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A Principled Look at Cost Cutting

June 03, 2008 by Sumit Sahni, Sunil Kappagoda, Andrew Toma, and Ranu Dayal
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In This Article
  • Financial institutions can cut up to 20 percent of total FTE costs with no negative effect on either revenues or the customer experience.
  • Cuts can be achieved within a six-month period.
  • The key is an innovative process called principles-based cost reduction (PBCR).
  • Enhanced organizational flexibility, better decision making, and tighter accountability are common secondary benefits.

Major financial institutions, by nature of their size and scope, have a difficult time remaining “lean and mean” operations. As they grow in size, they tend to become bloated and inefficient—trends that hurt revenues, profits, and shareholder returns. Consider the following symptoms that we have observed among numerous players:

  • Too many managers have narrow spans of control (only a few direct reports) and don’t really manage much—essentially living off their titles and tenure.

  • The number of organizational layers between the CEO and the lowest-ranking full-time equivalent (FTE) is in the double digits.

  • Too many employees have roles that are two to three degrees removed from the customer—and some of these workers are often situated in high-cost locations.

  • Business units often have their own set of staff functions (such as finance, human resources, IT, and legal), creating duplicate activities and competing fiefdoms.

  • Employee productivity (for example, in client management, sales, and call centers) is poor when compared with external and internal benchmarks. But line managers often push back, saying the comparison isn’t valid.

  • Some activities represent “invented” tasks that keep people busy but add no value that customers are willing to pay for.

Symptoms such as these cry out for a cost-cutting exercise to reduce overhead. But which method should be used? One based on standard delayering? On outsourcing and offshoring? On process reengineering?