Addressing the cost reduction challenge in banking – part 1

Despite bank CEOs’ relentless focus on cost optimization, tangible results have been mixed at best in recent years.  Senior executives often report that they have not hit their cost savings target – and few believe the savings they have made will stick over the longer-term. 

Too often, tactical cost reduction initiatives lead to a game of ‘whack-a-mole’, with costs hammered down in one area popping up unplanned elsewhere. The fundamental problem is that businesses continue to grow without properly addressing the underlying scalability or efficiency challenges. 

For example, banks may attempt to optimize costs through:  

• Tactical offshoring to teams not equipped with the right processes or technology to deal with growing volumes
• Shifting work from operations to servicing teams via poorly implemented process or digital change
• Continuous reorganization that amounts to little more than a reshuffle
• Resorting to creative finance strategies, such as driving up the software capitalization rate, to save the day on cost targets without truly increasing productivity and scalability.

Given the pace of market innovation powered by cloud, AI and open banking – and with fintech competitors chipping away at parts of the banking value chain – simply reducing the costs of existing operating models and technology stacks will result in many banks being left behind. So what is the answer?

 

A shift in mindset

Balancing cost optimization and innovation requires a new mindset, especially in the fast-growing markets across Asia. To achieve true scalability and productivity, bank CEOs must move away from focusing on short-term results and avoid cutting ‘muscle over fat’ in ways that will inhibit future business growth. 

If investment prioritization frameworks do not enable this mindset shift, the same old challenges will re-emerge. This is especially acute for banks, where most of the tactical levers have already been pulled: work easily moved offshore has already been shifted; vendor rate cards have been squeezed to the point where ‘cost of poor quality’ challenges arise; and infrastructure and application simplification has addressed the quickest wins. 

In this context, we propose eight priorities for sustainable cost optimization for banks – four presented below and the remainder covered in the second article in this series. 

 

Use the full spectrum of intelligent automation

The latest generation of AI technologies looks set to have a seismic impact on financial services, with first movers already realizing significant benefits in areas such as customer service, digital assistants for front-line teams, internal knowledge management, fraud detection and accelerating software development lifecycles.  

However, GenAI and Agentic AI should be seen primarily as levers to improve client experiences, productivity and innovation, as opposed to just driving short-term FTE savings and cost reduction.  

Particularly in complex banks with a diverse footprint across Asia, such solutions should not be viewed as a ‘silver bullet’ to address process problems, where the underlying work has not been done to standardize processes and simplify data flows. 

We recommend the following steps: 

• Simplify and standardize processes first across markets and products to ensure AI solutions are scalable and to lay the foundation for more complex agentic solutions
• Develop an automation and AI tool selection framework to give prescriptive guidance on when to use each tool considering capabilities, license costs, existing use cases and opportunities to rationalize tools
• Define the right digital toolkit based on common process patterns, unlocking ROI by using the same fit-for-purpose tool and solution across multiple use cases and functions 
• Train cross-functional business, operations and technology teams to identify and deliver solutions autonomously and continuously, with support, toolkits and guardrails provided through an automation Center of Excellence (CoE).

Significant cost benefits can be driven by industrializing and scaling existing intelligent automation tools and capabilities across the organization. ‘Traditional’ AI capabilities often have fewer integration, risk and regulatory hurdles to overcome. 

These solutions can act as stepping stones towards true end-to-end agentic workflows, which can be implemented as soon as the underlying governance, data and regulatory challenges have been addressed. 

 

Focus on scalability 

Many banks – laser focused on quarterly results – treat longer-term ‘cost avoidance’ as a non-tangible benefit and therefore prioritize initiatives with a 12-month payback based on direct cost reduction.  

This ignores the challenge of scalability and leads to costs popping up in other areas, as non-scalable parts of the business grow. The ‘you manage what you measure’ principle is applied in these organizations: tactical projects get prioritized over investment in strategic initiatives to address underlying technology and process inefficiencies in high-growth areas. 

Scalability challenges will only be properly addressed when banks factor in expected business growth and take proper account of cost avoidance benefits in their prioritization of investment. This means taking a two-to-three year view of return on investment (ROI) and building frameworks to properly measure and compare the scalability of core processes and products. 

Introducing a consistent ‘scalability index’ across products and markets is often the first step in the journey to understand and tackle the areas where costs will proliferate. 

