Banking

The Next Level in Cost Transformation: Achieving High Performance with Structural Cost Initiatives

Contents

Executive Summary 3

Background 4

Analysis 6

Recommendations 10

There’s no question that banks have made cost reductions in the last decade—yet, given the market outlook over the next few years, greater efforts are necessary. The next wave of cost transformation requires banks to make structural changes to their cost base.

The EU postal industry faced a similar challenge, and in the face of deregulation and contraction in their traditional mail business, transformed its business operations to reduce costs and drive growth. Drawing from lessons learned by the EU postal industry, Accenture identified six principles that will enable banks to transform their cost structure:• Speedupthesupplychainwithreal-

time processing. • Restructureretaildistributiontobalance

service and costs.• Shiftfixedcoststothirdparties.• Decreaselabourcostswithappropriate

use of outsourcing.• Shareinfrastructureandassets.• Diversifytorefreshcoststructures.

Executive Summary

3

Background

Australianbankshavedrivencost-to-income ratios from the 50 percent range a decade ago, to the 40 percent range today. However, today’s banking landscape requires even greater efficiency.

Notably, Commonwealth Bank has targeted acost-to-incomeratioof35percentforits retail business. If this becomes industry standard, each bank will need to trim 20–30 percent from its cost base—an estimated $1.5–2.5 billion each. Accenture believes that the industry is beyond tactical cost reductions. To achieve true cost transformation, banks must revise their underlying cost drivers and make structural changes. Today’s efforts will shape the ability of banks to achieve high performance in the future.

The EU Postal Industry In spite of declining mail volumes and deregulation, the EU postal industry turned losing businesses into profitable ones and reduceditscost-to-incomeratiofrommore than 100 percent to approximately 90 percent. Many businesses restructured their retail distribution; between 1998 and2008,third-partyownershipincreasedfrom one in three to nearly one in two (Figure 1).

Further, the industry reduced labour costs from more than 60 percent of total costs to nearly 50 percent, significantly improving employee productivity as measured by employee spread (Figure 2).

In Action: Cost TransformationFaced with deregulation and declining mail volumes, Austria Post shifted fixed costs into variable ones, and diversified into new services and markets. Notably, it transitionedtothird-partyownedpostaloutlets and reduced its workforce through natural attrition and outsourcing. It partnered with Austrian bank BAWAG PSK to expand branch offerings, and packaged its assets and capabilities as specialised services, such as direct marketing mail. It also diversified into express, parcel and logistic businesses, cycling new capabilities back into the traditional business. Between 2003 and 2010, Austria Post grew revenue by 5 percent annually and improved its returnonequity(ROE)from2percentto20 percent.

4

Figure 2: Transformation of labour strategy in the EU postal industry2

Figure 1: Growth in third-party ownership of postal outlets in the European Union1

Percentage of fully owned postal outlets (1998)

United Kingdom

Spain

Norway

Italy

Ireland

Hungary

France

Czech

Belgium

Austria

Finland

Denmark

Avg. 69%

100%

90%

100%

99%

46%

36%

83%

91%

5%

100%

71%

United Kingdom

Spain

Norway

Italy

Ireland

Hungary

France

Czech

Belgium

Austria

Finland

Denmark

Avg. 55%

100%

86%

59%

100%

19%

16%

70%

88%

4%

100%

21%

3% 3%

Percentage of fully owned postal outlets (2008)

Labour cost as a percentage of total costs Employee spread (Euro)

62%

52%

54%

56%

58%

60%

50%2002 2003 2005

64%

2004 2006 200920082007

0

2,000

6,000

4,000

-2,000

2002 2003 20052004 2006 200920082007

5

Based on analysis of the EU postal industry, Accenture identified six cost transformation principles for banks:

1. Speed up the supply chain.EU postal companies sped up their supply chainwithautomatedmailsorting,real-timescanningandtrack-and-tracecapabilities. To improve supply chain responsiveness, they optimised their processing network and delivery routes.

Similarly, banks can speed up their supply chainbyenablingreal-timebanking,andremoving batch processing and manual intervention. They can focus on achieving “once and done” functionality in the front office, and automating and streamlining back-officeprocessesthroughworkflowanddatapre-population.Real-timeprocessing also applies beyond operations; forexample,real-timemarketingandcampaign management can reduce costs and campaign cycle times, while improving hit rate.

