United States, Canada, France, Germany, Italy, Spain and the United Kingdom to understand their cost management experiences and plans. In the survey, we asked questions such as: What action has your company taken in the past 12 months in regard to cost management? Did your company achieve its business objectives with the cost management activities? What results have you already experienced?

What additional cost management activities, if any, are planned for the next 12 months? What objectives does your company expect to meet with these future cost management activities? Which business functions will be most strongly affected? To gain perspective on important cost management trends, we engaged survey respondents from nine major industry segments, including banking, capital markets and insurance. In particular, 455 financial services executives provided insights on their current and upcoming cost reduction initiatives and cost management programs.

The Accenture Cost Management Survey underscores the importance for bank executives of:

Managing aggressive cost reduction initiatives. Developing and continuing sustainable cost management programs. Understanding the short- and long-term effects of cost reduction initiatives and cost management programs.

Key findings
Figure 1. Strategic cost management survey: comparative cost reduction achieved
Current situation for North American banking institutions:

How much has your organization reduced its costs in the last 12 months?
49%

Key Message
50% 40% 30% 20%
11% 39% Nearly half of North 40% American banking executives indicated their cost reduction efforts through late last year at least equaled or even exceeded the global average for banking and other industries (11%) 6% 1% 3%

All Industries Insurance Capital Markets Banking

10% 0% Costs increased 0% 1% -5% 6% -10% 11% -20%

21%-30%

>30%

Costs decreased
Source: Accenture, January 2010

This report details the survey findings as they relate to the North American banking industry. For most banks, return on equity in recent years has fallen from 25 percent to less than five percent. Institutions are now under severe liquidity pressures due to loan losses, often anemic organic growth, a tight credit environment and generally weak economy. High cost bases and inflexible, redundant operations are no longer acceptable. To restore profitability as the economy rebounds, many banks recognize the need to be strategic with cost reduction effortsand aggressive. By balancing short-term, tactical cost reduction initiatives with longer-term, sustainable cost management programs, most banks can work to achieve cost reductions of 20 percent to 40 percent.

Current realities
Bankers around the world have already shown their resolve to face the current global financial challenges using aggressive cost reduction initiatives. Banking executives indicated in the survey that their industry has already been pursuing significant cost reductions (Figure 1) and that these efforts will continue at a pace exceeding most other industries going forward. Butand this may be one of the most significant findings for the banking industrymany executives also suggested that their current approach to cost cutting might not be sustainable or have the desired long-term effect.

In particular, executives were uncertain whether their banks are prepared to meet increasing expectations for sustainable growth as they continue to cope with the challenges of the global economic environment. We will return to this topic later in the report, but first a few more findings on what has recently happened.

For most banks, return on equity in recent years has fallen from 25 percent to less than ve percent. High cost bases and inexible, redundant operations are no longer acceptable.

Figure 2. Strategic cost management survey: number of cost reduction rounds

Current situation for North American banking institutions:

How many rounds of cost reduction has your organization implemented since the global economic downturn started 18 months ago?
Mean reduction rounds for: U.S. banks = 3.34 Global banks = 3.24 Canadian banks = 2.70
45% 39%

70% 60% 50% 40% 30% 20% 10% 0% Do not know/ not applicable
Source: Accenture, January 2010

All Industries Insurance Capital Markets Banking

13% 3%

1 to 2

3 to 5

>5
Response higher (by 2%) than average global banker response

The majority of the more than 100 North American banking executives we surveyed reported that through late last year they had: Reduced their overall expenses by at least six percent, with nearly half of respondents achieving reductions of 11 percent to 30 percent or more, a level higher than their counterparts in capital markets and insurance. Executed three or more waves of cost cutting. An average of 3.34 rounds for US banking respondents was much higher than the average for all nine industries surveyed, including capital markets and insurance. It also exceeded the average of 2.7 rounds for their Canadian counterparts (Figure 2).