In complex areas such as corporate payments, we recommend establishing a framework to rank products and markets based on their scalability using a number of levers such as product and regulatory complexity, STP rates, error rates and client query volumes. This can be overlaid with the expected growth of those products so that investment can be prioritized in ways that optimize cost avoidance and enable scalable growth.

 

Invest in hubs as Centers of Excellence 

In many organizations, the quickest wins from moving roles and activity offshore were achieved years ago. To boost ROI, these initiatives were often delivered without addressing underlying technology, process and organizational inefficiencies, leading to cheaper operational costs but minimal improvement to underlying productivity. 

Once the offshoring happens, investments to address inefficiencies in offshore hubs are often deprioritized due to their relatively low ROIs. Future growth continues to be inhibited, with offshore teams let down by poor technology and processes. 

It is therefore important to invest in the right process simplification and standardization, coaching, training and technology solutions in offshore hubs to transform them into true CoEs – even when the initial ROI may be less than compelling.   

Another common challenge is failing to establish the right resource blend in offshore hubs to maximize arbitrage benefits, and therefore depending on junior employees to manage work transitioned from onshore teams. It is important to establish the right pyramid in these teams to avoid future costs driven by poor-quality delivery.  

Meanwhile, proper scrutiny of activities being performed in high-cost locations is sometimes avoided by playing the regulatory or client-proximity card. Here, a principles-based and detailed challenge is required, for example: 

• In which lines of business and functions does client proximity matter in a digital age?
• How often are teams meeting business stakeholders or clients? 
• Which specific regulations prohibit activity being managed in offshore or nearshore CoEs? 

The added advantage of moving higher value activities into hubs is that they evolve from being ‘processing centers’ into true CoEs. This means they can offer more breadth and seniority of career paths and can develop their ability to take accountability for client journeys end-to-end. 

We have typically seen that applying a principles-based approach to scrutinizing onshore activities, and building stronger leadership in nearshore and offshore CoEs, can reduce the onshore footprint by a further 10-20%.

 

Reorganize decisively 

Reorganizations aimed at streamlining decision-making, removing inefficient layers and reducing cost often lose momentum and fail to deliver on their promise. It can be tempting to compromise when tough decisions need to be made, turning the reorganization into a reshuffle and introducing confusion and complexity. 

Given the significant disruption and impact on morale from big reorganizations, banks should endeavor to act decisively, consistently and in line with clearly defined organization design principles. For example, they need to create a consistent approach to defining responsibilities for functional versus country lead roles, and avoid ‘co-leads’ or overlapping roles. 

Reducing the period of uncertainty across the bank helps minimize the delivery disruption that can come with reorganization, particularly when decision making stalls and focus is lost during changes in leadership. 

One common mistake we see is that some banks go through rounds of redundancies without fully exploring which other parts of their organization may be struggling to ramp up, and how employees and resources might instead be reassigned to these projects. 

As a result, valuable institutional knowledge is lost and, in some cases, former employees have to be subsequently rehired as contractors. One answer is to establish a well-designed ‘clearing house’ for retrenched employees with the right skills data to enable mapping to new opportunities. 

 

Closing thoughts

Cost optimization programs embrace various levers, journeys and functions within their scope. It is critical to embed the right governance and cost reduction capabilities before rolling out the program.

• This starts by ensuring business cases and their underlying assumptions are challenged robustly and consistently. Complex dependencies between these cases must be well understood and proper sequencing applied if the program is to unlock overall benefits.
    
• It is also important to set guiding principles around the impact of cost optimization on high growth areas, client satisfaction, risk and architectural design. Banks will need to build some flexibility into cost programs to account for external factors such as high inflation, rapid growth in one business, or new regulatory requirements.
  
  
• It is critical to embed the right leading indicators to ensure programs are on track to deliver the cost and productivity benefits promised. Lagging indicators will not support timely course correction. 

In the second part of this series, we look at four further priorities when implementing sustainable cost optimization: how to avoid a siloed approach by optimizing horizontally and across journeys; optimizing spiraling data costs; building a more strategic view of vendor costs; and gaining a deeper understanding of ‘cost to serve’. We also take a closer look at the challenge of monitoring bank optimization programs and making sure they inspire and support a continuing effort to improve.