In Action: Real-Time BankingIn early 2000, Spanish bank BBVA startedamulti-yearprocesstointegrate itsLatin-Americanoperations.UsingAccenture’s Alnova platform, BBVA achievedautomation,end-to-endreal-time processing and a centralised back office.Real-timebankingenabled BBVA to achieve 30 percent efficiency in the back office and 13 percent in branch offices, and reduce branch employee headcount by nearly 20 percent. It also helped the bank improve its customer focus through better customer segmentation. By 2008, BBVA reduceditscost-to-incomeratioto43percent (an improvement of nearly 10 percent)andachievedanaverageROE of38percentinitsLatin-Americanoperations.3

In Action: Real-Time MarketingING relied heavily on direct mail marketing, which was inconsistent with its strong onlinefocus.Itimplementedareal-timemarketing engine that personalises and decidesthenext-bestoffer,andanalysescustomer responses for further optimisation. ING cut campaign cycles from 26 weeks to four weeks, reduced marketing costs by 35 percent and increased overall earnings from direct marketing.4

2. Restructure retail distribution to balance service and costs.Given declining mail volumes, players in the EU postal industry restructured their retail distribution. In particular, they increasedself-servicecapabilitiesandcreated innovative products that promote online transactions and customer self service.

Similarly, bank branch traffic is declining5 while operating costs outpace improvements in branch productivity (Figure 3). Accenture recommends that banks balance their customer service and costsbyshiftingfromtransaction-basedbranchestoanadvice-orientedmodel,migratingtransactionalservicestoself-service channels and directing problem resolutions to call centres.

Analysis

Figure 3: Estimated cost and productivity of physical bank branches6

Estimated cost per branch Income per branch Loan and deposit volumes per branch

2,500

AUD ’000CAGR: 8.1% CAGR: 6.0% CAGR: 5.4%

AUD ’000

2,000

2,100

2,200

2,300

2,400

1,9002009 2010 2011

13,500

11,500

12,000

12,500

13,000

11,0002009 2010 2011

AUD M

630

590

580

570

560

550

540

600

610

620

5302009 2010 2011

6

To strengthen sales and advisory services, banks can target smaller branches at particular customer segments, supported bymulti-channeldistributionandamobilesales force. They can also adopt the store and kiosk retail model.

In Action: Low-Cost DistributionTo diversify funding sources, Gruppo Mediobanca launched CheBanca!, a low-costretailbankwithanintegratedmulti-channelstrategy.Chebanca!focusesits direct channels on client management, and its small network of branches and mobile kiosks on customer acquisition and education. The bank deploys the same banking application across all channels to minimize costs and encourage self service. Notably, branch customers and employees look at the same screen, creating an opportunity for customer engagement and education. Within three years of launching, CheBanca! acquired 400,000 customers, accumulated €10 billion in deposits and drove 90 percent of transactions through its web portal.7,8

3. Shift fixed costs to third parties.EU postal players shifted their fixed distribution costs to variable costs by adopting a franchised branch model. Similarly, in the telecommunications industry, franchising has been an effective way to restructure costs, drive revenue and expand retail reach.

Todate,therehasbeenlittlepick-up from major banks in franchising, while BOQandBendigoBank,whohaveadoptedthis practice, deployed a complex model that requires the franchisee to manage the full scope of bank operations. Accenture sees opportunities for banks to transform the branch network through simplifiedfranchisedorthird-partylocations. In particular, retail stores that focus on sales, rather than transactions, are well suited to the franchising model.

In Action: Franchised Retail Model In 2008, SNS Bank transformed itself fromaretailbankintoaself-servicebank,placing online channels at the heart of itsmulti-channeldistributionstrategy. It removed cash transactions from its branches, enabling its transition to a network of franchised, lean “SNS shops” thatalsosellthird-partybankingproducts.Customers conduct cash transactions through ATMs or deposit money through the post. To strengthen its advisory services, SNS Bank retrained former branch employees as mobile bank advisors. By 2011, 30 percent of SNS Bank’s branches operated as franchises; from 2009–2011, its deposit market share grew from 8.7 percent to 9.5 percent.9

7

4. Decrease labour costs.EU postal players reduced their workforce through natural attrition and moved to lower-cost,part-timeworkersfornon-value-addedactivities,suchasmailsorting and delivery. They also outsourced parts of their supply chain, including third-partycollection,deliverytoremoteareasandlong-haultransportation.

Despite gains in productivity, banks still face rising personnel costs (Figure 4). Accenture recommends that banks outsource capabilities that do not create competitive differentiation. While Australian banks have previously outsourced IT maintenance, IT developmentandlimitedback-officeprocessing, additional candidates for outsourcinginclude:furtherback-officeprocessing (including origination and servicing, lending operations and credit card processing), human resources and payroll, risk management and analytics.

