Alternative routes to cost reduction..

Since the early 2000s financial institutions have been reducing headcount to cut costs and increase margin/return on equity. Received wisdom has it that this is the cost saving option which makes the biggest single impact. What started with headcount reductions through labour arbitrage as outsourcing gained traction has evolved to simply doing more with significantly less.

In theory, down-sizing has paved the way for ‘right-sizing’, to ensure that additional operational risk is not created, and that cuts do not go too deep. But even in 2013, some 40 per cent of institutions are said to have scheduled headcount reductions, whether through outsourcing or implementation of more technology.

Typically however, cyclical trading patterns have meant that where reductions have taken place, a period of hiring has then followed to cope with peaks of volumes due to inefficient processes or scalability issues. Even where processes have been outsourced, if the functions themselves have not been efficiently redesigned, then scalability is still somebody’s issue.

Could it be time to consider alternatives to headcount reductions generally? Most institutions have fairly well-entrenched outsourced operational processes, and many consider it ineffectual to have anything more than a 40/60 per cent operational split on/off/near-shore for control and/or knowledge reasons.

So what are the alternatives?

An easy approach which requires little spend is improving the efficiency of operational processes: put very basically, making sure that processes handled internally are best practice, slick (STP) and avoid a multitude of rework. Automation of trade lifecycle events, matching, trade settlement, corporate actions and collateral flows all helps - and in some cases can be achieved with minimal spend and technology implementation.

Technology renewal is another option for creating major cost saving opportunities – but it does require multi-year, multi-million dollar investment. That said, I would argue that over time this is the best cost saving option an institution has. It not only increases margin and reduces cost from a technology operations perspective, but it also solves the scalability problem, and indeed, handled correctly, can enable the implementation of new functionality and processing capability for internal and external clients.

For example, with many considering that the days of T+1 control are no longer sustainable and a build-up in momentum for same day affirmation and reconciliation, improvements to intraday liquidity and same day reconciliation/matching could be key improvements to build into new platforms. Given that recent reports have predicted $70 billion of spending by financial institutions in 2014, perhaps some of this will start to take flight..

What about pricing, commission or margin amendments? Many baulk at the idea of price adjustments (up being the wrong way), but with clever consideration to new enhanced services, low cost (to supply) features, and a true understanding of the underlying value of your product, I think this could be within reach at the appropriate times of course. Underlying clients do not pay for a product per se: they pay for the benefits a product brings to them, what it enables them to do, or save.

Last but not least, simply prioritising the functions you are handling internally can be a cost saving opportunity. Are all these functions necessary, required and relevant for your core business?

Headcount reductions may be the most obvious way to cut costs, but they can only go so far: there are other ways to take out cost without either increasing risk, or jeopardising future growth, and now is the time to consider the alternatives.