Targeted staff-related expenses. The most popular cost reduction tactics include (Figure 3) making layoffs (67 percent of responses), eliminating jobs (66 percent), reducing employee compensation (55 percent) and cutting employee benefits (45 percent). For all but one of these categories (employee benefits), the percentage of reductions by those in the United States exceeded the amount of reductions by banks elsewhere by at least 11 percent. Used cost management initiatives mainly to reduce operating expenses.

cost reduction activity much higher than that of respondents from other industries. And going forward, nearly a majority of banking executives (49 percent) intend to reduce costs further by at least six percent, with some aiming for up to 20 percent or more in additional cost reductions. However, the motivation for upcoming cost management actions appears to be shifting: 70 percent of banking executives said that future cost reductions will be to enhance profitability. In contrast, respondents ranked Survive Global Economic Downturn as a rather distant third priority, possibly signaling renewed favor for long-term, strategic actions over short-term tactical maneuvers (Figure 4).

Future plans
Looking to the future, more than three quarters of banking executives told us that they are not finished reducing their costs. At least 65 percent of bank executives said they will initiate further cost management actionsa level of

Figure 3. Strategic cost management survey: actions already taken by banks

Current situation for North American banking institutions:

Which of the following cost management actions did your organization implement in the last 12 months? (based on multiple responses)
Employee layoffs Job eliminations Organizational structure changes Employee compensation reduction Employee benefits reduction Advertising reduction Process redesign Facility-real estate rationalization Shared services Strategic sourcing Customer self-service options Product redesign
Source: Accenture, January 2010

67% 57% 66% 51% 58% 48% 55% 45% 45% 45% 42% 44% 41% 37% 38% 33% 32% 30% 25% 22% 23% 23% 22% 20%

% = Response level of bank executives worldwide

Figure 4. Strategic cost management survey: US bank plans for additional expense reduction
Future aspirations for North American banking institutions:

What objectives do you plan to achieve by taking additional cost management actions in the next 12 months? (based on multiple responses)
Reduce operating costs Increase profitability Survive global economic downturn Eliminate process redundancies Free up cash quickly Foster cost management culture Provide greater expense visibility Drive asset productivity Improve decision-making speed More variable cost structure
Source: Accenture, January 2010

71% 66% 70% 62% 46% 46% 41% 35% 26% 29% 25% 31% 25% 22% 22% 23% 16% 26% 13% 10%

% = Response level of bank executives worldwide

Key Message
Only 14% of Canadian executives indicated Survive Global Economic Downturn as an objective compared with 50% of their U.S. counterparts

Figure 5. Strategic cost management survey: functional areas of focus for banks
Future aspirations for North American banking institutions:

In which functional areas do you plan to make cost reductions in the next 12 months? (based on multiple responses)
Operations & Production Information Technology General Management Marketing & Sales Human Resources Finance & Accounting Procurement Research & Development Customer Service Legal Strategy & Business Development
Source: Accenture, January 2010

39% 31% 38% 36% 38% 36% 35% 33% 33% 31% 29% 36% 20% 25% 19% 19% 16% 21% 13% 17% 13% 14%

% = Response level of bank executives worldwide

Used appropriately as a major financial performance lever, strategic cost management programs can help banks achieve an acceptable level of profitability andultimatelydeliver attractive returns to shareholders. Strategic cost management programs may also be increasingly important as loan loss write-downs continue to occur and banks experience ongoing pressure to boost capital levels.

Responses to the survey also indicated that, going forward, bankers intend to reduce costs across a broad range of functional areas (Figure 5), including operations and IT as well as in human resources, finance and accounting, and procurement.

Challenges and opportunities for banks

During the economic downturn, most banksperhaps by necessityhave emphasized tactical cost reduction initiatives over strategic cost reduction programs that have sustainable, longterm business benefits. However, those organizations that recognize the opportunities created by a general shift toward strategic, sustainable cost reduction programs will be best positioned to achieve high performance going forward. The current situation emphasizes how important it is for banking executives now to take a strategic view toward managing cost reductions. In the survey, most banking executives (78 percent) believe that cost reductions so far have permanently changed the way their organizations will operate.

Survey results also indicate that cost reductions already made in such areas as human resources, IT, and research and development have actually harmed more than helped their banks ability to achieve short-term performance goals. When asked about the long-term impact of their cost reduction activities, banking executives told us that cost cuts related to IT and customer service departments did more harm than good and those related to risk have at least hindered as much as helped their banks ability to achieve long-term performance goals. On a more positive note, cutbacks made to functions such as supply chain management, procurement, and finance and accounting are viewed as having helped the organization much more in the long run (Figure 6).

