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An accelerated agile approach to sustainable cost reduction

It is a well-known phenomenon that back office operations have historically lacked major investment. Antiquated, often disparate technical architectures contributing to poor processing automation are consistent themes across the industry. When back office operations did finally get some investment in the early 2000’s, business process re-engineering, exception management processing, workflow, automated query management and the concept of golden sources of data became the flavours of the day.

But, what long-term benefits did these initiatives really deliver? Did they really improve processing efficiency and contribute anything to sustainable operational cost reduction? Market professionals widely agree that while some process efficiency gains were achieved, they were not as great as expected, and sustainable operational cost reduction was neither achieved nor properly considered. The consensus of opinion is that these initiatives were predominantly efficiency plays, contributing to operations departments’ ability to process the growth in flow business volumes peaking at the time.

The largest pure cost reduction initiatives can more likely be attributed to the increasing use of lower-cost locations, with either a ‘follow-the-sun operating model’ or simply a nearshore or offshore strategy. The majority of key players in the financial services market have all achieved something in this arena, with many being able to significantly reduce their long-term operational costs as a result.

These initiatives continued with varying degrees of success until the financial crisis of 2008/9 when the industry changed forever and minds became very focused on protecting the business and reducing costs where possible.

The banking crisis of 2008/9 created an unprecedented whirlwind of ‘top-down’ cost reduction initiatives as banks fought for survival. As ever, operational areas were a major focus of potential cost reduction, resulting in further operational role transitions to low cost locations, simple low cost system automation, increases in flow business straight-through-processing (STP) and significant headcount reduction. Unfortunately, much of this was reactionary, rapidly implemented and without real strategic thought. Survival and immediate adherence to stringent senior management objectives were the order of the day.

While the immediacy of the issue has diminished, the demand for increased efficiency still exists and is one of the lasting initiatives to emerge from the banking crisis. Speaking with professionals from across the industry reveals a demand for year-on-year efficiency improvements of 10-20% from operational areas. In essence, doing ‘more for less’ is the new norm.

However, the challenge that operations managers face is not simple:

  • Unlike during the early 2000’s, investment budgets are now heavily diverted into satisfying the regulatory requirements of Dodd Frank, FATCA, EMIR and Basel III
  • Obtaining scarce operational change budgets requires an exceptionally strong business case and rapid, if not immediate, return-on-investment (ROI) in terms of both operational efficiencies and cost reduction

But on a more positive note, the challenge of finding continued efficiency gains does provide an opportunity to initiate more strategic thinking.

Experience has shown, banks that have been most successful in achieving large operational efficiency gains tend to focus on two key themes:

  1. The identification of efficiency gains that aresustainablethrough periods ofhigh volatility
  2. The cultural acceptance that costsavings are re-investedin the business to achieve ever-increasing efficiency gains

In the new environment where everything is under scrutiny, the identification of sustainable efficiency gains is essential. However, the appetite for re-investment of efficiency gains varies from institution to institution, depending on the current state of their balance sheet.

Having discussed this approach with a diverse cross-section of operational managers, it is clear that progress along the path of operational efficiency varies dramatically. However, the following are consistent areas of focus for both the buy-side and the sell-side:

Client efficiency
  • Taking the ‘retail’ approach, clients are being encouraged to undertake self-service. Often linked with front-end trading portals, clients are encouraged to access the status of their transactions online. Advanced systems allow them to receive valuations, confirmations, statements, query status and resolutions via an online portal
  • In a similar manner, ‘high-dependency clients’ are identified and sales teams tasked to either streamline the client idiosyncrasies or even exit the client
  • Obtaining straight-through-processing (STP) for clients is paramount
Process efficiency
  • Organisations are continuing to rationalise their control points. For many, analysis has shown multiple and overlapping controls, which with focussed attention can be rationalised to generate significant gains without increasing operational risk
  • Deep analysis of the “true cost” of internal trades has also highlighted startling opportunities for operational efficiencies gains
Cost reduction

Data costs (market data and reference data)

  • The duplication of data and the lack of centralised distribution have been identified as significant areas for improvement

Technology (system duplication)

  • The abundance of mergers and acquisitions over many years in the banking industry has resulted in a great deal of system duplication. If the reluctance to switch systems off can be overcome, this can provide a fertile area for cost reduction

Location strategy

  • Many of the location strategies were initiated over 7 or 8 years ago, and many firms have re-located multiple times since then. In order to be sure of on-going efficiency, the location strategy needs to be constantly reviewed: Does the strategy still actually make sense? Do the current location costs continue to justify the benefit? Do concentrated rather than segmented offshore operations actually offer more efficiencies?

Operating model

  • The emergence and proliferation of cross-product utilities can create targets for efficiency gains
  • The creation of ‘centres of excellence’ and the sharing of ‘best-of-breed’ practices across a deeply siloed business will often produce efficiency gains
  • Flexible, multi-disciplined teams may be able to operate more efficiently than traditional single-disciplined teams

Also consistent is the stark change in mind-set with operational heads asking themselves “if this was my own business, what would I do?” The one consistent answer is that efforts must focus on achieving ‘sustainable’ cost efficiencies. The ‘boom-and-bust’ headcount fluctuations of the past as businesses peak and trough cannot be repeated if operational areas are to remain cost effective and competitive.


It is clear that the required investment in back offices is some time away, but it is also clear that year-on-year operational cost reduction pressures will be prevalent for the foreseeable future. As such, operational managers must accept the challenge of ensuringtheirbusiness can cater for the new norm of “doing more for less”.

But with the low hanging fruit already harvested, the industry must find new and rapid ways to cost effectively seek out the hidden fruit of savings in the back office.

In summary, firms need to change their approach to cost reduction. The traditional ‘waterfall’ approach of focusing on exception reduction through detailed process assessment, cost driver definition, route cause analysis, planning and delivery are not possible with change budgets competing to deliver to the current regulatory agenda. Nor is it clear that continuous improvement initiatives are hitting the target.

A better view is that players will be successful if they adopt an ‘agile’ approach that provides structure with the flexibility and control to achieve rapid returns on investment and in some cases self-funding initiatives. It is these firms that will not only do more for less but are also likely to establish a platform to continually do more for less.

The race is on; the ‘hidden fruit’ in the back office must now be harvested before it rots away leaving the stench of inefficiency and high operating costs, with firms finding themselves disadvantaged by those that have tackled the problem by adopting an agile way forward.

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Derek Perry

Specialist in Operational Processing and Design
Derek Perry