Financial institutions had a great run. In the lead up to the financial crisis, businesses in the sector had years of continuous revenue growth, large profits and expansion. While that time may feel like decades ago, as the sense of optimism in the market returns it is time to focus on driving growth.
The years of relatively “easy” growth meant financial organisations grew in an inefficient way, expanding without too much concern for the waste or inefficiencies building up to drive that progression. As the financial crisis struck and the bottom line was hit, nearly every organisation has shifted to necessary cost cutting. It is not too surprising that businesses turned to cost cutting measures initially but this isn’t necessarily the right long-term strategy. Once organisations have reduced the major inefficiencies within the business, cost cutting starts to become counterproductive and results in few gains despite a lot of effort.
Financial organisations have also been restricted through rafts of regulatory reform. Implementing the mandatory regulations and the subsequent changes to the business coupled with cost cutting has dominated the focus of change activity, and therefore investment, across the financial sector for a number of years. Moorhouse’s , “Too much change? Financial Services Survey 2012”, found that 88 per cent of Financial Services organisations feel regulatory change is preventing their organisation from addressing other urgent business priorities with over half (61 per cent) stating significantly.
As the market stabilises, financial organisations need to move from cutting costs to investing in growth. By shifting focus to investing in growth, financial organisations can get ahead of the competition and seize opportunities as they are presented. A staggering three quarters (77 per cent) of those surveyed in Moorhouse’s, “Too much change? Financial Services Survey 2012”, felt their organisation would have to change its business model in order to thrive over the next three to five years. In fact, almost two thirds (60 per cent) reported that this change would need to be substantial or fundamental. This is not without risk and requires a number of key considerations to be made in order to determine how far your organisation is willing to go.
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Risk appetite is key. While cost/benefit analysis is always an important step when determining whether to invest, in current times there may be less certainty about the reward potential. Although the economy has been slowly recovering, long-term stability in the market is by no means assured and there is always a risk that the market won’t respond to the direction your organisation chooses to take. The board needs to be clear on their risk tolerance level, and the potential fallout associated with any losses in the banking sector. Setting clear boundaries and criteria for investment in growth is key and this will help ensure that the company doesn’t over-invest in an initiative that isn’t achieving the right results. Ensuring that the investment criteria are set up front and then adhered to, will mean that you are able to make decisions with a clear mind.
There are a several important steps to take when deciding on the company risk tolerance and appetite and creating an investment criteria. Firstly, the organisation must determine who is needed to assess any new investment decisions and provide a balanced view of the organisation’s risk appetite. These people need to be empowered to make the decisions on behalf of the business within the risk tolerance that the organisation accepts. Decisions need to be made with a full and frank understanding of the environment in which financial organisations now operate, with ever increasing restrictions through imposed regulations and the media hype that surrounds any negative story arising from the sector. However, once the investment decision is made, there need to be processes in place allowing key people to have access to the right information in order to make important decisions based on the impact of the initiative on the balance sheet. So long as they have access to the right information and are empowered to act, they will be able to quickly make decisions on continued investment or to know when to pull the plug. If the appropriate disciplines aren’t in place, it will be hard to assess the company’s market position and the impact of the initiative on your balance sheet. Without this information, it will be very difficult establish whether is it right to keep investing in this initiative and if the organisation can afford to do so.
What is dominating the agenda in the next board meeting? Are the initiatives focused on cost cutting still reaping great rewards or are the savings starting to become harder to obtain? Are you still being restricted from broader investment decisions due to the requirement to implement further regulatory reform? Is it time for your organisation to begin focusing on the potential growth areas in your market? Are your competitors already beginning to make their move?
As you make decisions to get back to growth, consider the risk that your company is willing to take, and what it can afford to lose, but above all make sure that you put in place the right people, with access to the right information and empower them to act so that your business can seize the opportunities on the horizon.
By Mike Irving, Manager, transformation consultancy Moorhouse