In Action: Business Process OutsourcingIn 2003, multinational insurance group RSAannouncedanambitiouscostreductiongoalof£270millionbyyear-end 2008, to be achieved through systems transformation and selective outsourcing. RSAcreated1,200FTEoffshoreroles,includingfront-linecustomerservice,back-officeadministration,andsupport for direct customer and intermediated business. It reduced its UK workforce

through natural turnover and redeployment, and labour unions commented that the approach was a model for other organisations. Performance reports indicated no impact on sales rates or service levels, and an increase in service efficiency.NotonlydidRSAmeetitscostreduction goal, but it also continued to reduce costs in subsequent years.11

5. Share infrastructure and assets.Austria Post reduced costs by sharing its retailoutletswithBAWAGPSK.Othercompanies package and sell existing capabilitiesasservicesorwhite-labelproducts; for example, several companies offer logistic capabilities and client deliveries. Additionally, Deutsche Post offers its pension management capabilities as a service to other industries. Sharing infrastructure is also used in the telecommunications industry, where major players share their network with smaller ones.

Previously, banks have offered cash management and transaction services to large corporations, and Accenture believes that they should leverage technology to extend these services to smaller commercial customers. Competing bankscanalsosharenon-value-addedinfrastructure to create economies of scale. For example, a third party now manages the combined cheque processing volumes of Commonwealth Bank, National Australia Bank and Westpac.

Furthermore, the ATM network—more of a utility than a differentiated channel in the Australian market—is an ideal candidate for cost reduction. In Scandinavia, banks have aggregated their ATM network since themid-1990s.Finally,banksbuildingpresenceinAsiacanshareacloud- basedplatform,andevenback-officeinfrastructure, to reach reasonable scale while avoiding significant capital investment.

In Action: Capitalising On AssetsWells Fargo created scale for its transaction services by launching CommercialElectronicOffice®(CEO®)portaltocommercialcustomers.Offeringmore than 80 applications, including cash management, credit and foreign exchange,CEOportalserves70percent of the bank’s commercial customers and helped the bank process 4.5 billion electronic interbank payments in 2010. The system also gives Wells Fargo relationship managers a complete customer view, enabling them to improve sales effectiveness.12,13

Figure 4: Staff expense and income per FTE for Australian banks10

Staff expense per FTE

104

AUD ’000CAGR: 2.4%

94

92

90

96

98

100

102

882007 2008 2009 2010 2011

Income per FTE

420

AUD ’000CAGR: 2.1%

370

360

350

380

390

400

410

3402007 2008 2009 2010 2011

8

6. Diversify to refresh cost structure.EU postal players leveraged their existing network to enter the growing market of parcel and express delivery. They also developed new capabilities to meet customer demand, such as online booking, real-timescanningandtrack-and-tracecapabilities. The benefits were twofold: they built on established assets to minimise the capital required for new market offerings, and cycled their new capabilities back into the traditional business to drive efficiency.

Accenture believes that diversification can also help restructure a bank’s operating model to improve cost efficiency. For example, transaction services—typically seen as a complement to banking services—can be a profitable revenue source with a lower cost structure than traditional banking.

In Action: Creating Efficiencies Citigroup’s Global Transaction Service (GTS) leverages the parent company’s global footprint, industry knowledge and technology platform. GTS has served more than 80 national governments and 60 central banks, with contracts that include theFederalReserve,governmentpensionsto French farm workers, unemployment benefits in Mexico and Poland, and payroll services for United Nations peacekeepers in Sudan.14 From 2005–2010, GTS grew its revenue by 25 percent per year to US$10billion.Requiringrelativelylowcapital usage, GTS has transformed Citigroup’s overall cost structure, contributing 40 percent of the group’s deposits, 12 percent of its revenue nd 35 percent of its profit in 2010.

9

Recommendations

Today’s business environment requires increasingly rigorous efficiency. Indeed, as Commonwealth Bank targetscost-to-incomeratioof35percent for its retail business, Australian banks must now move beyond tactical cost reduction.

Just as the EU postal industry overcame a declining traditional market and deregulation, banks have the opportunity to conquer the next level of cost reduction—by transforming their underlying cost structure.

Real-time operating capabilitiesReal-timeprocessingreducespersonnelrequirements, work volumes and cycle times—but more strategically, it enables banks to unlock further opportunities throughoutthebusiness.Real-timecapabilitiescanenhancemulti-channeldistribution,driveself-serviceadoptionand facilitate new models of retail distribution.

