SOURCE: Strategy& (Formerly Booz & Company)

Strategy& (Formerly Booz & Company)

September 04, 2014 09:00 ET

Most Big Banks and Securities Firms' Responses to Market Pressures to Date Are Only Short-Term Fixes That Do Not Address Underlying Weaknesses

Instead of Indiscriminate Cost-Cutting, Financial Services Firms Should Consider Six Emerging Models for Achieving Sustainable Growth, Says Strategy& Research

NEW YORK, NY--(Marketwired - Sep 4, 2014) - Big banks and securities firms are cutting costs in response to current market pressures -- including globalization, technological change, depressed interest rates and an evolving regulatory landscape -- but the typical cuts are only short-term fixes that do not address underlying fundamental weaknesses, according to research by Strategy&, a member of the PwC network of firms.

"We believe that the majority of banks' cost initiatives are not linked to a strategic growth agenda, creating sub-optimal outcomes," said Kelley Mavros, a Chicago-based partner at Strategy&, formerly Booz & Company. "Most are cutting costs across the board, thereby weakening what once made them distinctive and what now could fuel growth. What these firms need to do is to be clear about how they are going to create value for customers in ways that their competitors can't, invest disproportionately in capabilities that enable that value creation and cut all the rest back to the minimum. This is what we call a Fit for Growth* approach."

Strategy& research identifies six models for positioning financial services companies for growth and for effectively dealing with costs in this new operating environment. To date, only a few firms have set off in those directions.

Current Approaches to Cost Cutting

"Unfortunately, the two most common cost initiatives that big banks and securities firms have taken are not linked to their strategy, and thus carry significant risks," Mavros said.

  • Distressed Cost Cutters: Cutting Costs to Stay Afloat. A number of financial services firms -- including some of the world's largest banks -- cut costs broadly, without an apparent plan for reinvestment in strategic priorities. One bank cut 11,000 jobs in early 2012 to save $1.1B annually; another one plans to reduce staff by 30,000 by the end of 2014 and cut annual expenses by $8B. "These firms appear to be cutting costs with an emphasis on short-term profit improvement over long-term sustainability, with communications focused on the cuts themselves versus the ability to re-invest or focus on growth," said Mavros.

  • Profit-Seeking Blue Chips: Cut Costs to Afford Medium-Term Profitability. Other companies have cut expenses more responsibly; for example, one institution worked to improve overall efficiency by streamlining their back-office processes (e.g., IT, ops, marketing, HR) across business units, instead of simply cutting tens of thousands of jobs across the company. "This 'middle ground' is better and more targeted than indiscriminate, across-the-board cost cutting," added Mavros. "However, it still fails to link cost initiatives to an overall growth strategy."

"Very few financial services firms have responded to new market pressures while simultaneously investing in future growth. We call these forward-thinking and forward-acting players New Normal Pioneers," said Mavros. "A good example is an international financial services company we recently worked with. They transformed their business operations and IT programs in late 2010, accelerating innovation, saving about $600 million, and creating opportunities to boost revenue by over 3% in the short term with significant growth potential."

"They then reinvested those savings to digitize the organization, further unlocking efficiency while building new capabilities around data aggregation and analytics," she said.

Six Emerging Ways for Financial Services Firms to Succeed

"In order for big banks and securities firms to win in the marketplace, they need to re-imagine how they create value and differentiate themselves from their competitors," said Mavros. She points to six emerging models that can help banks and securities firms profit and grow in the new, tighter environment:

  • Universal Banks. These large and global banks will leverage the balance sheet of an institution with full banking services, where securities services make up one portion of all services, and provide superior value through product-bundling and lower costs with their large scale.

  • Securities Servicer Experts. These firms can build a range of business offerings around their primary focus. Their costs will be low due to their massive scale, and they can offer outsourcing services and leverage higher-margin businesses (e.g., asset management, securities lending, data and analytics) on top of their core securities servicing.

  • Market Specialists. Market specialists will be smaller, understanding select local and regional markets exceptionally well instead of operating globally, leveraging deep history and relationships. They will have the potential to gain scale by leveraging a range of bank services.

  • High-Touch Servicers. These players will offer seamless, consistent, and customized client service, with less of a focus on a breadth of corporate banking functions.

  • Niche Players. The niche players will operate locally, protected by special regulations, long-standing market ties, and/or limited global asset flows.

  • Platform Providers. These companies will be global, but focused on technology & operations, offering integrated platform solutions, data access as well as outsourcing services.

"These puretone models -- which companies can combine in practice -- re-imagine the role and strategy of securities firms. Depending on what a given company is great at today, a different model will be the most promising one for that company to succeed," said Mavros. "And based on the chosen model, companies will then need to undertake cost transformation programs that re-allocate spending from areas that are not distinctive to those that are key for winning with that model. It's very obvious that efficiency programs are going to look very different by model. That's why cutting costs across the board is so dangerous: instead of making you distinctive and fueling growth, it makes you a little bit more like everyone else."

About Strategy&
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