South African banks have some of the highest operating costs in the world relative to revenues, a problem that has steadily worsened over the past decade, according to World Bank data.
Source: Provided. His Kwaku Debra, an expert at Partners in Performance, says:
Despite performing well in difficult economic conditions, South Africa's banking sector is less profitable than more than half of its global peers and ranks 35th out of 133 countries for having the highest operating costs. The estimated cost-to-return ratio is between 54%. and 61%.
“Traditional cost-cutting and short-term approaches don’t work, but banks and financial services companies can improve substandard cost efficiencies through four key business strategies,” says the Financial Industry Comprehensive. says Kwaku Debra, an experienced banking executive with extensive expertise. African banking sector. He currently serves as a partner at Partners in Performance, a global business optimization firm serving clients in 33 countries.
“A bank's cost-to-income ratio is one of the key financial indicators for assessing its performance. is increasing faster than revenues. High cost-to-income ratios have a negative impact on shareholder value creation, so banks need to look for new ways to reduce costs effectively and sustainably.” Debra says.
Debra says banks can manage costs and increase profitability by following four strategies:
1. Empower employees to generate cost-saving ideas and turn them into an idea pipeline
A common response to cost pressure is rapid top-down cost optimization. While this looks good on paper and may provide short-term results, it almost always does not provide long-term, permanent results.
When knee-jerk cost targets are set from the top down, banks often apply short-term cost-cutting measures that turn off the faucet on training, travel and hiring, but this cannot be sustained over time.
Another commonly used and unfortunate method is the “lawnmower approach,'' which holds all cost centers to a fixed percentage over a period of time, regardless of challenges or successes. These actions are not particularly strategic and can cause long-term damage.
Instead, foster a culture that encourages open idea generation. Encourage teams across your organization to have emotional, data-driven conversations about where they can improve efficiency. Ideas can be prioritized and implemented with enough specificity to help build a culture of collaboration and accountability.
A pipeline of ideas is key to sustainably reducing costs. Understand that most of the time, the problem is not a lack of ideas, but rather prioritization and execution. Traditional banks often take on too many ideas and tasks, blocking the pipeline, reducing productivity and making cost optimization unsustainable.
Progressive banks that sustainably reduce costs focus on implementing and prioritizing ideas, resulting in a fast pipeline of results.
2. Align the organization behind the cost optimization plan to establish ownership
Successful cost reduction efforts require support within your organization. Those who have to make spending cuts will need to get buy-in to a shared plan, otherwise costs will inevitably bounce back over time.
Buy-in also requires clearly communicating the plan and vision throughout the organization so everyone understands what they are expected to achieve. You need to reinforce your message often and celebrate successes.
Cost reductions cannot be achieved unless an organization and its employees have a clear understanding of the true cost drivers, how to manage them, and measures of success.
Without clarity and transparency, leaders struggle to communicate consistently and individual accountability within the organization becomes impossible.
Clearly communicating your plan and vision promotes accountability, ensuring everyone is working towards the same goal and knows their role and responsibility in the scheme of things.
Beyond communication, alignment may include co-creation, celebrating successes, and establishing feedback loops to obtain organizational feedback on proposed changes.
3. Assign accountability to generate demands for improvement
Suppose a bank discovers that one of its biggest profitability problems is within its call center, where agents spend an average of 15 minutes on a call with a customer instead of 5 minutes. Incorporating key performance indicators (KPIs) such as “customer wait time” into call center staff deliverables is a good starting point to sustainably solve this problem.
It is imperative to assign responsibility for specific cost issues caused by specific people or segments of the organization. Incorporate stretch goals into her KPIs to show what “good” looks like.
Employers need to find ways to hold single people accountable for their driving performance. However, identifying a single point of accountability is not enough. It requires daily, weekly, monthly, and quarterly reviews of progress and clarity on how individuals are held accountable.
Banks have multiple layers of structural and functional overlap, increasing costs, confusion, and unnecessary work. Removing unnecessary duplication creates the necessary ability and motivation. Again, a single point of accountability helps drive behavioral change at the executive level, which cascades throughout the organization.
4. Build the right capabilities to get the job done
Cost reduction can only be achieved with the right capabilities and tools in place.
Organizations need to identify critical roles, capabilities, and gaps. Hold people accountable, set goals and identify root causes of problems. To fill these gaps, you often first need to train and coach your employees.
In some cases, you will need to develop fairly specialized technical skills within your team. Employees often learn how to generate, access, collect, and use quality data within their organizations, how to visualize data, and how to use available technology more effectively to increase productivity. It is very important to teach.
Rising inflationary pressures and economic headwinds are impacting the competitiveness of South African banks.
Financial institutions are doing a lot of things right, but to remain competitive they must avoid top-down actions and focus on identifying areas where they can achieve sustainable cost reductions, and develop collaborative approaches to achieve them. We need to build a strong culture. Only by doing so can you manage and maintain costs.