A majority of banking executives indicated that they are not certain whether their cost reduction efforts to date will be sustainable going forward.

Figure 6. Strategic cost management survey: long-term impact of implementation

Current situation for North American banking institutions:

For the following functions where you decreased costs, please indicate how cost management actions impacted your organizations ability to achieve long term (more than 12 months old) performance goals?
Information Technology Customer Service General Management Human Resources Marketing & Sales Operations Research & Development Risk Strategy & Business Development Finance & Accounting Procurement Supply Chain Management Legal 40% 26% 25% 24% 24% 22% 22% 22% 21% 16% 15% 10% 8% 0%
Hindered No impact Improved No action taken Do not know/not applicable

22% 41% 32% 41% 28% 32% 51% 48% 46% 35% 38% 35% 54% 10% 20% 30% 40% 50% 60% 48% 42% 42% 36% 40% 35%

31% 22% 11%

7%

3% 4% 31% 2% 3% 2% 10% 2% 5% 19% 22% 29% 3% 5% 9% 4% 7% 2% 4% 6% 25% 70% 80% 8% 90% 4% 100%

Perhaps because of some of the negative effects of the recent cost cuts, nearly half of banking executives reported that they are undecided whether to continue previous initiatives implemented over the past 12 months. Nonetheless, banking executives said that, moving forward, they again will be focused on tactical initiatives such as reducing employee-related costs. Less popular were such strategic considerations as undertaking process redesign (26 percent), adopting shared services (25 percent) and rationalizing customer mix (25 percent). However, a similar emphasis on shortterm thinking and tactical solutions helped create the current business reality, and the time may be right to reconsider the overall approach.

For example, before the full impact of the global financial crisis, many banks were focused on driving growth through product innovation and focused relatively less attention on developing efficient operating models or achieving customer centricity. Complex and disjointed organizational structures were erected that embedded duplicative efforts and created, in some cases, siloed sources of cost scattered throughout the company. These isolated organizational structures were also inherently inflexible and disallowed economies of scale. So the tunnel vision for immediate growth resulted, perhaps inadvertently, in the creation of inflexible and expensive operating models.

Had the pre-crisis focus instead been on sustainable growth, the banking industry may well have had efficient and flexible operating models that would have put it in a much different situation going into the global economic downturn. Although in a weak economy, there may be similar temptations to focus only on immediate needs and reassure investors by cutting costs indiscriminately10 percent across all departments, for examplethe approach of sharing the pain equally across the organization often cuts muscle as well as fat and risks hampering a bank's ability to bounce back as the economy recovers. The fact that most banks have so far initiated three or more rounds of cost cutting hints at limited effectiveness. Leading banks today have an opportunity to take a strategic approach to cost management and work toward achieving sustainable growth.

Recommendations
Figure 7. Strategic cost management
Impact and Sustainable Value Creation 3

Strategic Actions

2 1 Tactical Actions

Sustain Cost Reduction

Time

Rapid Cost Takeout

6/12 months > 12 months
2

Tactical Actions Rapid Cost Take Out

Near term cost reduction with low complexity and investment

Bolster Cost Governance

Cost management model optimization to achieve sustainable cost reduction, ensuring effective execution

Strategic/Operational Transformation
Optimize non core capabilities Search for cost variabilization Transform/invest in core capabilities

It is critical for banks today to find the right balance between painful but sometimes necessary headcount cuts and the more strategic efforts to streamline processes, rationalize systems, outsource non-core activities and improve the operating model.

1. Tactical Cost ReductionsSeek rapid cost takeout of non-strategic expenses, the low-hanging fruit, to fund ongoing strategic cost management initiatives. 2. Proactive Cost GovernanceCreate or fortify a proactive cost governance model to sustain cost reductions using an organizational mindset that is focused on continuous improvement. 3. Strategic Cost Management/ Operational TransformationImplement structural changes to the operating model and business processes to maximize value, sustain cost reductions and move to a more variable (vs. fixed) cost structure. Many times, these strategic initiatives can be funded with savings from tactical cost reductions.

Balancing short-term, tactical cost reduction initiatives with longer-term, strategic cost management programs, most banks can achieve cost reductions of 20 to 40 percent or more.

