Posts Tagged ‘costs’

Truths in Cost Management

Sunny cloudsOne of the most dramatic changes that has occurred in Institutional Banking since the financial crisis hit in 2008 is an increased focus on management of costs. This is isn’t anything incredibly new. Financial firms have been focusing on cost management for years. What has changed is an increased intensity and urgency due to margin compression driven by increased regulatory pressures and more aggressive competition for a quickly shrinking client wallet.

Many banks have created teams fully dedicated to the analysis of their costs. We’ve worked with a few of those organizations to help them define the scope of their work. It’s important to determine upfront what kinds of costs will be targeted for analysis and what will be on the table for aggressive management.[more…] The sizing of the initiative is critical in order to make sure that expectations are in line with what can realistically be achieved. Senior management have to be on board with most of the changes that the analysis identifies. It’s all too common for management to have high hopes only to back down when they perceive that they are cutting too much into meat and bone.

It’s important to get comfortable with a few truths:

  • Cost efficiencies in some cases will only come from additional investments in the platform and will be realized only some years later.
  • Cutting costs implies in many cases a cutting of some revenue streams
  • The perceived “fat” that people talk about in an organization is not a discrete element separate from the productive “meat and bone”. Most banks now are running pretty lean, so the exercise is one of objectively evaluating prioritization of businesses, functions, and initiatives.
  • Every business or project has their merits which should be fully understood before any rash decisions are made about them, especially…
  • Projects with longer horizons often have less potential impact that is less visible on the organization so they have higher risk of being cut. The long-term strategy of the organization should weigh heavily upon evaluation of these.
  • Cost and profitability analyses use a great deal of assumptions to come up with their results. All layers of management who are part of the cost management decision-making process must be well-versed in these assumptions to ensure that implications of decisions are well understood.

I’ll be writing more about cost management in the next few posts as its a topic that seams to be top-of-mind for many managers as they plan for 2014.

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Costs of Inadequate MIS

2013-08-24 17.13.49It’s surprisingly common for firms to attempt to drive cost savings by defraying investment in management information systems (MIS). In short-term budget planning it makes sense, especially in recent year with increased scrutiny on expenses and rerouting of IT expenditure toward regulatory requirements. But this can’t be part of a longer term strategy. There are significant costs, some hidden and some explicit, that accumulate every year that investment in MIS is deferred. These costs should be factored into any technology investment decisions.

The lack of visibility and transparency that comes from lack of correct management information systems creates three different types of costs: explicit, hidden, and opportunity costs. I’ll talk about each one and provide some key examples.

Explicit Costs

You can quantify how much you are spending to plug your MIS hole. If taken in perpetuity, these costs will greatly outweigh any projected investment in new MIS.

– Increases in staff to cobble together and produce information and reports. Firms with inadequate systems will have armies of analysts often doing low-value work, often taking hours and manual manipulation. It’s a useful, and often shocking exercise to determine a “cost per report” metric.

– Higher risks of transaction errors driven from either inaccurate data that drove a bad decision or critical pieces of information missing not available (or hard to attain) at the point of transaction.

– Regulatory costs in the form of fines and contingencies due to non-compliance or breaches. Without systems to provide transparency in rules and limits at the point of a transaction or automatically flag breaches or potential breaches, firms can face massive penalties.

– Increasing costs of infrastructure decay. This is probably the cost that’s most ignored and misunderstood. Managers assume that no investment means no cost, which is wrong. It’s like owning an old, beat-up car – the cost to keep it running can be extraordinary. The main drivers of this cost are:

  • Increased staff and programmers to create band-aids/patches to fix tactical issues
  • Increased infrastructure costs maintain an antiquated platform with “band-aid sprawl”
  • Increased future cost to replace a complex patched infrastructure

Hidden Costs

Hidden costs will of course not show up on an income statement, but they are real and insidious. They can have a lasting negative impact on the performance, client relationships, and on the firm’s culture.

– Loss of staff productivity. It’s not the job of front-office professionals to hunt down data and they are often really bad at it. Any time they waste tracking down information is less time they are talking to clients, creating products, and enhancing their work. Also, there’s a huge risk that they use wrong information or inaccurately interpret it leading to confusion and wrong decisions.

– The frustration level from staff in firms with bad MIS can be high. People who feel they are not being as productive as they could be are usually not satisfied with their jobs. It makes it enticing to go to a competitor. Senior managers lose a lot of credibility from their staff, making it extremely difficult for them to execute on their strategies.

– Loss of credibility with clients, which is the death knell for a client-centric organization. Clients will see that not only is the firm not managing their own house well, they also won’t be able to fully understand their needs. Clients want to be engaged with the “right” conversation that helps them solve their problems and make money. The “right” conversation emanates from the right set of information.

Opportunity Costs

In our current information driven economy, having the right piece of information or insight at exactly the right time can be a huge competitive differentiator. Firms lacking in the right information systems and processes will constantly miss opportunities, principally:

– Opportunities driven from day-to-day information flow that can be missed, such as market, competitive, client or product data. Lack of timeliness to action will allow competitors to scoop up the opportunity.

– Cross-selling opportunities, which are completely dependent on good information flow, especially information flow across business units within a firm. These opportunities can represent the biggest upside to any organization.

Strategic Stagnation

The best way to think about inadequate MIS is as if an organization is gummed up by molasses. Information is not allowed to freely and quickly travel to where it is most needed. You end up with what I call “strategic stagnation” where, in spite of the most well-intentioned and detailed strategic plans, an organization without the proper information tools will not be able to efficiently execute and will stagnate.

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