By Anthony Klick, Diamond Management & Technology Consultants
Behind the headlines about bank restructuring and "right-sizing," management teams are grappling with two diametrically opposed challenges: improving efficiency and strengthening customer service quality. Each of these objectives is integral to a bank's success, and institutions need to develop effective strategies to manage expenses and improve efficiency ratios without undermining customer service quality or long-term customer relationships. But for many, it's a devil's bargain-they reduce the cost base at the expense of attracting and retaining profitable customers. Some banks, however, are learning that by applying customer-oriented expense management principles, they can avoid "damned if you do, damned if you don't" decisions.Throughout the industry, banks are taking necessary, but often risky, steps to reduce expenses. The problem is that expense-reduction measures that provide quick results can also be the most short-sighted-potentially compromising long-term profitable growth. This risk is typically associated with across-the-board cuts, where funding inevitably is taken from areas that still require investment. Furthermore, banks cannot sustain across-the-board expense cuts over the long term. Instead, a bank should manage expenses in a thoughtful manner through an effective, sustainable strategy that minimizes risk to the institution.
There are banks operating in the "sweet spot" of high customer service ratings and low efficiency ratios, but this has become more of an exception than the rule in today's industry. Too often, a bank will react to a high efficiency ratio by taking out a percentage of expenses across the entire institution, 20 percent to 25 percent, for example. A bank might quickly achieve a desired effect in terms of its efficiency ratio, but at what cost? Often the capabilities to attract and retain profitable customers suffers.
For example, executive management may decide to cut staff at the retail branch level, but in doing so, customers frustrated with poor service levels and long wait times head for the competition. The same holds true for banks' call centers, where cuts at the lower end clearly have an impact on service. Across-the-board cost-cutting may look right for a short period of time, but the bank will likely experience customer attrition, low employee morale and difficulty attracting new customers.
Customer-oriented expense management involves a thoughtful, objective process, devoid of rash decisions and emotion. Objectivity must be inserted into the process to challenge every aspect of the business and to ensure there are no "sacred cows" when analyzing the organization, its functions and its technology. An objective party will have a decided advantage when identifying areas where the institution can afford cuts and where funding is most urgent.
Managing expenses from a customer-oriented perspective typically includes some thoughtful reinvestment of savings-not simply randomly removing expenses. Rather than cutting 20 percent across the board, for example, an institution might find that one of its business lines can afford to shed 40 percent of expenses. Using a customer-oriented expense management approach, half of that 40 percent would then be reinvested in a growing or underfunded business.
From an organizational standpoint, several pieces must fall into place for an expense management strategy to work, and banks that are getting it right apply several fundamental principles. First, an enterprisewide program will only succeed if it has been sanctioned by the CEO and CFO. Banks that have constantly improved their efficiency ratios while maintaining coherent customer experience strategies have prioritized sustainable expense management by emphasizing discipline and accountability throughout the firm. They have committed to analyzing all areas of the institution, diagnosing the trouble spots, and mapping a strategy to resolve weaknesses and inconsistencies detected in the bank's organization, processes, technology and business goals.
Further, efficient banks with the highest customer service ratings approach their annual budgeting process from the customer's perspective, realizing that customer satisfaction drives profitability. A customer-centric operating model considers both the cost and revenue potential in making investments. This customer view helps management strike the right balance of cost-reduction and customer-facing initiatives. The impact of eliminating products, processes and services can be rationalized objectively. Areas worthy of reinvestment can be identified accurately. And the investment requirements of new products and services can be calculated based on their cost, revenue potential and customer impact.
Whether a bank is seeking to increase profitability through a merger or acquisition, or developing a strategy for organic growth, a customer-focused expense management program becomes a critical element. A bank can typically achieve a majority of the program's benefits within 12 months as part of a strategy to maintain a low efficiency ratio and the ability to nurture long-term customer relationships.
In the absence of change on the near-term banking horizon, many institutions need to look within their organizations and determine whether they are properly managing expenses, whether their efforts have improved customer service quality, and whether they are serving customers in the most cost-efficient way possible. Implementing a customer-oriented expense management program can address all three of these variables and seal the gaps that are found along the way.
In the current environment, it boils down to a question of, "Can our bank afford not to do this?"
Anthony Klick is a partner in Chicago-based Diamond Management & Technology Consultants' Financial Services practice, with more than 25 years of experience in process/technology improvements, organizational redesigns, service quality implementations, and expense management.