Journey to strategic cost management

To achieve high performance with strategic cost management, Accenture recommends bankers create maximum impact and sustainable results by using a timely combination of (Figure 7):

Six recommended actions

By using a smart combination of tactical cost reductions, proactive cost governance and strategic cost management initiatives, a highperformance efficiency bank can be created. This type of bank usually benefits from having implemented the following six recommended actions: Create a lean organizational structure to minimize management layers, clearly define roles and make extensive use of shared services to de-duplicate activities. Rationalize the banks product portfolio so that it offers standardized components and reusable product features that can be grouped into tailored customer offerings that drive profitability. Optimize the operating model architecture by moving progressively from a high fixed-cost base to a variable lower-cost base using offshoring and outsourcing. Strategic
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sourcing provides the flexibility to dial up or dial down costs and capacity according to market conditions and business goals. Streamline and automate processes, encouraging a culture of end-to-end process ownership and continuous improvement. Deploy a multi-channel mix of capabilities for an effective customer experience that delivers satisfying self-service options for simple sale and service transactions while focusing the right amount and quality of professional resources on interactions with the most profitable customers. Modernize and simplify the technical architecture to implement capabilities that extract intelligence from data analytics to enhance customer targeting and service, capitalize on the mobile revolution and revamp the banks capacity for managing risk.

Accenture believes that, despite recent cost reduction initiatives, expenses at most North American banks are still at least 20 percentand in some cases 40 percenttoo high. With savings generated from tactical cost reductions, many banks can create self-funding programs for strategic operating model or process improvements that have long-term business benefits. With flexible and streamlined organizational structures, a bank can improve its ability to meet evolving customer needs. It can also be prepared to lead the way in the changing financial services landscape with its new non-banking competitors such as telecommunications companies, retailers, electronics makers and internet providers.

Why Accenture

Accenture provides clients with a solid approach to cost reduction. Our proven assets, multi-sector track record in financial services and other industries, and award-winning Accenture Global Delivery Network help us deliver effective cost reduction programs and meet a range of IT and business process outsourcing needs. Accentures end-to-end strategic cost management capabilities facilitate smart planning as well as efficient implementation and optimization of ongoing operations. Our key differentiators include: Senior teams of industry experts who closely co-operate with client management teams and other key stakeholders to set priorities and optimize savings in the right areas. Implementation focus enables a make-it-happen attitude to achieve business results, leverage existing

initiatives and provide a combination of quick wins and longer-term savings. In-house, full-service portfolio of resources for operational and financial restructuring and other business functions to be performed on site, near shore and/or offshore, as appropriate. Holistic approach to address costs using an end-to-end, cross-functional transformation that focuses on change management and the promotion of a performance culture to create strategic cost management rather than ad hoc cost reductions. Strategic cost management can and shouldbe a continuous process implemented with a long-term view to enabling cost reductions while sustaining sources of revenue generation, creating effective risk management capabilities and developing a nimble organization that is able to adapt to economic, financial and regulatory changes. In this way, strategic cost

management can help a bank achieve sustainable growth and be well positioned for high performance in the future.

Proprietary assets and specialized methods for:

Cost management benchmarking and planning Cost reduction across the banking operating modelfrom distribution through to back ofce and IT Cost governance Business process management improvements, including using Lean Six Sigma Savings realization and certication

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Contact us
Matt Podrebarac
Lead for Strategic Cost Management Services North America Banking +1 973 301 1087 matthew.j.podrebarac@accenture.com

Julian Ortiz
Senior Director for Process and Innovation Performance North America Financial Services +1 310 426 5183 julian.ortiz@accenture.com

Terry Moore
Managing Director for Financial Services North America Banking +1 678 657 8730 terry.l.moore@accenture.com

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About Accenture
Accenture is a global management consulting, technology services and outsourcing company, with more than 181,000 people serving clients in more than 120 countries. Combining unparalleled experience, comprehensive capabilities across all industries and business functions, and extensive research on the worlds most successful companies, Accenture collaborates with clients to help them become high-performance businesses and governments. The company generated net revenues of US$21.58 billion for the scal year ended Aug. 31, 2009. Its home page is www.accenture.com.