Internal cost efficienciesSignificant cost efficiencies will come from consolidating capabilities and infrastructure across business units and brands. Banks can also reduce labour costsbyoutsourcingnon-value-addedprocesses.

Diversification and shared capabilitiesBanks should look for opportunities to share their capabilities with other parties. As demonstrated in other industries, diversification can drive new revenue streams, as well as improve operational efficiency and refresh a business’s cost structure.

Australian banks are at a crossroads, with the opportunity to optimise and transform their cost base—an initiative that requires shifting from tactical to structural changes, and from isolated actions to holistic strategy. By capitalising on the next wave of cost transformation, banks can position themselves for high performance—now, and in the future.

10

Notes1 “TheEvolutionoftheEuropeanPostalMarketsince1997,”ITAConsultingandWIK-Consult,2009.

http://ec.europa.eu/internal_market/post/doc/studies/2009-wik-evolution-country-annex_en.pdf

2 Based on combined data from company reports and Accenture analysis of 12 EU postal companies. Employeespreadiscalculatedas(Revenue–Cost)/Totalnumberofemployees.

3 “BBVA: Mergers and Acquisitions Services,” Accenture, 2008. http://www.accenture.com/us-en/Pages/success-bbva-mergers-acquisitions-summary.aspx

4 “CaseStudy:INGDeliversPersonalizedProductOffersacrossChannelsinRealTime,”Forrester,2009. http://www.unica.com/documents/us/Unica_CaseStudy_ING_021910.pdf

5 “Multichannel Banking in Europe 2011,” Finalta and Efma, 2011.

6 Based on combined data from company reports and Accenture analysis of ANZ, Commonwealth Bank and Westpac. Estimated branch cost is based on occupancy costs plus 50 percent labour costs.

7 “Italian Bank Cuts Costs but Builds Business,” The Wall Street Journal, March 22, 2011. http://online.wsj.com/article/SB10001424052748703858404576214634020094752.html

8 Gordon,N.andGera,P.,“Banking2012:PreparingforaRevolution,”Outlook,October2009. http://www.accenture.com/us-en/outlook/pages/outlook-journal-2009-banking-2012.aspx

9 Company reports and “Case Study: How SNS Bank Put the Web at the Heart of Its New Multichannel Strategy,” Forrester, 2010. http://www.forrester.com/rb/Research/case_study_how_sns_bank_put_web/q/id/57867/t/2

10 Based on combined data from company reports and Accenture analysis of ANZ, Commonwealth Bank, National Australia Bank and Westpac.

11 “RSA:InsuranceBusinessProcessOutsourcing,”Accenture,2008. http://www.accenture.com/us-en/Pages/success-bpo-insurance-rsa-summary.aspx

12 WellsFargo&Company.(2010).WellsFargoCommercialElectronicOfficePortalMarks10-yearMilestone[Pressrelease].Retrievedfromhttp://www.businesswire.com/news/home/20100624005353/en/Wells-Fargo-Commercial-Electronic-Office-Portal-Marks

13 Based on 2010 automated clearing house reports from NACHA. http://www.nacha.org

14Companyreportsand“CitiUnitGrows--WithFeds’Help,”TheWallStreetJournal,January12,2010. http://online.wsj.com/article/SB126317001431624045.html

About the authors

Ira Maruta is a senior manager in Accenture’s Financial Services Strategy practice in Sydney, Australia. He has spent the past 10 years working closely with clients to define and implement their business and operational strategies, and to help them pursue their business transformation agendas. He has worked in a number of different industries in Asia Pacific, including banking, resources and supply chain services. He holds an M.B.A. from the Australian Graduate School of Management and a project management certificate (PMP) from the Project Management Institute.

Nelson Stephens is a Partner in Accenture’s Financial Services Strategy practice in Sydney, Australia. He is Accenture’s Global Lead for the High Performance Banking Model and specialises in architecting High Performance operating models, translating these models into components that can be implemented, driving alignment during implementation, and working with clients to realise value out of their new model. Nelson has worked with many leading banks in Australia, Asia, North America and Europe bringing the IT, marketing, risk and finance communities closer together with the business units, across retail, business, institutional banking, insurance, and funds management.

About Accenture

Accenture is a global management consulting, technology services and outsourcing company, with more than 246,000 people serving clients in more than 120 countries. Combining unparalleled experience, comprehensive capabilities across all industries and business functions, and extensive research on the world’s most successful companies, Accenture collaborates with clients to help them becomehigh-performancebusinessesandgovernments. The company generated net revenues of US$25.5 billion for the fiscal year ended Aug. 31, 2011. Its home page is www.accenture.com.

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