Cost transformation - Part 2: Rethinking cost structures in Swiss banking - Banking blog

Cost transformation cover

Our Deloitte banking blog last week on Cost Transformation1 outlined the economic and regulatory market conditions for banks in Switzerland. It identified a save-to-transform approach as the appropriate cost management strategy for overhauling banking business and operating models in order to stay competitive in a changing and increasingly technology-dominated banking industry, while also adapting to new requirements in a post-COVID-19 environment.

In this second article, we discuss the cost levers for contributing to a sustainable overhaul of bank operating models, and explain where Swiss banks stand today in revising their approach to value creation in the longer term.

Levers for targeting potential cost savings

The impetus for cost transformation can have a foundational, transformational or disruptional impact on the operating model. Foundational change focuses on enhancing the existing operating model. Transformational levers deploy concepts to reassemble parts of the existing business model. A disruptional approach challenges existing structures by applying entirely new ways of defining what is value and how to create it.

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Figure 1: Monitor Deloitte cost management framework

A robust cost management framework should apply all three levels of impact to change and improve cost structures in the following layers of a bank’s operating model:

  • Value creation layer: the value proposition, definition of client services and products, client experience, branding, and value measurement
  • Process delivery layer: service delivery and processing, including composition of the value chain and orchestration of vendors, sourcing partners and enhanced automation
  • Organization layer: the structural composition of the business, its governance and resource deployment.
  • Infrastructure layer: the geographic footprint, premises, infrastructure, systems and technologies

Banks take different approaches to cost management

The cost saving initiatives observed in Swiss banking today vary substantially between types of bank.

Private banks have focused mainly on foundational measures for change and usually deploy disruptive elements only selectively. The majority invest conservatively in an overhaul of their current infrastructure.

Foreign banks have reduced substantially their presence in Switzerland, and those that remain have transformed their operations mostly by sourcing non-core competences (including IT) externally, through outsourcing, offshoring or buying managed services. They are following a more transformational path in reconfiguring their value chain and cost structures.

Both types of bank therefore aim for capital-efficient development of their operating models, targeting quick savings with shorter payback periods rather than exploring fully the potential for transformational or even disruptional measures for change.

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Figure 2: Cost focus of banks by category

In contrast to private and foreign banks, global banks and to some extent regional banks have already in recent years reworked their cost structures in many layers of their operating model. They have realized most of the potential for efficiency gains achievable from foundational change. They are now addressing client interface and platform initiatives, often through cloud services, to achieve disruptional cost savings, by holistically redefining (parts) of their operating model and client value creation.

They have been more willing than other banks to invest in selected new technologies, alter their business model and accept longer payback periods. While digital disruption is now widely recognized as a major external risk (cited by 61 percent of global respondents in Deloitte’s latest report, up from 6 percent in 2017), disruptional cost saving measures remain sporadic2.

Sustainable cost transformation

Digital disruption is reshaping the business landscape globally—and its impact will grow even more in the post-COVID-19 world3. Banks will need to use the transformational power of disruptive technologies to improve their cost structures and generate strategic cost advantages along their entire value chain and across all layers of their operating model.

A clear understanding of the current cost base serves as a starting point for all cost saving measures. The underlying business model, value proposition and strategic priorities should be included in an assessment of performance and efficiency: this should reveal ‘pain points’ in the current model and provide an initial indication of potential ways to improve costs.

Improvement options should be developed to validate the hypothesis for realizing or exceeding defined cost targets. Those that are successful should be implemented to develop a sustainable operating model that emerges stronger in the post COVID-19 environment. The right choice of improvements will enable a bank to capitalize on digital disruption — becoming the disrupter, rather than the disrupted.

A critical factor for success in designing and implementing cost-enhancing measures is a diverse team of experts in methodology and (disruptive) technologies, and with deep industry expertise to assess the art of the possible and tailor a banking model that is geared to the future, while managing costs effectively.

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1 Deloitte Banking Blog: Cost transformation - Part 1: More than ever an imperative for Swiss banking (https://blogs.deloitte.ch/banking/2020/06/cost-transformation-12-more-than-ever-an-imperative-for-swiss-banking-.html)

2 Deloitte Global Cost Survey

3 Deloitte Banking Blog: COVID-19 boosts digitalisation of retail banking (https://www2.deloitte.com/ch/en/pages/financial-services/articles/corona-krise-digitalisierungsschub-im-retailbanking.html)

 

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Patrik Spiller - Partner, Monitor Deloitte Strategy Consulting and Wealth Management Industry Lead

Patrik leads Strategy and Analytics in Switzerland as well as the Wealth Management Industry Practice in North South Europe. He has 20 years of experience in banking industry consulting. He supported many leading international banking institutions and wealth managers in the development of innovation and transformational strategies, technology and operational strategies as well as shaping cost reduction programmes.

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Dieter  Klein

Dieter  Klein - Director, Consulting in North West Europe

Dieter joined Monitor Deloitte’s banking strategy practice in 2016 in Zurich. Dieter has delivered a wide range of market strategy, product development, operational and regulatory projects in the banking industry across Europe for more than 20 years. He has delivered post-merger-integration, target operating model design, implementation of regulations, outsourcing, offshoring and cost reduction initiatives. He has an in-depth understanding of the Retail and Private Banking business with extensive practical background in product management, treasury and credit risk management.

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