Author: Daren Cox, CEO of Project Brokers
Modern financial Institutions are facing unprecedented challenges: the largest investment banks in Europe and the US have suffered double-digit falls in their fixed income, commodities and currencies (
) trading arms, just as increased regulation is forcing banks to hold onto more capital, resulting in reduced leverage and a significant squeeze on their return on equity.
As a result, the pressure to slash costs in UK banking operations has never been more intense. Most leading banks have responded to a need for operational efficiency by promising to reduce costs across the board with widespread job cuts and stricter rules on travel and entertainment expenditure. Many have announced they will not subsidise any holiday parties or other entertainment this year, and banks are now scrutinising even the smallest of expenses, with newspaper subscriptions and pot plants among the items up for review.
Of course, the ability to maintain a tight reign over direct and indirect expenses is an essential part of controlling costs. However, banks need to begin this process by understanding their expense patterns – past, present and future – in order to make the best and most effective decisions in this area.
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Cutting costs can clearly be challenging for finance officers within investment banking operations, especially as smaller expenditure can often go unnoticed due to the disparity and magnitude of the different divisions within the organisation. CFOs across the banking sector are therefore looking to enhance both the visibility and transparency of their costs, so that they can make better-informed decisions as part of on-going spending reviews.
Problems arise, however, when it comes to interpreting this information, since this data is often stored across many different management systems that are non-conversant and incompatible, and which therefore hinder any efforts to produce useful analytics or gain any meaningful insights
This lack of visibility can cause serious problems for today’s CFOs and other financial decision-makers, as it often means that they only have access to headline costs, and therefore often can’t see where other savings could be made. The solution to this problem is not as difficult as it may seem, however. Banks simply need to take a more holistic view of their expenses so that they can make informed decisions that will allow them to cut the fat – but not the muscle – when trying to reduce costs.
To achieve this goal, banks will need to begin by making the invisible, visible by identifying previously unseen trends, connections and relationships between their expenses data instantly, so that lower-profile costs such as market data and telecom costs, travel and entertainment, and brokerage fees can all be identified, assessed and reduced.
For many banks, however, the format in which this expense data is reported makes this process extremely difficult, as many systems only provide decision-makers with access to top-level costs, and therefore makes it difficult to identify precisely where these more ‘granular’ savings could be made. As a result, many expense reports are often missing this vital information, and therefore provide an incomplete and misleading picture.
In order to address this issue, it’s important for banks to be able to extract and consolidate their expenses data from multiple vendors and sources, so that they can have a single view of this disparate information and therefore gain a comprehensive overview of each department’s expenses.
The good news is that new technology now makes it possible to extract and consolidate this type of expense data from multiple vendors and sources into a single ‘dashboard’. The result is a holistic overview of the data that empowers managers to accurately pinpoint any employees that are spending excessively, to effectively manage multiple vendors, and to expose anomalies and inaccuracies in their expense data.
It’s easy to see the benefits that this approach can deliver. By providing a single view of all expenses and comparing it against the latest cost centre structure in areas like client entertainment, travel, corporate services, mobile communications, enterprise infrastructure, market data and catering – along with details of the management structure and the final ledger – the visibility of this data can be greatly improved. As a result, recent studies have shown that banks can reduce their direct line expenses by as much as 20% by turning data into action in this way.
At the same time, data quality will also be better as a result of this more consolidated approach, since any inconsistencies and anomalies in reports can be investigated and corrected very quickly. Not only will this approach make it easier for the management team to see ‘the big picture’ when it comes to expenses, but they will also have the ability to drill down into granular detail in order to investigate and understand any exceptions. As a result, the time spent producing and amending reports for any particular month, division or item can be drastically reduced, accuracy can be improved, and key decision-makers can gain much-needed insight into how and where to reduce operating costs.
Without a doubt, cost-cutting campaigns are here to stay for the vast majority of UK banks. Cost reduction, however, is a different philosophy to cost efficiency. It is cost efficiency and value for money that should be the focal point any new initiatives in this area. In most cases, a lack of visibility is probably the biggest stumbling block in this regard, since trends in high-volume, low-cost spending will often go unnoticed as a result. By comparison, new ways of looking at this data can provide a much clearer understanding of an organisation’s expenditure, and therefore make it possible to reduce inefficiencies like policy breaches and to focus on the things that matter instead.
As such, decision-makers within the financial services sector can tighten their belts more effectively by keeping closer tabs on any unnecessary employee expenditure and maximising budgeting strategies and operational efficiency. To save money in the short, medium and long term, it will be important to define key objectives in these areas carefully, however. After all, most banks aren’t trying to remove their discretionary spend completely; they simply need to ensure that their funds are focussed on the areas that will have the highest impact on their clients, employees and the community.