Inflation and operating model optimisation

Rising inflation across the US, UK and the Eurozone is creating massive pressures across global markets.

We’re seeing a reduction in the breadth of credit products, like mortgages, as they become more unaffordable, which leads to a reduction in volume and profitability as net interest margins are squeezed.

Defaults are increasing – and will continue to do so as people struggle with the cost-of-living crisis, and this will put more pressure on business profits, creating a greater need for operational efficiency.

Many financial service firms are looking at what strategies and tactics they can use to get through the next few years of turmoil.

1.      They’re investigating how to optimise their operating models

We’re seeing more firms switch to a GOLOCAL model – that’s a blend of globalised delivery combined with a strong local presence aligned with local markets.

They’re also working out what their headcount should be to balance inflationary and cost pressures and optimising delivery and cost to clients and consumers.

Organisations have to make difficult decisions right now, but they know that if they don’t make them, there could be more pain down the line.

2.      They’re sourcing the talent they’ll need to get through the crisis

For more commodity skill sets, firms are moving away from managed service models – which typically have high inflationary clause uplifts – and looking to transition to an in-house model.

For specialised skills such as data scientists or quants, this would remain in-house for differentiated parts of the value chain but not for non-differentiated.

3.      They’re working out how to minimise G&A expenses

General and administrative expenses need to be under continuous review and typically shouldn't exceed 10% of the business's total expenses.

Organisations should focus on how these expenses can be minimised in the short-term, releasing budget that can be allocated to profit-making parts of the business.

4.      They’re supporting their core products

Organisations are reviewing what their most profitable products are and focusing on supporting them. They're reintegrating them into their business value propositions and reinforcing their importance to the customer base.

Businesses are looking at where to make adaptations and investments to strengthen their core products. They're also considering the value of non-core products, services and business units and evaluating how much investment these areas should receive.

5.      They’re putting the customer first

Times are tough, but most businesses know that customer and client satisfaction should remain a priority. Supporting customers in difficult times can help forge a long-term bond.

We’re seeing organisations being conscious of the potential struggles experienced by their customers and doing what they can to help them out when needed.

While these are all sound measures to take as we face the prospect of a recession, a major challenge lies in being able to read where the economy is in the recession-recovery cycle and therefore knowing what changes the organisation needs to make to its strategy.

This is where benchmarking comes in.

Organisations need to look at how their competitors are performing today and how performance has ebbed and flowed during previous downturns.

By running a benchmarking programme, organisations can compare and monitor performance and identify where they can find the best return on investment and where extra cost savings can be made.